<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1998
File No. 33-2610
File No. 811-4550
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 47 [X]
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 49 [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 Street, 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 paragraph (b), or
[ ] on ( ) pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1), or
[X] on September 1, 1998 pursuant to paragraph (a)(1), or
[ ] 75 days after filing pursuant to paragraph (a)(2), or
[ ] on ( ) pursuant to 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
This Post-Effective Amendment No.47 contains a Prospectus and Statement of
Additional Information relating to the following 15 of The MainStay Funds' (the
"Trust's") 22 series: Capital Appreciation Fund, Equity Index Fund,
International Equity Fund, Convertible Fund, Strategic Value, Total Return Fund,
Value Fund, Government Fund, High Yield Corporate Bond Fund, International Bond
Fund, Money Market Fund, Stategic Income Fund, California Tax Free Fund, New
York Tax Free Fund and Tax Free Bond Fund; and a separate Prospectus and
Statement of Additional Information relating to the following 7 of the Trust's
22 series: Small Cap Growth Fund, Small Cap Value Fund, Blue Chip Growth Fund,
Equity Income Fund, Growth Opportunities Fund, Research Value Fund and Global
High Yield Fund.
Items Required by Form N-1A
---------------------------
Item Number in Part A Prospectus Caption
- --------------------- ------------------
1 Cover Page
2 Tell Me the Key Facts - Analyze the Cost of
Investing: Two Kinds of Fees; If you invest
$1,000, you might pay
3 Financial Highlights
4 Tell Me the Key Facts - Descriptions of Each Fund;
General Investment Considerations; Tell Me the
Details - The Trust; Other Information About the
Funds; Description of Investments and Investment
Practices; Investment Restrictions
5 Tell Me the Key Facts - Descriptions of Each Fund;
Know With Whom You're Investing; Tell Me the
Details - The Trust; Manager, Sub-Advisers and
Distributor
5A See Annual Reports
6 Tell Me the Key Facts - Decide whether to pay a
sales charge now, later or maybe never; Decide How
to Receive Your Earnings; Understand the Tax
<PAGE>
Consequences; Know Your Rights as a Shareholder;
Tell Me the Details -The Trust; Alternative Sales
Arrangements; Portfolio Transactions; Tax
Information
Item Number in Part A Prospectus Caption
- --------------------- ------------------
7 Tell Me the Key Facts - Decide whether to pay a
sales charge now, later or maybe never; Consider
Reducing Your Sales Charge; Open an Account and
Buy Shares; Know with Whom You're Investing; Tell
Me the Details -Manager, Sub-Advisers and
Distributor; How to Purchase Shares of the Funds;
Alternative Sales Arrangements
8 Tell Me the Key Facts - Know How to Sell and
Exchange Shares; Tell Me the Details -Redemptions,
Repurchases and Exchanges
9 Not Applicable
Item Number in Part B Statement of Additional Information Caption
- --------------------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Organization and Capitalization
13 Additional Investment Policies Of The Money Market
Fund; Investment Practices Common to Multiple
Funds; Additional Fundamental Investment
Restrictions; Additional Non-Fundamental
Investment Restrictions
14 Trustees and Officers
15 Trustees and Officers; Other Information
2
<PAGE>
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
20 Tax Status
21 The Manager, the Sub-Advisers and the Distributor
22 Calculation of Performance; Quotations; Tax Status
23 Financial Statements
3
<PAGE>
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The MainStay Funds Prospectus September 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 (see "Description of Investments and Investment Practices" on
page 73).
No guarantees. There are no guarantees that a Fund will meet its objectives. All
mutual funds involve risk, including the potential to lose some or all of your
original investment. Except for money market funds, the price of a mutual fund
share will fluctuate and, when sold, may be higher or lower than your original
purchase price. Furthermore, although the Money Market Fund attempts to maintain
a stable net asset value of $1 per share, there can be no assurance that it will
succeed in doing so.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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Please read this Prospectus carefully before you invest and keep it for future
reference. It includes information you should know before investing. We hope you
will easily find and understand the information you need but if you have any
suggestions for improvement--or if you need any help--please ask your Registered
Representative.
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Building A, Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782), or
visit our website at http://www.mainstayfunds.com.
The Statement of Additional Information (SAI) is incorporated by reference into
this Prospectus and also has been filed with the Securities and Exchange
Commission (SEC). For a free copy of the SAI write to NYLIFE Distributors, Inc.
or call 1-800-MAINSTAY. The SEC maintains a website (http://www.sec.gov) that
contains the SAI, material incorporated by reference, and other information
regarding registrants that file electronically with the SEC.
- --------------------------------------------------------------------------------
The following 15 MainStay Funds are offered in this Prospectus.
<TABLE>
<CAPTION>
================================================================================
Growth
================================================================================
<S> <C>
Capital Appreciation Fund ........................................... page 42
Equity Index Fund ................................................... page 43
International Equity Fund ........................................... page 44
================================================================================
Growth & Income
================================================================================
Convertible Fund .................................................... page 45
Total Return Fund ................................................... page 46
Strategic Value Fund ................................................ page 47
Value Fund .......................................................... page 48
================================================================================
Income
================================================================================
Government Fund ..................................................... page 49
High Yield Corporate Bond Fund ...................................... page 50
International Bond Fund ............................................. page 51
Money Market Fund ................................................... page 52
Strategic Income Fund ............................................... page 53
================================================================================
Tax Free
================================================================================
California Tax Free Fund ............................................ page 54
New York Tax Free Fund .............................................. page 55
Tax Free Bond Fund .................................................. page 56
</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
Financial Highlights ...................................................... 16
Descriptions of Each Fund ................................................. 42
General Investment Considerations ......................................... 57
Decide Whether to Pay a Sales Charge Now, Later...or Maybe Never .......... 59
Consider Reducing Your Sales Charge ....................................... 62
Open an Account/Buy Shares ................................................ 63
Know How to Sell and Exchange Shares ...................................... 65
Decide How to Receive Your Earnings ....................................... 67
Understand the Tax Consequences ........................................... 68
Know With Whom You're Investing ........................................... 69
Know Your Rights as a Shareholder ......................................... 71
<CAPTION>
================================================================================
Tell Me the Details
================================================================================
The Trust ................................................................. 72
Other Information About the Funds ......................................... 72
Description of Investments and Investment Practices ....................... 77
Manager, Sub-Advisers and Distributor ..................................... 83
How to Purchase Shares of the Funds ....................................... 84
Alternative Sales Arrangements ............................................ 86
Redemptions and Exchanges ................................................. 89
Tax-Deferred Retirement Plans ............................................. 91
Net Asset Value ........................................................... 91
Portfolio Transactions .................................................... 91
Tax Information ........................................................... 91
Other Information ......................................................... 92
Appendix A: Description of Securities Ratings ............................. 93
Appendix B: Taxable Equivalent Yield Table ................................ 95
</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 40-54. For
more detailed information, see "Tell Me the Details" in this prospectus and see
the SAI.
- --------------------------------------------------------------------------------
- -------
3
- -------
================================================================================
Evaluate each Fund's track record, fees and expenses
================================================================================
Turn to pages 14-39 for Financial Highlights. Read down the columns (by year)
and find, in particular, the beginning and ending share prices, the amount of
income produced, and the "total investment return" figures to see how each Fund
has done in the past.
Don't just look at recent performance, which may or may not be repeated. Read
the "total investment return" for each year to look for a performance pattern.
Remember, though, no fund can ever guarantee it will continue to perform at the
same levels.
Understand one-time and ongoing fees.
See the tables beginning on page 7 for your Fund's one-time and ongoing fees and
the impact of those costs on a $1,000 investment.
- --------------------------------------------------------------------------------
- -------
7
- -------
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application, and have your Registered
Representative place the order. He or she can be invaluable here.
Make sure to provide complete information, including who will own the account,
and certify your Social Security number or Taxpayer I.D. number. This is also
the time to decide how you want to receive earnings--in cash or additional
shares--and whether you want telephone privileges and to make other choices that
will affect how you access your investments. (You may also place the order
directly with MainStay.)
For more on opening an account--including opening an account directly--see page
59.
- --------------------------------------------------------------------------------
- -------
8
- -------
================================================================================
See how many shares your money will buy
================================================================================
You can calculate the number of shares of a Fund your money buys using a simple
equation: (1) subtract the amount of any sales charge, then (2) divide the
remaining amount of your investment by the price of one share of the Fund.
Each Fund's share price (NAV or "net asset value") is calculated at the close of
business of the New York Stock Exchange, normally 4:00 PM Eastern time, each
business day (except for the Money Market Fund, which is calculated at noon).
The number of shares you receive is based on the NAV next calculated after your
order is received. You'll receive written confirmation of your purchase.
To learn more, see pages 60 and 87.
- --------------------------------------------------------------------------------
- -------
9
- -------
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution and
marketing, investment management, and shareholder services. Fees may be charged
on different schedules but the Fund accrues these expenses daily. You're not
charged directly, the Fund pays the fees to the firms who provide the services,
and then deducts the amounts from the Fund's assets. This, consequently, reduces
the NAV of your shares.
To learn more, see pages 6-12.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
...Understanding The MainStay Funds
- --------------------------------------------------------------------------------
- -------
4
- -------
================================================================================
Decide how much to invest in each Fund
================================================================================
You may split your investment among as many MainStay Funds as you desire. The
initial investment, however, must be at least $500 in each Fund ($1,000 for the
Money Market Fund and Equity Index Fund), then $50 thereafter (except for the
Equity Index Fund, which requires $1,000).
