<PAGE>
As filed with the Securities and Exchange Commission on March 17, 1998
File No. 33-2610
File No. 811-4550
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 44 [X]
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 46 [X]
THE MAINSTAY FUNDS
------------------
(Exact Name of Registrant as Specified in Charter)
51 Madison Avenue
New York, New York 10010
---------------------
(Address of Principal Executive Offices)
(212) 576-5773
----------------------
(Registrant's Telephone Number, including Area Code)
with a copy to:
A. Thomas Smith III, Esq. Jeffrey L. Steele, Esq.
The MainStay Funds Dechert Price & Rhoads
51 Madison Avenue 1775 Eye St, N.W.
New York, New York 10010 Washington, DC 20006
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] Immediately upon filing pursuant to [ ] on ( ) pursuant to
paragraph (b), or paragraph (b), or
[ ] 60 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(1), or paragraph (a)(1), or
[ ] 75 days after filing pursuant to [X] on June 1, 1998 pursuant to
paragraph (a)(2), or paragraph (a)(2), of Rule 485.
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<PAGE>
PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION RELATING TO
THE MAINSTAY FUNDS
CROSS REFERENCE SHEET
The enclosed Prospectus and Statement of Additional Information relate only to
the Large Cap Growth Fund, Large Cap Value Fund, Small Cap Value Fund, Large to
Mid Cap Value Growth Fund, Small Cap Growth Fund, Equity Income Fund and Global
High Yield Bond Fund, newly created series of The MainStay Funds (the "Trust").
The enclosed Part C relates to all of the series of the Trust. Information
relating to the Capital Appreciation Fund, Equity Index Fund, International
Equity Fund, Convertible Fund, Total Return Fund, Value Fund, Government Fund,
High Yield Corporate Bond Fund, International Bond Fund, Money Market Fund,
Strategic Income Fund, California Tax Free Fund, New York Tax Free Fund and Tax
Free Bond Fund is located in Post-Effective Amendment No. 43 to the Trust's
Registration Statement. Information relating to the Strategic Value Fund is
located in Post-Effective Amendment No. 41 to the Trust's Registration
Statement.
ITEMS REQUIRED BY FORM N-1A
---------------------------
Item Number in Part A Prospectus Caption
- --------------------- ------------------
1 Cover Page
2 Tell Me the Key Facts - Analyze the Cost
of Investing: Two Kinds of Fees; If
you invest $1,000, you might pay
3 Not applicable
4 Tell Me the Key Facts -Descriptions of
Each Fund; General Investment
Considerations; Tell Me the Details -
The Trust; Other Information About the
Funds; Description of
C-3
<PAGE>
Investments and Investment Practices;
Investment Restrictions
5 Tell Me the Key Facts - Descriptions of
Each Fund; Know With Whom You're
Investing; Tell Me the Details - The
Trust; Manager, Sub-Advisers and
Distributor
5A Not applicable
6 Tell Me the Key Facts - Decide whether to
pay a sales charge now, later or maybe
never; Decide How to Receive Your
Earnings; Understand the Tax
Consequences; Know Your Rights as a
Shareholder; Tell Me the Details - The
Trust; Alternative Sales Arrangements;
Portfolio Transactions; Tax Information
7 Tell Me the Key Facts - Decide whether to
pay a sales charge now, later or maybe
never; Consider Reducing Your Sales
Charge; Open an Account and Buy Shares;
Know with Whom You're Investing; Tell Me
the Details - Manager, Sub-Advisers and
Distributor; How to Purchase Shares of
the Funds; Alternative Sales Arrangements
8 Tell Me the Key Facts - Know How to Sell
and Exchange Shares; Tell Me the Details-
Redemptions, Repurchases and Exchanges
9 Not Applicable
C-4
<PAGE>
Item Number in Part B Statement of Additional Information Caption
- --------------------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Organization and Capitalization
13 Investment Practices Common to Multiple
Funds; Additional Fundamental Investment
Restrictions; Additional Non-Fundamental
Investment Restrictions
14 Trustees and Officers
15 Trustees and Officers; Other Information
16 The Manager, the Sub-Advisers and the
Distributor
17 Portfolio Transactions and Brokerage
18 Organization and Capitalization
19 Shareholder Investment Account; Redemption and
Repurchase; Net Asset Value
C-5
<PAGE>
20 Tax Status
21 The Manager, the Sub-Advisers and the
Distributor
22 Calculation of Performance Quotations; Tax
Status
23 Financial Statements
C-6
<PAGE>
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The MainStay Funds Prospectus June 1, 1998
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================================================================================
Read This!
================================================================================
These Funds aren't federally insured or guaranteed by the U.S. government--even
if you're investing through a bank. Shares of these Funds are not deposits or
obligations of, or guaranteed or insured by any financial institution, the
Federal Deposit Insurance Corporation, or any other government agency.
Investments in the Funds are subject to investment risks, including possible
loss of principal.
No guarantees. There are no guarantees that a Fund will meet its objectives. All
mutual funds involve risk, including the potential to lose some or all of your
original investment. Except for money market funds, the price of a mutual fund
share will fluctuate and, when sold, may be higher or lower than your original
purchase price.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
Please read this Prospectus carefully before you invest and keep it for future
reference. It includes information you should know before investing. We hope you
will easily find and understand the information you need but if you have any
suggestions for improvement--or if you need any help--please ask your Registered
Representative.
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Building A, Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782), or
visit our website at http://www.mainstayfunds.com.
The Statement of Additional Information (SAI) is incorporated by reference into
this Prospectus and also has been filed with the Securities and Exchange
Commission (SEC). For a free copy of the current SAI write to NYLIFE
Distributors, Inc. or call 1-800-MAINSTAY. The SEC maintains a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
- --------------------------------------------------------------------------------
MainStay offers 22 mutual funds. The following 7 funds are offered in this
Prospectus.
<TABLE>
<CAPTION>
================================================================================
Growth
================================================================================
<S> <C>
Blue Chip Growth Fund .............................................. page 10
Research Value Fund ................................................ page 11
Small Cap Value Fund ............................................... page 12
Growth Opportunities Fund .......................................... page 13
Small Cap Growth Fund .............................................. page 14
Equity Income Fund ................................................. page 15
================================================================================
Income
================================================================================
Global High Yield Fund ............................................. page 16
</TABLE>
[LOGO] MainStay(R) Funds
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This page intentionally left blank
2
<PAGE>
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What's Inside?
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<TABLE>
<CAPTION>
================================================================================
Tell Me Quickly page
================================================================================
<S> <C>
The MainStay Funds ..........................................................1
A Quick Overview...Understanding The MainStay Funds .........................4
<CAPTION>
================================================================================
Tell Me the Key Facts
================================================================================
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
<CAPTION>
================================================================================
Tell Me the Details
================================================================================
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 ............................................................44
Portfolio Transactions .....................................................44
Tax Information ............................................................44
Other Information ..........................................................44
Appendix A: Description of Securities Ratings ..............................45
</TABLE>
3
<PAGE>
================================================================================
Tell Me Quickly
================================================================================
- --------------------------------------------------------------------------------
A Quick Overview...
- --------------------------------------------------------------------------------
Investing in a mutual fund may seem complicated, but it may be easier when you
go through a Registered Representative. He or she can do many of the
administrative tasks--and help you confidently manage the rest.
- -----
1
- -----
================================================================================
Set your investment priorities
================================================================================
Decide if they are:
o protecting what you have,
o receiving income from dividends,
o participating in the potential for greater investment returns, or
o a combination of any of the above.
How much risk of losing money are you willing to take, how aggressive are you
willing to be to try to make money? This two-part question may be the most
difficult question in the world of investing. Start with your gut feeling--then
talk it over with your Registered Representative. This is also an appropriate
time to talk about your investment goals. Your Registered Representative may
have some ideas you haven't considered.
- --------------------------------------------------------------------------------
- -----
2
- -----
================================================================================
Study the Funds' objectives, policies, and risks
================================================================================
Focus on the Funds that seem to be seeking your objectives. Read about the
people who manage each Fund. Understand the types of securities in which each
Fund invests and the risks associated with those investments.
Talk with your Registered Representative.
For key facts about and risks associated with the Funds, see pages __-__. For
more detailed information, see "Tell Me the Details" in this prospectus and see
the SAI.
- --------------------------------------------------------------------------------
- -----
3
- -----
================================================================================
Evaluate each Fund's fees and expenses
================================================================================
Understand one-time and ongoing fees.
See the tables beginning on page _ for your Fund's one-time and ongoing fees and
the impact of those costs on a $1,000 investment.
- --------------------------------------------------------------------------------
- -----
7
- -----
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application, and have your Registered
Representative place the order. He or she can be invaluable here.
Make sure to provide complete information, including who will own the account,
and certify your Social Security number or Taxpayer I.D. number. This is also
the time to decide how you want to receive earnings in cash or additional
shares and whether you want telephone privileges and to make other choices that
will affect how you access your investments. (You may also place the order
directly with MainStay.)
For more on opening an account including opening an account directly--see page
__.
- --------------------------------------------------------------------------------
- -----
8
- -----
================================================================================
See how many shares your money
will buy
================================================================================
You can calculate the number of shares of a Fund your money buys using a simple
equation: (1) subtract the amount of any sales charge, then (2) divide the
remaining amount of your investment by the price of one share of the Fund.
Each Fund's share price (NAV or "net asset value") is calculated at the close of
business of the New York Stock Exchange, normally 4:00 PM Eastern time, each
business day. 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 __ and __.
- --------------------------------------------------------------------------------
- -----
9
- -----
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution and
marketing, investment management, and shareholder services. Fees may be charged
on different schedules but the Fund accrues these expenses daily. You're not
charged directly, the Fund pays the fees to the firms who provide the services,
and then deducts the amounts from the Fund's assets. This, consequently, reduces
the NAV of your shares.
To learn more, see pages ____ and ____.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
...Understanding The MainStay Funds
- --------------------------------------------------------------------------------
- -----
4
- -----
================================================================================
Decide how much to invest in each Fund
================================================================================
You may split your investment among as many MainStay Funds as you desire. The
initial investment, however, must be at least $500 in each Fund offered in this
Prospectus.
- --------------------------------------------------------------------------------
- -----
5
- -----
================================================================================
Decide when to pay the sales charge:
now or later
================================================================================
There may be a sales charge on share purchases. You may choose to pay it when
you invest (and you'll own "Class A" shares), or defer it until you sell,
according to a sliding scale based on the number of years you own the shares
(you'll own "Class B" shares). The sliding scale drops from 5% in the first year
to 0% after six years.
Deferring the sales charge allows you to buy more shares, but you'll pay higher
ongoing fees than Class A shareholders, which will reduce any earnings paid to
you.
Class B shares will be automatically converted to Class A shares 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 __.
- --------------------------------------------------------------------------------
- -----
6
- -----
================================================================================
Consider reducing the sales charge
================================================================================
There are also many ways to reduce or eliminate your sales charges, including
combining purchases, signing up for a letter of intent, or others. There are no
sales charges for reinvesting earnings.
See page __ for details.
- --------------------------------------------------------------------------------
- -----
10
- -----
================================================================================
Earn dividends and
capital gains
================================================================================
Your Fund may earn money through interest payments, dividend payments, or
through capital appreciation of the securities it owns. The Fund periodically
distributes these earnings to you, based on the number of shares you own.
You should check how often a Fund makes distributions, especially if current
income is important to you.
You may elect to have earnings sent to you or have them automatically reinvested
in more shares (with no sales charge).
To learn more, see page __.
- --------------------------------------------------------------------------------
- -----
11
- -----
================================================================================
Exchange shares/Redeem shares
================================================================================
You generally may redeem your shares on any business day. The Fund will redeem
shares at the current NAV and send you a check. If you wish, you may exchange
shares of one Fund for shares of another. You can only exchange shares of the
same class. An exchange is considered a sale of one Fund and a purchase of
another and may have tax consequences.
If you own Class B shares you may pay a charge when you redeem your shares,
depending on the length of time you've held the shares. MainStay provides a
number of convenient ways to redeem your shares.
If you buy $1 million or more of Class A shares and redeem them within a year of
the purchase, you may pay a sales charge.
To learn more, see pages __-__.
- --------------------------------------------------------------------------------
- -----
12
- -----
================================================================================
Manage your taxes/
Align your goals
================================================================================
If you've made a profit on your investment--either through dividends,
distributions, or capital gains, you may have to pay taxes at tax time (consult
your tax adviser).
Be aware that 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 __.
- --------------------------------------------------------------------------------
- -----
13
- -----
================================================================================
Know your rights/
Stay informed
================================================================================
Most of all, you have the right to ask questions-- and have them answered
intelligently. You may call your Registered Representative at any time.
MainStay will send you a quarterly statement, a confirmation of each
transaction, and annual and semiannual reports on your Fund's status and
investments.
To learn more, see page __.
- --------------------------------------------------------------------------------
5
<PAGE>
================================================================================
Tell Me The Key Facts
================================================================================
- --------------------------------------------------------------------------------
Analyze the Costs of Investing: Two Kinds of Fees
- --------------------------------------------------------------------------------
To help you understand the costs of investing in a MainStay Fund, we've provided
expense information based on 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 __-__ 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 __-__
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 _-__ pay, for
example, commissions and marketing/promotional expenses. "Other" includes legal,
auditing, custodian, and other fees. See pages __-__ for more details on fees.
- --------------------------------------------------------------------------------
Why read about costs? Costs are important since they may lower your earnings.
For example, a Fund with higher costs must perform better just to equal the
return of a Fund with lower costs. All things being equal, therefore, a
lower-cost Fund will begin with an advantage.
Lower fees alone, however, will not guarantee better total return performance.
For example, a Fund with no up-front sales charge may actually have higher
ongoing expenses. It may also leave you without a Registered Representative to
advise you. Before investing, you should be sure you understand the nature of
different costs.
Investing a million? The up-front sales charge is waived on investments of $1
million or more in Class A shares. But, there may be a contingent deferred sales
charge of 1% on redemptions (sales of shares) made within a year of the purchase
date.
- --------------------------------------------------------------------------------
If You Invest $1,000, You Might Pay...
- --------------------------------------------------------------------------------
The "Examples" on the following pages are provided to help you understand the
various costs and expenses that an investor in each Fund will bear directly or
indirectly.
