<PAGE>
SUPPLEMENT DATED JUNE 1, 1998
TO THE PROSPECTUS DATED JUNE 1, 1998
OF THE MAINSTAY FUNDS
Page 17 of the prospectus is revised to add the following information:
Global High Yield Fund is "nondiversified" for the purposes of the 1940 Act,
meaning that it may invest a greater percentage of its assets in the securities
of one issuer than a diversified fund. As a "nondiversified" fund, Global High
Yield Fund may be more susceptible to risks associated with a single economic,
political, or regulatory occurrence than a diversified fund might be. However,
the Global High Yield 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:
. 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
. 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.
<PAGE>
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The MainStay Funds Prospectus June 1, 1998
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Read This!
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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 (see "Description of Investments and Investment Practices" on
page 33).
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. The price of a mutual fund share will fluctuate and, when
sold, may be higher or lower than your original purchase price.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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Please read this Prospectus carefully before you invest and keep it for future
reference. It includes information you should know before investing. We hope you
will easily find and understand the information you need but if you have any
suggestions for improvement--or if you need any help--please ask your Registered
Representative.
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Building A, Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782), or
visit our website at www.mainstayfunds.com.
The Statement of Additional Information (SAI) is incorporated by reference into
this Prospectus and also has been filed with the Securities and Exchange
Commission (SEC). For a free copy of the current SAI write to NYLIFE
Distributors, Inc. or call 1-800-MAINSTAY. The SEC maintains a website
(www.sec.gov) that contains the SAI, material incorporated by reference, and
other information regarding registrants that file electronically with the
SEC.
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MainStay offers 22 mutual funds. The following 7 funds are offered in this
Prospectus.
<TABLE>
<CAPTION>
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Aggressive Growth
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<S> <C>
Small Cap Growth Fund .............................................. page 10
Small Cap Value Fund ............................................... page 11
<CAPTION>
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Growth
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<S> <C>
Blue Chip Growth Fund .............................................. page 12
<CAPTION>
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Growth & Income
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<S> <C>
Equity Income Fund ................................................. page 13
Growth Opportunities Fund .......................................... page 14
Research Value Fund ................................................ page 15
<CAPTION>
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Income
================================================================================
<S> <C>
Global High Yield Fund ............................................. page 16
</TABLE>
[LOGO] MAINSTAY(R) FUNDS
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2
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What's Inside?
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<TABLE>
<CAPTION>
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Tell Me Quickly page
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<S> <C>
The MainStay Funds ............................................................1
A Quick Overview...Understanding The MainStay Funds ...........................4
<CAPTION>
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Tell Me the Key Facts
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<S> <C>
Analyze the Costs of Investing: Two Kinds of Fees .............................6
If You Invest $1,000, You Might Pay... ........................................6
Descriptions of Each Fund ....................................................10
General Investment Considerations ............................................17
Decide Whether to Pay a Sales Charge Now, Later...or Maybe Never .............19
Consider Reducing Your Sales Charge ..........................................20
Open an Account/Buy Shares ...................................................21
Know How to Sell and Exchange Shares .........................................23
Decide How to Receive Your Earnings ..........................................25
Understand the Tax Consequences ..............................................26
Know With Whom You're Investing ..............................................27
Know Your Rights as a Shareholder ............................................31
</TABLE>
<TABLE>
<CAPTION>
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Tell Me the Details
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<S> <C>
The Trust ....................................................................32
Other Information About the Funds ............................................32
Description of Investments and Investment Practices ..........................33
Manager, Sub-Advisers and Distributor ........................................37
How to Purchase Shares of the Funds ..........................................38
Alternative Sales Arrangements ...............................................40
Redemptions and Exchanges ....................................................42
Tax-Deferred Retirement Plans ................................................43
Net Asset Value ..............................................................43
Portfolio Transactions .......................................................44
Tax Information ..............................................................44
Other Information ............................................................44
Appendix A: Description of Securities Ratings ................................44
</TABLE>
3
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Tell Me Quickly
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A Quick Overview...
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Investing in a mutual fund may seem complicated, but it may be easier when you
go through a Registered Representative. He or she can do many of the
administrative tasks--and help you confidently manage the rest.
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1
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Set your investment priorities
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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.
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2
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Study the Funds' objectives, policies, and risks
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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 10-16. For
more detailed information, see "Tell Me the Details" in this prospectus and see
the SAI.
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3
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Evaluate each Fund's fees and expenses
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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.
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7
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Open an account/Buy shares
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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 earningsin cash or additional
sharesand 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
21.
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8
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See how many shares your money will buy
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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. 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 22 and 43.
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9
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Ongoing fees
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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 6-9.
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4
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...Understanding The MainStay Funds
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4
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Decide how much to invest in each Fund
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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 offered in this
Prospectus.
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5
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Decide when to pay the sales charge:
now or later
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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 at the end of
the calendar quarter occurring eight years after the date a shareholder
purchases their shares.
For a list of the pros and cons of each choice, see page 19.
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6
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Consider reducing the sales charge
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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 20 for details.
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10
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Earn dividends and capital gains
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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, have them automatically reinvested
in more shares (with no sales charge) or a combination of both.
To learn more, see page 25.
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11
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Exchange shares/ Redeem shares
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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 MainStay Fund. 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 23-24 and 42-43.
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12
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Manage your taxes/ Align your goals
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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 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 26.
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13
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Know your rights/ Stay informed
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Most of all, you have the right to ask questions-- and have them answered
intelligently. You may call your Registered Representative at any time.
MainStay will send you a quarterly statement, a confirmation of each
transaction, and annual and semiannual reports on your Fund's status and
investments.
To learn more, see page 31.
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5
<PAGE>
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Tell Me The Key Facts
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Analyze the Costs of Investing: Two Kinds of Fees
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To help you understand the costs of investing in a MainStay Fund, we've provided
expense information based on estimated expenses for each Fund's first year of
operation. 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 40-42 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 37-38
for more details.
Management fees pay for the investment sub-advisers who invest your money and
for administrative services such as keeping records and providing you with
statements and reports. The Rule 12b-1 fees shown on pages 7-9 pay, for example,
commissions and marketing/promotional expenses. "Other" includes legal,
auditing, custodian, and other fees. See pages 37-38 for more details on
fees.
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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.
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If You Invest $1,000, You Might Pay...
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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 7-9 are based on a hypothetical 5% annual return on an
investment of $1,000, and the estimated 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 three 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.
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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.
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6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
SMALL CAP GROWTH 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 $ 73 $ 26 $ 76
Expenses after 3 years $110 $ 81 $111
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 $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 30 management fees 31 management fees
Other Expenses 0.61% 0.61% 7 12b-1 fees 31 12b-1 fees
---- ---- 18 other expenses 19 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.86% 2.61% $110 total sales charges $111 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
SMALL CAP 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 $ 73 $ 27 $ 77
Expenses after 3 years $111 $ 81 $111
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 $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 30 management fees 31 management fees
Other Expenses 0.61% 0.61% 7 12b-1 fees 31 12b-1 fees
---- ---- 19 other expenses 19 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.86% 2.61% $111 total sales charges $111 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
BLUE CHIP GROWTH 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 $ 73 $ 27 $ 77
Expenses after 3 years $111 $ 81 $111
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 $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 30 management fees 31 management fees
Other Expenses 0.62% 0.62% 7 12b-1 fees 31 12b-1 fees
---- ---- 19 other expenses 19 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.87% 2.62% $111 total sales charges $111 total sales charges
==== ==== and expenses and expenses
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
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Sales Charges and Operating Expenses Examples
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====================================================================================================================================
EQUITY 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 ----------- -------------------------
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 70 $ 24 $ 74
Expenses after 3 years $102 $ 72 $102
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 0.70% 0.70% $ 55 up-front sales charge $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 21 management fees 22 management fees
Other Expenses 0.62% 0.62% 7 12b-1 fees 31 12b-1 fees
---- ---- 19 other expenses 19 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.57% 2.32% $102 total sales charges $102 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
GROWTH OPPORTUNITIES 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 $ 24 $ 74
Expenses after 3 years $102 $ 72 $102
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 0.70% 0.70% $ 55 up-front sales charge $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 21 management fees 22 management fees
Other Expenses 0.62% 0.62% 7 12b-1 fees 31 12b-1 fees
---- ---- 19 other expenses 19 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.57% 2.32% $102 total sales charges $102 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
RESEARCH 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 $ 72 $ 25 $ 75
Expenses after 3 years $106 $ 77 $107
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 0.85% 0.85% $ 55 up-front sales charge $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 25 management fees 27 management fees
Other Expenses 0.62% 0.62% 8 12b-1 fees 31 12b-1 fees
---- ---- 18 other expenses 19 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.72% 2.47% $106 total sales charges $107 total sales charges
==== ==== and expenses and expenses
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
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Sales Charges and Operating Expenses Examples
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====================================================================================================================================
GLOBAL HIGH YIELD 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 $ 61 $ 24 $ 74
Expenses after 3 years $ 94 $ 74 $104
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 0.50% 0.50% $ 45 up-front sales charge $ 30 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 15 management fees 16 management fees
Other Expenses 0.88% 0.88% 8 12b-1 fees 31 12b-1 fees
---- ---- 26 other expenses 27 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses(3) 1.63% 2.38% $ 94 total sales charges $104 total sales charges
After Reimbursement ==== ==== 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, the management fee would be 0.70% and total
fund operating expenses would be 1.83% and 2.58% for Class A and Class B,
respectively.
9
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Small Cap Growth Fund
The Fund's objective is:
================================================================================
seeks long-term capital appreciation by investing primarily in securities of
small- cap companies.
Who should invest? Investors who seek growth and are willing to accept a higher
level of risk for higher return potential.
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WHO'S MANAGING YOUR MONEY?
EDMUND C. SPELMAN AND RUDOLPH C. CARRYL OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Spelman is a Managing Director of MacKay-Shields, and specializes in equity
securities. He joined MacKay-Shields in 1991 after working as a securities
analyst at Oppenheimer & Co., Inc. (1983-1990). Mr. Carryl is a Managing
Director of MacKay-Shields. He joined MacKay-Shields as a Director in 1992 with
twelve years of investment management and research experience. Mr. Carryl was
Research Director and Senior Portfolio Manager at Value Line, Inc. from 1978 to
1992. Messrs. Carryl and Spelman have acted as portfolio managers of the Fund
since its inception and also serve as portfolio managers of the Capital
Appreciation Fund and Total Return Fund.
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets in common stocks, preferred stocks, warrants and
other equity securities of companies with market capitalizations generally
between $100 million and $1.5 billion. MacKay-Shields selects investments
according to the economic environment and the attractiveness of particular
markets.
Under normal market conditions...
...securities of companies with these characteristics:
o above average revenue and earnings per share growth;
o participation in growing markets;
o potential for positive earnings surprises;
o strong management with, ideally, high insider ownership.
...any other securities that are deemed by MacKay-Shields to be attractive 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 17-18,
"General Investment Considerations"; and pages 33-37, "Description of
Investments and Investment Practices.")
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- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
Fund's investments, therefore, may carry above-average risk, compared to common
stock indexes, such as the S&P 500 Index. Small-cap companies may be more
volatile in price, have greater spreads between their bid and ask prices and
have significantly lower trading volumes than companies with larger
capitalizations. They may have cyclical, static or moderate growth prospects.
Small-cap companies may be more vulnerable to adverse business or market
developments than large-cap companies.
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10
<PAGE>
================================================================================
Small Cap Value Fund
The Fund's objective is:
================================================================================
to seek long-term capital appreciation by investing primarily in securities of
small-cap companies.
Who should invest? Investors who seek capital appreciation and are willing to
accept a higher level of risk for higher return potential.
See page 32 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
TIMOTHY DALTON, JR. AND KENNETH GREINER DALTON, GREINER, HARTMAN, MAHER & CO.
Mr. Dalton is Chief Executive Officer and Chief Investment Officer of DGHM. He
has served as CEO and CIO since he founded the investment management business in
1982. Kenneth Greiner, who joined the firm in 1983, is President of DGHM. Mr.
Greiner has served as a portfolio manager and research analyst since 1983.
Messrs. Dalton and Greiner have managed the Fund since its inception.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in common stocks and securities convertible into
common stocks of companies with market capitalizations at the time of purchase
within the capitalization spectrum defined by the Russell 2000 stock index. In
addition, the Fund has adopted a non-fundamental policy whereby it will invest
at least 80% of net assets in such securities.
As a matter of non-fundamental policy, an investment in any one company
generally will not exceed 3% of the Fund's net assets.
...other investments suitable for most or all MainStay Funds. (See pages 17-18,
"General Investment Considerations" and pages 33-37, "Description of Investments
and Investment Practices," for details.)
The Sub-Adviser uses a proprietary "value" method in managing the Fund's assets.