- --------------------------------------------------------------------------------
- -------
5
- -------
================================================================================
Decide when to pay the sales charge: now or later. . . or maybe never
================================================================================
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. Alternatively, you may pay no sales charge--unless
you sell your shares within one year of purchase (you'll own "Class C" shares).
Purchasing Class B or Class C shares 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 on or about
December 31, 2005 or at the end of the calendar quarter occurring eight years
after the date a shareholder purchased their shares, whichever is later. There
is no conversion feature applicable to Class C shares. [Thus, Class C
shareholders pay higher ongoing fees than Class A shareholders for the life of
their investment.]
For a list of the pros and cons of each choice, see pages 60 and 61.
- --------------------------------------------------------------------------------
- -------
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 58 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, have them automatically reinvested
in more shares (with no sales charge) or a combination of both.
To learn more, see page 63.
- --------------------------------------------------------------------------------
- -------
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 or Class C shares you may pay a charge when you redeem your
shares, depending on the length of time you've held the shares. MainStay
provides a number of convenient ways to redeem your shares.
If you buy $1 million or more of Class Ashares and redeem them within a year of
the purchase, you may pay a sales charge.
To learn more, see pages 61-62 and 84-86.
- --------------------------------------------------------------------------------
- -------
12
- -------
================================================================================
Manage your taxes/ Align your goals
================================================================================
If you've made a profit on your investment--either through dividends,
distributions, or capital gains, you may have to pay taxes at tax time (consult
your tax adviser).
Be aware that even a tax-free fund may earn taxable income for you. Also be
aware that your Fund may earn 1998 income that will be paid to you in January,
1999, but will apply to your 1998 tax return.
To learn more, see page 64.
- --------------------------------------------------------------------------------
- -------
13
- -------
================================================================================
Know your rights/ Stay informed
================================================================================
Most of all, you have the right to ask questions--and have them answered
intelligently. You may call your Registered Representative at any time.
MainStay will send you a quarterly statement (a monthly statement for the Money
Market Fund), a confirmation of each transaction, and annual and semiannual
reports on your Fund's status and investments.
To learn more, see page 67.
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5
<PAGE>
================================================================================
Tell Me The Key Facts
================================================================================
- --------------------------------------------------------------------------------
Analyze the Costs of Investing: Two Kinds of Fees
- --------------------------------------------------------------------------------
To help you understand the costs of investing in a MainStay Fund, we've provided
expense information based on the expenses paid by each Fund for the most recent
fiscal year, except Strategic Value Fund for which expenses are estimated. The
expenses payable by Class C shares have also been estimated as Class C shares
were not offered prior to September 1, 1998. Because some expenses are based on
the value of each 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 82-84 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 79-80
for more details.
Management fees pay for the investment sub-advisers who invest your money and
others for their administrative duties such as keeping records and providing you
with statements and reports. The Rule 12b-1 fees shown on pages 7-11 pay, for
example, commissions and marketing/promotional expenses. "Other" includes legal,
auditing, custodian, and other fees. See pages 79-80 for more details on fees.
- --------------------------------------------------------------------------------
Why read about costs? Costs are important since they may lower your earnings.
For example, a Fund with higher costs must perform better just to equal the
return of a Fund with lower costs. All things being equal, therefore, a
lower-cost Fund will begin with an advantage.
Lower fees alone, however, will not guarantee better total return performance.
For example, a Fund with no up-front sales charge may actually have higher
ongoing expenses. It may also leave you without a Registered Representative to
advise you. Before investing, you should be sure you understand the nature of
different costs.
Investing a million? The up-front sales charge is waived on investments of $1
million or more in Class A shares. But, there may be a contingent deferred sales
charge of 1% on redemptions (sales of shares) made within a year of the purchase
date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If You Invest $1,000, You Might Pay...
- --------------------------------------------------------------------------------
The "Examples" on the following pages are provided to help you understand the
various costs and expenses that an investor in each Fund will bear directly or
indirectly.
The examples on pages 7-12 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 for Class B shares declines the longer you
stay invested in the Fund (from 5% in year one to 0% after six years) and the
contingent deferred sales charge for Class C shares only applies for one year
following purchase; 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) with Class B and Class C shares. 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.
Class C shares do not convert.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
CAPITAL APPRECIATION FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(2) 0.55% 0.55% 0.55%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.29% 0.29% 0.29%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(2) 1.09% 1.84% 1.84%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 66 $ 19 $ 69 $ 19 $ 29
Expenses after 3 years $ 88 $ 58 $ 88 $ 58 $ 58
Expenses after 5 years $112 $100 $120 $ 100 $ 100
Expenses after 10 years $181 $196 $196 $ 216 $ 216
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
29 management fees 30 management fees 30 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
15 other expenses 16 other expenses 16 other expenses
-------------------------- -------------------------- --------------------------
$112 total sales charges $120 total sales charges $100 total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
EQUITY INDEX FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 3.00% N/A N/A
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(4) 0.47%
12b-1 Fees(3) 0.25%
Other Expenses 0.24%
----
Total Fund Operating Expenses(4) 0.96%
====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 40 N/A N/A
Expenses after 3 years $ 60
Expenses after 5 years $ 81
Expenses after 10 years $144
[THE FOLLOWING TABLE WAS REPRESENTED BY
A PIE CHART IN THE PRINTED MATERIAL.]
$ 30 up-front sales charge
25 management fees
13 12b-1 fees
13 other expenses
--------------------------
$ 81 total sales charges
and expenses
</TABLE>
7
<PAGE>
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Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
INTERNATIONAL EQUITY FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.00% 1.00% 1.00%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.76% 0.76% 0.76%
---- ---- ----
Total Fund Operating Expenses 2.01% 2.76% 2.76%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 74 $ 28 $ 78 $ 28 $ 38
Expenses after 3 years $115 $ 86 $116 $ 86 $ 86
Expenses after 5 years $157 $146 $166 $146 $146
Expenses after 10 years $276 $291 $291 $309 $309
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
51 management fees 53 management fees 53 management fees
13 12b-1 fees 53 12b-1 fees 53 12b-1 fees
38 other expenses 40 other expenses 40 other expenses
-------------------------- -------------------------- --------------------------
$157 total sales charges $166 total sales charges $146 total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
CONVERTIBLE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.72% 0.72% 0.72%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.48% 0.48% 0.48%
---- ---- ----
Total Fund Operating Expenses 1.45% 2.20% 2.20%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 69 $ 22 $ 72 $ 22 $ 32
Expenses after 3 years $ 98 $ 69 $ 99 $ 69 $ 69
Expenses after 5 years $130 $118 $138 $118 $118
Expenses after 10 years $219 $234 $234 $253 $253
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
37 management fees 38 management fees 38 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
25 other expenses 26 other expenses 26 other expenses
-------------------------- -------------------------- --------------------------
$130 total sales charges $138 total sales charges $118 total sales charges
and expenses and expenses and expenses
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
TOTAL RETURN FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(5) 0.62% 0.62% 0.62%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.28% 0.28% 0.28%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(5) 1.15% 1.90% 1.90%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 66 $ 19 $ 69 $ 19 $ 29
Expenses after 3 years $ 90 $ 60 $ 90 $ 60 $ 60
Expenses after 5 years $115 $103 $123 $103 $103
Expenses after 10 years $187 $202 $202 $222 $222
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
32 management fees 34 management fees 34 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
15 other expenses 15 other expenses 15 other expenses
-------------------------- -------------------------- --------------------------
$115 total sales charges $123 total sales charges $103 total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
STRATEGIC VALUE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75% 0.75% 0.75%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses(6) 0.57% 0.57% 0.57%
---- ---- ----
Total Fund Operating Expenses(6) 1.57% 2.32% 2.32%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 70 $ 24 $ 74 $ 24 $ 34
Expenses after 3 years $102 $ 72 $102 $ 72 $ 72
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ 0 deferred sales charge
22 management fees 23 management fees 23 management fees
8 12b-1 fees 31 12b-1 fees 31 12b-1 fees
17 other expenses 18 other expenses 18 other expenses
-------------------------- -------------------------- --------------------------
$102 total sales charges $102 total sales charges $ 72 total sales charges
and expenses and expenses and expenses
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
VALUE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.57% 0.57% 0.57%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.29% 0.29% 0.29%
---- ---- ----
Total Fund Operating Expenses 1.11% 1.86% 1.86%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 66 $ 19 $ 69 $ 19 $ 29
Expenses after 3 years $ 88 $ 58 $ 88 $ 58 $ 58
Expenses after 5 years $113 $101 $121 $101 $101
Expenses after 10 years $183 $198 $198 $218 $218
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
30 management fees 31 management fees 31 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
15 other expenses 16 other expenses 16 other expenses
-------------------------- -------------------------- --------------------------
$113 total sales charges $121 total sales charges $101 total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
GOVERNMENT FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.60% 0.60% 0.60%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.24% 0.24% 0.24%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement 1.09% 1.84% 1.84%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 56 $ 19 $ 69 $ 19 $ 29
Expenses after 3 years $ 78 $ 58 $ 88 $ 58 $ 58
Expenses after 5 years $102 $100 $120 $100 $100