The examples on pages _-__ are based on a hypothetical 5% annual return on an
investment of $1,000, conversion of Class B shares to Class A shares after 8
years and the annual fund operating expenses reflected in each chart under Sales
Charges and Operating Expenses. Each pie chart illustrates the expenses that
would be paid by a shareholder for shares held for a period of five years with
the same assumptions.
The actual return on your investment, of course, may be more or less than 5%,
and the actual expenses may also be more or less than those shown. This, of
course, depends on a variety of factors, including the performance of the Fund.
The figures in the following charts, therefore, do not represent how your
investment will perform, nor do they show how the Funds have actually performed
in the past. They are strictly hypothetical examples.
- --------------------------------------------------------------------------------
Take Note: The lowest sales charge won't
always be the least expensive option.
- --------------------------------------------------------------------------------
The contingent deferred sales charge (Class B shares) declines the longer you
stay invested in the Fund (from 5% in year one to 0% after six years); but even
if your sales charge drops to 0%, your cost over time might be more than the
cost of paying the full up-front sales charge. Notice the examples on the
following pages: you pay higher 12b-1 fees (which are ongoing fees) if you defer
the sales charge. However, if you hold Class B shares for eight years, they will
automatically be converted to Class A shares which pay lower 12b-1 fees.
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
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 $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ 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 $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ total sales charges
==== ==== and expenses and expenses
</TABLE>
7
<PAGE>
<TABLE>
<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 $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ 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 $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
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 $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ total sales charges
==== ==== and expenses and expenses
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
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) % None Expenses after 1 year $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
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) % None Expenses after 1 year $ $ $
Expenses after 3 years $ $ $
Expenses after 5 years $ $ $
Expenses after 10 years $ $ $
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 % % $ up-front sales charge $ deferred sales charge
12b-1 Fees(2) 0.25% 1.00% management fees management fees
Other Expenses % % 12b-1 fees 12b-1 fees
---- ---- other expenses other expenses
-------------------------- --------------------------
Total Fund Operating Expenses % % $ total sales charges $ total sales charges
==== ==== and expenses and expenses
</TABLE>
(1) Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. However, because front-end sales
charges are waived on investments in Class A shares of $1 million or more,
a contingent deferred sales charge of 1.00% will be imposed on redemptions
of such investments effected within one year of the date of purchase. With
respect to Class B shares, the amount of the contingent deferred sales
charge will depend on the number of years since the shareholder purchased
the shares being redeemed. See "Alternative Sales Arrangements--Deferred
Sales Charge Class B Shares--Contingent Deferred Sales Charge, Class B."
(2) Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a distribution fee of up to 0.75% of average annual net assets is
treated as a sales charge for certain purposes. Because the distribution
fee is an annual fee charged against the assets of a Fund, long-term
shareholders may indirectly pay an amount that is more than the economic
equivalent of the maximum front-end sales charge permitted by rules of the
NASD. For a description of the distribution plans adopted by the Funds, see
"The Distributor."
9
<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 ___ for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
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 __-__,
"General Investment Considerations" and pages __-__, "Description of Investments
and Investment Practices," for details.)
GAMCO chooses securities for the Fund using fundamental securities analysis to
develop company earnings forecasts for companies 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 __, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
HOWARD F. WARD
OF GAMCO INVESTORS, INC.
(GABELLI ASSET MANAGEMENT CO.)
Mr. Ward is a portfolio manager with GAMCO. 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.
- --------------------------------------------------------------------------------
10
<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").
- --------------------------------------------------------------------------------
================================================================================
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 __-__,
"General Investment Considerations" and page __-__, "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.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
[JOHN A. LEVIN AND
JEFFREY A. KIGNER 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. Messrs. Levin and Kigner have been portfolio managers of the Fund since
its inception.]
11
<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.
- --------------------------------------------------------------------------------
================================================================================
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 within the capitalization
spectrum defined by the Russell 2000 stock index--as of June, 1997, between $170
million and $1.7 billion. In addition, the Fund has adopted a non-fundamental
policy whereby it will invest at least 80% of total assets in such securities.
[The Fund may also invest in:
o securities of companies with stock market capitalizations above $______
o non-convertible preferred stocks
o debt securities.]
Although the Fund is diversified, 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 __-__,
"General Investment Considerations" and pages __-__, "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.
- --------------------------------------------------------------------------------
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 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.
12
<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.
================================================================================
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 page __,
"General Investment Considerations" and pages ___-___, "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 ___, "Description of Investments and
Investment Practices--Foreign Securities.")
WHO'S MANAGING
YOUR MONEY?
JAMES AGOSTISI AND
PATRICIA S. ROSSI OF NEW
YORK LIFE INSURANCE
COMPANY.
Mr. Agostisi is a Director of New York Life. He joined New York Life in 1984 and
subsequently served as its head money market trader. From 1989 to 1994 he worked
as a research analyst in both equities and high yield securities before becoming
a portfolio manager in 1994. Ms. Rossi is Managing Director and head of Public
Equities at New York Life which she joined in 1995. She has 21 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.
13
<PAGE>
================================================================================
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.
- --------------------------------------------------------------------------------
================================================================================
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 __-__,
"General Investment Considerations"; and pages __-, "Description of Investments
and Investment Practices.")
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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), and has been a portfolio manager
for the Fund since its inception. 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 MainStay Capital
Appreciation Fund.
14
<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.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
The Fund takes a flexible approach, emphasizing investments in common stocks
with the characteristics listed below:
Under normal market conditions...
...at least 65% of net assets in common stocks and other 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 __-__,
"General Investment Considerations" and pages __-__, "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.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
DENIS LAPLAIGE, NEIL
FEINBERG AND MICHAEL
SHERIDAN OF MACKAY-
SHIELDS FINANCIAL
CORPORATION.
Mr. Laplaige is President, Chief Investment Officer and Senior Managing Director
of MacKay-Shields. He joined the firm in 1982, became a director in 1988,
managing director in 1991 and a member of the Board of Directors in 1993. 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.
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.
15
<PAGE>
================================================================================
Global High Yield Fund
The Fund's objective is:
================================================================================
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 ___, for more details about the 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 (Baa to B) and S&P (BBB to B).
...without restriction in securities rated at least Ba or B by Moody's, BB or B
by S&P, or unrated securities determined by the Sub-Adviser to be of comparable
quality.
...in at least 3 different countries, which may include countries with
established economies as well as emerging market countries, including those in
Latin America 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 for hedging purposes. The Fund may also buy foreign
currency options.
...other investments suitable for most or all MainStay Funds. (See pages __-__,
"General Investment Considerations" and pages __-__, "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 below BBB
or Baa (sometimes called "junk bonds") are not considered "investment-grade" and
run greater risks of price fluctuations, loss of principal and interest, default
or bankruptcy by the issuer, and other risks which is why these securities are
considered speculative. (See page __. "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 __-__, "Description of Investments and Investment Practices."
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JOSEPH PORTERA AND MAUREEN
MCFARLAND
OF MACKAY-SHIELDS FINANCIAL CORPORATION. Mr. Portera and Ms. McFarland have
served as portfolio managers since the Fund commenced operations. 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 inception.
16
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MUTUAL FUNDS
================================================================================
- --------------------------------------------------------------------------------
The share price of a Fund isn't always stable
- --------------------------------------------------------------------------------
The value of the securities in a Fund and the share price (NAV) of that Fund
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 pages __-__ 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 Blue Chip Growth Fund estimates that its portfolio turnover rate will
not exceed ___%. The Research Value Fund estimates that its portfolio
turnover rate will not exceed 100%. The Small Cap Value Fund estimates that its
portfolio turnover rate will be less than 100%. The Growth Opportunities Fund
estimates that its portfolio turnover rate will not exceed ___%. The Small
Cap Growth Fund estimates that its portfolio turnover rate will not exceed
150%. The Equity Income Fund estimates that its portfolio turnover rate will not
exceed 150%. 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.
<TABLE>
<CAPTION>
====================================================================================================================================
WHAT ARE THE DIFFERENCES IF YOU...
...PAY UP-FRONT (CLASS A SHARES)? <VS> ...PAY WHEN YOU REDEEM/SELL (CLASS B SHARES)?
====================================================================================================================================
<S> <C>
Since some of your investment goes to pay a sales charge You pay no up-front sales charge, your full investment goes
up-front, you start off owning fewer shares. But, you're toward buying shares, so you start off owning more shares.
usually better off paying up-front if you:
The ongoing Rule 12b-1 fees are higher, which means:
o plan to own the shares for an extended period of time,
since the Rule 12b-1 fees on Class B shares will o you receive lower dividends;
eventually exceed the cost of the up-front sales
charge; or o your NAV will generally be lower; and
o qualify for a reduced sales charge (see page __, o therefore, total performance per share will be lower
"Consider Reducing Your Sales Charge," for details). than the Class A shares (but you'll own more shares).
You pay lower ongoing Rule 12b-1 fees--which means there's You may pay a sales charge if you sell shares within the
more net income to pay you higher dividends per share. next 6 years (there are exceptions; see page __, "Deferred
Sales Charge Class B Shares--Contingent Deferred Sales
You pay no sales charge when you redeem/sell your shares Charge, Class B"):
(except if you bought more than $1 million of shares and
redeemed within 1 year, see page __). 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
If there aren't enough shares... longest, so you pay the lowest possible sales charge,
When you sell Class B shares, the Fund is permitted to sell o if you sell a Fund's shares, the sales charge will be
additional Class B shares to cover the cost of the sales based on the lower of the current NAV of Fund shares
charge. If you don't own enough extra Class B shares to do less dividends and distributions or the price you
this, the sales charge will be taken from the proceeds of originally paid for those shares.
your sale, reducing the amount paid to you.
============================================================
If it's automatic reinvestment...
Take note: If you hold Class B shares for eight years they
You don't pay any sales charge (Class A or Class B) on will be automatically converted to Class A shares which pay
shares bought through the automatic reinvestment of lower 12b-1 fees at the end of the calendar quarter
dividends or capital gains. The full amount goes toward occurring eight years after the date a shareholder purchases
buying more shares. their shares.
- ------------------------------------------------------------ ============================================================
</TABLE>
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 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 __.)
Make your actions known
To receive the reduced sales charge, you must convey the information about the
shares you already own at the time you buy on the new account application. This
privilege of "Rights of Accumulation" may be ended or altered at any time upon
written notice.
REGULAR WITHDRAWALS TO PAY PREMIUMS
You won't pay a sales charge upon selling (Class B shares or Class A shares if
you purchased $1 million or more) if you redeem shares under the Systematic
Withdrawal Plan to pay scheduled monthly premiums on insurance issued by New
York Life or an affiliate.
SIGN A LETTER OF INTENT (LOI)
If you qualify, you can sign a letter stating your intention to invest at least
$100,000 within the next 24 months in Class A shares of one or more MainStay
Funds and to pay the up-front sales charge. The current sales charge will be
based on the total amount you intend to invest (the more you invest, the smaller
the sales charge). See "Alternative Sales Arrangements," page __. For more
information on LOIs, call your Registered Representative or MainStay Shareholder
Services, Inc. ("MSS") at 1-800-MAINSTAY.
INVEST $1,000,000 OR MORE
If you invest $1,000,000 or more in Class A shares of one or more MainStay
Funds, and don't sell the shares for at least one year, the up-front sales
charge is waived. If you sell the shares within one year, you may pay a sales
charge of 1% upon sale. See page __, "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 __ 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 OF A CHECK PARTIALLY PLACED INTO AN ENVELOPE]
SEND A CHECK TO YOUR REGISTERED REPRESENTATIVE WITH THE APPLICATION
You'll pay the next NAV that's set after your order is received and accepted,
plus any sales charge if purchasing Class A shares. Your check must be in U.S.
dollars and drawn on a U.S. bank. Include the account number, Fund name and
class of shares (Class A or Class B) you wish to buy. If the check doesn't
clear, your order will be cancelled and you could be liable for losses or fees.
We also reserve the right to limit the number of checks processed at one time.
You may send additional investments (minimum $50 each check) 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 OF A TELEPHONE]
HAVE YOUR REGISTERED REPRESENTATIVE ORDER BY TELEPHONE...
... between 9:00 AM and 4:00 PM Eastern time on any day the New York Stock
Exchange is open. You'll pay the next NAV that's set after your order is
received in good order, plus any sales charge for Class A shares. Have your
Registered Representative call MSS. Purchase orders effected by telephone are
subject to a purchase minimum of $5,000 per Fund. You may not purchase shares of
the Money Market Fund by telephone. MSS must receive your payment (and the
application, if it's your initial investment) within the next 3 business days.
All calls are recorded.
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).
- --------------------------------------------------------------------------------
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 __ and the SAI for the full details on calculating NAV.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 OF A RADIO TOWER]
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 __, "How to Purchase Shares of the Funds--By Wire," for the wire
address.) No wires are accepted on days when the New York Stock Exchange is
closed, or on Martin Luther King Day, Columbus Day or Veterans Day, because the
bank that would receive your wire is closed.
The fastest way to invest
Wiring will reduce the waiting time on selling or exchanging shares because your
money will be cleared right away. If you buy by check and quickly decide to
sell, the Fund may withhold payment for up to 10 days to allow the check to
clear.
[GRAPHIC OF A CLOCK]
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 pages __-__, "How to Purchase Shares of the Funds--Systematic
Investment Plans," for waiving minimums and for details on AutoInvest.)
22
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell and Exchange Shares
- --------------------------------------------------------------------------------
PLACE YOUR SALES ORDER DIRECTLY OR THROUGH YOUR REGISTERED REPRESENTATIVE, IF
ALLOWED BY THE BROKER-DEALER
If you place the order through your Registered Representative:
o MSS must receive the order with all the information, signatures, and
documentation necessary to carry out the order ("good order").
o Your shares are then priced at the next NAV set for the Fund (either 4:00
PM Eastern time that day, or the next day, if the order is placed too late)
after receipt of your order.
IF YOU PLACE THE ORDER DIRECTLY, YOU CAN DO IT BY WRITTEN REQUEST OR IN ONE OF
THE FOLLOWING THREE WAYS
When you want to use one of MainStay's alternative selling privileges, call
1-800-MAINSTAY to verify that the options you want are on record--before you
need to use them.