In its securities selection process, the Sub-Adviser focuses on securities which
it believes are undervalued and have positive and/or improving fundamentals. The
Sub-Adviser uses a proprietary valuation model and fundamental security
analysis, including direct company contact, to select investments for the Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
Fund's investments, therefore, may carry above-average risk, compared to common
stock indexes, such as the S&P 500. Small-cap companies may be more volatile in
price, have greater spreads between their bid and ask prices and have
significantly lower trading volumes than companies with larger capitalizations.
They may have cyclical, static or moderate growth prospects. Small-cap companies
may be more vulnerable to adverse business or market developments than large-cap
companies.
- --------------------------------------------------------------------------------
The Board of Trustees reserves the right to close the Fund to new investors at
the discretion of the Board at such time as the Fund's assets reach $250 million
or at such other time as the Board may determine appropriate.
11
<PAGE>
================================================================================
Blue Chip Growth Fund
The Fund's objective is:
================================================================================
to seek capital appreciation by investing primarily in securities of
large-capitalization companies. Current income is a secondary investment
objective.
Who should invest? Investors who seek growth of capital and, secondarily,
current income.
See page 32 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
HOWARD F. WARD OF GABELLI ASSET MANAGEMENT COMPANY (GAMCO INVESTORS, INC.)
Mr. Ward is a portfolio manager with Gabelli Asset Management Company. Prior to
joining GAMCO in 1995, Mr. Ward was Managing Director and Director of the
Quality Growth Equity Management Group of Scudder, Stevens and Clark, Inc., with
which he had been associated since 1982 and where he served as lead portfolio
manager for several of its registered investment companies. Mr. Ward has served
as portfolio manager since the Fund's inception.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
at least 80% of total assets in common stocks and other securities having equity
characteristics, such as convertible debt, convertible preferred securities,
preferred stocks, warrants and rights issued by Blue Chip companies (i.e.,
companies which possess leading market characteristics and certain financial
characteristics) having market capitalizations of greater than $2 billion and
revenues greater than $500 million;
Companies judged by GAMCO to have superior earnings per share (EPS) growth
prospects and above-average or expanding:
o market shares;
o profit margins; and
o returns on equity.
Up to 10% of total assets in securities of non-U.S. issuers.
...other investments suitable for most or all MainStay Funds. (See pages 17-18,
"General Investment Considerations" and pages 33-37, "Description of Investments
and Investment Practices," for details.)
GAMCO chooses securities for the Fund using fundamental securities analysis to
develop company earnings forecasts, selecting those securities which it
perceives to be undervalued or to otherwise have growth potential.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
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 34, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
12
<PAGE>
================================================================================
Equity Income Fund
The Fund's objective is:
================================================================================
to realize maximum long-term total return from a combination of capital
appreciation and income.
Who should invest? Investors who seek to maximize total return from common
stocks which also provide current income.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE, NEIL FEINBERG AND MICHAEL SHERIDAN 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, President
in 1994, and Senior Managing Director and Chief Investment Officer in 1996. He
is also a manager of the Convertible Fund, 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 with the firm since 1992. For
the three years prior to joining MacKay-Shields he was an analyst for National
Securities and Research Corporation, and for the four years prior to that he
worked as a CPA/auditor for Peat Marwick Main & Company. He is also a manager of
the Convertible Fund, the Strategic Value Fund and the Strategic Income Fund.
Mr. Sheridan joined MacKay-Shields in 1996 and is an Associate Director.
Previously, he was an equity analyst at Arnhold & S. Bleichroder Capital. Each
portfolio manager has managed the Fund since its inception.
================================================================================
The Fund invests in:
================================================================================
The Fund takes a flexible approach, emphasizing investments in common stocks and
other equity income producing securities with the characteristics listed below:
Under normal market conditions...
...at least 65% of total assets in equity income-producing securities which
o the Sub-Adviser believes were undervalued when purchased;
o pay cash dividends;
o are listed on a national securities exchange or traded in the OTC market.
The Sub-Adviser will seek to invest primarily in equities which pay out
dividends and are deemed to be undervalued based on a number of factors. Those
may include: relative valuation, prospects for future earnings growth, ability
to grow dividends and corporate management.
...up to 35% of total assets in equity securities that do not pay regular
dividends, debt securities, U.S. government securities, cash or cash
equivalents.
...other investments suitable for most or all MainStay Funds. (See pages 17-18,
"General Investment Considerations" and pages 33-37, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
- --------------------------------------------------------------------------------
13
<PAGE>
================================================================================
Growth Opportunities Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital, with income as a secondary
consideration.
Who should invest? Investors who seek growth of capital and are willing to
accept a higher level of risk for higher return potential.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JAMES AGOSTISI AND PATRICIA S. ROSSI OF MADISON SQUARE ADVISORS, INC.
Mr. Agostisi is a Director--Portfolio Management of Madison Square Advisors and
of New York Life Insurance Company. He has 14 years of investment experience at
New York Life and has been a Director--Portfolio Management of Madison Square
Advisors since its establishment. Ms. Rossi is Managing Director--Portfolio
Management of Madison Square Advisors and of New York Life. She joined New York
Life in 1995 as Head of Public Equities and has been a Managing
Director--Portfolio Management of Madison Square Advisors since its
establishment. Ms. Rossi has over 20 years of investment management and research
experience. Prior to joining New York Life, Ms. Rossi was a portfolio manager
for the United Church of Christ--Pension Boards. Mr. Agostisi and Ms. Rossi have
served as portfolio managers of the Fund since the Fund's inception.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in common stocks and other equity-related
securities of well-established, well-managed companies which appear to have
better than average growth potential and have large- to mid-cap market
capitalizations, generally above $5 billion.
...The Fund may invest up to 10% of its total assets in securities convertible
into or with rights to purchase common stocks, such as warrants.
The Fund may also make loans of portfolio securities and may invest in foreign
securities.
The Sub-Adviser will seek to identify companies which are considered to
represent good value based on historical investment standards, including
price/book value ratios and price/earnings ratios.
...other investments suitable for most or all MainStay Funds. (See pages 17-18,
"General Investment Considerations" and pages 33-37, "Investments and Investment
Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
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 34, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
14
<PAGE>
================================================================================
Research Value Fund
The Fund's objective is:
================================================================================
to seek long-term capital appreciation by investing primarily in securities of
large-capitalization companies.
Who should invest? Investors who seek capital appreciation through a Fund which
also attempts to preserve capital and control volatility as measured against the
Standard &Poor's Composite 500 Stock Index (the "S&P 500").
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JOHN A. LEVIN, JEFFREY A. KIGNER AND G. TODD SILVA OF JOHN A. LEVIN &CO.,
INC.
Mr. Levin has been Chairman and Chief Executive Officer of John A. Levin & Co.
(and President of its predecessor) since 1982. He has been Director, President
and Chief Executive Officer of Baker Fentress since June 1996. Mr. Kigner is
Co-Chairman and Chief Investment Officer of John A. Levin & Co. Mr. Kigner has
been a securities analyst and portfolio manager of John A. Levin & Co. (and its
predecessor) since 1984. He has been a Director of Baker Fentress since June
1996. Mr. Silva has been a Senior Portfolio Manager at John A. Levin & Co. since
February 1998. Prior to joining John A. Levin & Co., Mr. Silva was a portfolio
manager at Jennison Associates LLC and at Scudder, Stevens & Clark, Inc. and a
securities analyst at Putnam Investments. Messrs. Levin, Kigner and Silva have
been portfolio managers of the Fund since its inception.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of total assets in common stocks and other securities having
equity characteristics, such as convertible debt, convertible preferred
securities, preferred stocks, warrants and rights issued by companies with
market capitalizations of greater than $2 billion.
...securities that, in the opinion of the Sub-Adviser, are currently undervalued
in relation to their intrinsic value as indicated by the earnings and cash flow
potential or the asset value of the respective issuers. The Sub-Adviser also
considers growth and new products on a selective basis.
...debt securities, including U.S. government securities and corporate debt
securities (such as bonds, notes and debentures) and money market instruments,
including repurchase agreements.
...other investments suitable for most or all MainStay Funds. (See pages 17-18,
"General Investment Considerations" and pages 33-37, "Description of Investments
and Investment Practices," for details.)
The Sub-Adviser uses a proprietary "value" method in selecting stocks for the
Fund. In evaluating investments for the Fund, the Sub-Adviser uses a research
intensive approach, considering factors such as: security prices that reflect a
market valuation which is judged to be below the estimated present or future
value of the company; favorable earnings growth prospects; expected above
average return on equity and dividend yield; the financial condition of the
issuer; and various qualitative factors. Although payment of current dividends
and income are considered by the Sub-Adviser, they are not primary factors in
the selection of investments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
- --------------------------------------------------------------------------------
15
<PAGE>
================================================================================
Global High Yield Fund
The Fund's objective is:
================================================================================
to seek to provide maximum current income by investing primarily in high yield
debt securities of non-US issuers. Capital appreciation is a secondary
objective. Certain of the Fund's investments are speculative.
Who should invest? Investors who seek an opportunity for potentially higher
income and overall return (and commensurately higher risk) by investing in
multiple global market sectors, including emerging markets.
See page 33 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JOSEPH PORTERA AND MAUREEN MCFARLAND OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Portera is a Director of MacKay-Shields specializing in international bonds.
He returned to MacKay-Shields in December 1996 after working at Fiduciary Trust
Company International as a portfolio manager in international bonds. Mr. Portera
served as a portfolio manager at MacKay-Shields from 1991 to 1995. Previously,
Mr. Portera was a portfolio manager specializing in international debt
securities at ABN-AMRO Bank, N.V. from 1988 to 1991. Ms. McFarland is an
Associate Director at MacKay-Shields. She joined MacKay-Shields in 1997 as
Currency Overlay Manager in the Global Division. Prior to joining the company,
Ms. McFarland was employed at Brown Brothers Harriman & Co., where she managed
global fixed income portfolios. Mr. Portera and Ms. McFarland have managed the
Fund since its inception. Mr. Portera is also a manager of the International
Bond Fund and the Strategic Income Fund.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in debt securities issued by governments and
governmental authorities and agencies: all types of foreign or Yankee debt
securities, in U.S. dollars or foreign currency, ordinarily in the lower rating
categories of Moody's (Ba to B) and S&P (BB to B) or unrated securities
determined by the Sub-Adviser to be of comparable quality.
...in at least 3 different countries, which include countries with established
economies and emerging market countries, including, among others, those in Latin
America, Asia and other newly industrialized countries that the Sub-Adviser
believes present favorable opportunities.
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts. The Fund may also buy foreign currency options.
...other investments suitable for most or all MainStay Funds. (See pages 17-18,
"General Investment Considerations" and pages 33-37, "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 securities also may vary. For
example, some types of debt securities are particularly sensitive to interest
rate changes and may therefore be especially volatile. Others may entail unique
or special risks that can affect value. For example, securities rated BB or Ba
or below (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 36, "Risks of Investing in High
Yield Securities (`Junk Bonds')" for more 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, including currency
fluctuations and political and economic instabilities. Investments in emerging
markets can involve substantial volatility and significant economic
uncertainties. For additional information, see "Description of Investments and
Investment Practices--Foreign Securities."
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 33-37, "Description of Investments and Investment
Practices."
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MUTUAL FUNDS
================================================================================
================================================================================
- --------------------------------------------------------------------------------
[ARROW] The share price of a Fund will fluctuate
- --------------------------------------------------------------------------------
The value of the securities in a Fund and the share price (NAV) of that Fund
will fluctuate. Many factors can affect the value of securities, including:
o conditions in the securities markets;
o business success of the companies that issued the securities;
o creditworthiness of the companies that issued the securities;
o interest rates;
o average maturity of the Fund's nonequity or debt investments;
o foreign currency exchange rates (where applicable); and
o other factors.
- --------------------------------------------------------------------------------
Funds aren't guaranteed
- --------------------------------------------------------------------------------
Remember, mutual funds are not guaranteed or federally insured, even if you buy
them through a bank. MainStay recommends that you speak with your Registered
Representative to learn about other smart ways to help protect your money based
on the level of risk you are willing to take.
- --------------------------------------------------------------------------------
Fundamental investment 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 is "diversified" for the purposes of the Investment Company
Act of 1940, as amended ("1940 Act").
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions--for temporary defensive
purposes--each Fund may invest without limit in cash and cash equivalents (as
defined on page 33 under "Description of Investments and Investment
Practices--Cash Equivalents").
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
Each Fund has a nonfundamental policy that it will not invest more than 15% of
its net assets in "illiquid" securities. These are securities subject to legal
or contractual restrictions on resale (other than restricted securities eligible
for resale pursuant to Rule 144A 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.
17
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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).
The Small Cap Growth Fund estimates that its portfolio turnover rate will not
exceed 150%. The Small Cap Value Fund estimates that its portfolio turnover rate
will be less than 100%. The Blue Chip Growth Fund estimates that its portfolio
turnover rate will not exceed 100%. The Equity Income Fund estimates that its
portfolio turnover rate will not exceed 150%. The Growth Opportunities Fund
estimates that its portfolio turnover rate will not exceed 110%. The Research
Value Fund estimates that its portfolio turnover rate will not exceed 120%. The
Global High Yield Fund estimates that its portfolio turnover rate will not
exceed 175%.