Expenses after 10 years $172 $196 $196 $216 $216
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
31 management fees 33 management fees 33 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
13 other expenses 13 other expenses 13 other expenses
-------------------------- -------------------------- --------------------------
$102 total sales charges $120 total sales charges $100 total sales charges
and expenses and expenses and expenses
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
HIGH YIELD CORPORATE BOND FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(7) 0.56% 0.56% 0.56%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.20% 0.20% 0.20%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(7) 1.01% 1.76% 1.76%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 55 $ 18 $ 68 $ 18 $ 28
Expenses after 3 years $ 76 $ 55 $ 85 $ 55 $ 55
Expenses after 5 years $ 98 $ 95 $115 $ 95 $ 95
Expenses after 10 years $163 $187 $187 $207 $207
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
29 management fees 30 management fees 30 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
11 other expenses 11 other expenses 11 other expenses
-------------------------- -------------------------- --------------------------
$ 98 total sales charges $115 total sales charges $ 95 total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
INTERNATIONAL BOND FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(8) 0.40% 0.40% 0.40%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.91% 0.91% 0.91%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(8) 1.56% 2.31% 2.31%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 60 $ 23 $ 73 $ 23 $ 33
Expenses after 3 years $ 92 $ 72 $102 $ 72 $ 72
Expenses after 5 years $126 $126 $144 $124 $124
Expenses after 10 years $222 $246 $246 $265 $265
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ 0 deferred sales charge
21 management fees 21 management fees 21 management fees
13 12b-1 fees 54 12b-1 fees 54 12b-1 fees
47 other expenses 49 other expenses 49 other expenses
-------------------------- -------------------------- --------------------------
$126 total sales charges $144 total sales charges $124 total sales charges
and expenses and expenses and expenses
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
STRATEGIC INCOME FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(9) 0.56% 0.56% 0.60%
12b-1 Fees(3) 0.25% 1.00% 1.00%
Other Expenses 0.64% 0.64% 0.64%
---- ---- ----
Total Fund Operating Expenses(9) 1.45% 2.20% 2.24%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 59 $ 22 $ 72 $ $
Expenses after 3 years $ 89 $ 69 $ 99 $ $
Expenses after 5 years $121 $118 $138 $ $
Expenses after 10 years $211 $234 $234 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ deferred sales charge
29 management fees 30 management fees management fees
13 12b-1 fees 54 12b-1 fees 12b-1 fees
34 other expenses 34 other expenses other expenses
-------------------------- -------------------------- --------------------------
$121 total sales charges $138 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
MONEY MARKET FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) None None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(10) 0.25% 0.25% 0.25%
12b-1 Fees(3) None None None
Other Expenses 0.45% 0.45% 0.45%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(10) 0.70% 0.70% 0.70%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 7 7 $ 7 $ 7 $ 7
Expenses after 3 years $ 22 $ 22 $ 22 $ 22 $ 22
Expenses after 5 years $ 39 $ 39 $ 39 $ 39 $ 39
Expenses after 10 years $ 87 $ 87 $ 87 $ 87 $ 87
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 0 up-front sales charge $ 0 deferred sales charge $ 0 deferred sales charge
14 management fees 14 management fees 14 management fees
0 12b-1 fees 0 12b-1 fees 0 12b-1 fees
25 other expenses 25 other expenses 25 other expenses
-------------------------- -------------------------- --------------------------
$ 39 total sales charges $ 39 total sales charges $ 39 total sales charges
and expenses and expenses and expenses
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
CALIFORNIA TAX FREE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(11) 0.48% 0.48% 0.48%
12b-1 Fees(3) 0.25% 0.50% 1.00%
Other Expenses 0.51% 0.51% 0.51%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(11) 1.24% 1.49% 1.99%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 57 $ 15 $ 65 $ $
Expenses after 3 years $ 83 $ 47 $ 77 $ $
Expenses after 5 years $110 $ 81 $101 $ $
Expenses after 10 years $188 $171 $171 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ deferred sales charge
25 management fees 26 management fees management fees
13 12b-1 fees 27 12b-1 fees 12b-1 fees
27 other expenses 28 other expenses other expenses
-------------------------- -------------------------- --------------------------
$110 total sales charges $101 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
NEW YORK TAX FREE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees(11) 0.33% 0.33% 0.33%
12b-1 Fees(3) 0.25% 0.50% 1.00%
Other Expenses 0.66% 0.66% 0.66%
---- ---- ----
Total Fund Operating Expenses
After Reimbursement(11) 1.24% 1.49% 1.99%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 57 $ 15 $ 65 $ $
Expenses after 3 years $ 83 $ 47 $ 77 $ $
Expenses after 5 years $110 $ 81 $101 $ $
Expenses after 10 years $188 $171 $171 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ deferred sales charge
17 management fees 18 management fees management fees
13 12b-1 fees 27 12b-1 fees 12b-1 fees
35 other expenses 36 other expenses other expenses
-------------------------- -------------------------- --------------------------
$110 total sales charges $101 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
================================================================================
TAX FREE BOND FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.60% 0.60% 0.60%
12b-1 Fees(3) 0.25% 0.50% 1.00%
Other Expenses 0.16% 0.16% 0.16%
---- ---- ----
Total Fund Operating Expenses 1.01% 1.26% 1.76%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 55 $ 13 $ 63 $ $
Expenses after 3 years $ 76 $ 40 $ 70 $ $
Expenses after 5 years $ 98 $ 69 $ 89 $ $
Expenses after 10 years $163 $145 $145 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 20 deferred sales charge $ deferred sales charge
32 management fees 33 management fees management fees
13 12b-1 fees 27 12b-1 fees 12b-1 fees
8 other expenses 9 other expenses other expenses
-------------------------- -------------------------- --------------------------
$ 98 total sales charges $ 89 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- --------------------------------------------------------------------------------
(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."
With respect to Class C shares, a contingent deferred sales charge of 1.00%
will be imposed on redemptions of Class C shares effected within one year
of the date of purchase.
(2) Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.72% and total fund operating expenses would have been
1.26% and 2.01% for Class A and Class B, respectively, and are estimated to
be 2.01% for Class C.
----
(3) Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a distribution fee of up to 0.75% of average annual net assets is
treated as a sales charge for certain purposes. Because the distribution
fee is an annual fee charged against the assets of a Fund, long-term
shareholders may indirectly pay an amount that is more than the economic
equivalent of the maximum front-end sales charge permitted by rules of the
NASD. For a description of the distribution plans adopted by the Funds, see
"The Distributor."
(4) Absent voluntary fee waiver and/or expense limitation, the management fee
and total fund operating expenses would have been 0.50% and 0.99%,
respectively. Effective April 1, 1998, the Fund's expense limitation was
terminated.
(5) Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.64% and total fund operating expenses would have been
1.17% and 1.92% for Class A and Class B, respectively, and are estimated to
be 1.92% for Class C.
----
(6) Total fund operating expenses and other expenses are based on estimated
expenses for the year ended December 31, 1998.
(7) Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.60% and total fund operating expenses would have been
1.05% and 1.80% for Class A and Class B, respectively, and are estimated to
be 1.80% for Class C.
----
(8) Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.70% and total fund operating expenses would have been
1.86% and 2.61% for Class A and Class B, respectively, and are estimated to
be 2.61% for Class C.
----
(9) Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.60% and estimated total fund operating expenses would
have been 1.49% and 2.24% for Class A and Class B, respectively. Effective
February 28, 1998, the Fund's expense cap was terminated. Because Class C
Shares were not offered prior to September 1, 1998, the Fund's expense cap
that was in effect through February 28, 1998 was not applicable to Class C
Shares.
(10) Absent voluntary fee waiver and/or expense limitation, the management fee
and total fund operating expenses for each class would have been 0.50% and
0.95% for Class A and Class B, respectively, and are estimated to
be 0.50% and 0.95% for Class C.
(11) Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.50% for each class of each Fund and total fund operating
expenses would have been 1.26% and 1.51% for Class A and Class B,
respectively, of California Tax Free Fund and 1.41% and 1.66% for Class A
and Class B, respectively, of New York Tax Free Fund. Absent the voluntary
fee waiver and/or expense limitation, total fund operating expenses are
estimated to be 1.51% and 1.66% for Class C shares of the California Tax
---- ----
Free Fund and New York Tax Free Fund, respectively.
(12) [Class C expenses are estimated for the year ended December 31, 1998.]
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Here are the financial histories for each of the MainStay Funds. The information
for each of the ten years up to December 31, 1997 (including the short year
ended December 31, 1994) has been audited by PricewaterhouseCoopers LLP, the
Funds' independent accountants. You should read the related financial
information and notes and the independent accountants' unqualified reports on
each Fund incorporated by reference in the SAI. Information has not been
provided for Class C shares because Class C shares were not offered prior to
September 1, 1998.
================================================================================
MAINSTAY CAPITAL APPRECIATION FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------------- ----------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period... $ 30.56 $ 30.25 $ 25.90 $ 25.77 $ 19.11 $ 19.11
-------- ---------- -------- ---------- ------- --------
Net investment income (loss)* ........... (0.16) (0.34) (0.08) (0.22) 0.03 (0.08)
Net realized and unrealized gain (loss)
on investments ......................... 7.48 7.39 5.05 5.01 6.81 6.79
-------- ---------- -------- ---------- ------- --------
Total from investment operations ........ 7.32 7.05 4.97 4.79 6.84 6.71
-------- ---------- -------- ---------- ------- --------
Less dividends and distributions:
From net investment income .............. -- -- -- -- -- --
From net realized gain on investments ... (1.28) (1.28) (0.31) (0.31) (0.05) (0.05)
-------- ---------- -------- ---------- ------- --------
Total dividends and distributions ....... (1.28) (1.28) (0.31) (0.31) (0.05) (0.05)
-------- ---------- -------- ---------- ------- --------
Net asset value at end of period ........ $ 36.60 $ 36.02 $ 30.56 $ 30.25 $ 25.90 $ 25.77
======== ========== ======== ========== ======= ========
Total investment return(b) .............. 24.10% 23.45% 19.16% 18.56% 35.79% 35.11%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) ........... (0.48%) (1.00%) (0.3%) (0.8%) 0.2% (0.4%)
Expenses ............................... 1.09% 1.61% 1.1% 1.6% 1.1% 1.7%
Portfolio turnover rate ................. 35% 35% 16% 16% 29% 29%
Average commission rate paid ............ $ 0.0592 $ 0.0592 $ 0.0599 $ 0.0599 (c) (c)
Net assets at end of period (in 000's) .. $216,292 $1,869,664 $126,958 $1,342,578 $44,434 $856,221
</TABLE>
- ----------
* Per share data based on average shares outstanding during the period.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
16
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Additional performance information is included in each Fund's annual report to
shareholders.