You may also establish a Systematic Exchange Program to have a minimum of $100
exchanged periodically from any MainStay Fund [(except the Equity Index Fund)]
to another MainStay Fund within the same class of shares. The Fund from which
exchanges are made must have an account value of at least $10,000 at the time
the Systematic Exchange Program is established. (See page __, "Redemptions and
Exchanges--Exchange Privileges," for details.)
- --------------------------------------------------------------------------------
Your shares could be redeemed involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we have the right to redeem the shares in any account valued
at less than $250, provided that the value isn't based on fluctuations in market
prices.
We'll give you 60 days' written notice to allow you to add to your account and
avoid the redemption.
To avoid paying a reporting penalty, we may also redeem your shares if you
haven't given us a certified Taxpayer I.D. number.
- --------------------------------------------------------------------------------
OPTION 1
USE A SYSTEMATIC WITHDRAWAL PLAN
[GRAPHIC OF A CALENDAR]
o Requires at least $10,000 in the account at time of request
You may arrange to make monthly redemptions of $100 or more from any Fund [other
than the Equity Index Fund.] Shares will be sold automatically to cover the
amount plus any applicable sales charge.
These redemptions, like any sale, may result in a gain or loss and, therefore,
may be subject to taxation. Consult your tax adviser on the consequences.
MainStay may end this plan at any time, or begin charging up to $5 per
redemption after 30 days' written notice to you.
No sales charges
There are no deferred sales charges on systematic redemptions to pay scheduled
monthly premiums on policies issued by New York Life or an affiliate.
Words to the wise
We don't recommend using this plan during times when you're regularly buying
shares. You'll be paying new sales charges just to replace the shares you're
selling.
Also remember, these redemptions aren't dividends or income. If you redeem more
than your Fund is earning for you, eventually, your account will be worth less
than your original investment and, ultimately, you will redeem all of your
shares.
Systematic withdrawal plans established by phone are subject to the procedures
applicable to telephone redemptions.
- --------------------------------------------------------------------------------
You have help
If permitted by the broker-dealer, your Registered
Representative may sell or exchange your shares, set up a systematic withdrawal
plan for you or change your address by phone, unless you notify us in writing
not to allow it.
- --------------------------------------------------------------------------------
23
<PAGE>
OPTION 2
MAKE A TELEPHONE REQUEST:
1-800-MAINSTAY
[GRAPHIC OF A TELEPHONE]
You may sell or exchange shares directly over the phone.
o Minimum amount: $500 for exchanges
o You automatically have this privilege unless you notify us in writing that
you do not want it.
Whether you're buying, selling, or requesting a wire transfer or a check, the
price you receive is the next price (NAV) determined for the Fund (either at
4:00 PM Eastern time that day; or at 4:00 PM the next day, if the order is
placed too late) after receipt of your order.
Your broker-dealer must receive your order by 4:00 PM, and is responsible for
sending it in by 5:00 PM the day you place it.
o Be ready to present your Social Security number or Taxpayer I.D. number
over the phone.
o You can only 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.
- --------------------------------------------------------------------------------
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. 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 __,
"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 ________________, _________________and _______________ Funds declare and
distribute 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 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 net taxable income;
o net short-term capital gains; and
o net tax-exempt income.
"Net" means the amount remaining after tax deductible expenses (expenses reduce
"gross" earnings: in other words, the amount the Fund can pay to you.)
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends you receive from The MainStay Funds are taxable,
whether you take them as cash or automatically reinvest them. Some dividends
will be taxable as long-term capital gains.
Tax-free dividends are different
Dividends earned from tax-exempt securities will usually be free from federal
tax. Your MainStay year-end statement will provide full tax information.
MainStay keeps track of your tax status and will mail your tax report each year
by January 31. This report will tell you which dividends and redemptions should
be treated as taxable ordinary income, which, if any, as tax-exempt income, and
which, if any, as long- and short-term capital gains.
Retirement plans
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
Taxes on foreign investment income
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.
- --------------------------------------------------------------------------------
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 FUND'S DAY-TO-DAY BUSINESS?
================================================================================
MainStay Management, Inc. (the "Manager"), 300 Interpace Parkway, Building A,
Parsippany, NJ 07054, serves as the Funds' manager, handling business affairs
for the Funds. MainStay Management, Inc. is a corporation organized under the
laws of Delaware and is an indirect wholly owned subsidiary of New York Life
Insurance Company. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and keeps most of the financial and
accounting records required for the Funds. The Manager has delegated its
portfolio management responsibilities to the Sub-Advisers.
The Manager pays the salaries and expenses of all personnel affiliated with the
Funds, and all the operational expenses that aren't the responsibility of the
Funds, including the fee paid to the Sub-Advisers. (See page __, "Manager, Sub-
Advisers and Distributor," and the SAI for more details.) For its services, the
Fund pays the Manager a monthly fee. (See page __, "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. As of December 31, 1997, MacKay-Shields managed over $28.8
billion in assets.
New York Life Insurance Company ("New York Life"), 51 Madison Avenue, New York,
New York 10010, is the Sub-Adviser to the Growth Opportunities Fund. New York
Life is a mutual life insurance company organized in the State of New York.
Authorized to conduct business as a life insurance company since 1845, it offers
a complete line of life insurance policies and annuity contracts, as well as
financial and retirement contracts. As of December 31, 1997, New York Life had
total assets of approximately $__ billion and managed approximately $__ billion
in assets for qualified retirement plans.
GAMCO Investors, Inc. ("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 NYSE. As of ____________, John A.
Levin & Co. manages approximately $7 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,
New York Life, Gabelli, John A. Levin & Co., and Dalton, Greiner (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 __, for a breakdown of fees.)
- --------------------------------------------------------------------------------
Who works to protect your interests?
- --------------------------------------------------------------------------------
A Board of Trustees oversees the Funds. The Trustees have financial or other
relevant experience and meet several times during the year to review contracts,
Fund activities and the quality of services provided to the Funds. Other than
serving as Trustees, most of the Board Members have no affiliation with the
Trust or its service providers.
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
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. Past investment performance of
Gabelli Growth Fund, as shown in the table below, may be relevant to your
consideration of the Blue Chip Growth Fund. The investment performance of
Gabelli Growth is not necessarily indicative of future performance of the Large
Company Growth Fund. [Disclosure about fee and expense comparison.] The
investment performance of Gabelli Growth Fund is provided merely to indicate the
experience of the portfolio manager in managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses. Included for comparison are performance
figures of the _____ 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
______________________ Index
</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
__________.
[Other than one account, which commenced operations in August 1997,] the
accounts were not subject to the same types of expenses as the Research
Value Fund or the requirements of the Investment Company Act of 1940 or the
Internal Revenue Code, the limitations of which might have adversely affected
performance results. [The figures reflect reinvestment of dividends and are net
of expenses]. The figures have been provided by John A. Levin & Co. and have not
been verified or audited by the Manager or the Fund. They do not indicate how
John A. Levin & Co. or the Fund will perform in the future. 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.]
<TABLE>
<CAPTION>
As of 12/31/97
----------------------------------------------------------------------------
One Three Five Ten Since
Year Year Year Year Inception*
Return Return Return Return Returns
------ ------ ------ ------ -------
<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
Lipper Growth &
Income Index
* October 13, 1982
</TABLE>
28
<PAGE>
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 accounts were not subject to the same types of expenses as the Small Cap
Value Fund or the requirements of the Investment Company Act of 1940 or the
Internal Revenue Code, the limitations of which might have adversely affected
performance results. The figures reflect reinvestment of dividends and are net
of management fees. The figures have been provided by DGHM and have not been
verified or audited by the Manager or the Fund. They do not indicate how DGHM or
the Fund will perform in the future. 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
Year Year Since
Return Return Inception
------ ------ ---------
Dalton, Greiner, Hartman, Mayer & Co.
<S> <C> <C> <C>
Small Cap Value Composite 40.0% 27.4%
Russell 2000 Index 22.4% 22.3%
</TABLE>
NEW YORK LIFE - PRIOR PERFORMANCE
Set forth below is the performance of a mutual fund which is managed by New York
Life and 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 intends that the Growth Opportunities
Fund and MainStay VP Growth Equity will be managed by the same personnel and
will have substantially similar investment strategies, techniques, and
characteristics. Past investment performance of MainStay VP Growth Equity Fund,
as shown in the table below, may be relevant to your consideration of the Growth
Opportunities Fund. The investment performance of MainStay VP Growth Equity Fund
is not necessarily indicative of the future performance of the Growth
Opportunities Fund. [Disclosure about fee and expense comparison.] The
investment performance of MainStay VP Growth Equity is provided merely to
indicate the experience of New York Life in managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses. Included for comparison are performance
figures of the _________ 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
______ Index
</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 _______.
The accounts were not subject to the same types of expenses as the Small Cap
Growth Fund or the requirements of the Investment Company Act of 1940 or the
Internal Revenue Code, the limitations of which might have adversely affected
performance results. The figures reflect reinvestment of income and dividends
and are net of expenses. The figures have been provided by MacKay-Shields and
have not been verified or audited by the Manager or the Fund. They do not
indicate how MacKay-Shields or the Fund will perform in the future. 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
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 __, "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 (between 8:00 AM and 6:00 PM Eastern time); or
o write to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts,
02266-8401.
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT -- CALL 1-800-MAINSTAY
You receive quarterly statements 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 vote upon the election of MainStay Trustees.]
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 _ through __ and in the SAI. The differences
in objectives and policies among the Funds can be expected to affect the degree
of market and financial risk to which each Fund is subject and the investment
return of each Fund. The Trust was established as a Massachusetts business trust
on January 9, 1986 by a Declaration of Trust.
Shares have non-cumulative voting rights, do not have preemptive or subscription
rights and are transferable. No contingent deferred sales charge would be
imposed on distributions during liquidation of a Fund.
As of December 31, 1997, the Trust had aggregate assets of approximately $___
billion, and _______ shareholders.
================================================================================
OTHER INFORMATION ABOUT THE FUNDS
================================================================================
None of the Funds alone constitutes a complete investment program.
Investment decisions for each Fund are made independently from those of the
other accounts and investment companies that may be managed by the Sub-Advisers.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which one Fund invests at the same
time as another Fund, available investments or opportunities for sales will be
allocated equitably to each. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by a Fund or the price paid
or received by a Fund.
- --------------------------------------------------------------------------------
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. Strong market
positions, particularly in growing industries, can give a company pricing
flexibility as well as the potential for strong unit sales. These factors can in
turn lead to higher earnings growth and greater share price appreciation. 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 source 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 interview with company
management. Research is directed towards locating stocks that are undervalued
relative to their future earnings potential.
Tender or exchange offers or reorganization proposals may not be consummated
within the time and under the terms contemplated at the time of the Fund's
investment, and the Fund may sustain a loss. For additional information, see
"Corporate Reorganizations" in the SAI.
- --------------------------------------------------------------------------------
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 (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
32
<PAGE>
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts for purposes of
seeking to enhance portfolio returns and manage portfolio risk more efficiently.
================================================================================
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.
- --------------------------------------------------------------------------------
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
33
<PAGE>
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
__, "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.
- --------------------------------------------------------------------------------
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
34
<PAGE>
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.
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
35
<PAGE>
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 a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market and the laws relating to swaps, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements, to realize amounts to be received under such agreements, or to enter
into swap agreements. Furthermore, swap agreements could have adverse tax
consequences. See Tax Status in the SAI for information regarding the tax
considerations relating to swap agreements.
- --------------------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
- --------------------------------------------------------------------------------
Each Fund may from time to time purchase securities on a when-issued basis. Debt
securities are often issued on this basis. The price (or yield)of such
securities is fixed at the time a commitment to purchase is made, but delivery
and payment for the when-issued securities take place at a later date. During
the period between purchase and settlement, no payment is made by the Fund and
no interest accrues to the Fund. The market value of the when-issued securities
on the settlement date may be more or less than the purchase price payable at
settlement date. Similarly, each Fund may commit to purchase a security at a
future date at a price determined at the time of the commitment. The same
procedures for when-issued securities will be followed.
- --------------------------------------------------------------------------------
ZERO COUPON BONDS
- --------------------------------------------------------------------------------
The Funds 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 "General Investment
Considerations," invest in debt securities rated lower than Baa by Moody's or
BBB by S&P or, if not rated, determined to be of equivalent quality by the Sub-
Adviser. Such securities are sometimes referred to as junk bonds and are
considered speculative.
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
36
<PAGE>
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investment in high yield bonds, be more
dependent upon such creditworthiness analysis than would be the case if the Fund
were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, a Fund may incur additional expenses to seek recovery. In the case of
high yield bonds structured as zero coupon or payment-in-kind securities, the
market prices of such securities are affected to a greater extent by interest
rate changes and, therefore, tend to be more volatile than securities which pay
interest periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Fund could sell a high yield
bond, and could adversely affect and cause large fluctuations in the daily NAV
of the Fund's shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the portfolio security if the
Sub-Adviser deems it in the best interest of the shareholders.
================================================================================
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>
Blue Chip Growth Fund 1.00%
Research Value Fund .85%
Small Cap Value Fund 1.00%
Growth Opportunities Fund .70%
Small Cap Growth Fund %
Equity Income Fund %
Global High Yield Fund %
................................................................................
</TABLE>
[Each expense limitation, fee waiver and fee breakpoint arrangement discussed
above, is voluntary and may be discontinued at any time.]
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' Custodians,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or
Sub-Advisers.
- --------------------------------------------------------------------------------
THE SUB-ADVISERS
- --------------------------------------------------------------------------------
Pursuant to the terms of the Sub-Advisory Agreements between the Manager and the
Sub-Advisers on behalf of each Fund, the Manager, not the Fund, pays the
Sub-Advisers a monthly fee for services performed at the annual rates as
follows:
<TABLE>
<CAPTION>
Annual
Rate
................................................................................
<S> <C>
Blue Chip Growth Fund .50%*
Research Value Fund .425%**
Small Cap Value Fund .50%*
Growth Opportunities Fund .35%
Small Cap Growth Fund %
Equity Income Fund %
Global High Yield Fund %
................................................................................