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.
- --------------------------------------------------------------------------------
18
<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.
================================================================================
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 20, "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 20).
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 41, "Deferred Sales Charge Class B Shares--Contingent
Deferred Sales Charge, Class B"):
o the sales charge drops from 5% in the first year to 0% after six years,
o it's assumed you're selling the shares you've owned the longest, so you pay
the lowest possible sales charge,
o if you sell a Fund's shares, the sales charge will be based on the lower of
the current NAV of Fund shares less dividends and distributions or the
price you originally paid for those shares.
- --------------------------------------------------------------------------------
If there aren't enough shares...
When you sell Class B shares, the Fund is permitted to sell additional Class B
shares to cover the cost of the sales charge. If you don't own enough extra
Class B shares to do this, the sales charge will be taken from the proceeds of
your sale, reducing the amount paid to you.
If it's automatic reinvestment...
You don't pay any sales charge (Class Aor Class B) on shares bought through the
automatic reinvestment of dividends or capital gains. The full amount goes
toward buying more 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,
at the end of the calendar quarter occurring eight years after the
date a shareholder purchases their shares.
================================================================================
19
<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 the same class of 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
40.)
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 if you purchased $1
million or more of Class A shares) if you redeem shares under the Systematic
Withdrawal Plan to pay scheduled monthly premiums on insurance issued by New
York Life or an affiliate.
SIGN A LETTER OF INTENT (LOI)
If you qualify, you can sign a letter stating your intention to invest at least
$100,000 within the next 24 months in Class A shares of one or more MainStay
Funds and to pay the up-front sales charge. The current sales charge will be
based on the total amount you intend to invest (the more you invest, the smaller
the sales charge). See "Alternative Sales Arrangements," page 40. For more
information on LOIs, call your Registered Representative or MainStay Shareholder
Services, Inc. ("MSS") at 1-800-MAINSTAY and see "Letter of Intent (`LOI')" in
the SAI.
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 41, "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.
================================================================================
- --------------------------------------------------------------------------------
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 40 for the full listing.)
================================================================================
20
<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 $500 for all Funds offered in this prospectus;
o Each time after that: $50 for all Funds offered in this prospectus.
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) 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. MSS must receive your payment
(and the application, if it's your initial investment) within the next 3
business days. All calls are recorded.
21
<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. NAV is calculated at the
close of business of the New York Stock Exchange (normally at 4:00 PM Eastern
time).
================================================================================
- --------------------------------------------------------------------------------
[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);
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 43 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 39, "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 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 for the Funds offered in this prospectus. Subsequent minimum investments
are $50. (See page 39, "How to Purchase Shares of the Funds--Automatic
Investments," for waiving minimums and for details on AutoInvest.)
22
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell and Exchange Shares
- --------------------------------------------------------------------------------
PLACE YOUR SELL 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 after
4:00 PM Eastern time) 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 sell 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 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 42, "Redemptions and Exchanges--Exchange Privileges," for
details.)
================================================================================
- --------------------------------------------------------------------------------
[ARROW] Your shares could be sold involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we have the right to sell the shares in any account valued
at less than $250, provided that the value isn't based on fluctuations in market
prices.
We'll give you 60 days' written notice to allow you to add to your account and
avoid the redemption.
To avoid paying a reporting penalty, we may also sell your shares if you haven't
given us a certified Taxpayer I.D. number.
================================================================================
OPTION 1
USE A SYSTEMATIC WITHDRAWAL PLAN [GRAPHIC]
o Requires at least $10,000 in the account at time of request and shares must
not be in certificate form.
You may arrange to sell shares equal to $100 or more from any Fund, on a monthly
basis. Shares will be sold automatically to cover the amount plus any applicable
sales charge.
Selling shares 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 sale
after 30 days' written notice to you.
No sales charges
There are no deferred sales charges on shares sold systematically to pay
scheduled monthly premiums on policies issued by New York Life or an affiliate
and on systematic withdrawals up to an annual total of 10% of the value of a
shareholders' Class B shares in a Fund.
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, the proceeds from the sale of your shares aren't dividends or
income. If you sell more than your Fund is earning for you, eventually, your
account will be worth less than your original investment and, ultimately, you
will sell all of your shares.
Systematic withdrawal plans established by phone are subject to the procedures
applicable to telephone sales.
- --------------------------------------------------------------------------------
You have help
If permitted by the broker-dealer, your Registered Representative may sell or
exchange your shares, set up a systematic withdrawal plan for you or change your
address of record by phone, unless you notify us in writing not to allow
it.
- -------------------------------------------------------------------------------
23
<PAGE>
OPTION 2
MAKE A TELEPHONE REQUEST:
1-800-MAINSTAY
You may sell or exchange shares directly over the phone.
o Minimum amount: $500 for exchanges
o You automatically have this privilege unless you notify us in writing that
you do not want it.
Whether you're buying, selling, or requesting a wire transfer or a check, the
price you receive is the next price (NAV) determined for the Fund (either at
4:00 PM Eastern time that day; or at 4:00 PM the next day, if the order is
placed after 4:00 PM Eastern time) 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.
================================================================================
- --------------------------------------------------------------------------------
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. There is a $5.00 fee for
this service and, in addition, 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 42,
"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.
24
<PAGE>
- --------------------------------------------------------------------------------
Decide How to Receive Your Earnings
- --------------------------------------------------------------------------------
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most Funds earn either dividends from stocks, interest from bonds and other
securities, or both. A mutual fund, however, always pays this income to you as
"dividends." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
When the Funds pay
The Global High Yield Fund declares and distributes any dividends monthly. The
other Funds declare and distribute any dividends quarterly.
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.
- --------------------------------------------------------------------------------
When are you paid? On the first business day of each month after a dividend is
declared.
- --------------------------------------------------------------------------------
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your Registered Representative (if permitted by the
broker-dealer) or MainStay directly. If you don't make a choice on your
application, your earnings will be automatically reinvested in the same class of
shares of the same Fund. In order to reinvest dividends and/or capital gains in
another Fund, you must have an established account in that class of shares of
that Fund. Here are your choices:
REINVEST EVERYTHING IN:
o the same Fund; or
o in another Fund of your choice.
TAKE THE DIVIDENDS IN CASH
Reinvest the capital gains in:
o the same Fund; or
o in another Fund of your choice.
TAKE THE CAPITAL GAINS IN CASH
Reinvest the dividends in:
o the same Fund; or
o in another Fund of your choice.
TAKE A PERCENTAGE OF THE DIVIDENDS IN CASH AND REINVEST THE REMAINDER IN:
o the same Fund.
TAKE A PERCENTAGE OF THE CAPITAL GAINS IN CASH AND REINVEST THE REMAINDER
IN:
o the same Fund.
TAKE EVERYTHING IN CASH
25
<PAGE>
- --------------------------------------------------------------------------------
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 investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of any net
long-term capital losses); 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 are taxable,
whether you take them as cash or automatically reinvest them. Some dividends
will be taxable as long-term capital gains, and some long-term gains will be
taxable at a maximum federal tax rate of 28% and others at a maximum federal tax
rate of 20%.
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
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.
================================================================================
- --------------------------------------------------------------------------------
[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.
================================================================================
26
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
================================================================================
WHO RUNS THE FUNDS' 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 37, "Manager,
Sub-Advisers and Distributor," and the SAI for more details.)
For its services, the Fund pays the Manager a monthly fee. (See page 37,
"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 the Small Cap Growth Fund, Equity Income
Fund and Global High Yield 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; it is now an indirect wholly-owned subsidiary of New York
Life Insurance Company. As of December 31, 1997, MacKay-Shields managed over
$28.8 billion in assets.
Madison Square Advisors, Inc. ("MSA"), 51 Madison Avenue, New York, New York
10010, is the Sub-Adviser to the Growth Opportunities Fund. MSA, which was
formed in 1997, is an indirect wholly-owned subsidiary of New York Life
Insurance Company. Although MSA is a newly formed investment adviser, its
investment professionals have provided investment advisory services to clients
through New York Life Insurance Company.
Gabelli Asset Management Company ("GAMCO"), One Corporate Center, Rye, New York
10580, serves as Sub-Adviser to the Blue Chip Growth Fund. GAMCO was formed in
1978, and as of December 31, 1997, acts as investment adviser to institutional
and individual investors with aggregate assets of approximately $4 billion.
GAMCO is a majority-owned subsidiary of Gabelli Funds, Inc.
John A. Levin & Co., Inc. ("John A. Levin & Co."), One Rockefeller Plaza, 25th
Floor, New York, New York 10020, serves as Sub-Adviser to the Research Value
Fund. Together with its predecessor, John A. Levin & Co. has provided investment
advisory services to clients since 1982. John A. Levin & Co. is an indirect
wholly-owned subsidiary of Baker, Fentress & Company ("Baker Fentress"), a
closed-end investment company listed on the New York Stock Exchange. As of March
31, 1998, John A. Levin &Co. manages approximately $8.4 billion in assets for
its clients.
Dalton, Greiner, Hartman, Maher & Co. ("DGHM"), 1100 Fifth Avenue South, Suite
301, Naples, FL 34102, serves as Sub-Adviser to the Small Cap Value Fund. DGHM
is a value driven investment manager specializing in smaller capitalization
equities. The firm, founded in 1982, manages more than $1 billion in assets.
DGHM is a partnership 51% owned by Value Asset Management, an investment manager
holding company. The remaining 49% of the firm is owned by Messrs. Dalton,
Greiner and seven other full time employees who autonomously manage the
firm.
Under the supervision of the Funds' Trustees and the Manager, MacKay-Shields,
MSA, GAMCO, John A. Levin & Co., and DGHM (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 37, 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.
================================================================================
27
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
Prior performance does not represent historical performance of a Fund, nor is it
an indication or guarantee of future performance of a Fund, which may be higher
or lower than the performance shown below. Performance data for the Gabelli
Growth Fund and the MainStay VP Growth Equity Portfolio was calculated in
compliance with the method of performance calculation prescribed by the SEC for
mutual funds. Except as described below, performance data for each composite has
been prepared in compliance with the Performance Presentation Standards of the
Association for Investment Management and Research (AIMR-PPS(TM)).(1)(2)(3) AIMR
did not prepare or review this data. All performance information has been
provided by the Sub-Advisers and has not been verified or audited by the Manager
or the Funds. For the periods prior to January 1, 1993, performance data for the
John A. Levin & Co. Large Cap Value Composite was not calculated in compliance
with AIMR standards because size-weighted composite returns were calculated
using end-of-period market values. Accounts in the composites were not subject
to the same types of expenses as the Funds or (except for one account in the
John A. Levin & Co. Large Cap Value Composite) the requirements of the
Investment Company Act of 1940 or the Internal Revenue Code, the limitations of
which might have adversely affected performance results. Prior performance
reflects actual expenses incurred by the comparison fund and/or accounts in the
composite.(2) Estimated Fund expenses are higher, and therefore, if Fund
expenses had been applied, performance of the comparison fund and/or accounts in
the composite would have been lower.
GABELLI FUNDS, INC. AND GAMCO - PRIOR PERFORMANCE
Set forth below is the performance record for another mutual fund which is
managed by Gabelli Funds, Inc., an affiliate of GAMCO, which has investment
objectives and policies that are substantially similar though not identical to
those of the Blue Chip Growth Fund. In addition, Gabelli Funds, Inc. and GAMCO
intend that the Blue Chip Growth Fund and Gabelli Growth Fund will be managed by
the same personnel and will have substantially similar investment strategies,
techniques, and characteristics. The investment performance of Gabelli Growth
Fund is provided merely to indicate the experience of Gabelli personnel in
managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses of the Gabelli Growth Fund. Included for
comparison purposes are performance figures of the S&P 500 Index. It has been
adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
As of 12/31/97
-------------------------------------------------------------------------------------------------
One Three Five Ten
Year Year Year Year
Inception Total Total Total Total
Date Return Return Return Return
---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Gabelli Growth Fund 4/10/87 42.6% 31.2% 19.4% 20.6%
S&P 500 Index 33.4% 31.2% 20.3% 18.0%
</TABLE>
JOHN A. LEVIN & CO. - PRIOR PERFORMANCE
The figures below show the past performance of John A.
Levin & Co. in managing accounts with investment objectives, policies,
techniques and restrictions substantially similar though not identical to those
of the Research Value Fund. The chart below shows average annual returns for a
composite of the actual performance of all large cap value accounts managed by
John A. Levin & Co. since October 31, 1982, except for accounts with assets
under $1 million and accounts managed under a broker-sponsored wrap-fee
program.(2)
The figures reflect reinvestment of dividends and are net of expenses. Included
for comparison purposes are performance figures of the S&P 500 Index and the
Lipper Growth & Income Index. They have been adjusted to reflect reinvestment of
dividends.