For a free copy of the SAI or the annual reports, ask your Registered
Representative; call 1-800-MAINSTAY (1-800-624-6782); or write to NYLIFE
Distributors, Inc., 300 Interpace Parkway, Building A, Parsippany, N.J. 07054.
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ----------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ----------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 19.93 $ 19.47 $ 14.14 $ 15.96 $ 11.35 $ 12.44 $ 9.37 $ 13.14
-------- -------- -------- -------- ------- ------- ------- -------
(0.03) (0.12) (0.12) (0.19) (0.13) (0.02) (0.11) (0.12)
(0.65) 1.13 5.64 1.30 5.16 (0.36) 3.18 (3.65)
-------- -------- -------- -------- ------- ------- ------- -------
(0.68) 1.01 5.52 1.11 5.03 (0.38) 3.07 (3.77)
-------- -------- -------- -------- ------- ------- ------- -------
-- -- -- -- -- (0.02) -- --
(0.14) (0.55) (0.19) (2.93) (0.42) (0.69) -- --
-------- -------- -------- -------- ------- ------- ------- -------
(0.14) (0.55) (0.19) (2.93) (0.42) (0.71) -- --
-------- -------- -------- -------- ------- ------- ------- -------
$ 19.11 $ 19.93 $ 19.47 $ 14.14 $ 15.96 $ 11.35 $ 12.44 $ 9.37
======== ======== ======== ======== ======= ======= ======= =======
(3.40%) 5.36% 39.25% 6.77% 45.89% (3.14%) 32.76% (28.69%)
(0.5%)+ (0.6%) (0.7%) (1.2%) (1.0%) (0.2%) (0.8%) (1.3%)
1.8%)+ 1.8% 1.8% 2.0% 2.5% 2.5% 2.8% 2.7%
11% 31% 73% 157% 327% 259% 256% 60%
(c) (c) (c) (c) (c) (c) (c) (c)
$499,133 $472,497 $279,300 $128,710 $65,659 $36,062 $34,685 $28,845
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY EQUITY INDEX FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994, the years ended August 31, 1994, August 31, 1993 and
August 31, 1992 and the period December 20, 1990 through August 31, 1991.
<TABLE>
<CAPTION>
Dec. 20,
September 1 Year Ended 1990(b)
Year Ended Year Ended Year Ended through August 31, through
December 31, December 31, December 31, December 31,----------------------------- August 31,
1997 1996 1995 1994(a) 1994 1993 1992 1991
-------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ................. $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41 $ 9.45
-------- -------- -------- ------- ------- ------- ------- -------
Net investment income ................ 0.30 0.30 0.24 0.09 0.27 0.22 0.18 0.11
Net realized and unrealized
gain (loss) on investments .......... 7.24 3.92 4.82 (0.48) 0.37 1.47 0.56 1.85
-------- -------- -------- ------- ------- ------- ------- -------
Total from investment operations ..... 7.54 4.22 5.06 (0.39) 0.64 1.69 0.74 1.96
-------- -------- -------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income ........... (0.30) (0.54) (0.27) -- (0.25) (0.18) (0.17) --
From net realized gain on
investments ......................... (0.41) (0.82) (0.27) -- (0.18) (0.02) (0.04) --
-------- -------- -------- ------- ------- ------- ------- -------
Total dividends and distributions .... (0.71) (1.36) (0.54) -- (0.43) (0.20) (0.21) --
-------- -------- -------- ------- ------- ------- ------- -------
Reverse share split .................. 0.71 1.36 0.54 -- 0.43 0.20 0.21 --
-------- -------- -------- ------- ------- ------- ------- -------
Net asset value at end of period ..... $ 30.91 $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41
======== ======== ======== ======= ======= ======= ======= =======
Total investment return(c) ........... 32.26% 22.04% 35.91% (2.68%) 4.59% 13.91% 6.49% 20.74%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ............... 1.25% 1.8% 1.7% 2.0%+ 1.9% 1.9% 1.8% 1.9%+
Net expenses ........................ 0.80% 0.8% 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Expenses (before reimbursement) ..... 0.99% 1.0% 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate .............. 3% 3% 4% 2% 12% 4% 3% 1%
Average commission rate paid ......... $ 0.0499 $ 0.0465 (d) (d) (d) (d) (d) (d)
Net assets at end of period (in 000's) $435,689 $225,750 $109,308 $61,561 $62,828 $62,921 $41,742 $23,534
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY INTERNATIONAL EQUITY FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995 and the period September 13, 1994
through December 31, 1994.
<TABLE>
<CAPTION>
Class B
---------------
Class A Class B Class A Class B Class A Class B September 13(a)
------- ------- ------- ------- ------- ------- through
Year Ended Year Ended Year Ended December 31,
December 31, 1997 December 31, 1996 December 31, 1995 1994
------------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.48 $ 10.38 $ 10.05 $ 9.97 $ 9.77 $ 9.77 $ 10.00
------- ------- ------- ------- ------- ------- -------
Net investment income (loss) .......... 0.80 0.72 0.29 0.24 0.27 0.26 (0.04)
Net realized and unrealized gain (loss)
on investments ....................... 0.03 0.03 0.07 0.07 0.10 0.07 (0.16)
Net realized and unrealized gain (loss)
on foreign currency transactions ..... (0.36) (0.37) 0.62 0.59 0.14 0.09 (0.03)
------- ------- ------- ------- ------- ------- -------
Total from investment operations ...... 0.47 0.38 0.98 0.90 0.51 0.42 (0.23)
------- ------- ------- ------- ------- ------- -------
Less distributions:
From net realized gain on foreign
currency transactions ................ (0.62) (0.54) (0.52) (0.46) (0.15) (0.15) --
In excess of net realized gain
on investments ....................... -- -- (0.03) (0.03) (0.08) (0.07) --
------- ------- ------- ------- ------- ------- -------
Total distributions ................... (0.62) (0.54) (0.55) (0.49) (0.23) (0.22) --
------- ------- ------- ------- ------- ------- -------
Net asset value at end of period ...... $ 10.33 $ 10.22 $ 10.48 $ 10.38 $ 10.05 $ 9.97 $ 9.77
======= ======= ======= ======= ======= ======= =======
Total investment return(b) ............ 4.52% 3.78% 9.78% 9.05% 5.25% 4.27% (2.30%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) ......... 0.19% (0.49%) (0.1%) (0.8%) (0.2%) (1.0%) (1.6%)+
Expenses ............................. 2.01% 2.69% 2.0% 2.7% 2.2% 3.0% 3.9%+
Portfolio turnover rate ............... 43% 43% 19% 19% 25% 25% 9%
Average commission rate paid .......... $0.0281 $0.0281 $0.0374 $0.0374 (c) (c) (c)
Net assets at end of period (in 000's) $17,452 $63,241 $17,475 $52,709 $12,856 $25,341 $20,549
</TABLE>
- ----------
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY CONVERTIBLE FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- -------- ------- -------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
--------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .. $ 13.81 $ 13.80 $ 13.45 $ 13.45 $ 11.67 $ 11.67
------- -------- ------- -------- ------- --------
Net investment income ................... 0.60 0.51 0.57 0.48 0.59 0.51
Net realized and unrealized gain (loss)
on investments ......................... 0.91 0.91 1.02 1.02 2.14 2.14
Net realized and unrealized gain (loss)
on foreign currency transactions ....... 0.03 0.03 0.02 0.02 (0.00)(c) (0.00)(c)
------- -------- ------- -------- ------- --------
Total from investment operations ........ 1.54 1.45 1.61 1.52 2.73 2.65
------- -------- ------- -------- ------- --------
Less dividends and distributions:
From net investment income .............. (0.60) (0.51) (0.62) (0.54) (0.55) (0.47)
From net realized gain on investments ... (1.22) (1.22) (0.63) (0.63) (0.40) (0.40)
------- -------- ------- -------- ------- --------
Total dividends and distributions ....... (1.82) (1.73) (1.25) (1.17) (0.95) (0.87)
------- -------- ------- -------- ------- --------
Net asset value at end of period ........ $ 13.53 $ 13.52 $ 13.81 $ 13.80 $ 13.45 $ 13.45
======= ======== ======= ======== ======= ========
Total investment return(b) .............. 11.36% 10.67% 12.13% 11.39% 23.72% 23.02%
Ratios (to average net
assets)/Supplemental Data:
Net investment income .................. 4.10% 3.47% 4.4% 3.8% 4.9% 4.3%
Expenses ............................... 1.45% 2.08% 1.5% 2.1% 1.5% 2.1%
Portfolio turnover rate ................. 273% 273% 296% 296% 243% 243%
Average commission rate paid ............ $0.0461 $ 0.0461 $0.0468 $ 0.0468 (d) (d)
Net assets at end of period (in 000's) .. $64,246 $841,540 $56,621 $797,243 $26,836 $427,461
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Less than one cent per share.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ----------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, -------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
-------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 12.83 $ 13.92 $ 11.46 $ 10.10 $ 8.02 $ 9.16 $ 8.91 $ 10.22
-------- -------- ------- ------- ------- ------- ------- -------
0.19 0.50 0.92 0.32 0.24 0.40 0.52 0.40
(0.71) 0.70 2.45 1.32 2.08 (1.06) 0.41 (1.21)
-- (0.01) -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- -------
(0.52) 1.19 3.37 1.64 2.32 (0.66) 0.93 (0.81)
-------- -------- ------- ------- ------- ------- ------- -------
(0.21) (0.49) (0.42) (0.28) (0.24) (0.48) (0.46) (0.42)
(0.43) (1.79) (0.49) -- -- -- (0.22) (0.08)
-------- -------- ------- ------- ------- ------- ------- -------
(0.64) (2.28) (0.91) (0.28) (0.24) (0.48) (0.68) (0.50)
-------- -------- ------- ------- ------- ------- ------- -------
$ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10 $ 8.02 $ 9.16 $ 8.91
======== ======== ======= ======= ======= ======= ======= =======
(4.09%) 8.95% 30.80% 16.43% 29.58% (7.25%) 10.73% (7.83%)
4.8%+ 3.5% 3.4% 2.9% 2.8% 4.7% 5.6% 4.4%
1.9%+ 1.9% 1.9% 2.3% 2.7% 2.5% 2.6% 2.6%
77% 269% 370% 291% 283% 204% 308% 182%
(d) (d) (d) (d) (d) (d) (d) (d)
$180,304 $160,407 $58,943 $28,899 $20,029 $17,791 $25,651 $29,189
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY TOTAL RETURN FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and the