</TABLE>
* of average daily net assets up to $250 million, .45% of average daily net
assets from $250 million 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.
- --------------------------------------------------------------------------------
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
37
<PAGE>
shares of the Fund, at the annual rate of 0.75% of the average daily net assets
of the Fund's Class B shares.
Class B shares of the 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 __, "Alternative
Sales Arrangements--Deferred Sales Charge Class B Shares--Contingent Deferred
Sales Charge, Class B."
Under a Plan, a class of shares of a Fund pays distribution and/or service fees
to the Distributor as compensation for distribution and/or service activities
related to that class of shares and its shareholders. Each Plan provides that
the distribution and/or service fees are payable to the Distributor regardless
of the amounts actually expended by the Distributor. Authorized distribution
expenses include the Distributor's interest expense and profit. The Distributor
anticipates that its actual expenditures will substantially exceed the
distribution fee received by it during the early years of the operation of a
Plan. For example, the Distributor will advance to dealers who sell Class B
shares of the Funds an amount equal to 4% of the aggregate net asset value of
the shares sold. In addition, the Distributor will pay dealers an ongoing annual
service fee equal to 0.25% of the aggregate net asset value of shares held by
investors serviced by the dealer. In later years, its expenditures may be less
than the distribution fee, thus enabling the Distributor to realize a profit in
those years. If the Plans for the Funds are terminated, the Funds will owe no
payments to the Distributor other than any portion of the distribution fee
accrued through the effective date of termination but then unpaid.
Plan revenues may be used to reimburse third parties which provide various
services to shareholders who are participants in various retirement plans. These
services include aggregating and processing purchase and redemption orders for
participant shareholders, processing dividend payments, forwarding shareholder
communications, and recordkeeping. Persons selling or servicing different
classes of shares of the Funds may receive different compensation with respect
to one particular class of shares as opposed to another in the same Fund.
Class B shares will be automatically converted to Class A shares, which pay
lower 12b-1 fees, at the end of the calendar quarter occurring eight years after
(i) October 27, 1997 or (ii) the date a shareholder purchases his Class B
shares, whichever is later. It is the Trust's intention that all share
conversions be made on a tax-free basis, and if this cannot be reasonably
assured, the Trustees reserve the right to modify or eliminate this share class
conversion feature.
================================================================================
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 __.
- --------------------------------------------------------------------------------
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 __-__, "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 or exchanging shares because, when a shareholder purchases by check,
the Trust will withhold payment for up to 10 days of purchase or until the check
clears, whichever is first.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENTS
- --------------------------------------------------------------------------------
Additional investments in a Fund may be made at any time by mailing a check
payable to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401.
The shareholder's account number and the name of the Fund and class of shares
must be included with each investment. Purchases will be effected at the NAV per
share plus any applicable sales charge as described above.
- --------------------------------------------------------------------------------
SYSTEMATIC INVESTMENT PLANS
- --------------------------------------------------------------------------------
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of a Fund through AutoInvest. AutoInvest facilitates investments
by using electronic debits, authorized by the shareholder, to a checking or
savings account, for share purchases. When the authorization is accepted
(usually within two weeks of receipt) a shareholder may purchase shares by
calling MSS, toll free at 1-800-MAINSTAY (between 8:00 AM and 4:00 PM, Eastern
time). The investment will be effected at the NAV per share next determined
after receipt in good order of the order, plus any applicable sales charge, and
normally will be credited to the shareholder's Fund account within two business
days thereafter. Shareholders whose bank is an ACH member also may use
AutoInvest to automatically purchase shares of a Fund on a scheduled basis by
electronic debit for an account designated by the shareholder on an application
form. The initial investment must be in accordance with the investment amounts
previously mentioned. Subsequent minimum investments are $50 monthly, $100
quarterly, $250 semiannually, or $500 annually or $1,000 in the case of the
Equity Index Fund. The investment day may be any day from the first through the
twenty-eighth of the respective month. Redemption proceeds from Fund shares
purchased by AutoInvest may not be paid until 10 days or more after the purchase
date. Fund shares may not be redeemed by AutoInvest.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
Investors may, subject to the approval of the Trust, the Distributor, the
Manager and the Sub-Adviser to the particular Fund, purchase shares of a Fund
with liquid securities that are eligible for purchase by that Fund and that have
a value that is readily ascertainable. These transactions will be effected only
if the Sub-Adviser intends to retain the security in the Fund as an investment.
The Trust reserves the right to amend or terminate this practice at any time. An
investor must call MainStay at 1-800-MAINSTAY before sending any securities.
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. number (or such other information as
the Trust has requested) has been provided.
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) and employees (and
immediate family members) and institutional clients of John A. Levin & Co. and
DGHM. Also, any employee or Registered Representative of an authorized
broker-dealer may purchase a Fund's shares at NAV without payment of any sales
charge. In addition, the Trust will treat Class A share purchases of Funds in an
amount less than $1,000,000 by defined contribution plans, other than 403(b)
plans, that are sponsored by employers with 250 or more employees as if such
purchases were equal to an amount more than $1,000,000 but less than $2,999,999.
In addition, Class A shares of the Funds may be purchased at net asset value
through broker-dealers, investment advisers and other financial institutions
which have entered into a supplemental agreement with the Distributor, which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or similar program under which clients pay a
fee to the broker-dealer, investment adviser or other financial institution.
- --------------------------------------------------------------------------------
REDUCED SALES CHARGES ON CLASS A SHARES
- --------------------------------------------------------------------------------
The sales charge varies with the size of the purchase and reduced charges apply
to the aggregate of purchases of a Fund made at one time by any "Qualified
Purchaser," which term includes (i) an individual and his/her spouse and their
children under the age of 21; and (ii) any other organized group of persons,
whether incorporated or not, which is itself a shareholder of the Fund,
including group retirement and benefit plans (other than IRAs and non-Erisa
403(b) plans) whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
at a discount of redeemable securities of a registered investment company. The
circumstances under which "Qualified Purchasers" and other investors in the
Funds may pay reduced sales charges are described on page __, "Consider Reducing
Your Sales Charges."
Letter of Intent
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested during a 24-month period. A 90-day back-dated period can be used to
include earlier purchases; the 24-month period would then begin on the date of
the first purchase during the 90-day
40
<PAGE>
period. For more information, see the SAI or call your Registered Representative
or MainStay at 1-800-MAINSTAY.
Contingent Deferred Sales Charge, Class A
In order to recover commissions paid to dealers on qualified investments of $1
million or more, a contingent deferred sales charge of 1% may be imposed on
redemptions of such investments made within one year of the date of purchase.
Class A shares that are redeemed will not be subject to a contingent deferred
sales charge, however, to the extent that the value of such shares represents:
(1) capital appreciation of Fund assets; (2) reinvestment of dividends or
capital gains distributions; or (3) Class A shares redeemed more than one year
after their purchase. Class A shares of a Fund that are purchased without a
front-end sales charge may be exchanged for Class A shares of another Fund
without the imposition of a contingent deferred sales charge, although, upon
redemption, contingent deferred sales charges may apply to the Class A shares
that were acquired through an exchange.
The contingent deferred sales charge will be applicable to amounts invested
pursuant to a right of accumulation or an LOI to the extent that (a) a front-end
sales charge was not paid at the time of the purchase and (b) any shares so
purchased are redeemed within one year of the date of purchase.
For federal income tax purposes, the amount of the contingent deferred sales
charge generally will reduce the gain or increase the loss, as the case may be,
recognized upon redemption.
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE CLASS B SHARES
- --------------------------------------------------------------------------------
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses related to providing
distribution related services to the Funds in connection with the sale of the
Class B shares, such as the payment of compensation to selected dealers and
agents. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase.
Contingent Deferred Sales Charge, Class B
A contingent deferred sales charge will be imposed on redemptions of Class B
shares of the Funds, in accordance with the table below, at the time of any
redemption by a shareholder which reduces the current value of the shareholder's
Class B account in any Fund to an amount which 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.
The contingent deferred sales charge will be waived in connection with the
following redemptions: (i) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, QDRO's and excess contributions pursuant to
applicable IRS rules; and Required Minimum Distributions at age 701/2 for IRA
and 403(b) participants; (ii) withdrawals related to the termination of a
retirement plan where no successor plan has been established; (iii)
preretirement transfers or rollovers within a retirement plan where the proceeds
of the redemption are invested in a MainStay IRA, the New York Life Separate
Account or any guaranteed investment contract written by New York Life or any of
its affiliates, as well as preretirement transfers within a retirement plan
administered by New York Life Benefit Services, Inc. or TRAC-2000; (iv) required
distributions by charitable trusts under Section 664 of the Code; (v)
redemptions following the death of the shareholder or the beneficiary of a
living
41
<PAGE>
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 a stock power
or certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed by an eligible guarantor
institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to MSS must be submitted before the
redemption request will be accepted. The signature guarantee may be waived on a
redemption of $100,000 or less which is payable to the shareholder(s) of record
and mailed to the address of record, or under such other circumstances as the
Trust may allow. 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 Fund may be exchanged for shares of an identical class of the
following MainStay Funds:
MainStay California Tax Free Fund
MainStay Capital Appreciation Fund
MainStay Convertible Fund
MainStay Equity Income Fund
MainStay Global High Yield Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay International Bond Fund
MainStay International Equity Fund
MainStay Blue Chip Growth Fund
MainStay Research Value Fund
MainStay Growth Opportunities Fund
MainStay Money Market Fund
MainStay New York Tax Free Fund
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund
MainStay Strategic Income Fund
MainStay Strategic Value Fund
MainStay Tax Free Bond Fund
MainStay Total Return Fund
MainStay Value Fund
In addition, an exchange privilege between Class A shares of the Funds and
MainStay Equity Index Fund is offered. 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
42
<PAGE>
Class B shares of the Funds and MainStay Equity Index Fund is offered.
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
following receipt of a properly executed exchange request. However, where a
shareholder seeks to exchange Class A shares of the Money Market Fund for Class
A shares of another MainStay Fund which are subject to a front-end sales charge,
the applicable sales charge will be imposed on the exchange, unless the
shareholder has previously paid a sales charge with respect to such shares.
Class B shares of a Fund may be exchanged for Class B shares of another MainStay
Fund at the NAV next computed following receipt of a properly executed exchange
request, without the payment of a contingent deferred sales charge; the sales
charge will be assessed, if applicable, when the shareholder redeems his or her
shares without a corresponding purchase of shares of another MainStay Fund.
However, where a shareholder previously exchanged his or her Class B shares into
the Money Market Fund from another MainStay Fund, the applicable contingent
deferred sales charge will be assessed when the shares are redeemed from the
Money Market Fund even though the Money Market Fund does not otherwise assess a
contingent deferred sales charge on redemptions. Class B shares of a Fund
acquired as a result of subsequent investments, except reinvested dividends and
distributions, will be subject to the contingent deferred sales charge when
ultimately redeemed or repurchased without purchasing shares of another MainStay
Fund.
Exchanges may only be made with respect to Funds registered in the state of
residence of the investor or where an exemption from registration is available
and only with respect to Funds that are available for sale to new investors. An
exchange may be made by either writing to MSS at the following address: The
MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401, or by calling
MSS at 1-800-MAINSTAY (8:00 AM to 4:00 PM Eastern time).
In times when the volume of telephone exchanges is heavy, additional phone lines
will automatically be added by MSS. However, in times of drastic economic or
market changes, the telephone exchange privilege may be difficult to implement.
When calling MSS to make a telephone exchange, shareholders should have
available their account number and Social Security or Taxpayer I.D. numbers.
Under the telephone exchange privilege, shares may only be exchanged among
accounts with identical names, addresses and Social Security or Taxpayer I.D.
numbers. Shares may be transferred among accounts with different names,
addresses and Social Security or Taxpayer I.D. numbers only if the exchange
request is in writing and is received in "good order." If the dealer permits,
the dealer representative of record may initiate telephone exchanges on behalf
of a shareholder, unless the shareholder notifies the Fund in writing not to
permit such exchanges.
It is the policy of The MainStay Funds to discourage frequent trading by
shareholders among the Funds in response to market fluctuations. Accordingly, in
order to maintain a stable asset base in each Fund and to reduce administrative
expenses borne by each Fund, five exchanges are permitted in each 12-month
period without the imposition of any transaction fee; subsequently, exchange
requests may be denied.
For purposes of determining the length of time a shareholder owned Class B
shares prior to redemption or repurchase in order to determine the applicable
contingent deferred sales charge, Class B shares will be deemed to have been
held from the date of purchase of the shares, regardless of exchanges into other
Funds. For federal income tax purposes, an exchange is treated as a sale on
which an investor may realize a gain or loss. See page __, "Understand the Tax
Consequences," for information concerning the federal income tax treatment of a
disposition of shares. All exchanges are subject to the minimum investment
requirements of the Funds involved. The exchange privilege may be modified or
withdrawn at any time without notice.
Distributions in Kind
The Trust has agreed to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio. The securities
distributed in such a distribution would be valued at the same value as that
assigned to them in calculating the NAV of the shares being redeemed. If a
shareholder receives a distribution in kind, he or she should expect to incur
transaction costs when he or she converts the securities to cash.
================================================================================
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
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.
43
<PAGE>
================================================================================
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.
================================================================================
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. Although there can be no assurances, the Funds believe
these steps will be sufficient to avoid any material adverse impact on the
Funds. 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
44
<PAGE>
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Designations Applicable to Municipal Bond Ratings
In its municipal bond rating system, Moody's designates those bonds within the
Aa, A, Baa, Ba and B categories that it believes possess the strongest credit
attributes with the symbols Aa1, A1, Baa1, Ba1 and B1.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Issues that are subject to a periodic reoffer and resale in the secondary market
in a "dutch auction" are assigned a long-term rating based only on Moody's
assessment of the ability and willingness of the issuer to make timely principal
and interest payments. Moody's expresses no opinion as to the ability of the
holder to sell the security in a secondary market "dutch auction." Such issues
are identified by the insertion of the words "dutch auction" into the name of
the issue.
Municipal Short-Term Loan Ratings
Issues or the features associated with MIG, VMIG or SQ ratings are identified by
date of issue, date of maturity or maturities or rating expiration date and
description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issue's specific structural or
credit features.