(1) MacKay-Shields (and its small cap growth equity composite) has received a
Level 1 verification from an independent party for the period January 1,
1988 through the most recent quarter. An opinion is available on request,
as is a complete list and description of the firm's composites. No leverage
has been used in this composite. The asset mix of small cap growth equity
accounts may not be precisely comparable to the Russell 2000 Index. Net
returns are calculated quarterly, based on an assumed account size of $50
million which, based on MacKay's-Shields' standard fee schedule would be
subject to one-fourth of the annual fee of $245,000 or 0.12% per quarter.
The composite consisted of less than five accounts for the entire period.
Annual net returns, composite assets (in millions) and percentage of firm
assets were as follows at year ends 1988-1997: 10.6%, $19.8, 0.4%; 26.0%,
$24.7, 0.4%; 11.3%, $48.0, 0.7%; 65.5%, $78.8, 1.0%; 3.0%, $65.0, 0.8%;
23.9%, $53.5, 0.5%; -3.7%, $51.8, 0.4%; 34.9%, $45.5, 0.2%; 21.1%, $44.0,
0.2%; 14.4%, $103.5, 0.4%.
(2) With respect to the John A. Levin & Co. Large Cap Value Composite, for the
period through June 30, 1996, performance is that of the company's
predecessor. For the period from 1986 through 1989, the results shown
reflect the deduction of a 1% investment management fee payable quarterly
at the rate of .25% of ending market value. This is the maximum investment
management fee charged by John A. Levin & Co. Individual account fees may
have varied. For the period from January 1, 1990 through December 31, 1996,
returns reflect the deduction of the actual dollar-weighted fee rate paid
by all accounts in the composite. The dollar-weighted fee rate has been
calculated by dividing the quarterly investment management fees paid by the
accounts in the composite by the total composite asset value. This
dollar-weighed fee rate includes the performance fees paid by certain
accounts. Inclusion of the performance-based fee does not materially affect
the dollar-weighted fee rate. Composite assets (in millions) were as
follows at year-ends 1982-1997: $3; $16; $10; $43; $182; $245; $397; $823;
$960; $1,289; $1,531; $2,373; $2,889; $3,714; $5,110; and $5,723.
(3) With respect to DGHM's Small Cap Value Composite, performance is net of
actual management fees paid which were 1% per annum. The composite consists
of fewer than five accounts since its inception in July 1994. A complete
list of composites is available upon request. Annual net returns, composite
assets (in millions), percentage of firm assets and the standard deviation
of composite accounts were as follows: 1994 - .3%, $25, less than 1%, 0;
1995 - 13.4%, $20, less than 1%, .30; 1996 - 30.2%, $21, 1%, .17; 1997 -
40%, $27, 2%, .33.
28
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of 12/31/97
----------------------------------------------------------------------------
One Three Five Ten Since
Year Year Year Year Inception
Total Total Total Total Total
Return Return Return Return Return
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
John A. Levin & Co.
Large Cap Value Composite 23.12% 25.49% 17.77% 17.39% 18.87%*
S&P 500 Index 33.4% 31.2% 20.3% 18.0% 17.75%**
Lipper Growth & Income Index 26.96% 26.19% 18.06% 16.03% 15.86%**
* From October 13, 1982
** From October 31, 1982
</TABLE>
DGHM - PRIOR PERFORMANCE
The figures below show the past performance of DGHM in managing accounts with
investment objectives, policies, techniques and restrictions substantially
similar though not identical to those of the Small Cap Value Fund. The chart
below shows average annual returns for a composite of the actual performance of
all small cap value accounts managed by DGHM since July 1, 1994.
The figures reflect reinvestment of dividends and are net of fees. Included for
comparison purposes are performance figures of the Russell 2000 Index. It has
been adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
As of 12/31/97
--------------------------------------------------------------------------
One Three Since
Year Year Inception
Total Total Total
Return Return Return
------ ------ ------
<S> <C> <C> <C>
Dalton, Greiner, Hartman, Maher & Co.
Small Cap Value Composite 40.0% 27.4% 23.1%
Russell 2000 Index 22.4% 22.3% 20.5%
</TABLE>
NEW YORK LIFE AND MSA - PRIOR PERFORMANCE
Set forth below is the performance of a mutual fund which is managed by New York
Life, the parent of MSA, which has investment objectives and policies that are
substantially similar though not identical to those of the Growth Opportunities
Fund. In addition, New York Life and MSA intend that the Growth Opportunities
Fund and MainStay VP Growth Equity Portfolio will be managed by the same
personnel and will have substantially similar investment strategies, techniques,
and characteristics. The investment performance of MainStay VP Growth Equity
Portfolio is provided merely to indicate the experience of MSA personnel in
managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses of the MainStay VP Growth Equity
Portfolio. Included for comparison purposes are performance figures of the S&P
500 Index. It has been adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
As of 12/31/97
--------------------------------------------------------------------------
One Three Five Ten
Year Year Year Year
Total Total Total Total
Return Return Return Return
------ ------ ------ ------
<S> <C> <C> <C> <C>
MainStay VP Growth Equity Portfolio 26.75% 26.79% 18.59% 16.87%
S&P 500 Index 33.4% 31.2% 20.3% 18.0%
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
MACKAY-SHIELDS - PRIOR PERFORMANCE
The figures below show the past performance of MacKay-Shields in managing
accounts with investment objectives, policies, techniques and restrictions
substantially similar though not identical to those of the Small Cap Growth
Fund. The chart below shows the market weighted average of the time weighted
returns for a composite of the actual performance of all small cap growth
accounts managed by MacKay-Shields since January 1, 1985.
The figures reflect reinvestment of income and dividends and are net of
expenses. Included for comparison purposes are performance figures of the
Russell 2000 Growth Index, which also reflects reinvestment of income and
dividends.
<TABLE>
<CAPTION>
As of 12/31/97
--------------------------------------------------------------------------
One Three Five Ten
Year Year Year Year
Total Total Total Total
Return Return Return Return
------ ------ ------ ------
<S> <C> <C> <C> <C>
MacKay-Shields
Small Cap Growth Composite 14.4% 23.2% 17.4% 19.4%
Russell 2000 Growth Index 12.9% 18.1% 12.7% 13.5%
</TABLE>
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 37, "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 Funds and has
subcustodial agreements for holding the Funds' foreign securities.
30
<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 (1-800-624-6782) (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
(1-800-624-6782)
You receive quarterly statements 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.
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.
================================================================================
- --------------------------------------------------------------------------------
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 approve the adoption of a new management or sub-advisory
agreement or plan of distribution relating to the Fund.
o You're also entitled to approve changes in the Fund's investment objective
or fundamental investment restrictions 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.
31
<PAGE>
================================================================================
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 31 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.
================================================================================
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.
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
It is expected that stock price performance for those firms that generate cash
flow substantially exceeding normal capital spending requirements generally
betters that of the equity market as a whole. At any given time, a large
percentage of the Fund's portfolio may consist of substantial free cash flow
generators. Sell decisions are driven by the Sub-Adviser's proprietary
multifactor model or a change in fundamental expectations. Positions are
eliminated when price appreciation renders a sale rating based on the
Sub-Adviser's valuation model.
The Fund may invest up to 15% of net assets in real estate investment trusts
("REITs"). REITs are pooled investment vehicles that invest primarily in either
real estate or real estate-related loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs. REITs are also subject to risks generally
associated with investments in real estate.
- --------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND
- --------------------------------------------------------------------------------
The Fund will generally invest in Blue Chip companies, with the Sub-Adviser
selecting those securities which it perceives to be undervalued or to otherwise
have growth potential. Blue Chip companies are those which occupy (or in the
Sub-Adviser's judgement have the potential to occupy) leading market positions
that are expected to be maintained or enhanced over time. Market leaders can be
identified within an industry as those companies which have: superior growth
prospects compared with other companies in the same industry; possession of
proprietary technology with the potential to bring about major changes within an
industry; and/or leading sales within an industry, or the potential to become a
market leader.
In addition, Blue Chip companies possess at least one of the following
attributes: faster earnings growth than its competitors and the market in
general; higher profit margins relative to its competitors; strong cash flow
relative to its competitors; and/or a balance sheet with relatively low debt and
a high return on equity relative to its competitors.
The Fund's investments will usually be sold when they lose their perceived value
relative to other similar or alternative investments. Specific sources of
information used to select securities for the Fund include: general economic and
industry data provided by the U.S. government, various trade associations;
annual and quarterly reports and Form 10-Ks; and direct interviews with company
management. Research is directed towards locating stocks that are undervalued
relative to their future earnings potential.
- --------------------------------------------------------------------------------
RESEARCH VALUE FUND
- --------------------------------------------------------------------------------
Under normal market conditions, the Fund invests at least 80% of its total
assets in common stock and other securities having equity characteristics. For
hedging purposes, the Fund may use options on securities, stock index options,
and stock index futures and related options. These investments involve certain
risks. See "Description of Investments and Investment Practices--Risk Management
Techniques". The Fund may also invest in debt securities, including U.S.
Government securities and corporate debt securities (such as bonds, notes and
debentures). Certain of the Fund's investments in debt securities will be
obligations which, at the time of purchase, are rated "A" or better by S&P or
Moody's or, if unrated, are of comparable quality as determined by the
Sub-Adviser. However, the Fund may invest up to 5% of the value of its total
assets in non-convertible, non-investment grade debt securities
32
<PAGE>
(commonly known as "high yield" or "junk" bonds). These investments involve
certain risks. See "Description of Investments and Investment Practices--Risks
of Investing in High Yield Securities ("Junk Bonds"). The Fund may also invest
in money market instruments (see "Description of Investments and Investment
Practices--Cash Equivalents"), including repurchase agreements. Investments in
debt securities will generally be made to reduce the Fund's equity exposure.
During periods of high market valuations or adverse market conditions or for
liquidity purposes, all or any portion of the Fund's assets may be invested
temporarily in high quality debt securities or money market instruments, or held
as cash.
- --------------------------------------------------------------------------------
GLOBAL HIGH YIELD FUND
- --------------------------------------------------------------------------------
Investors should 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 foreign and emerging markets sectors of 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
credit quality of individual issuers. The Sub-Adviser will also determine, using
good faith and judgement, (1) the percentage of the Fund's assets to be invested
in each emerging market; (2) currency exposure (asset allocation across
currencies); and (3) diversified security holdings within each market.
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.
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 and foreign
currency options for purposes of seeking to enhance portfolio returns and manage
portfolio risk more efficiently.
================================================================================
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, Lending of
Portfolio Securities, Loan Participation Interests, Mortgage-Backed and
Asset-Backed Securities, Repurchase Agreements, Risk Management Techniques,
Short Sales Against the Box, Swap Agreements, When-Issued Securities and Forward
Commitments, Zero Coupon Bonds and Risks of Investing in High Yield Securities
("Junk Bonds"). 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. For more information
about the investments, investment practices and risks described in this section,
please see the SAI.
- --------------------------------------------------------------------------------
BRADY BONDS
- --------------------------------------------------------------------------------
The Global High Yield Fund may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings. (For more information, see the SAI.)
- --------------------------------------------------------------------------------
CASH EQUIVALENTS
- --------------------------------------------------------------------------------
Each of the Funds may invest in cash or cash equivalents, which include, but are
not limited to: short-term obligations issued or guaranteed as to interest and
principal by any U.S. or foreign government or government agencies or
instrumentality thereof (including repurchase agreements collateralized by such
securities); obligations of banks (certificates of deposit, bankers' acceptances
and time deposits) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000, and obligations of other banks or savings
and loan associations if such obligations are federally insured; commercial
paper which at the date of investment is rated A-1 by S&P or P-1 by Moody's or,
if not rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue rated
AA or better by S&P or Aa or better by Moody's; short-term corporate obligations
which at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and other debt instruments not specifically described if such
instruments are deemed by the Trustees to be of comparable high quality and
liquidity.
33
<PAGE>
- --------------------------------------------------------------------------------
FLOATERS AND INVERSE FLOATERS
- --------------------------------------------------------------------------------
Each 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 Equity Income and
Global High Yield Funds 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 Global High Yield 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 may purchase foreign securities. Foreign investments could be more
difficult to sell than U.S. investments. They also may subject the Fund to risks
different from investing in domestic securities. Investments in foreign
securities involve 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. Developing
countries have economic structures that are less mature. Furthermore, developing
countries have less stable political systems and may have high inflation,
rapidly changing interest and currency exchange rates, and their securities
markets are substantially less developed.
A portion 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
35, "Risk Management Techniques."
- --------------------------------------------------------------------------------
LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
Each 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 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.
34
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Each Fund may enter into domestic repurchase agreements to earn income. The
Global High Yield 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 Funds 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.
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 Equity Income and Global High Yield Funds 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.
Each of the Funds 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 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.
Each 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.
Each 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.