period December 29, 1987 through August 31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- ------- ---------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ....... $ 20.09 $ 20.10 $ 18.53 $ 18.53 $ 14.76 $ 14.76
-------- ---------- ------- ---------- ------- --------
Net investment income ........................ 0.40 0.29 0.37 0.27 0.42 0.33
Net realized and unrealized gain (loss)
on investments .............................. 3.19 3.19 2.07 2.08 3.77 3.77
-------- ---------- ------- ---------- ------- --------
Total from investment operations ............. 3.59 3.48 2.44 2.35 4.19 4.10
-------- ---------- ------- ---------- ------- --------
Less dividends and distributions:
From net investment income ................... (0.40) (0.29) (0.37) (0.27) (0.42) (0.33)
From net realized gain on investments ........ (1.84) (1.84) (0.51) (0.51) -- --
-------- ---------- ------- ---------- ------- --------
Total dividends and distributions ............ (2.24) (2.13) (0.88) (0.78) (0.42) (0.33)
-------- ---------- ------- ---------- ------- --------
Net asset value at end of period ............. $ 21.44 $ 21.45 $ 20.09 $ 20.10 $ 18.53 $ 18.53
======== ========== ======= ========== ======= ========
Total investment return(c) ................... 18.24% 17.65% 13.22% 12.73% 28.66% 27.96%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ....................... 1.86% 1.36% 1.9% 1.4% 2.5% 2.0%
Expenses .................................... 1.15% 1.65% 1.1% 1.6% 1.1% 1.7%
Portfolio turnover rate ...................... 182% 182% 173% 173% 228% 228%
Average commission rate paid ................. $ 0.0598 $ 0.0598 $0.0599 $ 0.0599(d) (d) (d)
Net assets at end of period (in 000's) ....... $108,329 $1,198,206 $68,975 $1,029,878 $19,206 $860,881
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations December 29, 1987.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- -----------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ----------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988(b)
-------- -------- -------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15.28 $ 15.42 $ 13.37 $ 13.89 $ 11.07 $ 11.82 $ 10.24 $10.00
-------- -------- -------- -------- -------- ------- ------- ------
0.11 0.38 0.33 0.22 0.26 0.32 0.38 0.18
(0.52) (0.02) 2.31 0.32 2.83 (0.29) 1.67 0.16
-------- -------- -------- -------- -------- ------- ------- ------
(0.41) 0.36 2.64 0.54 3.09 0.03 2.05 0.34
-------- -------- -------- -------- -------- ------- ------- ------
(0.11) (0.37) (0.36) (0.23) (0.27) (0.33) (0.38) (0.10)
-- (0.13) (0.23) (0.83) -- (0.45) (0.09) --
-------- -------- -------- -------- -------- ------- ------- ------
(0.11) (0.50) (0.59) (1.06) (0.27) (0.78) (0.47) (0.10)
-------- -------- -------- -------- -------- ------- ------- ------
$ 14.76 $ 15.28 $ 15.42 $ 13.37 $ 13.89 $ 11.07 $ 11.82 $10.24
======== ======== ======== ======== ======== ======= ======= ======
(2.65%) 2.41% 20.09% 3.96% 28.42% 0.19% 20.69% 3.39%
2.5%+ 2.5% 2.4% 1.7% 2.1% 2.8% 3.6% 3.0%+
1.7%+ 1.7% 1.8% 2.0% 2.4% 2.4% 2.8% 3.4%+
74% 273% 340% 316% 213% 171% 271% 197%
(d) (d) (d) (d) (d) (d) (d) (d)
$648,725 $639,619 $486,959 $292,002 $116,072 $47,008 $21,383 $9,936
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY STRATEGIC VALUE FUND
================================================================================
Selected data for a share outstanding throughout the period October 22, 1997
through December 31, 1997.
<TABLE>
<CAPTION>
Class A Class B
------- -------
October 22, 1997*
through
December 31, 1997
---------------------
<S> <C> <C>
Net asset value at beginning of period .......... $ 10.00 $ 10.00
------- -------
Net investment income ........................... 0.03 0.02
Net realized and unrealized gain
on investments ................................. 0.38 0.38
------- -------
Total from investment operations ................ 0.41 0.40
------- -------
Less dividends and distributions:
From net investment income ...................... (0.03) (0.02)
From net realized gain on investments ........... (0.09) (0.09)
------- -------
Total dividends and distributions ............... (0.12) (0.11)
------- -------
Net asset value at end of period ................ $ 10.29 $ 10.29
======= =======
Total investment return (a) ..................... 4.11% 4.04%
Ratios (to average net
assets)/Supplemental Data:
Net investment income .......................... 1.66%+ 0.91%+
Expenses ....................................... 2.73%+ 3.48%+
Portfolio turnover rate ......................... 29% 29%
Average commission rate paid .................... $0.0600 $0.0600
Net assets at end of period (in 000's) .......... $13,622 $12,325
======= =======
</TABLE>
- ----------
* Commencement of operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
24
<PAGE>
This page intentionally left blank
25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY VALUE FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- ------- ---------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ........ $ 20.34 $ 20.32 $ 18.25 $ 18.25 $ 14.66 $ 14.66
-------- ---------- ------- ---------- ------- --------
Net investment income ......................... 0.27 0.15 0.30 0.20 0.29 0.19
Net realized and unrealized gain (loss)
on investments ............................... 4.10 4.10 3.66 3.64 3.91 3.91
-------- ---------- ------- ---------- ------- --------
Total from investment operations .............. 4.37 4.25 3.96 3.84 4.20 4.10
-------- ---------- ------- ---------- ------- --------
Less dividends and distributions:
From net investment income .................... (0.27) (0.15) (0.30) (0.20) (0.29) (0.19)
From net realized gain on investments ......... (2.68) (2.68) (1.57) (1.57) (0.32) (0.32)
-------- ---------- ------- ---------- ------- --------
Total dividends and distributions ............. (2.95) (2.83) (1.87) (1.77) (0.61) (0.51)
-------- ---------- ------- ---------- ------- --------
Net asset value at end of period .............. $ 21.76 $ 21.74 $ 20.34 $ 20.32 $ 18.25 $ 18.25
======== ========== ======= ========== ======= ========
Total investment return(b) .................... 21.88% 21.29% 21.84% 21.11% 28.74% 28.01%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ........................ 1.22% 0.70% 1.6% 1.1% 1.5% 0.9%
Expenses ..................................... 1.11% 1.63% 1.1% 1.6% 1.2% 1.8%
Portfolio turnover rate ....................... 61% 61% 47% 47% 48% 48%
Average commission rate paid .................. $ 0.0592 $ 0.0592 $0.0595 $ 0.0595 (c) (c)
Net assets at end of period (in 000's) ........ $124,011 $1,399,589 $73,259 $1,019,307 $25,258 $708,840
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
26
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- -------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ---------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 16.30 $ 15.90 $ 13.82 $ 13.27 $ 10.42 $ 12.55 $ 9.51 $ 11.62
-------- -------- -------- ------- ------- ------- ------- -------
0.04 0.06 0.07 0.12 0.14 0.25 0.19 0.09
(1.03) 1.04 3.40 1.64 3.07 (1.47) 2.98 (2.09)
-------- -------- -------- ------- ------- ------- ------- -------
(0.99) 1.10 3.47 1.76 3.21 (1.22) 3.17 (2.00)
-------- -------- -------- ------- ------- ------- ------- -------
(0.03) (0.06) (0.10) (0.09) (0.20) (0.18) (0.13) (0.06)
(0.62) (0.64) (1.29) (1.12) (0.16) (0.73) -- (0.05)
-------- -------- -------- ------- ------- ------- ------- -------
(0.65) (0.70) (1.39) (1.21) (0.36) (0.91) (0.13) (0.11)
-------- -------- -------- ------- ------- ------- ------- -------
$ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27 $ 10.42 $ 12.55 $ 9.51
======== ======== ======== ======= ======= ======= ======= =======
(6.03%) 7.26% 26.58% 14.82% 31.79% (10.23%) 33.66% (17.22%)
0.8%+ 0.5% 0.5% 0.8% 1.2% 2.2% 1.7% 0.9%
1.8%+ 1.9% 1.9% 1.9% 2.4% 2.6% 2.8% 2.9%
11% 53% 77% 145% 150% 117% 107% 88%
(c) (c) (c) (c) (c) (c) (c) (c)
$472,365 $449,789 $226,524 $77,877 $44,548 $30,827 $26,218 $17,252
</TABLE>
27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY GOVERNMENT FUND (++)
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- -------- ------- -------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
--------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ...... $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 7.76
------- -------- ------- -------- ------- --------
Net investment income ....................... 0.50 0.45 0.50 0.46 0.58 0.54
Net realized and unrealized gain (loss)
on investments ............................. 0.21 0.21 (0.35) (0.37) 0.65 0.65
------- -------- ------- -------- ------- --------
Total from investment operations ............ 0.71 0.66 0.15 0.09 1.23 1.19
------- -------- ------- -------- ------- --------
Less dividends and distributions:
From net investment income .................. (0.50) (0.45) (0.50) (0.46) (0.58) (0.54)
In excess of net investment income .......... -- -- -- -- (0.00)(c) (0.00)(c)
Return of capital ........................... -- -- -- -- -- --
------- -------- ------- -------- ------- --------
Total dividends and distributions ........... (0.50) (0.45) (0.50) (0.46) (0.58) (0.54)
------- -------- ------- -------- ------- --------
Net asset value at end of period ............ $ 8.27 $ 8.25 $ 8.06 $ 8.04 $ 8.41 $ 8.41
======= ======== ======= ======== ======= ========
Total investment return(b) .................. 9.12% 8.54% 1.97% 1.25% 16.38% 15.69%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ...................... 6.23% 5.67% 6.3% 5.7% 7.3% 6.7%
Expenses ................................... 1.09% 1.65% 1.0% 1.6% 1.0% 1.7%
Portfolio turnover rate ..................... 338% 338% 307% 307% 540% 540%
Net assets at end of period (in 000's) ...... $17,114 $636,491 $16,413 $782,970 $12,784 $990,184
</TABLE>
- ----------
+ Annualized.