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SQ: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject
45
<PAGE>
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
- --------------------------------------------------------------------------------
STANDARD & POOR'S
- --------------------------------------------------------------------------------
Corporate and Municipal Debt Ratings Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC rating.
C: The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities.
46
<PAGE>
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Note Rating Definitions
SP-1: Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
Commercial Paper Rating Definitions
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information.
47
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48
<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
[LOGO]
49
<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 GAMCO Investors, Inc. ("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; New York Life
Insurance Company ("New York Life") 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, New York Life 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
<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............................................................................................58
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR................................................................66
Management Agreement....................................................................................66
Sub-Advisory Agreements.................................................................................67
Distribution Agreement..................................................................................68
Other Services..........................................................................................70
</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...................................................................................77
SHAREHOLDER SERVICING AGENT......................................................................................77
PURCHASES, REDEMPTION AND REPURCHASE.............................................................................78
Letter of Intent ("LOI")................................................................................78
Suspension of Redemptions...............................................................................78
TAX-DEFERRED RETIREMENT PLANS....................................................................................79
Cash or Deferred Profit Sharing Plans
Under Section 401(k) for Corporations
and Self-Employed Individuals..................................................................79
Individual Retirement Account ("IRA")...................................................................79
403(b)(7) Tax Sheltered Account.........................................................................81
General Information.....................................................................................82
CALCULATION OF PERFORMANCE QUOTATIONS............................................................................82
TAX STATUS.......................................................................................................86
Taxation of the Funds...................................................................................86
Character of Distributions to Shareholders -- General
..............................................................................................88
Discount ...............................................................................................90
Taxation of Options, Futures and Similar Instruments
..............................................................................................91
Passive Foreign Investment Companies....................................................................93
Foreign Currency Gains and Losses.......................................................................94
Commodity Investments...................................................................................94
Dispositions of Fund Shares.............................................................................95
Tax Reporting Requirements..............................................................................96
Foreign Taxes...........................................................................................97
State and Local Taxes - General.........................................................................98
Explanation of Fund Distributions.......................................................................98
General Information.....................................................................................98
ORGANIZATION AND CAPITALIZATION..................................................................................99
General ...............................................................................................99
Voting Rights...........................................................................................99
Shareholder and Trustee Liability.......................................................................99
</TABLE>
B-4
<PAGE>
<TABLE>
<S> <C>
OTHER INFORMATION...............................................................................................100
Independent Accountants................................................................................100
Legal Counsel..........................................................................................100
Code of Ethics.........................................................................................100
FINANCIAL STATEMENTS............................................................................................101
</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
B-7
<PAGE>
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
B-22
<PAGE>
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.
The California Tax Free Fund, New York Tax Free Fund and Equity Index
Fund, however, may not invest in non-government mortgage pass-through
securities. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. No Fund will purchase mortgage-related securities or any other
assets which in the Sub-Advisers' opinion are illiquid if, as a result, more
than 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
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<PAGE>
quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes receive principal only after the first class has been retired.
An investor is partially guarded against a sooner than desired return of
principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond Offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt
-----------------------------------------
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
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<PAGE>
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event
of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities
---------------------------------
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO RESIDUALS CMO residuals are derivative mortgage securities issued
-------------
by agencies or instrumentalities of the U.S. government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the 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
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<PAGE>
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.
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
B-26
<PAGE>
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.
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
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<PAGE>
"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.
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
B-28
<PAGE>
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 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
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<PAGE>
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 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.
B-30
<PAGE>
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 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
B-31
<PAGE>
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 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
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<PAGE>
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 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
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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 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.
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<PAGE>
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
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
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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.
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.
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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 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
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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 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
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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' 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
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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 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
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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.
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
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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 is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the
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Funds may enter into futures on debt securities indexes (including the municipal
bond index) to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, a Fund
may seek to protect the value of its portfolio against an overall decline in the
market for securities. Alternatively, in anticipation of a generally rising
market, a Fund can seek to avoid losing the benefit of apparently low current
prices by establishing a "long" position in securities index futures and later
liquidating that position as particular securities are in fact acquired. To the
extent that these hedging strategies are successful, the Fund will be affected
to a lesser degree by adverse overall market price movements, unrelated to the
merits of specific portfolio securities, than would otherwise be the case. A
Fund may also purchase futures on debt securities or indexes as a substitute for
the purchase of longer-term debt securities to lengthen the average duration of
the Fund's debt portfolio.
The Funds do not intend to use U.S. stock index futures to
hedge positions in securities of non-U.S. companies.
CURRENCY FUTURES A sale of a currency futures contract creates an
----------------
obligation by a Fund, as seller, to deliver the amount of currency called for in
the contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. A Fund may sell a currency futures contract, if the Sub-Adviser
anticipates that exchange rates for a particular currency will fall, as a hedge
against a decline in the value of the Fund's securities denominated in such
currency. If the Sub- Adviser anticipates that exchange rates will rise, the
Fund may purchase a currency futures contract to protect against an increase in
the price of securities denominated in a particular currency the Fund intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by a Fund, the Fund purchases a currency futures contract for the same
aggregate amount of currency and delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the Fund is immediately paid the
difference. Similarly, to close out a currency futures contract purchased by the
Fund, the Fund sells a currency futures contract. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the
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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,"
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
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margin account, while the loss suffered by the writer of the option will be
debited to its account. However, as with the trading of futures, most
participants in the options markets do not seek to realize their gains or losses
by exercise of their option rights. Instead, the writer or holder of an option
will usually realize a gain or loss by buying or selling an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures contracts can be used by a Fund to hedge
substantially the same risks and for the same duration and risk management
purposes as might be addressed or served by the direct purchase or sale of the
underlying futures contracts. If the Fund purchases an option on a futures
contract, it may obtain benefits similar to those that would result if it held
the futures position itself.
The purchase of put options on futures contracts is a means of hedging
a Fund's portfolio against the risk of rising interest rates, declining
securities prices or declining exchange rates for a particular currency. The
purchase of a call option on a futures contract represents a means of hedging
against a market advance affecting securities prices or currency exchange rates
when the Fund is not fully invested or of lengthening the average maturity or
duration of a Fund's portfolio. Depending on the pricing of the option compared
to either the futures contract upon which it is based or upon the price of the
underlying securities or currencies, it may or may not be less risky than
ownership of the futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs
are involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
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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 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
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Fund's total assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Fund may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, a portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Fund to purchase
the same futures contract at a price no higher than the price of the contract
written by the Fund (or at a higher price if the difference is maintained in
liquid assets with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that
equal the purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the
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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 futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no
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trading, thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses.
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 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
----
B-49
<PAGE>
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 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.
B-50
<PAGE>
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 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
B-51
<PAGE>
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 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
B-52
<PAGE>
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 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
B-53
<PAGE>
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 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.
B-54
<PAGE>
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 Trustees of the Trust also have adopted the following fundamental
investment restrictions, which may not be changed with respect to any Fund
without the approval of the majority of the outstanding voting securities of
that Fund, as defined under the 1940 Act.
The Trust may not, on behalf of any Fund:
(1) act as an underwriter of securities issued by others, except to the
extent that a Fund may be considered an underwriter within the meaning of the
1933 Act, as amended, in the disposition of portfolio securities;
(2) issue senior securities, except to the extent permitted under the
Investment Company Act of 1940;
(3) with respect to 75% of each Fund's total assets invest more than 5%
of the value of the total assets of a Fund in the securities of any one issuer,
except U.S. government securities, or purchase the securities of any issuer if
such purchase would cause more than 10% of the voting securities of such issuer
to be held by a Fund;
B-55
<PAGE>
(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 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.
B-56
<PAGE>
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 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.
B-57
<PAGE>
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees deemed to be "interested persons" of the Trust for
purposes of the 1940 Act are indicated by an asterisk.
B-58
<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 Officer,
953 Cherokee Lane New York Life Insurance Company; Director,
Franklin Lakes, NJ 07417 New York Life Insurance Company, 1978 to 1996;
Age: 72 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 Trustee Institutional Funds, Inc., 1997 to present;
New York, NY 10010 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 Officer,
51 Madison Avenue New York Life Insurance Company; Chairman
New York, NY 10010 of the Board and Chief Executive Officer,
Age: 65 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 Independent management consultant, 1991 to 1995;
Box 2321 President, Westinghouse - Airship Industries, Inc.
Sun Valley, ID 83353 and Managing Director, Airship Industries U.K.,
Age: 65 Ltd., 1987 to 1990.
</TABLE>
B-59
<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,
Hendersons Road Council of Rockefeller University, 1995 to
Kent, CT 06757 present; Trustee, Animal Medical Center,
Age: 63 1993 to present; and Trustee, The Masters
School, 1994 to present.
Terry L. Lierman Trustee President, Capitol Associates, Inc., 1984 to
426 C Street, N.E. present; President, Employee Health Programs,
Washington, D.C. 20002 1990 to present; Vice Chairman, TheraCom Inc.,
Age: 49 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, 1993 to
present; and Board Member, Hollings Cancer Center,
Medical University of South Carolina, 1993 to
present.
</TABLE>
B-60
<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 plc,
Cloughmills 1970 to present; Chairman of the Board, Tedcastle
Northern Ireland Holding Ltd. (energy), 1995 to present; Director,
BT4 49NL Cooneen Textiles Ltd. (clothing manufacturer),
Age: 58 1967 to present; Director Allied Irish Banks plc,
1977 to present; Director, First Trust Bank, 1991 to
present; Director, Unidare plc (engineering), 1986 to
present; Director, Irish Continental Group plc (ferry
operations), 1988 to present; Director, Harbour Group Ltd.
(management company), 1980 to present; Chairman, Industrial
Development Board, 1990 to present; and Chairman of Senate
and Senior Pro- Chancellor, Queen's University, 1986 to
present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group Industries, Inc.,
1701 Highway A-1-A Suite 101 1991 to present; Director, PaineWebber Group,
Vero Beach, FL 32963 1980 to 1993; President, PaineWebber Group, 1988 to
Age: 65 1990; Chairman of the Board, PaineWebber Properties,
1985 to 1989; Director, Harbour Group, 1986 to present;
Director, CPA 10 Real Estate Inv. Trust, 1990 to present;
Director, CIP 11 Real Estate Inv. Trust, 1991 to present;
Chairman of the Board and Director, Rapid Rock Industries,
Inc., 1986 to present; Director and Chairman of the Board,
Del Industries, 1990 to present; Trustee, Jones Foundation
(Los Angeles), 1978 to present; Director, Allied Healthcare
Products, Inc., 1992 to present; Director, Sugen, Inc., 1992
to present; Director and Chairman of the Board, Greenfield
Industries, Inc., 1993 to present; Director, DT Industries,
1992 to present; Chairman of the Board, Omniquip
International, Inc., 1996 to present; and Advisory Panel,
Sedgwick James of NY, 1996 to present.
</TABLE>
B-61
<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
Suite 400 present; Senior Vice President,
Washington, DC 20036 Washington National Investment Corporation
Age: 45 (financial advisory firm), 1985 to 1990;
Director, Allin Communications Corporation,
1996 to present; and Director and Member of
Executive Committee, Southern Net, Inc., 1986 to 1990.
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
New York, NY 10028 in charge of Mutual Funds Department,
Age: 56 1989 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 Insurance Company,
51 Madison Avenue 1990 to present; and Director and Senior Vice President
New York, NY 10010 and Chief Operating Officer, MainStay Management, Inc.,
Age: 58 1997 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>
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-63
<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, 1986 to
Age: 48 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-64
<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 Counsel,
51 Madison Avenue New York Life Insurance Company, 1997 to present;
New York, NY 10010 Associate General Counsel, New York Life Insurance Company,
Age: 41 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:
B-65
<PAGE>
Total Compensation
Aggregate From Registrant
Name of Compensation and Fund Complex
Trustee from the Trust Paid to Trustees
- ------- -------------- -------------------
Edward J. Hogan $________ $________
Harry G. Hohn $________ $________
Richard M. Kernan $________ $________
Nancy M. Kissinger $________ $________
Terry L. Lierman $________ $________
John B. McGuckian* $________ $________
Donald E. Nickelson $________ $________
Donald K. Ross $________ $________
Stephen C. Roussin $________ $________
Richard S. Trutanic $________ $________
Walter W. Ubl $________ $________
* Mr. McGuckian was elected to his position as Trustee of the
Trust on July 28, 1997.
As of __________, 1998, the Trustees and officers of the Trust as a
group owned less than 1% of the outstanding shares of any class of beneficial
interest of each of the Funds.
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Funds, 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 __________, 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
B-66
<PAGE>
of the Funds (as defined in the 1940 Act and in a rule under the 1940 Act) and,
in either case, by a majority of the Trustees who are not "interested persons"
of the Trust or the Manager (as the term is defined in the 1940 Act).
The Manager has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or 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; New York Life and
MacKay-Shields manage the Funds' portfolios, including the purchase, retention,
disposition and loan of securities.
B-67
<PAGE>
The Trustees, including the Independent Trustees, approved the
Sub-Advisory Agreements at an in-person meeting held April 27, 1998. On
__________, 1998, the sole shareholder of each of the Funds approved the
Sub-Advisory Agreements with GAMCO; John A. Levin & Co.; Dalton, Greiner; New
York Life and MacKay- Shields. The Sub-Advisory Agreements will remain in effect
for two years following their effective date, and will continue in effect
thereafter only if such continuance is specifically approved at least annually
by the Trustees or by vote of a majority of the outstanding voting securities of
each of the Funds (as defined in the 1940 Act and in a rule under the 1940 Act)
and, in either case, by a majority of the Trustees who are not "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.
B-68
<PAGE>
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.
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 __________, 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
__________, 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 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
B-69
<PAGE>
the amount to be spent for the services described therein without approval of
the shareholders of the affected class of shares of a Fund, and all material
amendments of each Plan must also be approved by the Trustees in the manner
described above. Each Plan may be terminated at any time, without payment of any
penalty, by vote of a majority of the Independent Trustees, or by a vote of a
majority of the outstanding voting securities of the affected Fund (as defined
in the 1940 Act) on not more than 30 days' written notice to any other party to
the Plan. So long as any Plan is in effect, the selection and nomination of
Trustees who are not such interested persons has been committed to those
Trustees who are not such interested persons. The Trustees have determined that,
in their judgment, there is a reasonable likelihood that each Plan will benefit
the respective Fund and its shareholders. Pursuant to both the Class A and Class
B Plans, the Distributor shall provide the Trust for review by the Trustees, and
the Trustees shall review at least quarterly, a written report of the amounts
expended under each Plan and the purpose for which such expenditures were made.