35
<PAGE>
Subject to limitations with respect to options, 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 Funds may purchase put and call options on securities indexes to hedge
against risks of market-wide price fluctuations.
- --------------------------------------------------------------------------------
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 Funds may enter into interest rate, index and currency exchange rate swap
agreements for purposes of attempting to obtain a particular desired return at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return.
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 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 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 Research Value and Global High Yield Funds may, to varying degrees as
previously described under "Descriptions of Each Fund" and "Tell Me the
Details," 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.
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
36
<PAGE>
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.
================================================================================
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>
Annual
Rate
................................................................................
<S> <C>
Small Cap Growth Fund 1.00%
Small Cap Value Fund 1.00%
Blue Chip Growth Fund 1.00%
Equity Income Fund 0.70%
Growth Opportunities Fund 0.70%
Research Value Fund 0.85%
Global High Yield Fund 0.70%*
................................................................................
</TABLE>
* The Manager has agreed to voluntarily reduce its fee payable to an annual
percentage of 0.50% of average daily net assets.
Each 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 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' Custodian,
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>
Annual
Rate
................................................................................
<S> <C>
Small Cap Growth Fund 0.50%
Small Cap Value Fund 0.50%*
Blue Chip Growth Fund 0.50%**
Equity Income Fund 0.35%
Growth Opportunities Fund 0.35%
Research Value Fund 0.425%***
Global High Yield Fund 0.35%****
................................................................................
</TABLE>
* of average daily net assets up to $250 million; .45% from $250 million to
$500 million and .40% in excess of $500 million.
** of average daily net assets up to $500 million; and .40% of average daily
net assets in excess of $500 million.
*** of average daily net assets up to $250 million; .3825% of average daily net
assets from $250 million to $500 million; and .34% of average daily net
assets in excess of $500 million.
**** To the extent that the Manager has agreed to voluntarily reduce its fee,
the Sub-Adviser has voluntarily agreed to do so proportionately.
- --------------------------------------------------------------------------------
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 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"). 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.
37
<PAGE>
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 41, "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, with respect to both Class A and Class B shares, the Distributor
may 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
the date a shareholder purchased their Class B shares. 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.
================================================================================
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 40.
- --------------------------------------------------------------------------------
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
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.
- --------------------------------------------------------------------------------
BY TELEPHONE
- --------------------------------------------------------------------------------
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 23-24, "Know How to Sell and Exchange Shares."
38
<PAGE>
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENTS
- --------------------------------------------------------------------------------
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 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 6:00 PM, Eastern
time). To make an investment effective the same day, MSS must receive the order,
in good order, by 2:00 PM Eastern time. The investment 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. 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.
39
<PAGE>
================================================================================
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 each of the
Funds other than the Global High Yield 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 Global
High Yield 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>
* 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% 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); employees and
clients (and immediate family members) of John A. Levin & Co. and DGHM; and
investors who are recommended to invest in the Research Value and Small Cap
Value Funds by John A. Levin & Co. and DGHM, respectively. Also, any employee or
Registered Representative of an authorized broker-dealer (and immediate family
members) 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 in an amount
less than $1,000,000 by defined contribution plans, other than 403(b) plans,
that are sponsored by employers with 100 or more eligible employees as if such
purchases were equal to an amount more than $1,000,000 but less than $2,999,999.
Such purchases by defined contribution plans may be subject to a contingent
deferred sales charge of 1% on shares redeemed within one year of the date of
purchase. See "Reduced Sales Charges on Class A Shares--Contingent Deferred
Sales Charge, Class A."
Class A shares of the Funds may also 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 20, "Consider Reducing
Your Sales Charge."
Letter of Intent
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested
40
<PAGE>
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; (3) Class A shares redeemed more than one year
after their purchase; (4) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, death, disability, QDROs and excess contributions
pursuant to applicable IRS rules; and Required Minimum Distributions at age 70
1/2 for IRA and 403(b)(7) TSA participants; (5) transfers within a retirement
plan where the proceeds of the redemption are invested in any guaranteed
investment contract written by New York Life or any of its affiliates; transfers
to products offered within a retirement plan which uses New York Life Benefit
Services, Inc. or TRAC-2000 as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; or (6)
redemptions, under the Systematic Withdrawal Plan, used to pay scheduled monthly
premiums on insurance policies issued by New York Life or an affiliate. Class A
shares of a Fund that are purchased without a front-end sales charge may be
exchanged for Class A shares of another Fund without the imposition of a
contingent deferred sales charge, although, upon redemption, contingent deferred
sales charges may apply to the Class A shares that were acquired through an
exchange.
The contingent deferred sales charge will be applicable to amounts invested
pursuant to a right of accumulation or an LOI to the extent that (a) a front-end
sales charge was not paid at the time of the purchase and (b) any shares so
purchased are redeemed within one year of the date of purchase.
For federal income tax purposes, the amount of the contingent deferred sales
charge generally will reduce the gain or increase the loss, as the case may be,
recognized upon redemption.
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE CLASS B SHARES
- --------------------------------------------------------------------------------
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses related to providing
distribution related services to the Funds in connection with the sale of the
Class B shares, such as the payment of compensation to selected dealers and
agents. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase.
Contingent Deferred Sales Charge, Class B
A contingent deferred sales charge will be imposed on redemptions of Class B
shares of the Funds, in accordance with the table below, at the time of any
redemption by a shareholder which reduces the current value of the shareholder's
Class B account in any Fund to an amount which is lower than the amount of all
payments by the shareholder for the purchase of Class B shares in that Fund
during the preceding six years. However, no such charge will be imposed to the
extent that the net asset value of the Class B shares 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 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.
41
<PAGE>
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, QDROs and excess contributions pursuant to
applicable IRS rules; and Required Minimum Distributions at age 701/2 for IRA
and 403(b) TSA participants; (ii) withdrawals related to the termination of a
retirement plan where no successor plan has been established; (iii) transfers
within a retirement plan where the proceeds of the redemption are invested in
any guaranteed investment contract written by New York Life or any of its
affiliates, transfers to products offered within a retirement plan which uses
New York Life Benefit Services, Inc. as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; (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
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. 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.
================================================================================
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 for
certificated shares, a stock power or certificate must be endorsed, and for
uncertificated shares a letter must be signed, 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. Send your written request to The MainStay Funds, P.O. Box 8401,
Boston, MA 02266-8401.
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.
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 MainStay Fund may be exchanged for shares of an identical class of a
MainStay Fund registered in the state of residence of the investor or where an
exemption from registration is available and only with respect to Funds that are
available for sale to new investors.
In addition, an exchange privilege between Class A shares of the Funds and
MainStay Equity Index Fund is offered. 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.
42
<PAGE>
Investors should request a prospectus for any Fund they wish to exchange into
and 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
(either 4:00 PM Eastern time that day, or the next day, if the request is placed
after 4:00 PM Eastern time) 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 (either 4:00 PM Eastern time that day, or the next
day, if the request is placed after 4:00 PM Eastern time) following receipt of a
properly executed exchange request, without the payment of a contingent deferred
sales charge; the sales charge will be assessed, if applicable, when the
shareholder redeems his or her shares without a corresponding purchase of shares
of another MainStay Fund. However, where a shareholder previously exchanged his
or her Class B shares into the Money Market Fund from another MainStay Fund, the
applicable contingent deferred sales charge will be assessed when the shares are
redeemed from the Money Market Fund even though the Money Market Fund does not
otherwise assess a contingent deferred sales charge on redemptions. Class B
shares of a Fund acquired as a result of subsequent investments, except
reinvested dividends and distributions, will be subject to the contingent
deferred sales charge when ultimately redeemed or repurchased without purchasing
shares of another MainStay Fund.
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 6:00 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 per account are permitted in each
calendar year without the imposition of any transaction fee; subsequently, a $10
fee will be assessed per exchange and additional 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 26, "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.
================================================================================
TAX-DEFERRED RETIREMENT PLANS
================================================================================
Shares of each 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 and
Education 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.
================================================================================
NET ASSET VALUE
================================================================================
For purposes of determining NAV, portfolio securities of the Funds 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.
43
<PAGE>
================================================================================
PORTFOLIO TRANSACTIONS
================================================================================
The primary consideration in portfolio security transactions is best execution.
Subject to this requirement, securities may be bought from or sold to brokers or
dealers who have furnished statistical, research and other information or
services to the 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
================================================================================
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.
================================================================================
OTHER INFORMATION
================================================================================
The services provided to the Funds by the Manager, the Sub-Advisers and the
Funds' other service providers are dependent on those service providers'
computer systems. Many computer software and hardware systems in use today
cannot distinguish between the year 2000 and the year 1900 because of the way
dates are encoded and calculated (the "Year 2000 Issue"). The failure to make
this distinction could have a negative implication on handling securities
trades, pricing and account services. The Manager, the Sub-Advisers and the
Funds' other service providers are taking steps that each believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that they use. The Funds have no reason to believe these steps will not
be sufficient to avoid any material adverse impact on the Funds, although there
can be no assurances. The costs or consequences of incomplete or untimely
resolution of the Year 2000 Issue are unknown to the Manager, the Sub-Advisers
and the Funds' other service providers at this time but could have a material
adverse impact on the operations of the Funds and the Manager, the Sub-Advisers
and the Funds' other service providers.
================================================================================
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.
44
<PAGE>
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
Issues or the features associated with MIG, VMIG or SG 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.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
45
<PAGE>
- --------------------------------------------------------------------------------
STANDARD & POOR'S
- --------------------------------------------------------------------------------
Corporate and Municipal Long-Term Debt Ratings Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B,CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC:Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions for the obligor. In the
event of adverse business, financial or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or a similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
A-1: A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated `C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
46
<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]
This prospectus is also available in Spanish. For a copy, please
call 1-800-MAINSTAY (1-800-624-6782), option 3.
<PAGE>
THE MAINSTAY FUNDS
MAINSTAY BLUE CHIP GROWTH FUND
MAINSTAY RESEARCH VALUE FUND
MAINSTAY SMALL CAP VALUE FUND
MAINSTAY GROWTH OPPORTUNITIES FUND
MAINSTAY SMALL CAP GROWTH FUND
MAINSTAY EQUITY INCOME FUND
MAINSTAY GLOBAL HIGH YIELD FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
JUNE 1, 1998
- --------------------------------------------------------------------------------
The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of twenty-two series, the
following seven of which are discussed herein: Blue Chip Growth Fund, Research
Value Fund, Small Cap Value Fund, Growth Opportunities Fund, Small Cap Growth
Fund, Equity Income Fund and Global High Yield 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 Gabelli Asset Management Company ("GAMCO") with
respect to the Blue Chip Growth Fund; John A. Levin & Co., Inc. ("John A. Levin
& Co.") with respect to the Research Value Fund; Dalton, Greiner, Hartman, Maher
& Co. ("Dalton, Greiner") with respect to the Small Cap Value Fund; Madison
Square Advisors, Inc. ("Madison Square Advisors") with respect to the Growth
Opportunities Fund; and MacKay-Shields Financial Corporation ("MacKay-Shields")
with respect to the Small Cap Growth Fund, Equity Income Fund and Global High
Yield Fund. GAMCO, John A. Levin & Co., Dalton, Greiner, Madison Square Advisors
and MacKay-Shields 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 Funds dated June 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
B-1
<PAGE>
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.