(++) Formerly Government Plus Fund.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Less than one cent per share.
28
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- -----------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
---------- ---------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8.04 $ 8.77 $ 8.88 $ 8.82 $ 8.48 $ 9.01 $ 8.96 $ 9.40
---------- ---------- ---------- -------- -------- -------- -------- --------
0.19 0.57 0.68 0.73 0.81 0.83 0.99 0.95
(0.29) (0.71) (0.09) 0.07 0.35 (0.52) (0.04) (0.44)
---------- ---------- ---------- -------- -------- -------- -------- --------
(0.10) (0.14) 0.59 0.80 1.16 0.31 0.95 0.51
---------- ---------- ---------- -------- -------- -------- -------- --------
(0.18) (0.57) (0.70) (0.74) (0.82) (0.84) (0.90) (0.95)
-- (0.01) -- -- -- -- -- --
-- (0.01) -- -- -- -- -- --
---------- ---------- ---------- -------- -------- -------- -------- --------
(0.18) (0.59) (0.70) (0.74) (0.82) (0.84) (0.90) (0.95)
---------- ---------- ---------- -------- -------- -------- -------- --------
$ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82 $ 8.48 $ 9.01 $ 8.96
========== ========== ========== ======== ======== ======== ======== ========
(1.24%) (1.63%) 6.92% 9.46% 14.33% 3.53% 11.18% 5.53%
7.1%+ 7.1% 7.8% 8.3% 9.5% 9.4% 10.2% 10.3%
1.7%+ 1.7% 1.7% 1.8% 1.8% 2.0% 2.0% 2.0%
143% 491% 629% 613% 318% 228% 383% 476%
$1,024,492 $1,119,586 $1,210,998 $957,010 $622,550 $463,010 $512,669 $436,836
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY HIGH YIELD CORPORATE BOND FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- ----------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------ ------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period.. $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ 7.44
-------- ---------- -------- ---------- ------- ----------
Net investment income .................. 0.74 0.69 0.72 0.67 0.84 0.81
Net realized and unrealized gain (loss)
on investments ........................ 0.23 0.23 0.52 0.52 0.61 0.61
Net realized and unrealized loss
on foreign currency transactions ...... (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c)
-------- ---------- -------- ---------- ------- ----------
Total from investment operations ....... 0.97 0.92 1.24 1.19 1.45 1.42
-------- ---------- -------- ---------- ------- ----------
Less dividends and distributions:
From net investment income ............. (0.74) (0.69) (0.71) (0.67) (0.84) (0.81)
In excess of net investment income ..... -- -- -- -- (0.01) (0.01)
From net realized gain on investments .. (0.34) (0.34) (0.18) (0.18) (0.10) (0.10)
In excess of net realized gain
on investments ........................ -- -- -- -- (0.02) (0.02)
-------- ---------- -------- ---------- ------- ----------
Total dividends and distributions ...... (1.08) (1.03) (0.89) (0.85) (0.97) (0.94)
-------- ---------- -------- ---------- ------- ----------
Net asset value at end of period ....... $ 8.16 $ 8.15 $ 8.27 $ 8.26 $ 7.92 $ 7.92
======== ========== ======== ========== ======= ==========
Total investment return(b) ............. 12.20% 11.55% 16.33% 15.58% 20.28% 19.71%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ................. 8.79% 8.18% 9.0% 8.4% 10.2% 9.5%
Expenses .............................. 1.01% 1.62% 1.0% 1.6% 1.0% 1.6%
Portfolio turnover rate ................ 128% 128% 118% 118% 137% 137%
Average commission rate paid ........... $ 0.0600 $ 0.0600 $ 0.0630 $ 0.0630 (d) (d)
Net assets at end of period (in 000's).. $238,841 $3,380,439 $116,805 $2,441,180 $42,850 $1,601,238
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Less than one cent per share.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
30
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- --------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ---------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
- ---------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 7.70 $ 7.93 $ 7.41 $ 6.66 $ 6.54 $ 8.34 $ 9.10 $ 9.37
- ---------- ---------- -------- -------- -------- -------- -------- --------
0.23 0.69 0.70 0.79 0.89 1.01 1.41 1.08
(0.27) (0.08) 0.54 0.75 0.15 (1.77) (0.85) (0.30)
-- -- -- -- -- -- -- --
- ---------- ---------- -------- -------- -------- -------- -------- --------
(0.04) 0.61 1.24 1.54 1.04 (0.76) 0.56 0.78
- ---------- ---------- -------- -------- -------- -------- -------- --------
(0.22) (0.67) (0.72) (0.79) (0.92) (1.04) (1.32) (1.05)
-- -- -- -- -- -- -- --
-- (0.17) -- -- -- -- -- --
-- -- -- -- -- -- -- --
- ---------- ---------- -------- -------- -------- -------- -------- --------
(0.22) (0.84) (0.72) (0.79) (0.92) (1.04) (1.32) (1.05)
- ---------- ---------- -------- -------- -------- -------- -------- --------
$ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66 $ 6.54 $ 8.34 $ 9.10
========== ========== ======== ======== ======== ======== ======== ========
(0.48%) 7.95% 18.58% 24.55% 18.25% (9.51%) 6.71% 8.98%
9.1%+ 8.7% 9.9% 11.0% 14.4% 14.3% 15.3% 12.1%
1.6%+ 1.6% 1.7% 1.9% 2.1% 2.1% 2.1% 2.2%
45% 190% 207% 226% 214% 305% 403% 437%
(d) (d) (d) (d) (d) (d) (d) (d)
$1,128,913 $1,090,261 $808,538 $447,819 $262,103 $201,052 $181,496 $109,569
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY INTERNATIONAL BOND FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995 and the period September 13, 1994
through December 31, 1994.
<TABLE>
<CAPTION>
Class B
---------------
Class A Class B Class A Class B Class A Class B September 13(a)
------- ------- ------- ------- ------- ------- through
Year Ended Year Ended Year Ended December 31,
December 31, 1997 December 31, 1996 December 31, 1995 1994
------------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ........ $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90 $ 9.90 $ 10.00
------- ------- ------- ------- ------- ------- -------
Net investment income ......................... 0.80 0.74 0.72 0.64 1.15 1.06 0.12
Net realized and unrealized gain (loss)
on investments ............................... (0.94) (0.96) 0.27 0.27 0.59 0.61 (0.08)
Net realized and unrealized gain (loss)
on foreign currency transactions ............. 0.33 0.34 0.41 0.42 0.07 0.07 (0.02)
------- ------- ------- ------- ------- ------- -------
Total from investment operations .............. 0.19 0.12 1.40 1.33 1.81 1.74 0.02
------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income and net realized
gain on foreign currency transactions ........ (0.76) (0.70) (0.73) (0.65) (0.61) (0.56) (0.12)
From net realized gain on investments ......... (0.28) (0.28) (0.15) (0.15) (0.28) (0.28) --
In excess of net realized gain on investments
and foreign currency transactions ............ -- -- -- -- (0.39) (0.35) --
------- ------- ------- ------- ------- ------- -------
Total dividends and distributions ............. (1.04) (0.98) (0.88) (0.80) (1.28) (1.19) (0.12)
------- ------- ------- ------- ------- ------- -------
Net asset value at end of period .............. $ 10.10 $ 10.12 $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90
======= ======= ======= ======= ======= ======= =======
Total investment return(b) .................... 1.83% 1.15% 13.90% 13.13% 18.68% 17.96% 0.20%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ........................ 5.35% 4.69% 5.4% 4.8% 5.6% 4.9% 4.8%+
Net Expenses ................................. 1.56% 2.22% 1.5% 2.1% 1.5% 2.2% 2.8%+
Expenses (before waiver) ..................... 1.86% 2.52% 1.8% 2.4% 1.8% 2.5% 3.1%+
Portfolio turnover rate ....................... 179% 179% 59% 59% 103% 103% 4%
Net assets at end of period (in 000's) ........ $12,263 $20,870 $11,965 $19,020 $11,494 $13,212 $17,155
</TABLE>
- ----------
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
32
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY STRATEGIC INCOME FUND
================================================================================
Selected data for a share outstanding throughout the period February 28, 1997
through December 31, 1997.