In the Trustees' quarterly review of each Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
Pursuant to a rule of the National Association of Securities Dealers,
Inc., the amount which a Fund may pay for distribution expenses, excluding
service fees, is limited to 6.25% of the gross sales of the Fund's shares since
inception of the Fund's Plan, plus interest at the prime rate plus 1% per annum
(less any contingent deferred sales charges paid by shareholders to the
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.
B-70
<PAGE>
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of each Fund, is responsible under its
Management Agreement for the payment of expenses related to each Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trust ees who are not affiliated with the Manager or Sub-Advisers,
(iii) certain fees and expenses of the Trust's Custodian and Transfer Agent,
including the cost of pricing a Fund's shares, (iv) the charges and expenses of
the Trust's legal counsel and independent accountants, (v) brokers' commissions
and any issue or transfer taxes chargeable to the Trust, on behalf of a Fund, in
connection with its securities transactions, (vi) the fees of any trade
association of which a Fund or the Trust is a member, (vii) the cost of share
certificates representing shares of a Fund, (viii) reimbursement of a portion of
the organization expenses of a Fund and the fees and expenses involved in
registering and maintaining registration of the Trust and of its shares with the
SEC and registering the Trust as a broker or dealer and qualifying its shares
under state securities laws, including the preparation and printing of the
Trust's registration statements and prospectuses for such purposes, (ix)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees' meetings and preparing, printing and
mailing prospectuses and reports to shareholders, (x) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of a Fund's business, (xi) any expenses assumed by the Fund
pursuant to its plan of distribution, and (xii) all taxes and business fees
payable by a Fund to federal, state or other governmental agencies. Fees and
expenses of legal counsel, registering shares, holding meetings and
communicating with shareholders include an allocable portion of the cost of
maintaining an internal legal and compliance department.
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.
B-71
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected
by brokers, and the Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in certain
over-the-counter securities also may be effected on an agency basis, when the
total price paid (including commission) is equal to or better than the best
total prices available from other sources. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
The primary consideration in placing portfolio security transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Sub- Advisers attempt to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of each Fund and
their other clients on the basis of the broker-dealers' professional capability,
the value and quality of their brokerage services and the level of their
brokerage commissions. Consistent with the foregoing primary considerations, the
Conduct Rules of the NASD and such other policies as the Trustees may determine,
the Sub-Advisers may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Trust. In order for the Affiliated Broker to effect any portfolio transactions
for the Trust, the commissions, fees or other remuneration received by the
Affiliated Broker must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time. This standard
B-72
<PAGE>
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 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
B-73
<PAGE>
directed by the Trust, a commission higher than one charged elsewhere will not
be paid to such a firm solely because it provided Research to an Sub-Adviser.
Research provided by brokers is used for the benefit of all of the Sub-Advisers'
clients and not solely or necessarily for the benefit of the Trust. The
Sub-Advisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Sub-Advisers as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Sub-Advisers. Investment decisions for a Fund and for the
Sub-Advisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be 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.
B-74
<PAGE>
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 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
B-75
<PAGE>
whose operations are similar to the U.S. over-the-counter market and debt
securities for which prices are supplied by a pricing agent but are not deemed
by the Sub-Adviser to be representative of market values, but excluding money
market instruments with a remaining maturity of 60 days or less and including
restricted securities and securities for which no market quotation is available,
at fair value in accordance with procedures approved by and determined in good
faith by the Trustees, although the actual calculation may be done by others.
Money market instruments held by the Funds with a remaining maturity of 60 days
or less will be valued by the amortized cost method unless such method does not
represent fair value. Forward foreign cur rency exchange contracts held by the
Funds are valued at their respective fair market values determined on the basis
of the mean between the last current bid and asked prices based on dealer or
exchange quotations.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank or broker-dealer.
If such quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Trustees. The Trust recognizes
dividend income and other distributions on the ex-dividend date, except that
certain dividends from foreign securities are recog nized as soon as the Trust
is informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges
and over-the-counter markets is normally completed well before the close of
business on each business day in New York (i.e., a day on which the New York
Stock Exchange is open for trading). In addition, European or Far Eastern
securities trading generally in a particular country or countries may not take
place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not business days in New York and on which the Funds' net asset values
are not calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of
B-76
<PAGE>
the majority of the portfolio securities used in such calculation.
Events affecting the values of portfolio securities that oc cur between
the time their prices are determined and the close of the New York Stock
Exchange will not be reflected in the Funds' calculation of net asset values
unless the Sub-Adviser deems that the particular event would materially affect
net asset value, in which case an adjustment 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 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
B-77
<PAGE>
securities. There is currently no precedent prohibiting banks from performing
shareholder servicing and recordkeeping functions. Changes in federal or state
statutes and regulations pertaining to the permissible activities of banks and
their affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations of those provisions, could prevent a bank from
continuing to perform all or a part of such services. If a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services.
It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
PURCHASES, REDEMPTION AND REPURCHASE
LETTER OF INTENT ("LOI")
The LOI is a non-binding obligation on the Qualified Purchaser to
purchase the full amount indicated; however, on the initial purchase, if
required (or, on subsequent purchases if necessary), 5% of the dollar amount
specified in the LOI will be held in escrow by the Transfer Agent in shares
registered in the shareholder's name in order to assure payment of the proper
sales charge. If total purchases pursuant to the LOI (less any dispositions and
exclusive of any distribution on such shares automatically reinvested) are less
than the amount specified, the investor will be requested to remit to the
Distributor an amount equal to the difference between the sales charge paid and
the sales charge applicable to the aggregate purchases actually made. If not
remitted within 20 days after written request, an appropriate number of escrowed
shares will be redeemed in order to realize the difference.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Trust; or (iv) at any other time when
the Trust may, under
B-78
<PAGE>
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 excise tax. For
distributions made after 1997, the excise tax does not apply to withdrawals up
to a total of $10,000 for first-time homebuyer expenses or to withdrawals used
to pay "qualified higher education expenses" of the taxpayer or his or her
spouse, child or grandchild. There are also special rules governing when IRA
distributions must begin and the minimum amount of such distributions; failure
to comply with these rules can result in the imposition of an excise tax.
Roth IRAs. Roth IRAs are a form of individual retirement account
---------
applicable for tax years beginning after 1997. Contributions to a Roth IRA are
not deductible but may be made even after the individual attains the age of
70-1/2. In certain cases, distributions from a Roth IRA may be tax free. The
Roth IRA, like the traditional IRA, is subject to a $2,000 ($4,000 for a married
couple) contribution limit (taking into account both Roth IRA and traditional
IRA contributions). The maximum contribution that can be made is phased-out for
taxpayers with adjusted gross income between $95,000 and $110,000 ($150,000 -
$160,000 if married filing jointly). If the Roth IRA has been in effect for five
years, and distributions are (1) made on or after
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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, an
excise 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 an excise tax upon distribution.
All income and capital gains deriving from IRA investments in the Fund
are reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA or
Education IRA combined with tax-deferred 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. This calculation
assumes a complete redemption of the investment and the deduction of the maximum
contingent deferred sales charge at the end of the period in the case of Class B
shares. In the case of Class A shares, the calculation assumes the maximum sales
charge is deducted from the initial $1,000 purchase order. It also assumes that
all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
In considering any average annual total return quotation, investors
should remember that the maximum initial sales charge
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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 nth power = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10-year periods at the
end of the 1, 5, or 10-year periods (or fractional portion
thereof)
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
compounded on a bond equivalent (semiannual) basis and then they
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are annualized. Yield will be calculated using the following SEC formula:
Yield = 2[(a-b +1) to the 6th power -1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
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 any prior period should not be
considered as a representation of
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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 Lipper Analytical Services, widely used
independent research
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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.
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To qualify as a regulated investment company, each Fund must, among
other things: (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
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long-term capital gains in excess of the net short-term capital 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 for purposes of
Massachusetts law, 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. For dividends
received or accrued after September 4, 1997, the holding period must occur
during the 90-day period beginning 45 days before the date on which the shares
become x-dividend. In addition, the entire dividend (including the deducted
portion) is includable in the corporate shareholder's alternative minimum
taxable income. Finally, if such dividends are large enough to constitute
"extraordinary dividends" under Section 1059 of the Code 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% Gain" or "28% Gain," depending upon the Fund's holding period for the
assets sold. "20% 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% 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.
If any net long-term capital gains in excess of net short-term capital
losses are retained by a Fund for
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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, 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 difference between the price at which a security was
issued (or the price at which it was deemed issued for federal income tax
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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 federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by a Fund. In addition,
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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 such transactions in a manner they deem to be
appropriate, the IRS might challenge such treatment. If such a challenge were
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successful, status of a Fund as a regulated investment company might be
affected. The Funds intend to monitor developments in this area. Certain
requirements that must be met under the Code in order for a Fund to qualify as a
regulated investment company may limit the extent to which a Fund will be able
to engage in swap agreements.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain of the Funds may invest in shares of foreign corporations which
may be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at least
one-half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election may be available
that would involve marking-to-market a Fund's PFIC shares at the end of each
taxable year (and on certain other dates prescribed in the Code), with the
result that unrealized gains are treated as though they were realized. If this
election were made, tax at the fund level under the PFIC rules would generally
be eliminated, but a Fund could, in limited circumstances, incur nondeductible
interest charges. Other
B-93
<PAGE>
elections may become available that would affect the tax treatment of PFIC
shares held by the Fund. The Fund's intention to qualify annually as a regulated
investment company may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not invest in PFIC shares.
FOREIGN CURRENCY GAINS AND LOSSES
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time a Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on the disposition of debt securities denominated in a foreign
currency and on the disposition of certain options, futures, forward and other
contracts, gain or loss attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Fund's net investment income to be
distributed to its shareholders. If Section 988 losses exceed other investment
company taxable income (which includes, among other items, dividends, interest
and the excess, if any, of net short-term capital gains over net long-term
capital losses) during the taxable year, a Fund would not be able to make any
ordinary dividend distributions, and distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders or, in
some cases, as capital gain, rather than as an ordinary dividend.
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,
----------
B-94
<PAGE>
dividends, and gain from the sale of stock or securities, but it does not
include gain from the sale of commodities such as gold and other precious
metals.
DISPOSITIONS OF FUND SHARES
Upon redemption, sale or exchange of shares of a Fund, a shareholder
will realize a taxable gain or loss, depending on whether the gross proceeds are
more or less than the shareholder's tax basis for the shares. Such gain or loss
generally will be a capital gain or loss if the shares of a Fund were capital
assets in the hands of the shareholder, and generally will be taxable to
stockholders as "20% Gain" if the shares had been held for more than 18 months
or as "28% 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.
B-95
<PAGE>
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 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 re-elected in their basis, accordingly.
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
B-96
<PAGE>
subject to a $50 penalty imposed by the IRS if a correct, certified taxpayer
identification number is not furnished and used on required information returns.
If the withholding provisions are applicable, any such distributions and
proceeds, whether taken in cash or reinvested in shares, will be reduced by the
amounts required to be withheld. Backup withholding is not an additional tax and
any amounts withheld are creditable against the shareholder's U.S. Federal tax
liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
FOREIGN TAXES
Investment income and gains received by a Fund from sources outside the
United States may be subject to foreign taxes which were 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
B-97
<PAGE>
will be treated as having taxable income in respect to the shareholder's pro
rata share of foreign taxes paid by the Fund. It should also be noted that a
tax-exempt shareholder, like other shareholders, will be required to treat as
part of the amounts distributed its pro rata portion of the income taxes paid by
the Fund to foreign countries. However, that income will generally be exempt
from taxation by virtue of such shareholder's tax-exempt status, and such a
shareholder will not be entitled to either a tax credit or a deduction with
respect to such income. The foreign tax credit generally may offset only up to
90% of the alternative minimum tax in any given year. Foreign taxes generally
are not deductible in computing alternative minimum taxable income.
STATE AND LOCAL TAXES - GENERAL
The state and local tax treatment of distributions received from a Fund
and any special tax considerations associated with foreign investments of a Fund
should be examined by shareholders with regard to their own tax situations.
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.
B-98
<PAGE>
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 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
B-99
<PAGE>
entered into or executed by the Trust or the Trustees. The Declaration of Trust
provides for indemnification by the relevant Fund for any loss suffered by a
shareholder as a result of an obligation of the Fund. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which a Fund would be unable to meet its obligations. The Trustees believe
that, in view of the above, the risk of personal liability of shareholders is
remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------
has been selected as independent public
- ---------------
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 or who have the power to influence the management or policies
of the Trust or a Sub-Adviser unless such power is the
B-100
<PAGE>
result of their position with the Trust or Sub-Adviser. Such persons are
generally required to preclear all security transactions with the Trust's
Compliance Officer or his designee and to report all transactions on a regular
basis. The Trust has developed procedures for administration of the Code.
FINANCIAL STATEMENTS
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.
B-101
<PAGE>
THE MAINSTAY FUNDS
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements:
Not Applicable.
b. Exhibits:
1. (a) Amended and Restated Declaration of Trust dated August 30, 1991 -
Previously filed as Exhibit 1(a) to Post-Effective Amendment No.
13*
(b) Fifth Amended and Restated Establishment and Designation of Series
of Shares of Beneficial Interest, Par Value $.01 Per Share dated
October 26, 1992 -- Previously filed as Exhibit 1(b) to Post-
Effective Amendment No. 16*
(c) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(b) to Post-Effective Amendment No. 11*
(d) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(b) to Post-Effective Amendment No.
23*
(e) Form of Declaration of Trust as Amended and Restated December 31,
1994 -- Previously filed as Exhibit 1(e) to Post-Effective
Amendment No. 27*
(f) Form of Establishment and Designation of Additional Series of
Shares of Beneficial
<PAGE>
Interest, Par Value $.01 Per Share -- Previously filed as
Exhibit 1(e) to Post-Effective Amendment No. 28*
(g) Form of Establishment and Designation of an Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(g) to Post-Effective Amendment No.