B-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE IN
STATEMENT OF
ADDITIONAL
INFORMATION
-----------
<S> <C>
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS................ 6
Repurchase Agreements.................................................. 6
Lending of Portfolio Securities........................................ 7
Bank Obligations....................................................... 8
U.S. Government Securities............................................. 9
Debt Securities........................................................ 9
Convertible Securities................................................ 10
Arbitrage............................................................. 11
Foreign Securities.................................................... 11
Foreign Currency Transactions......................................... 13
Foreign Index-Linked Instruments...................................... 17
Brady Bonds........................................................... 17
Floating and Variable Rate Securities................................. 18
Zero Coupon Bonds..................................................... 19
When-Issued Securities................................................ 19
Mortgage-Related and Other Asset-Backed Securities.................... 20
Short Sales Against the Box........................................... 29
Options on Securities................................................. 30
Options on Foreign Currencies......................................... 36
Securities Index Options.............................................. 38
Futures Transactions.................................................. 39
Swap Agreements....................................................... 49
Loan Participation Interests.......................................... 51
Risks Associated with Debt Securities................................. 53
Risks of Investing in High Yield Securities ("Junk Bonds")............ 54
FUNDAMENTAL INVESTMENT RESTRICTIONS......................................... 55
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS..................................... 57
TRUSTEES AND OFFICERS....................................................... 59
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR.......................... 67
Management Agreement................................................. 67
Sub-Advisory Agreements.............................................. 68
Distribution Agreement............................................... 69
Other Services....................................................... 71
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C>
Expenses Borne by the Trust.......................................... 71
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... 72
NET ASSET VALUE............................................................ 75
SHAREHOLDER INVESTMENT ACCOUNT............................................. 78
SHAREHOLDER SERVICING AGENT................................................ 78
PURCHASES, REDEMPTION AND REPURCHASE....................................... 79
Letter of Intent ("LOI")............................................. 79
Distributions in Kind................................................ 79
Suspension of Redemptions............................................ 79
TAX-DEFERRED RETIREMENT PLANS.............................................. 80
Cash or Deferred Profit Sharing Plans Under Section 401(k)
for Corporations and Self-Employed Individuals................. 80
Individual Retirement Account ("IRA")................................ 80
403(b)(7) Tax Sheltered Account...................................... 82
General Information.................................................. 83
CALCULATION OF PERFORMANCE QUOTATIONS...................................... 83
TAX STATUS................................................................. 87
Taxation of the Funds................................................ 87
Character of Distributions to Shareholders -- General................ 89
Discount............................................................. 91
Taxation of Options, Futures and Similar Instruments................. 92
Passive Foreign Investment Companies................................. 94
Foreign Currency Gains and Losses.................................... 95
Commodity Investments................................................ 95
Dispositions of Fund Shares.......................................... 96
Tax Reporting Requirements........................................... 97
Foreign Taxes........................................................ 98
State and Local Taxes - General...................................... 99
Explanation of Fund Distributions.................................... 99
General Information.................................................. 99
ORGANIZATION AND CAPITALIZATION............................................ 99
General.............................................................. 99
Voting Rights........................................................ 100
Shareholder and Trustee Liability.................................... 100
OTHER INFORMATION.......................................................... 101
Independent Accountants.............................................. 101
</TABLE>
B-4
<PAGE>
<TABLE>
<S> <C>
Legal Counsel........................................................ 101
Code of Ethics....................................................... 101
FINANCIAL STATEMENTS....................................................... 102
</TABLE>
B-5
<PAGE>
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. In addition, the Global High Yield Fund 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 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.
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
B-6
<PAGE>
of bankruptcy or insolvency proceedings with respect to the seller of the
Obligation before repurchase of the Obligation under a repurchase agreement, the
Fund may encounter delays and incur costs before being able to sell the
security. Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan and the Fund
has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate 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 Funds 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 Funds will limit
its investments in reverse repurchase agreements to no more than 5% of its total
assets.
LENDING OF PORTFOLIO SECURITIES
Each 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
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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 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
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most recently published financials) in excess of $100,000,000, or if, with
respect to the obligations of other banks and savings and loan associations,
such obligations are federally insured.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow from the Treasury; others, such as those
issued by the Federal National Mortgage Association ("FNMA"), by the
discretionary authority of the U.S. government to purchase certain obligations
of the agency or instrumentality; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. government provides financial support to such
U.S. government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so, and it is not so obligated by law. See
"Mortgage-Related and Other Asset-Backed Securities."
DEBT SECURITIES
Debt securities may have fixed, variable or floating (including inverse
floating) rates of interest. To the extent that 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
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in interest rates will increase the value of fixed income securities held by a
Fund.
CONVERTIBLE SECURITIES
The Funds 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
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holders of common stock in case of liquidation. However, convertible securities
are typically subordinated to similar non-convertible securities of the same
issuer.
Accordingly, convertible securities have unique investment characteristics
because (i) they have relatively high yields as compared to common stocks, (ii)
they have defensive characteristics since they provide a fixed return even if
the market price of the underlying common stock declines, and (iii) they provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by 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 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
The Funds may invest 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.
Investors should carefully consider the appropriateness of foreign
investing in light of their financial objectives and goals. While foreign
markets may present unique investment opportunities, foreign investing involves
risks not associated with domestic investing. Securities markets in other
countries
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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. Developing countries have economic structures that are less mature.
Furthermore, developing countries have less stable political systems and may
have high inflation, rapidly changing interest and currency exchange rates, and
their securities markets are substantially less developed. The economies of
developing countries generally are heavily dependent upon international trade,
and, accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures in the countries with which they trade. These
economies also have been and may continue to be adversely affected by economic
conditions in the countries with which they trade.
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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 may, to the extent it invests in foreign securities, enter
into forward foreign currency transactions in order to protect against
uncertainty in the level of future foreign currency exchange rates. Each of
these Funds may enter into contracts to purchase foreign currencies to protect
against an anticipated rise in the U.S. dollar price of securities it intends to
purchase and may enter into contracts to sell foreign currencies to protect
against the decline in value of its foreign currency-denominated portfolio
securities due to a decline in the value of the foreign currencies against the
U.S. dollar. In addition, a Fund may use one currency (or a basket of
currencies) to hedge against adverse changes in the value of another currency
(or a basket of currencies) when exchange rates between the two currencies are
correlated.
Foreign currency transactions in which the Funds may engage include
forward foreign currency contracts, currency exchange transactions on a spot
(I.E., cash) basis, put and call options on foreign currencies and foreign
exchange futures contracts. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days (usually less than one year) from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the spread)
between the price at which they are buying and selling various currencies.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, the 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
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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.
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).
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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 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"
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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 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.
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FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility,
the Global High Yield Bond 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
The Global High Yield Fund may invest a portion of its assets in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to sovereign entities for new obligations in connection with debt
restructurings. Brady Bonds may be collateralized or uncollateralized and are
issued in various currencies (primarily the U.S. dollar). Brady bonds are not
considered U.S. government securities.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least
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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.
FLOATING AND VARIABLE RATE SECURITIES
Floating and variable rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be based
on an event, such as a change in the prime rate.
The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money-market
index or Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Funds with a certain degree of protection against rises in
interest rates, the Funds will participate in any declines in interest rates as
well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse
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floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of the Funds' limitations on investments in such securities.
ZERO COUPON BONDS
The Funds may purchase zero coupon bonds, which are debt obligations
issued without any requirement for the periodic payment of interest. Zero coupon
bonds are issued at a significant discount from face value. The discount
approximates 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.
WHEN-ISSUED SECURITIES
The Funds may from time to time purchase securities on a "when-issued"
basis. Debt securities, including municipal bonds, are often issued in this
manner. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery of and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase (60 days for municipal
bonds and notes). During the period between purchase and settlement, no payment
is made by the Fund and no interest accrues to the Fund. To the extent that
assets of a Fund are held in cash pending the settlement of a purchase of
securities, that Fund would earn no income; however, it is the Trust's intention
that each Fund will be fully invested to the extent practicable and subject to
the policies stated herein. Although when-issued securities may be sold prior to
the settlement date, the Trust intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
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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
The Funds 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 "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
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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 any government
agency) residential mortgages from a list of
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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
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policies or guarantee arrangements. The Funds may buy mortgage-related
securities without insurance or guarantees if, through an examination of the
loan experience and practices of the originator/servicers and poolers, the
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.
Although the market for privately issued mortgage-related 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 15% of the value of the Fund's total assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Interest and prepaid
principal is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs are structured into multiple classes, each
bearing a different stated maturity - actual maturing and average life will
depend upon the prepayment experience of the collateral. CMOs provide 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
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prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond Offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
The eligible Funds will not invest in any privately issued CMOs that do
not meet the requirements of Rule 3a-7 under the 1940 Act if, as a result of
such investment, more than 5% of a Fund's net assets would be invested in any
one CMO, more than 10% of the Fund's net assets would be invested in CMOs and
other investment company securities in the aggregate, or the Fund would hold
more than 3% of any outstanding issue of CMOs.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCS, payments of principal and interest on the CMOs are made
semiannually, as opposed to monthly. The amount of principal payable on each
semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because
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of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCS. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO RESIDUALS CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of
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residual cash flow resulting from a CMO will depend on, among other things, the
characteristics of the mortgage assets, the coupon rate of each class of CMO,
prevailing interest rates, the amount of administrative expenses and the
prepayment experience on the mortgage assets. In particular, the yield to
maturity on CMO residuals is extremely sensitive to prepayments on the related
underlying mortgage assets, in the same manner as an interest-only ("IO") class
of stripped mortgage-backed securities. See "Stripped Mortgage-Backed
Securities." In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances a portfolio may
fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and, 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.
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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. 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 rule in determining
whether to invest in residual interests.
STRIPPED MORTGAGE-BACKED SECURITIES Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
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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 to find a buyer, which may in turn decrease
the price at which they may be sold.
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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 CARSSM ("Certificates for
Automobile ReceivablesSM"). CARSSM represent undivided fractional interests in a
trust ("trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARSSM are passed-through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor's return
on CARSSM may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
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 decline in the value of the security owned by the
Fund. If the
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value of a security sold short against the box increases, the Fund would suffer
a loss when it purchases or delivers to the selling broker the security sold
short. The proceeds of the short sale are retained by the broker pursuant to
applicable margin rules. In addition, the Fund may segregate assets, equal in
value to 50% of the value of the short sale, in a special account with the
Fund's custodian. The segregated assets are pledged to the broker pursuant to
applicable margin rules. If a broker with which the Fund has open short sales,
were to become bankrupt, a Fund could experience losses or delays in recovering
gains on short sales. The Funds will only enter into short sales against the box
with brokers the 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 may sell ("write") covered call options on
the portfolio securities of such Fund in an attempt to enhance investment
performance. A call option sold by a Fund is a short-term contract, having a
duration of nine months or less, which gives the purchaser of the option the
right to buy, and 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 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
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circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing market
price. Covered call options and the securities underlying such options will be
listed on national securities exchanges, except for certain transactions in
options on debt securities and foreign securities.
During the option period, the covered call writer has, in return for the
premium received on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline.
A Fund may protect itself from further losses due to a decline in value of
the underlying security or from the loss of ability to profit from appreciation
by buying an identical option, in which case the purchase cost may offset the
premium. In order to do this, the Fund makes a "closing purchase
transaction"--the purchase of a call option on the same security with the same
exercise price and expiration date as the covered call option which it has
previously written on any particular security. The Fund will realize a gain or
loss from a closing purchase transaction if the amount paid to purchase a call
option in a closing transaction is less or more than the amount received from
the sale of the covered call option. Also, because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the closing out of a call option is
likely to be offset in whole or in part by unrealized appreciation of the
underlying security owned by the Fund. When a security is to be sold from the
Fund's portfolio, the Fund will first effect a closing purchase transaction so
as to close out any existing covered call option on that security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") which provides a secondary market for an
option with the same exercise price and expiration date, except as discussed
below. There is no assurance that a liquid secondary market on an Exchange or
otherwise will exist for any particular option, or at any particular time, and
for some options no secondary market on an Exchange or otherwise may exist. If
the Fund is unable to effect a closing purchase transaction involving an
exchange-traded option, the Fund will not sell the underlying security until the
option expires or the Fund delivers the underlying security upon exercise. A
closing purchase transaction for an over-the-counter option may be made only
with the other party to the option. Once an option writer has received an
exercise notice, it cannot
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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 Global High Yield 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 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.
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
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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 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.
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
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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 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 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
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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 call
option (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 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
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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 may, to the extent that it invests in foreign securities,
purchase and write options on foreign currencies for hedging purposes in a
manner similar to that of the Fund's transactions in currency futures contracts
or forward contracts. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such declines in the value of portfolio
securities, a Fund may purchase put options on the foreign currency. If the
value of the currency does decline, that Fund will have the right to sell such
currency for a fixed amount of dollars which exceeds the market value of such
currency, resulting in a gain that may offset, in whole or in part, the negative
effect of currency depreciation on the value of the Fund's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options on such currency. If
the value of such currency does increase, the purchase of such call options
would enable the Fund to purchase currency for a fixed amount of dollars which
is less than the market value of such currency, resulting in a gain that may
offset, at least partially, the 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.
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A Fund may also write options on foreign currencies for hedging purposes.
For example, if a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the decrease in value of portfolio securities will be offset by
the amount of the premium received by the Fund.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.
A call option written on foreign currency by a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the 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
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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 for the
purpose of hedging against the risk of unfavorable price movements which may
adversely affect the value of a Fund's securities.
Unlike a securities option, which gives the holder the right to purchase
or sell specified securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the difference between the value of the underlying securities index
on the exercise date and the exercise price of the option, multiplied by (ii) a
fixed "index multiplier." In exchange for undertaking the obligation to make
such a cash payment, the writer of the securities index option receives a
premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options are
based on a broad market index such as the S&P 500 Composite Price Index or the
N.Y.S.E. Composite Index, or a narrower market index such as the S&P 100 Index.
Indexes may also be based on an industry or market
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segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indexes are traded on the following exchanges,
among others: The Chicago Board Options Exchange, New York Stock Exchange, and
American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by 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.
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 Equity Income Fund and Global High Yield 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. 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. Each Fund may
purchase and sell stock index futures to hedge the equity portion of those
Funds'
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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). The Funds 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 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 Futures Trading Commission ("CFTC"). Subject to applicable CFTC rules,
the Funds also may enter into futures contracts traded on foreign futures
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
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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.
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.