<TABLE>
<CAPTION>
Class A Class B
------- -------
February 28, 1997*
through
December 31, 1997
--------------------------
<S> <C> <C>
Net asset value at beginning of period ............................................. $ 10.00 $ 10.00
------- -------
Net investment income .............................................................. 0.54 0.48
Net realized and unrealized gain on investments .................................... 0.07 0.07
Net realized and unrealized gain on foreign currency transactions .................. 0.05 0.05
------- -------
Total from investment operations ................................................... 0.66 0.60
------- -------
Less dividends and distributions:
From net investment income ......................................................... (0.54) (0.48)
From net realized gain on investments .............................................. (0.21) (0.21)
------- -------
Total dividends and distributions .................................................. (0.75) (0.69)
------- -------
Net asset value at end of period ................................................... $ 9.91 $ 9.91
======= =======
Total investment return(a) ......................................................... 6.62% 6.02%
Ratios (to average net assets)/Supplemental Data:
Net investment income ............................................................. 6.46%+ 5.71%+
Net expenses ...................................................................... 1.15%+ 1.90%+
Expenses (before reimbursement) ................................................... 1.49%+ 2.24%+
Portfolio turnover rate ............................................................ 323% 323%
Average commission rate paid ....................................................... $0.0520 $0.0520
Net assets at end of period (in 000's) ............................................. $18,922 $43,872
</TABLE>
- ----------
* Commencement of operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
33
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY MONEY MARKET FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- -------- ------- -------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- -------- ------- --------
Net investment income ............................... 0.05 0.05 0.05 0.05 0.05 0.05
------- -------- ------- -------- ------- --------
Less dividends from net investment income ........... (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
------- -------- ------- -------- ------- --------
Net asset value at end of period .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======== ======= ========
Total investment return(b) .......................... 5.08% 5.08% 4.91% 4.91% 5.51% 5.51%
Ratios (to average net
assets)/Supplemental Data:
Net investment income .............................. 4.97% 4.97% 4.8% 4.8% 5.4% 5.4%
Net expenses ....................................... 0.70% 0.70% 0.7% 0.7% 0.7% 0.7%
Expenses (before waiver and reimbursement) ......... 0.95% 0.95% 1.0% 1.0% 0.9% 0.9%
Net assets at end of period (in 000's) .............. $80,925 $336,622 $53,890 $317,483 $34,880 $279,843
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is not annualized.
34
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- -----------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, -------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------
0.02 0.03 0.03 0.04 0.06 0.08 0.08 0.06
-------- -------- -------- -------- -------- -------- -------- -------
(0.02) (0.03) (0.03) (0.04) (0.06) (0.08) (0.08) (0.06)
-------- -------- -------- -------- -------- -------- -------- -------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== =======
1.54% 3.08% 2.71% 3.80% 6.63% 8.36% 8.75% 6.76%
4.6%+ 3.1% 2.7% 4.0% 6.5% 7.7% 8.6% 6.5%
0.7%+ 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.8%
0.9%+ 1.0% 0.9% 1.0% 0.9% 0.9% 1.0% 1.0%
$221,912 $192,477 $149,907 $182,567 $246,954 $256,489 $171,088 $59,572
</TABLE>
35
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY CALIFORNIA TAX FREE FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994, the years ended August 31, 1994 and August 31, 1993
and the period October 1, 1991 through August 31, 1992.
<TABLE>
<CAPTION>
Class A Class B Class A Class B
------- ------- ------- -------
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------- -------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period ................... $ 9.78 $ 9.75 $ 9.95 $ 9.91
------- ------- ------- -------
Net investment income .................................... 0.48 0.45 0.49 0.45
Net realized and unrealized gain (loss) on
investments ............................................. 0.27 0.27 (0.16) (0.16)
------- ------- ------- -------
Total from investment operations ......................... 0.75 0.72 0.33 0.29
------- ------- ------- -------
Less dividends and distributions:
From net investment income ............................... (0.48) (0.45) (0.50) (0.45)
From net realized gain on investments .................... (0.12) (0.12)
------- ------- ------- -------
Total dividends and distributions ........................ (0.60) (0.57) (0.50) (0.45)
------- ------- ------- -------
Net asset value at end of period ......................... $ 9.93 $ 9.90 $ 9.78 $ 9.75
======= ======= ======= =======
Total investment return(c) ............................... 7.90% 7.63% 3.44% 3.10%
Ratios (to average net assets)/Supplemental Data:
Net investment income ................................... 4.88% 4.63% 5.0% 4.7%
Net expenses ............................................ 1.24% 1.49% 1.24% 1.49%
Expenses (before reimbursement) ......................... 1.26% 1.51% 1.3% 1.6%
Portfolio turnover rate .................................. 108% 108% 79% 79%
Net assets at end of period (in 000's) ................... $18,199 $ 7,288 $18,098 $ 5,089
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
36
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
October 1,
Class A Class B September 1 Year Year 1991(b)
- ------- ------- through Ended Ended through
Year Ended December 31, August 31, August 31, August 31,
December 31, 1995 1994(a) 1994 1993 1992
- ------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 9.10 $ 9.10 $ 9.57 $ 10.38 $ 9.90 $ 9.55
- ------- ------- ------- ------- ------- -------
0.50 0.52 0.17 0.53 0.55 0.45
0.85 0.81 (0.47) (0.51) 0.64 0.30
- ------- ------- ------- ------- ------- -------
1.35 1.33 (0.30) 0.02 1.19 0.75
- ------- ------- ------- ------- ------- -------
(0.50) (0.52) (0.17) (0.52) (0.59) (0.40)
-- -- -- (0.31) (0.12) --
- ------- ------- ------- ------- ------- -------
(0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
- ------- ------- ------- ------- ------- -------
$ 9.95 $ 9.91 $ 9.10 $ 9.57 $ 10.38 $ 9.90
======= ======= ======= ======= ======= =======
15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
107% 107% 24% 96% 154% 87%
$19,825 $ 1,963 $16,667 $17,356 $14,603 $10,085
</TABLE>
37
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY NEW YORK TAX FREE FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994, the years ended August 31, 1994 and August 31, 1993
and the period October 1, 1991 through August 31, 1992.
<TABLE>
<CAPTION>
Class A Class B Class A Class B
------- ------- ------- -------
Year Ended Year Ended
December 31, 1997 December 31, 1996
------------------- -------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period ................... $ 9.91 $ 9.84 $ 10.12 $ 10.02
------- ------- ------- -------
Net investment income .................................... 0.49 0.45 0.50 0.45
Net realized and unrealized gain (loss) on
investments ............................................. 0.32 0.33 (0.21) (0.18)
------- ------- ------- -------
Total from investment operations ......................... 0.81 0.78 0.29 0.27
------- ------- ------- -------
Less dividends and distributions:
From net investment income ............................... (0.49) (0.45) (0.50) (0.45)
From net realized gain on investments .................... (0.14) (0.14) -- --
------- ------- ------- -------
Total dividends and distributions ........................ (0.63) (0.59) (0.50) (0.45)
------- ------- ------- -------
Net asset value at end of period ......................... $ 10.09 $ 10.03 $ 9.91 $ 9.84
======= ======= ======= =======
Total investment return(c) ............................... 8.39% 8.14% 3.06% 2.86%
Ratios (to average net assets)/Supplemental Data:
Net investment income ................................... 4.88% 4.63% 5.0% 4.7%
Net expenses ............................................ 1.24% 1.49% 1.24% 1.49%
Expenses (before reimbursement) ......................... 1.41% 1.66% 1.4% 1.6%
Portfolio turnover rate .................................. 212% 212% 114% 114%
Net assets at end of period (in 000's) ................... $13,814 $ 5,585 $15,572 $ 4,100
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
38
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
October 1,
Class A Class B September 1 Year Year 1991(b)
- ------- ------- through Ended Ended through
Year Ended December 31, August 31, August 31, August 31,
December 31, 1995 1994(a) 1994 1993 1992
- ------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 9.20 $ 9.20 $ 9.58 $ 10.43 $ 9.95 $ 9.55
- ------- ------- ------- ------- ------- -------
0.52 0.59 0.19 0.56 0.60 0.49
0.91 0.82 (0.39) (0.59) 0.54 0.34
- ------- ------- ------- ------- ------- -------
1.43 1.41 (0.20) (0.03) 1.14 0.83
- ------- ------- ------- ------- ------- -------
(0.51) (0.59) (0.18) (0.57) (0.65) (0.43)
-- -- -- (0.25) (0.01) --
- ------- ------- ------- ------- ------- -------
(0.51) (0.59) (0.18) (0.82) (0.66) (0.43)
- ------- ------- ------- ------- ------- -------
$ 10.12 $ 10.02 $ 9.20 $ 9.58 $ 10.43 $ 9.95
======= ======= ======= ======= ======= =======
15.97% 15.67% (2.11%) (0.35%) 11.88% 8.95%
5.4% 5.1% 6.1%+ 5.7% 6.0% 5.9%+
1.24% 1.49% 0.99%+ 0.99% 0.98% 0.99%+
1.4% 1.6% 1.2%+ 1.1% 1.2% 1.5%+
114% 114% 39% 169% 131% 23%
$18,248 $ 1,588 $17,106 $17,862 $15,665 $10,605
</TABLE>
39
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY TAX FREE BOND FUND
================================================================================
Selected data for a share outstanding throughout the years ended December 31,
1997, December 31, 1996 and December 31, 1995, the period September 1, 1994
through December 31, 1994 and the years ended August 31, 1994, August 31, 1993,
August 31, 1992, August 31, 1991, August 31, 1990, August 31, 1989 and August
31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- -------- ------- -------- ------- --------
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.84 $ 9.84 $ 10.02 $ 10.03 $ 9.20 $ 9.20
------- -------- ------- -------- ------- --------