35*
(h) Establishment and Designation of an Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(h) to Post-Effective Amendment No. 38*
(i) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share.**
2. (a) Amended and Restated By-laws dated August 30, 1991 -- Previously
filed as Exhibit 2 to Post-Effective Amendment No. 13*
(b) Amended and Restated By-Laws dated December 31, 1994 -- Previously
filed as Exhibit 2(b) to Post-Effective Amendment No. 32*
3. Inapplicable
4. Specimen Share Certificate -- Previously filed as Exhibit 4 to
Pre-Effective Amendment No. 2*
5. (a)(1) Revised Form of Investment Advisory Agreement -- Capital
Appreciation Fund -- Previously filed as Exhibit 5(a)(1) to
Pre-Effective Amendment No. 2*
(2) Revised Form of Investment Advisory Agreement -- Value Fund --
Previously filed as Exhibit 5(a)(2) to Pre-Effective Amendment
No. 2*
(3) Revised Form of Investment Advisory Agreement -- Convertible
Fund -- Previously filed as
- --------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
Exhibit 5(a)(3) to Pre-Effective Amendment No. 2*
(4) Revised Form of Investment Advisory Agreement -- High Yield
Corporate Bond Fund --Previously filed as Exhibit 5(a)(4) to
Pre-Effective Amendment No. 2*
(5) Revised Form of Investment Advisory Agreement -- Government
Fund -- Previously filed as Exhibit 5(a)(5) to Pre-Effective
Amendment No. 2*
(6) Revised Form of Investment Advisory Agreement -- Money Market
Fund -- Previously filed as Exhibit 5(a)(6) to Pre-Effective
Amendment No. 2*
(7) Form of Investment Advisory Agreement -- Tax Free Bond Fund --
Previously filed as Exhibit 5(a)(7) to Post-Effective Amendment
No. 2*
(8) Revised Form of Investment Advisory Agreement -- Total Return
Fund -- Previously filed as Exhibit 5(a)(9) to Post-Effective
Amendment No. 4*
(9) Form of Investment Advisory Agreement -- Equity Index Fund --
Previously filed as Exhibit 5(a) to Post-Effective Amendment
No. 7*
(10) Form of Investment Advisory Agreement -- California Tax Free
Fund and New York Tax Free Fund -- Previously filed as Exhibit
5(a) to Post-Effective Amendment No. 11*
(11) Form of Investment Advisory Agreement -- International Equity
Fund and International Bond Fund -- Previously filed as Exhibit
5 to Post-Effective Amendment No. 23*
(12) Form of Investment Advisory Agreement--Strategic Income Fund--
Previously filed as Exhibit 5(a)(12) to Post-Effective
Amendment No. 35*
(13) Form of Management Agreement -- Strategic Value Fund --
Previously filed as Exhibit 5(a)(13) to Post Effective
Amendment No. 38*
- ------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
(14) Form of Composite Management Agreement**
(b)(1) Form of Sub-Advisory Agreement -- Strategic Value Fund --
Previously filed as Exhibit 5(b)(1) to Post-Effective Amendment
No. 38*
(b)(2) Composite Sub-Advisory Agreement with MacKay-Shields and
Monitor**
(b)(3) Form of Sub-Advisory Agreement - with GAMCO Investors,
Inc.**
(b)(4) Form of Sub-Advisory Agreement - with New York Life Insurance
Company**
(b)(5) Form of Sub-Advisory Agreement - with John A. Levin & Co.,
Inc.**
(b)(6) Form of Sub-Advisory Agreement - with Dalton, Greiner, Hartman,
Maher & Co.**
6. (a) Form of Distribution Agreement -- Previously filed as Exhibit
6(a) to Post-Effective Amendment No. 22*
(b) Form of Soliciting Dealer Agreement -- Previously filed as
Exhibit 6(b) to Pre-Effective Amendment No. 1*
7. Inapplicable
8. (a) Custodian Contract with State Street Bank and Trust Company --
Previously filed as Exhibit 8(a) to Pre-Effective Amendment No.
1*
(b) Fee schedule for Exhibit 8(a) -- Previously filed as Exhibit 8(b)
to Pre-Effective Amendment No. 2*
- ------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
(c) Custodian Contract with The Bank of New York --Previously filed
as Exhibit 8(a) to Post-Effective Amendment No. 7*
9. (a)(1) Form of Transfer Agency Agreement --Previously filed as Exhibit
9(a)(1) to Post-Effective Amendment No. 37*
(2) Form of Subtransfer Agency Agreement --Previously filed as
Exhibit 9(a)(2) to Post-Effective Amendment No. 37*
(b)(1) Form of Administration Agreement -- Equity Index Fund --
Previously filed as Exhibit 9(b) to Post Effective Amendment
No. 20*
(2) Form of Administration Agreement --California Tax Free Fund and
New York Tax Free Fund -- Previously filed as Exhibit 9(b) to
Post-Effective Amendment No. 21*
(3) Form of Composite Administration Agreement --Capital
Appreciation Fund, Value Fund, Convertible Fund, Total Return
Fund, High Yield Corporate Bond Fund, Government Fund and Tax
Free Bond Fund -- Previously filed as Exhibit 9(b) to Post-
Effective Amendment No. 22*
(4) Form of Administration Agreement --International Equity Fund
and International Bond Fund -- Previously filed as Exhibit 9(b)
to Post-Effective Amendment No. 23*
(5) Form of Administration Agreement -- Strategic Income Fund --
Previously filed as Exhibit 9(b)(5) to Post-Effective Amendment
No. 35*
(c) Form of Fund Accounting Service Agreement --Previously filed as
Exhibit 9(11) to Post-Effective Amendment No. 6*
- ------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
(d) Form of Guaranty Agreement -- Equity Index Fund -- Previously
filed as Exhibit 9(c) to Post-Effective Amendment No. 7*
(e) Form of Services Agreement between The MainStay Funds and
NYLIFE Distributors Inc. -- Previously filed as Exhibit 9(b) to
Post-Effective Amendment No. 25*
(f) Form of Service Agreement -- Previously filed as Exhibit 9(g)
to Post-Effective Amendment No. 33*
(g) Form of Service Agreement with New York Life Benefit Services,
Inc. --Previously filed as Exhibit 9(g) to Post-Effective
Amendment No. 37*
10. Opinion of counsel** -
11. Consent of independent accountants**
12. Inapplicable
13. Investment representation letter relating to initial capital --
Previously filed as Exhibit 13 to Pre-Effective Amendment No. 1*
14.(a)(1) Revised Form of 403(b) Account Application --Previously filed as
Exhibit 14(a)(1) to Post-Effective Amendment No. 3*
- ------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
(2) Revised Form of 403(b) Custodial Agreement --Previously filed as
Exhibit 14(a)(2) to Post-Effective Amendment No. 3*
(b)(1) Form of 401(k) Adoption Agreement --Previously filed as Exhibit
14(b)(1) to Pre-Effective Amendment No. 2*
(2) Form of 401(k) Plan and Trust -- Previously filed as Exhibit
14(b)(2) to Pre-Effective Amendment No. 2*
(c)(1) Form of IRS Form 5305-A -- Previously filed as Exhibit 14(c)(1) to
Pre-Effective Amendment No. 2*
(2) Revised Form of IRS Adoption Agreement and Custodian Disclosure
Statement*
(3) Form of MainStay Funds Individual Retirement Account Application
and Transfer Request*
15.(a)(1) Form of Composite Plan of Distribution pursuant to Rule 12b-1
(Class A shares) as approved October 30, 1995 -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Total Return
Fund, High Yield Corporate Bond Fund, Government Fund and Tax Free
Bond Fund -- Previously filed as Exhibit 15(a)(1) to Post-
Effective Amendment No. 32*
(2) Form of Composite Plan of Distribution pursuant to Rule 12b-1
(Class B Shares) as approved October 30, 1995 -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Global Fund,
Total Return Fund, Natural Resources/Gold Fund, High Yield
Corporate Bond Fund, Government Fund and Tax Free Bond Fund --
Previously filed as Exhibit 15(a)(2) to Post-Effective Amendment
No. 32*
(3) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) as approved October
- ------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
30, 1995 -- International Equity Fund and International Bond Fund
--Previously filed as Exhibit 15(a)(3) to Post-Effective Amendment
No. 33*
(4) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) as approved October 30, 1995 -- International Equity Fund
and International Bond Fund -- Previously filed as Exhibit
15(a)(4) to Post-Effective Amendment No. 33*
(5) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) as approved October 30, 1995 -- California Tax Free Fund,
New York Tax Free Fund and Equity Index Fund --Previously filed as
Exhibit 15(a)(5) to Post-Effective Amendment No. 33*
(6) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) as approved October 30, 1995 -- California Tax Free Fund
and New York Tax Free Fund -- Previously filed as Exhibit 15(a)(6)
to Post-Effective Amendment No. 33*
(7) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) --MainStay Strategic Income Fund -- Previously filed as
Exhibit 15(a)(7) to Post-Effective Amendment No. 34*
(8) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) --MainStay Strategic Income Fund -- Previously filed as
Exhibit 15(a)(8) to Post-Effective Amendment No. 34*
(9) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
shares) --MainStay Strategic Value Fund -- Previously filed as
Exhibit 15(a)(9) to Post-Effective Amendment No. 38*
(10) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
shares) --MainStay Strategic Value Fund -- Previously filed as
Exhibit 15(a)(10) to Post-Effective Amendment No. 38*
- ------------------------
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** To be filed by amendment
<PAGE>
(11) Form of Composite Plan of Distribution pursuant to Rule 12b-1 as
approved October 24, 1997 - -- Previously filed as Exhibit
15(a)(11) to Post-Effective Amendment No. 42.*
16. Inapplicable
17. Financial Data Schedules - Not applicable
18. Form of Multiple Class Plan Pursuant to Rule 18f-3 --Previously filed
as Exhibit 18 to Post-Effective Amendment No. 30*
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following chart indicates the persons controlled by New York Life:
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation which owns 100% Delaware 100%
of the shares of:
Greystone Realty Management, Inc. Delaware
NYLIFE Administration Corp. Texas 100%
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
MainStay Institutional Funds Inc. Maryland ***
MainStay Management, Inc. Delaware 100%
MainStay Shareholder Services, Inc. Delaware 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity Delaware 100%
Corporation
New York Life International Investment Inc. Delaware 100%
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited England
MainStay VP Series Fund, Inc. Maryland *
New York Life International, Inc. (formerly New York
Life Worldwide Holding, Inc.), which owns 100% of
the shares of:
New York Life Worldwide Capital, Inc. Delaware
New York Life Worldwide Development, Inc. Delaware
New York Life Worldwide (Bermuda) Ltd. Bermuda
New York Life Insurance Worldwide Ltd. Bermuda
and owns 99.97% of the shares of
New York Life (U.K.) Ltd., which owns 100% of the England
shares of:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
Windsor Construction Company Limited England
and 33.3% of Japan Gamma Asset Management
Limited and 31.5% of the shares of: Japan
Life Assurance Holding Corporation Limited, South Korea
which owns 100% of the shares of:
Indonesia
Windsor Life Assurance Company Limited
and which owns 51% of the shares of:
KOHAP New York Life Insurance Ltd. Mexico
and which owns 50.2% of the shares of:
P.T. Asuransi Jiwa Sewur -
New York
and which owns 49% of the shares of:
GEO New York Life, S.A. 100%
Delaware
NYLIFE Depositary Corporation which owns 16.67% Texas
of NYLIFE Structured Asset Management Company Ltd.
New York Life Benefit Services, Inc. which owns Massachusetts 100%
100% of ADQ Insurance Agency Inc.
Massachusetts
New York Life Trust Company New York 100%
NYLIFE Distributors Inc. Delaware 100%
NYLIFE Healthcare Management Inc., which owns Delaware
54.3% of total combined stock and 89.6% of the voting
rights of:
Express Scripts, Inc., which owns 100% of the
shares of:
Delaware
Great Plains Reinsurance Company
Arizona
Practice Patterns Science, Inc.
Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
ESI Canada Holdings, Inc., which owns Canada
100% of the shares of:
ESI Canada, Inc.
Canada
IVTx of Houston, Inc.
Texas
IVTx of Dallas, Inc.
Texas
PhyNet, Inc.
Texas
Express Scripts Vision Corporation
Delaware
NYLCare Health Plans, Inc.
Delaware
(formerly Sanus Corp. Health Systems), which
owns 100% of the shares of: Delaware
New York Life and Health Insurance Delaware
Company
Delaware
Avanti Corporate Health Systems Inc.
Maryland
Avanti Health Systems, Inc., which owns
100% of the shares of:
Maryland
Avanti of the District, Inc.
Illinois
Avanti of Illinois, Inc.
New York
Avanti of New York, Inc.
New Jersey
Avanti of New Jersey, Inc.
and owns 80% of the shares of:
NYLCare Health Plans of the Mid-Atlantic,
Inc., which owns 100% of the shares of:
Maryland
Physicians Health Services Foundation,
Inc.
Delaware
Lonestar Holding Co., which owns 90% of the
shares of:
Texas
Lone Star Health Plan, Inc., which owns
100% of the shares of:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
NYLCare Health Plans of the Gulf Texas
Coast, Inc.
Prime Provider Corp., which owns 100% of
the shares of: New York
Prime Provider Corp. of Texas
Texas
NYLCare Health Plans of Connecticut, Inc.
Connecticut
Sanus Dental Plan of N.J., Inc.
New Jersey
NYLCare Dental Plans of the Southwest, Inc.
Texas
NYLCare Health Plans of New York, Inc.
New York
NYLCare Health Plans of Connecticut, Inc.
Connecticut
NYLCare Health Plans of the Midwest, Inc.
Illinois
NYLCare Health Plans of New Jersey, Inc. New Jersey
NYLCare of Texas, Inc., which owns 100% Texas
of the shares of:
NYLCare Passport PPO of the Texas
Southwest, Inc.