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Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
On other occasions, a Fund may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Fund
intends to purchase particular securities and it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Fund of purchasing
the securities will be offset, at least to some extent, by the rise in the value
of the futures position taken in anticipation of the subsequent securities
purchase. A Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to lengthen the average duration of the
Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
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
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is designed to reflect overall price trends in the market for
equity securities.
Stock index futures may be used to hedge the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the
Funds may enter into futures on debt securities indexes (including the municipal
bond index) to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, a Fund
may seek to protect the value of its portfolio against an overall decline in the
market for securities. Alternatively, in anticipation of a generally rising
market, a Fund can seek to avoid losing the benefit of apparently low current
prices by establishing a "long" position in securities index futures and later
liquidating that position as particular securities are in fact acquired. To the
extent that these hedging strategies are successful, the Fund will be affected
to a lesser degree by adverse overall market price movements, unrelated to the
merits of specific portfolio securities, than would otherwise be the case. A
Fund may also purchase futures on debt securities or indexes as a substitute for
the purchase of longer-term debt securities to lengthen the average duration of
the Fund's debt portfolio.
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
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purchases a currency futures contract for the same aggregate amount of currency
and delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference. Similarly, to close out a
currency futures contract purchased by the Fund, the Fund sells a currency
futures contract. If the offsetting sale price exceeds the purchase price, the
Fund realizes a gain, and if the offsetting sale price is less than the purchase
price, the Fund realizes a loss.
A risk in employing currency futures contracts to protect against the
price volatility of portfolio securities denominated in a particular currency is
that changes in currency exchange rates or in the value of the futures position
may correlate imperfectly with changes in the cash prices of a Fund's
securities. The degree of correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
for hedging purposes over a short-term period. Such distortions are generally
minor and would diminish as the contract approached maturity. Another risk is
that the 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,"
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the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a "long" futures
position, in the case of a "call," or a "short" futures position, in the case of
a "put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the Fund is
not fully invested or of lengthening the average maturity or duration of a
Fund's portfolio. Depending on the pricing of the option compared to either the
futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
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If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are denominated. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of securities or the currencies in which such
securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost to a Fund of the debt securities acquired by it will be reduced by the
amount of the option premium received. Of course, if market prices have
declined, the Fund's purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market.
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
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and related options that do not constitute bona fide hedging positions, a Fund
will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.
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When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment
company also may limit the extent to which a Fund may enter into
futures, futures options or forward contracts. See "Tax Status."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in the Fund's securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends. 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
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futures contract subject to the limit, no more trades may be made on that day at
a price beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid market in the options. It is not certain
that such a market will develop. Although the 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 Funds may enter into interest rate, index and currency exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or for other portfolio management
purposes. Swap agreements are two party contracts entered into
B-49
<PAGE>
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
----
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. Commonly used swap agreements include interest rate caps, under which,
in return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap"; interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels. 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
B-50
<PAGE>
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 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
B-51
<PAGE>
Participation Interests may be acquired from an agent bank, co-lenders or other
holders of Participation Interests ("Participants"). In a novation, a Fund would
assume all of the rights of the lender in a corporate loan, including the right
to receive payments of principal and interest and other amounts directly from
the borrower and to enforce its rights as a lender directly against the
borrower. As an alternative, a Fund may purchase an assignment of all or a
portion of a lender's interest in a corporate loan, in which case, a Fund may be
required generally to rely on the assigning lender to demand payment and enforce
its rights against the borrower, but would otherwise be entitled to all of such
lender's rights in the corporate loan. A Fund also may purchase a Participation
Interest in a portion of the rights of a lender in a corporate loan. In such a
case, a Fund will be entitled to receive payments of principal, interest and
fees, if any, but generally will not be entitled to enforce its rights directly
against the agent bank or the borrower; rather a Fund must rely on the lending
institution for that purpose. A Fund will not act as an agent bank, a guarantor
or sole negotiator 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
B-52
<PAGE>
structuring and funding the corporate loan and other fees paid on
a continuing basis.
A financial institution's employment as an agent bank may be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, a Fund might incur certain costs and
delays in realizing payment on a corporate loan, or suffer a loss of principal
and/or interest. In situations involving intermediate Participants similar risks
may arise.
When a Fund acts as co-lender in connection with a participation interest
or when a Fund acquires a participation 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
B-53
<PAGE>
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.
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, the Funds may purchase
securities not paying interest or dividends at the time acquired if, in the
opinion of the Sub-Adviser, such securities have the potential for future income
(or capital appreciation, if any).
Since shares of the Funds represent an investment in securities with
fluctuating market prices, the value of shares of 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.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The prices
of high yield bonds have been found to be less sensitive to interest-rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the
B-54
<PAGE>
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 on account of such interest
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.
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).
FUNDAMENTAL 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 under the 1940 Act). Investment restrictions that appear
below or elsewhere in this Statement of Additional Information 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) Act as an underwriter of securities issued by others, except to the
extent that a Fund may be considered an underwriter
B-55
<PAGE>
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;
(3) With respect to 75% of each Fund's (except Global High Yield Fund)
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;
(4) 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.
(5) Purchase securities 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 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;
(6) 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, 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
B-56
<PAGE>
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
(7) Make loans to other persons, except loans of portfolio securities. The
purchase of debt obligations and the entry into repurchase agreements in
accordance with a Fund's investment objectives and policies are not deemed to be
loans for this purpose.
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. These represent
intentions of the Trustees based upon current circumstances. They differ from
fundamental investment policies in that the following additional investment
restrictions may be changed or amended by action of the Trustees without
requiring prior notice to or approval of shareholders.
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold
short, and provided that transactions in options, futures and forward
contracts are deemed not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute the purchase of securities on margin.
(c) As an operating policy, a Fund may not 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 and Section 4(2) commercial
paper 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
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<PAGE>
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 purchase the securities
of other investment companies except to the permitted by the 1940 Act in
connection with a merger, consolidation, acquisition, or reorganization.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
The Trustees have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Trustees have delegated the
function of making day-to-day determinations of liquidity to the Sub-Advisers,
pursuant to guidelines approved by the Trustees.
Each Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by a Fund is liquid,
including at least the following:
(i) the frequency and size of trades and quotes for
the Rule 144A security relative to the size of the Fund's
holding;
(ii) the number of dealers willing to purchase or sell the Rule 144A
security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the Rule 144A
security; and
(iv) the nature of the Rule 144A security and the nature of the
market for the Rule 144A security (i.e., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is
liquid, a Sub-Adviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded
flat or in default as to principal or interest;
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<PAGE>
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by
at least two nationally recognized statistical rating
organizations ("NRSROs"); or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper
is rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Sub-Adviser has determined
that the security is of equivalent quality based on factors commonly used by
rating agencies; and
(c) there is a viable trading market for the specific
security, taking into account all relevant factors (e.g., whether the security
is the subject of a commercial paper program that is administered by an issuing
and paying agent bank and for which there exists a dealer willing to make a
market in the security, the size of trades relative to the size of the Fund's
holding or whether the 4(2) commercial paper is administered by a direct issuer
pursuant to a direct placement program).
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees deemed to be "interested persons" of the Trust for
purposes of the 1940 Act are indicated by an asterisk.
B-59
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Donald K. Ross* Chairman and Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance Company;
Franklin Lakes, NJ 07417 Director, New York Life Insurance
Age: 72 Company, 1978 to 1996; President, New
York Life Insurance Company, 1986 to
1990; Chairman of the Board, New York
Life Insurance Company, 1981 to 1990;
Chief Executive Officer, New York Life
Insurance Company, 1981 to 1990; Director,
MacKay-Shields Financial Corporation,
1984 to present; and Trustee, Consolidated
Edison Company of New York, Inc., 1976 to
present.
Stephen C. Roussin* President, Chief Director and Chairperson, MainStay
51 Madison Avenue Executive Officer and Institutional Funds, Inc., 1997 to present;
New York, NY 10010 Trustee Senior Vice President, New York Life
Age: 34 Insurance Company, 1997 to present; Senior
Vice President, Smith Barney, 1994 to 1997;
and Division Sales Manager, Prudential
Securities, 1989 to 1994.
Harry G. Hohn* Trustee Retired Chairman and Chief Executive
51 Madison Avenue Officer, New York Life Insurance Company;
New York, NY 10010 Chairman of the Board and Chief Executive
Age: 65 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
1997; Director, Insurance Marketplace
Standards Association, 1996 to 1997;
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.
Edward J. Hogan Trustee Rear Admiral U.S. Navy (Retired);
Box 2321 Independent management consultant, 1992
Sun Valley, ID 83353 to 1997.
Age: 65
</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>
Richard M. Kernan, Jr. * Trustee Director of MainStay VP Series Fund, Inc.
51 Madison Avenue from January 1987 to present; Chairman of
New York, NY 10010 the Board and Chief Executive Officer of
Age: 57 MainStay VP Series Fund, Inc. from August
1989 to present; Executive Vice President
and Chief Investment Officer of New York
Life Insurance Company from March 1995
to present; Executive Vice President prior
thereto; Member of the Board of Directors
of New York Life Insurance Company from
November 1996 to present and Chairman of
the Investment Committee from January
1997 to present; and Director, Greystone
Realty Corp. January 1997 to present.
Nancy Maginnes Trustee Member, Council of Rockefeller University,
Kissinger New York, NY, 1991 to present; Trustee,
Henderson Road Rockefeller University, 1995 to present;
South Kent, CT 06785 Trustee, Animal Medical Center, 1993 to
Age: 64 present; and Trustee, The Masters School,
1994 to present; Member, Board of
Overseers, Rockefeller Institute of
Government, Albany, NY, 1983-1992
(Board dissolved).
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 Chairman,
Age: 49 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; Commissioner,
State of Maryland, Higher Education
Commission, 1995 to present; Vice
Chairman, National Organization on
Fetal Alcohol Syndrome, 1993 to present;
Chief Executive Officer, Medical Crisis
Systems, 1997 to present; and Board
Member, Hollings Cancer Center, Medical
University of South Carolina, 1993 to
present.
</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>
John B. McGuckian Trustee Chairman of the Board, Ulster Television plc,
Ardverna 1990 to present; Director, Ulster Television
Cloughmills plc, 1970 to present; Chairman of the Board,
Northern Ireland Tedcastle Holding Ltd. (energy), 1995 to
BT4 49NL present; Director, Cooneen Textiles Ltd.
Age: 58 (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 1997; and Chairman of
Senate and Senior Pro-Chancellor, Queen's
University, 1986 to present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group Industries,
1701 Highway A-1-A Inc., 1991 to present; Director, PaineWebber
Suite 218 Group, 1980 to 1993; President,
Vero Beach, FL 32963 PaineWebber Group, 1988 to 1990;
Age: 65 Chairman of the Board, PaineWebber
Properties, 1985 to 1989; Director, Harbour
Group, 1986 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, Sugen,
Inc., 1992 to present; Chairman of the
Board, Omniquip International, Inc., 1996 to
present; Director, Carey Diversified, L.L.C.,
Jan. 1, 1998 to present.
</TABLE>
B-62
<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., N.W. (financial advisory firm), 1990 to present;
Suite 400 Chief Executive Officer and President,
Washington, DC 20036 Americap L.L.C. (financial advisory firm),
Age: 45 1997 to present; Senior Vice President,
Washington National Investment
Corporation (financial advisory firm), 1985
to 1990; Director, Allin Communications
Corporation, 1996 to 1997; and Director and
Member of Executive Committee, Southern
Net, Inc., 1986 to 1990.
Walter W. Ubl* Trustee Senior Vice President, New York Life
85 East End Avenue Insurance Company, 1995 to 1997; Vice
Apt. 2N President, 1984 to 1995; Vice President in
New York, NY 10028 charge of Mutual Funds Department, 1989
Age: 56 to 1997 ; Director and Vice President,
NYLIFE Distributors Inc., 1993 to 1997;
and Director and Senior Vice President
NYLIFE Securities Inc., 1996 to 1997.
- -----------------------------------------------------------------------------------------------------
OFFICERS (OTHER THAN TRUSTEES)
- -----------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice President Chairman, Monitor Capital Advisors, Inc.,
51 Madison Avenue 1997 to present; Senior Vice President,
New York, NY 10010 MainStay Institutional Funds Inc., 1995 to
Age: 40 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.
Frank A. Mistero Senior Vice President Senior Vice President, New York Life
51 Madison Avenue Insurance Company, 1997 to present; Vice
New York, NY 10010 President, New York Life Insurance
Age: 52 Company, 1990 to 1996; and Director and
Senior Vice President and Chief Operating
Officer, MainStay Management, Inc., 1997
to present.
</TABLE>
B-63
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Anthony W. Polis Vice President and Vice President, New York Life Insurance
51 Madison Avenue Chief Financial Officer Company, 1988 to present; Director, Vice
New York, NY 10010 President and Chief Financial Officer,
Age: 54 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-64
<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 President --
New York, NY 10010 Tax, New York Life Insurance Company,
Age: 48 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-65
<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: 41 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., 1994 to 1997; Assistant
Secretary, Eagle Strategies Corp. (registered
investment adviser), 1997 to present;
Secretary, Eagle Strategies Corp. (registered
investment adviser), 1996 to present; and
Assistant General Counsel, Dreyfus
Corporation, 1991 to 1993.