NYLCare Preference Services, Inc. Maryland
Sanus Preferred Providers West, Inc. California
Sanus Preferred Services of Illinois, Inc. Illinois
NYLCare Health Plans of the Southwest, Inc. Texas
WellPath of Arizona Reinsurance Company Arizona
NYLCare Health Plans of Louisiana, Inc. Louisiana
NYLCare of New England, Inc. Delaware
Sanus - Northeast, Inc. Delaware
NYLCare Health Plans of Maine, Inc. Maine
NYLCare NC Holdings, Inc. which owns Delaware
50% of the shares of:
WellPath Community Health Plan Holdings, North Carolina
L.L.C.
which owns 100% of WPCHP Holdings, Inc. Delaware
and 99% of:
WellPath Preferred Services, L.L.C. North Carolina
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
and
WellPath Select Holdings, L.L.C. which North Carolina
owns 100% of:
WellPath Select, Inc. North Carolina
WellPath of Carolina, Inc. North Carolina
Sanus of New York and New Jersey, Inc. New York
NYLCare Health Plans of Pennsylvania, Inc. Pennsylvania
Docservo, Inc. New York
The ETHIX Corporation, which owns 100% Delaware
of the shares of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc., Pennsylvania
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc. Missouri
ETHIX Northwest Public Services, Inc. Washington
ETHIX Northwest, Inc., Washington
which owns 100% of:
NYLCare Health Plans Northwest, Inc. Washington
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc. Oregon
ETHIX Southeast, Inc. North Carolina
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 100% California
of the shares of VivaHealth, Incorporated
and BPS Health Plan
Administrators. California
One Liberty Plaza Holdings, Inc. Delaware
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
NYLINK Insurance Agency Incorporated Delaware 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C> <C>
which owns 100% of the shares of: Alabama
NYLINK Insurance Agency of Alabama New Mexico
NYLINK Insurance Agency of New Mexico Hawaii
NYLINK Insurance Agency of Hawaii Massachusetts
Incorporated.
NYLINK Insurance Agency of Massachusetts,
Incorporated.
NYLTEMPS Inc. Delaware 100%
</TABLE>
_____________________
+ By including the indicated corporations in this list, New York Life is not
stating or admitting that said corporations are under its actual control;
rather, these corporations are listed here to ensure full compliance with
the requirements of this Form N-1A.
* New York Life serves as investment adviser to these entities, the shares of
which are held of record by separate accounts of New York Life (for the New
York Life Fund, Inc.) and NYLIAC (for the MainStay VP Series Fund, Inc.).
New York Life disclaims any beneficial ownership and control of these
entities.
** New York Life Foundation does not issue voting securities.
*** New York Life Insurance Company, MacKay-Shields Financial Corporation and
Monitor Capital Advisors, Inc. serve as sub-advisers to this entity.
<PAGE>
Item 26. Number of Holders of Securities (as of February 28, 1998)
<TABLE>
<CAPTION>
(2)
(1) NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
<S> <C> <C>
Shares of Common Stock: Class A Class B
------- -------
Shares of beneficial interest,
Capital Appreciation Fund 17,658 138,435
Shares of beneficial interest,
Value Fund 8,419 96,661
Shares of beneficial interest,
Convertible Fund 3,396 43,598
Shares of beneficial interest,
High Yield Corporate Bond Fund 6,965 108,359
Shares of beneficial interest,
Government Fund 792 38,596
Shares of beneficial interest,
Tax Free Bond Fund 400 15,323
Shares of beneficial interest,
Money Market Fund 4,683 33,619
Shares of beneficial interest,
Total Return Fund 5,098 88,191
Shares of beneficial interest,
Equity Index Fund 20,417 N/A
Shares of beneficial interest,
California Tax Free Fund 415 236
Shares of beneficial interest,
New York Tax Free Fund 401 162
Shares of beneficial interest,
International Equity Fund 1,565 9,261
Shares of beneficial interest,
International Bond Fund 318 2,398
Shares of beneficial interest,
Strategic Income Fund 425 2,230
Shares of beneficial interest,
Strategic Value Fund 422 1,700
</TABLE>
ITEM 27. INDEMNIFICATION
New York Life Insurance Company maintains Directors & Officers Liability
insurance coverage totaling $100 million. The coverage limit applies each year
and has been extended to cover Directors, Trustees and Officers of the
<PAGE>
Trust, and subsidiaries and certain affiliates of New York Life. Subject to the
policies' terms, conditions, deductible and retentions, Directors, Officers and
Trustees are covered for claims, including related expenses, made against them
while acting in their capacities as such. The primary policy in the amount of
$25 million is issued by National Union Fire Insurance Company of Pittsburgh,
PA, and the excess policies in the amount at $75 million are issued by various
insurance companies. The issuing insurance companies may be changed from time
to time and there is no assurance that any or all of the current coverage will
be maintained by New York Life.
Article IV of Registrant's Declaration of Trust states as follows:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(I) every person who is, or has been, a Trustee or officer of the Trust
shall be indemnified by the Trust, or by one or more Series thereof if the
claim arises from his or her conduct with respect to only such Series to
the fullest extent permitted by law against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(I) against any liability to the Trust or a Series thereof or the
Shareholders by reason of a final adjudication by a court or other body
before which a proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
<PAGE>
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interest of the Trust or a Series thereof;
(iii) in the event of a settlement or other disposition not involving a
final adjudication as provided in paragraph (b)(I) or (b)(ii) resulting in
a payment by a Trustee or officer, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(A) by the court or other body approving the settlement or other
disposition; or
(B) based upon a review of readily available facts (as
opposed to a full trial-type inquiry) by (x) vote of a majority of
the Disinterested Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in office act on the
matter) or (y) written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification
to which personnel of the Trust other than Trustees and officers may be entitled
by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceedings of the character described in paragraph (a) of this
Section 4.3 shall be advanced by the Trust or a Series thereof to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient, to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(I) such undertaking is secured by surety bond or some other
appropriate security provided by the recipient, or the Trust or a Series
thereof shall be insured against losses arising out of any such advances;
or
<PAGE>
(ii) a majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees acts on the matter)
or an independent legal counsel in a written opinion shall determine, based
upon a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who is not
(I) an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
The business of MainStay Management, Inc., New York Life Insurance Company,
GAMCO Investors, Inc., John A. Levin & Co., Inc., Dalton, Greiner, Hartman,
Maher & Co., MacKay-Shields Financial Corporation and Monitor Capital Advisors,
Inc. is summarized under "Know with Whom You're Investing" in the Prospectus
constituting Part A of this Registration Statement, which summary is
incorporated herein by reference.
The business or other connections of each director and officer of MainStay
Management, Inc. is currently listed in the investment
adviser registration on Form ADV for MainStay Management, Inc. (File No. 801-
54912) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of MacKay-
Shields Financial Corporation is currently listed in the investment
<PAGE>
adviser registration on Form ADV for MacKay-Shields Financial Corporation (File
No. 801-5594) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of Monitor
Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors, Inc. (File No. 801-34412)
and is hereby incorporated herein by reference.
The business or other connections of each director and officer of New York
Life Insurance Company is currently listed in the investment adviser
registration on Form ADV for New York Life Insurance Company (File No. 801-
19525) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of GAMCO
Investors, Inc. is currently listed in the investment adviser registration on
Form ADV for GAMCO Investors, Inc. (File No. 801-14132) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of John A.
Levin & Co., Inc. is currently listed in the investment adviser registration on
Form ADV for John A. Levin & Co., Inc. (File No. 801-52602) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of Dalton,
Greiner, Hartman, Maher & Co. Is currently listed in the investment adviser
registration on Form ADV for Dalton, Greiner, Hartman, Maher & Co. (File No.
801-36175) and is hereby incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b)
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ------------------ ------------------------ --------------
<S> <C> <C>
Mistero, Frank Director and President Senior Vice President
260 Cherry Hill Road
Parsippany, NJ 07054
Davidson, Sheila Chief Compliance Officer None
51 Madison Avenue
New York, NY 10010
Boyce, Jefferson C. Director Senior Vice President
51 Madison Avenue
New York, NY 10010
Brady, Robert E. Director and Vice None
260 Cherry Hill Road President
Parsippany, NJ 07054
Boccio, Frank M. Director None
51 Madison Avenue
New York, NY 10010
Rock, Robert D. Director None
51 Madison Avenue
New York, NY 10010
Gallo, Michael G. Director None
51 Madison Avenue
New York, NY 10010
Hildebrand, Phillip J. Director None
51 Madison Avenue
New York, NY 10010
Roussin, Stephen Director President and Chief
Morris Corporate Center I Executive Officer
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Polis, Anthony W. Vice President and Chief Chief Financial Officer
Morris Corporate Center I Financial Officer
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Calhoun, Jay S. Vice President and None
51 Madison Avenue Treasurer
New York, NY 10010
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ------------------ ------------------------ --------------
<S> <C> <C>
Ubl, Walter W. Director and Senior Vice Trustee
260 Cherry Hill Road President
Parsippany, NJ 07054
Warga, Thomas J. Senior Vice President and None
51 Madison Avenue General Auditor
New York, NY 10010
Livornese, Linda M. Vice President None
51 Madison Avenue
New York, NY 10010
Murray, Thomas J. Corporate Vice President None
51 Madison Avenue
New York, NY 10010
Zuccaro, Richard W. Tax Vice President Tax Vice
51 Madison Avenue President
New York, NY 10010
Krystel, David J. Vice President None
51 Madison Avenue
New York, NY 10010
O'Byrne, John H. Vice President and Chief None
51 Madison Avenue Compliance Officer
New York, NY 10010
Adasse, Louis H. Corporate Vice President None
51 Madison Avenue,
New York, NY 10010
Daoust, George R. Assistant Vice President None
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Arizmendi, Arphiela Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Cirillo, Antoinette B. Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ------------------ ------------------------ --------------
<S> <C> <C>
300 Interpace Parkway
Parsippany, NJ 07054
Lorito, Geraldine Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Gomez, Mark A. Assistant Secretary None
51 Madison Avenue
New York, NY 10010
Brenner, Nancy Secretary None
51 Madison Avenue
New York, NY 10010
</TABLE>
(c) Inapplicable.
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, the Manager and
NYLIFE Distributors Inc., Morris Corporate Center I, Building A, 300 Interpace
Parkway, Parsippany, NJ 07054, at MacKay-Shields Financial Corporation, 9 West
57th Street, New York, NY 10019; Monitor Capital Advisors, Inc., 504 Carnegie
Center, Princeton, New Jersey 08540; New York Life Insurance Company, 51
Madison Avenue, New York, NY 10010; GAMCO Investors, Inc., One Corporate Center,
Rye, NY 10580; John A Levin & Co., Inc., One Rockefeller Plaza, 25th Floor, New
York, NY 10020; Dalton Greiner, Hartman, Maher & Co., 1100 Fifth Ave. South,
Suite 301, Naples, FL 34102. Records relating to the Registrant's transfer
agent are maintained by MainStay Shareholder Services Inc., 200 Cherry Hill
Road, Parsippany, NJ 07054. Records relating to the duties of the Registrant's
custodian for the Capital Appreciation Fund, Convertible Fund, High Yield
Corporate Bond Fund, Government Fund, Money Market Fund, Tax Free Fund, Total
Return Fund and Value Fund are maintained by State Street Bank and Trust
Company, 1776 Heritage Drive, Quincy, MA 02171; and records relating to
Registrant's custodian for the California Tax Free Fund, New York Tax Free Fund,
International Equity Fund, International Bond Fund, Equity Index Fund, Strategic
Income Fund and Strategic Value Fund are maintained by The Bank of New York, 110
Washington Street, New York, NY 10286.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
b. The Registrant hereby undertakes to file a post-effective amendment,
including financial statements relating to the seven new funds discussed
herein, which need not be certified, within four to six months from the
effective date of Post-Effective Amendment No. 44 to the Registration
Statement under the Securities Act of 1933.
c. The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to its Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Parsippany and the
State of New York, on the 17th day of March, 1998.
THE MAINSTAY FUNDS
By: /S/ Stephen C. Roussin
-----------------------------------------
STEPHEN C. ROUSSIN, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities indicated on March 17, 1998.
Signatures Title
---------- -----
* Chairman and Trustee
- -------------------------
DONALD K. ROSS
/S/ Stephen C. Roussin President, Chief Executive
- ------------------------- Officer and Trustee
STEPHEN C. ROUSSIN
/S/ Anthony W. Polis Chief Financial Officer
- ------------------------- (Principal Financial and
ANTHONY W. POLIS Accounting Officer)
* Trustee
- -------------------------
EDWARD J. HOGAN
*
- ------------------------- Trustee
HARRY G. HOHN
<PAGE>
*
- ------------------------- Trustee
RICHARD M. KERNAN, JR.
*
- ------------------------- Trustee
NANCY M. KISSINGER
*
- ------------------------- Trustee
TERRY L. LIERMAN
**
- ------------------------- Trustee
JOHN B. McGUCKIAN
*
- ------------------------- Trustee
DONALD E. NICKELSON
*
- ------------------------- Trustee
RICHARD S. TRUTANIC
*
- ------------------------- Trustee
WALTER W. UBL
/S/ Jeffrey L. Steele
- -------------------------
JEFFREY L. STEELE
* Executed by Jeffrey L. Steele pursuant to a power of attorney filed with
herewith.
** Executed by Jeffrey L. Steele pursuant to a power of attorney filed with
Post-Effective Amendment No. 40 on August 28, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Edward J. Hogan Trustee January 26, 1998
- ----------------------
Edward J. Hogan
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Harry G. Hohn Trustee January 26, 1998
- --------------------
Harry G. Hohn
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Nancy Maginnes Kissinger Trustee January 26, 1998
- -----------------------------
Nancy Maginnes Kissinger
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Richard M. Kernan, Jr. Trustee January 26, 1998
- ---------------------------
Richard M. Kernan, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Terry L. Lierman Trustee January 26, 1998
- ----------------------
Terry L. Lierman
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Donald E. Nickelson Trustee January 26, 1998
- ------------------------
Donald E. Nickelson
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Donald K. Ross Chairman and January 26, 1998
- -------------------- Trustee
Donald K. Ross
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Richard S. Trutanic Trustee January 26, 1998
- -------------------------
Richard S. Trutanic
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to The MainStay Funds and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission and the states, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Walter W. Ubl Trustee January 26, 1998
- --------------------
Walter W. Ubl