</TABLE>
*Messrs. Ross, Roussin, Hohn, Kernan and Ubl are deemed to be "interested
persons" of the Trust under the 1940 Act.
As indicated in the above table, certain Trustees and officers also hold
positions with MacKay-Shields, New York Life, 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, 1997, 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:
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<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 $48,000 $48,000
Nancy M. Kissinger $46,000 $46,000
Terry L. Lierman $48,000 $48,000
Donald E. Nickelson $52,000 $52,000
Richard S. Trutanic $46,000 $46,000
John B. McGuckian* $12,000 $12,000
</TABLE>
* Mr. McGuckian was elected to his position as Trustee of the
Trust on July 28, 1997.
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Funds, 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 April 27, 1998, the
Trustees approved the Management Agreement with respect to the Funds. On
May 29, 1998, the sole initial shareholder 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).
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<PAGE>
The Manager has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or officers of the Trust to serve
in the capacities in which they have been elected or appointed.
The Management Agreement provides that the Manager shall not be liable to
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 each of the
Sub-Advisers, 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, GAMCO; John A. Levin & Co.; Dalton, Greiner; Madison Square Advisors and
MacKay-Shields 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 April 27, 1998. On
May 29, 1998, the sole shareholder of each of the Funds approved the
Sub-Advisory Agreements with GAMCO; John A. Levin & Co.; Dalton, Greiner;
Madison Square Advisors and MacKay-Shields. The Sub-Advisory Agreements will
remain in
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<PAGE>
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 "interested
persons" of the Trust, the Manager, or the Sub-Advisers (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 the Sub-Advisers shall not be
liable for any error of judgment by the Sub-Advisers or for any loss suffered by
any of the Funds except in the case of the Sub-Advisers' 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.
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 with respect to 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 April 27,
1998.
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<PAGE>
As disclosed in the Prospectus, each of the Funds 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 were approved by the sole initial shareholder of the Class A of shares of
each Fund on May 29, 1998. The Trustees, 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 Class A Plans for each of the
Funds on April 27, 1998.
As noted above, the Class B shares of each Fund also have adopted Rule
12b-1 distribution plans. Rule 12b-1 distribution plans were approved on
May 29, 1998 by the sole initial shareholder of each of the Funds. 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 Class B Plans of the Funds on April 27, 1998.
Under the current Class B plans, each Fund's Class B shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% of the average
daily net assets attributable to the Fund's Class B shares. Pursuant to the
Class B Plan, the Class B shares 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
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<PAGE>
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
Distributor or distribution fee (other than service fees) paid by the Funds to
the Distributor).
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated 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.
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 Custodians and Transfer Agent,
(iv) the charges and expenses of the Trust's legal counsel and independent
accountants, (v) brokers'
B-71
<PAGE>
commissions and any issue or transfer taxes chargeable to the Trust, on behalf
of a Fund, in connection with its securities transactions, (vi) the fees of any
trade association of which a Fund or the Trust is a member, (vii) the cost of
share certificates representing shares of a Fund, (viii) reimbursement of a
portion of the organization expenses of a Fund and the fees and expenses
involved in registering and maintaining registration of the Trust and of its
shares with the SEC and registering the Trust as a broker or dealer and
qualifying its shares under state securities laws, including the preparation and
printing of the Trust's registration statements and prospectuses for such
purposes, (ix) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and preparing,
printing and mailing prospectuses and reports to shareholders, (x) litigation
and indemnification expenses and other extraordinary expenses not incurred in
the ordinary course of a Fund's business, (xi) any expenses assumed by the Fund
pursuant to its plan of distribution, (xii) all taxes and business fees payable
by a Fund to federal, state or other governmental agencies, and (xiii) costs
associated with the pricing of the Funds' shares. 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.
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
B-72
<PAGE>
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.
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 on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
Affiliated Broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The 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-73
<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.
B-74
<PAGE>
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 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.
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 is determined by the Trust
daily as of the close of regular trading on the New
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<PAGE>
York Stock Exchange (currently 4:00 p.m., Eastern time) on each day when the New
York Stock Exchange is open for trading.
Portfolio securities of each 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-
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<PAGE>
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 the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank or broker-dealer.
If such quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Trustees. The Trust recognizes
dividend income and other distributions on the ex-dividend date, except that
certain dividends from foreign securities are recognized as soon as the Trust
is informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
----
Exchange is open for trading). In addition, European or Far Eastern securities
trading generally in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Funds' net asset values are not
calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between
the time their prices are determined and the close of the New York Stock
Exchange will not be reflected in the Funds' calculation of net asset values
unless the Sub-Adviser deems that the particular event would materially affect
net asset value, in which case an adjustment may be made.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights
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<PAGE>
of creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund. The underlying assets of each Fund will be
segregated on the books of account, and will be charged with the liabilities in
respect to such Fund and with a share of the general liabilities of the 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, 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.
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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 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.
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.
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
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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 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
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 may also be purchased 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
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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 (and reaching $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 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 penalty tax. For
distributions made after 1997, the penalty tax does not apply to withdrawals up
to a total of $10,000 for qualified 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
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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 for this purpose. Unlike the traditional IRA, Roth IRAs
are not subject to minimum distribution requirements during the account owner's
lifetime. However, the amount in a Roth IRA is subject to required distribution
rules after the death of the account owner.
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 part of a distribution is taxable, a
penalty tax will generally apply as well. Any balance remaining in an Education
IRA when the beneficiary becomes 30 years old must be distributed and any
earnings will be taxable and subject to a penalty 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 compounded earnings on IRA investments
can lead to substantial retirement and/or education savings.
403(b)(7) TAX SHELTERED ACCOUNT
Shares of a Fund may also be purchased as the underlying investment for
tax sheltered custodial accounts (403(b) plans) 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.
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GENERAL INFORMATION
Shares of a 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.
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 a 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 and reflects fee waivers and reimbursements in
effect for each 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.
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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
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 performance data represents historical performance and the investment
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
The yield of the Funds 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
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compounded on a bond equivalent (semiannual) basis and then they are annualized.
Yield will be calculated using the following SEC formula:
[ (a - b ) to the power of 6 ]
Yield = 2 [ (------ + 1) - 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.
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
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
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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
Russell 2000 Index, the Salomon Brothers Broad Investment Grade Bond Index, the
Morgan Stanley Capital International Indexes, the Dow Jones Industrial Average,
Donoghue Money Market Institutional Averages, the Merrill Lynch 1 to 3 Year
Treasury Index, the Salomon Brothers World Government Benchmark Bond Index, the
Salomon Brothers non-U.S. Dollar World Government Bond Index, J.P. Morgan
Emerging Markets 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
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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.
TAX STATUS
TAXATION OF THE FUNDS
The following summarizes certain federal income tax considerations
generally affecting the Funds and their stockholders. No attempt is made to
present a detailed explanation of the tax treatment of the Funds or their
stockholders, and the discussion here is not intended as a substitute for
careful tax planning. The discussion is based upon present provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be the retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase ownership, and disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Each Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
each Fund must, among other things:
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(i) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies ("Qualifying Income Test"); (ii) diversify its
holdings so that, at the end of each quarter of the taxable year, (a) at least
50% of the market value of the Fund's assets is represented by cash, cash items,
U.S. Government securities, the securities of other regulated investment
companies, and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities on any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls (as that term is
defined in the relevant provisions of the Code) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (iii) distribute at least 90% of the sum of its investment
company taxable income (which includes, among other items, dividends, interest
and net short-term capital gains in excess of any net long-term capital losses)
and its net tax-exempt interest each taxable year. The Treasury Department is
authorized to promulgate regulations under which foreign currency gains would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly related to investing in securities (or options and
futures with respect to securities). To date, no such regulations have been
issued.
Certain requirements relating to the qualification of a Fund as regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if a Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital
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losses), if any, that it distributes to shareholders. Each Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Funds, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Fund in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Provided that a Fund qualifies as a regulated investment company under the
Code, it generally will not be subject to any excise or income taxes in
Massachusetts. A Fund's investments, if any, in REMIC residual interests (as
explained previously in this SAI) or in Passive Foreign Investment Companies, as
explained below, may cause the Fund to become liable for certain taxes.
Investors that are tax-exempt organizations should carefully consider whether
distributions of a Fund's earnings will be subject to tax in their hands.
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 sources (such as
interest) other than dividends, no portion of such distributions will be
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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 generally eliminated unless such shares are deemed to have been held
for more than 45 days. The 45-day holding period must occur during the 90-day
period beginning 45 days before the date on which the shares become ex-
dividend. In the case of dividends on certain preferred stock, the holding
period requirement is 90 days during a 180-day period. In addition, the entire
dividend (including the deducted portion) is includable in the corporate
shareholder's alternative minimum taxable income. Finally, if such dividends are
large enough to constitute "extraordinary dividends" under Section 1059 of the
Code and the applicable holding period requirements are not met, the
shareholder's basis in its shares could be reduced by all or a portion of the
amount of the dividends that qualifies for the dividends-received deduction.
Distributions of net capital gain, whether received in cash or reinvested
in Fund shares, will generally be taxable to shareholders as either "20% Rate
Gain" or "28% Rate Gain," depending upon the Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by a Fund for more
than 18 months and are subject to a maximum tax rate of 20%; "28% Rate Gains"
arise from sales of assets held by a Fund for more than one year but no more
than 18 months and are subject to a maximum tax rate of 28%. Net capital gains
from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
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.
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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 capital
gains will be taxable to 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.
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 generally 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.
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
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difference between the price at which a security was issued (or the price at
which it was deemed issued for federal income tax purposes) 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 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.
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. 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.
Distribution of Fund gains from hedging transactions will be taxable to
shareholders. Generally, hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by a Fund may result in
"straddles" for
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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, certain transactions (including options, futures
contracts, notional principal contracts, short sales and including short sales
against the box) 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 may
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.
The Funds may engage in swap transactions. The tax
treatment of swap agreements is not entirely clear in certain
respects. Accordingly, while the Funds intend to account for
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such transactions in a manner they deem to be appropriate, the IRS might
challenge such treatment. If such a challenge were successful, status of a Fund
as a regulated investment company might be affected. The Funds intend to monitor
developments in this area.
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. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each taxable year, with the result that
unrealized gains are treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
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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.
COMMODITY INVESTMENTS
A regulated investment company is required under the Code to derive at
least 90% of its gross income from certain qualifying sources. 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.
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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 taxable to
stockholders as "20% Rate Gain" if the shares had been held for more than 18
months or as "28% Rate Gain" if the shares had been held for more than one year
but no more than 18 months. 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 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 pursuant to a right
acquired upon the initial purchase of
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shares. 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. The portion of
the sales charge affected by this rule will be treated as a sales charge paid
for the new shares and will be reflected in their basis.
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.
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 (or foreign
country).
Under the federal income tax law, a Fund will be required to report to the
IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares (other than shares of the Money Market Fund), except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, all such taxable distributions and proceeds from the
redemption or exchange of a Fund's shares may be subject to withholding of
federal income tax at the rate of 31% in the case of nonexempt shareholders who
fail to furnish a Fund with their taxpayer identification number and with
required certifications regarding their status under the federal income tax law
or if the IRS or a broker notifies a Fund that the number furnished by the
shareholder is incorrect. In addition, both the Fund and the shareholder are
potentially subject to a $50 penalty imposed by the IRS if a correct, certified
taxpayer identification number is not furnished and used on required information
returns. If the withholding provisions are applicable, any such distributions
and proceeds,
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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 paid or withheld at the
source. The payment of such taxes will reduce the amount of dividends and
distributions paid to the Funds' stockholders. 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. It should also be noted that a tax-exempt shareholder, like other
shareholders, will be required to treat as part of the amounts
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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.
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.
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.
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
Funds included herein
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commenced operations on June 1, 1997. 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 and Strategic Value Fund commenced operations on February
28 and October 22, 1997, respectively. The organizational expenses of each Fund
will be amortized and deferred over a period not to exceed 60 months. The
Declaration of Trust and By-laws authorize the Trustees to establish additional
series or "Funds" as well as additional classes of shares.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate
votes will be taken by 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
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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 accountants of the Trust.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust and persons who, in connection
with their regular functions, play a role in the recommendation of any purchase
or sale of a security by the Trust or obtain information pertaining to such
purchase or sale. 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. The Sub-Advisers that are unaffiliated with New York
Life Insurance Company have adopted their own codes of ethics to govern the
personal trading activities of their personnel.
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FINANCIAL STATEMENTS
Unaudited financial statements relating to the Funds will be prepared
semi-annually and distributed to shareholders. Audited financial statements will
be prepared annually and distributed to shareholders.
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