Net investment income 0.51 0.49 0.54 0.51 0.52 0.51
Net realized and unrealized gain (loss)
on investments 0.35 0.35 (0.19) (0.19) 0.83 0.83
------- -------- ------- -------- ------- --------
Total from investment operations 0.86 0.84 0.35 0.32 1.35 1.34
------- -------- ------- -------- ------- --------
Less dividends and distributions:
From net investment income (0.51) (0.49) (0.53) (0.51) (0.53) (0.51)
From net realized gain on investments -- -- -- -- -- --
------- -------- ------- -------- ------- --------
Total dividends and distributions (0.51) (0.49) (0.53) (0.51) (0.53) (0.51)
------- -------- ------- -------- ------- --------
Net asset value at end of period $ 10.19 $ 10.19 $ 9.84 $ 9.84 $ 10.02 $ 10.03
======= ======== ======= ======== ======= ========
Total investment return(b) 9.02% 8.80% 3.63% 3.33% 15.00% 14.86%
Ratios (to average net assets)/Supplemental Data:
Net investment income 5.14% 4.93% 5.4% 5.2% 5.5% 5.2%
Expenses 1.01% 1.22% 1.0% 1.2% 1.0% 1.2%
Portfolio turnover rate 119% 119% 95% 95% 110% 110%
Net assets at end of period (in 000's) $13,017 $482,109 $16,486 $496,231 $ 9,752 $543,314
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
40
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- -----------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, -------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.71 $ 10.39 $ 10.21 $ 9.82 $ 9.40 $ 9.74 $ 9.60 $ 9.73
-------- -------- -------- -------- -------- -------- -------- -------
0.17 0.51 0.57 0.59 0.59 0.61 0.70 0.65
(0.51) (0.58) 0.47 0.40 0.43 (0.33) 0.08 (0.13)
-------- -------- -------- -------- -------- -------- -------- -------
(0.34) (0.07) 1.04 0.99 1.02 0.28 0.78 0.52
-------- -------- -------- -------- -------- -------- -------- -------
(0.17) (0.53) (0.60) (0.60) (0.60) (0.62) (0.64) (0.65)
-- (0.08) (0.26) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
(0.17) (0.61) (0.86) (0.60) (0.60) (0.62) (0.64) (0.65)
-------- -------- -------- -------- -------- -------- -------- -------
$ 9.20 $ 9.71 $ 10.39 $ 10.21 $ 9.82 $ 9.40 $ 9.74 $ 9.60
======== ======== ======== ======== ======== ======== ======== =======
(3.53%) (0.69%) 10.81% 10.42% 11.21% 2.88% 8.34% 5.60%
5.6%+ 5.4% 5.6% 5.9% 6.1% 6.4% 6.8% 6.8%
1.2%+ 1.2% 1.2% 1.3% 1.4% 1.4% 1.6% 1.5%
37% 92% 138% 97% 52% 44% 186% 215%
$513,781 $552,156 $476,761 $292,936 $174,625 $131,342 $111,787 $82,042
</TABLE>
41
<PAGE>
================================================================================
Capital Appreciation Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital. Dividend income, if any, is an incidental
consideration.
Who should invest? Investors who seek growth and are willing to accept a higher
level of risk for higher return potential.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
The Fund may invest in a variety of companies and securities including common
stocks, preferred stocks, warrants, and other equity securities. MacKay-Shields
selects investments according to the economic environment and the attractiveness
of particular markets. Generally, the Fund does not invest its assets for
short-term profits.
Under normal market conditions...
...securities of companies with these characteristics:
o participation in expanding product or service markets;
o increasing unit sales volume;
o revenue growth and earnings per share superior to the average of common
stocks comprising indices such as the S&P 500 Index; or
o an increasing return on investment.
...any other securities that are deemed by MacKay-Shields to be ready for a rise
in price, or expected to have accelerated growth in earnings due to special
factors like new management, new products, changes in consumer demand, or
changes in the economy.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "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.
Opportunities for greater gain often come with greater risk of loss. Some of
the securities, therefore, may carry above-average risk, compared to common
stock indexes, such as the Dow Jones Industrial Average and the S&P 500 Index.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
EDMUND SPELMAN AND
RUDOLPH CARRYL OF
MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Spelman is a Managing Director at MacKay-Shields who specializes in
equities. He joined the firm in 1991 after working as an analyst at Oppenheimer
& Co. since 1983. Mr. Spelman has acted as a portfolio manager of the Capital
Appreciation and Total Return Funds since 1991. Mr. Carryl joined MacKay-Shields
Financial Corporation as a Director--and the manager of this Fund--in 1992 and
became a Managing Director in 1997. He has fifteen years of investment
management and research experience. Mr. Carryl was research director and senior
portfolio manager at Value Line, Inc. from 1978-1992. Mr. Carryl has also acted
as a portfolio manager of the Total Return Fund since 1992.
42
<PAGE>
================================================================================
Equity Index Fund
The Fund's objective is:
================================================================================
to provide investment results that correspond to the total return performance
(and reflect reinvestment of dividends) of publicly traded common stocks
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index" or the "Index").
Who should invest? Investors who seek a conservative way to participate in the
growth potential of stocks with the protection of a principal guarantee.
See pages 68-69 for more details about the Fund.
- --------------------------------------------------------------------------------
Guarantee. This Fund comes with an unconditional guarantee from NYLIFE, Inc.
that, 10 years from your date of purchase, the net asset value of a unit (equal
to the NAV of a Fund share when purchased, plus the value of all cumulative
reinvested dividends and distributions attributable to such share paid during
the 10-year period) will not be less than the price you paid for the Fund share.
For details and limitations of the guarantee, see "Other Information About the
Funds--Equity Index Fund."
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of net assets in stocks listed in the Index. The Fund will
attempt to be fully invested at all times, and will invest in stocks in the same
proportions as they are represented in the Index.
The Fund may invest in securities of foreign issuers included in the Index.
...futures contracts.
...call options on the Index.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
Risks? An investment in this Fund involves risks similar to those of investing
directly in common stocks. 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. The Fund uses the Index because it represents about
two-thirds of the total market value of all common stocks, and is well-known to
investors. The Index also represents total return performance including
reinvested dividends of the stocks in the Index. If the value of the Index
declines, the NAV of shares of the Fund will also decline.
- --------------------------------------------------------------------------------
The Index is a broad measurement of stock market performance composed of 500
common stocks selected by Standard & Poor's ("S&P"). By including a stock in the
Index, S&P does not take any position on the stock's investment value.
The Fund is neither sponsored by nor affiliated with S&P.
WHO'S MANAGING YOUR MONEY?
JAMES MEHLING OF
MONITOR CAPITAL
ADVISORS, INC.
Mr. Mehling joined Monitor Capital Advisors in 1991 after working as director of
risk management in the investment department of New York Life Insurance Company.
Mr. Mehling is currently Chief Investment Officer for Monitor. He began his
career in financial services with Merrill Lynch in 1976 and was with County
NatWest Government Securities from 1987-1989. Mr. Mehling has served as
portfolio manager to the Fund since 1991.
43
<PAGE>
================================================================================
International Equity Fund
The Fund's objective is:
================================================================================
to provide long-term growth of capital commensurate with an acceptable level of
risk by investing in a portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
Who should invest? Investors who prefer the higher return potential of
international equities or want to add diversification to their domestic
investments.
See pages 71-72 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in a diversified portfolio of equity securities,
which may include common stocks, preferred stocks, warrants, and other equity
securities of issuers, wherever organized, who do business mainly outside the
U.S. Eligible investments include any equity or equity-related investments,
domestic or foreign, whether denominated in foreign currencies or U.S. dollars.
...a variety of countries, with a minimum of five countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including, among others, those in Latin America and Asia, that the
Sub-Adviser believes present favorable opportunities.
...no more than 25% of total assets in any one industry group or in any one
government, not including the U.S.
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts for hedging purposes. The Fund may also buy foreign
currency options, securities and securities index options, and enter into
futures contracts and related options. (For more details, see pages 71-72,
"Other Information About the Funds--International Equity Fund.")
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Fund is for long-term investors who seek growth over current income. It is
not designed as a way to speculate on short-term stock market swings. Investors
should be able to tolerate sudden and sometimes substantial fluctuations in
value.
Risks? Alone, this Fund is not a balanced investment plan. It is appropriate for
investors wanting investments in markets outside the U.S., while seeking to
avoid undue volatility. The orientation is in avoiding excessive risk, although
there are risks associated with any investment. Due to this philosophy, the Fund
may not attain as high a return as more aggressively managed international
funds--although the Fund is expected to outperform some funds in down markets.
There is no guarantee that the Fund will succeed in achieving its objective.
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 74, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
SHIGEMI TAKAGI OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Takagi is a Director at MacKay-Shields, specializing in international
equities. He joined the firm in 1989 after working at First Boston Corp. as an
international equity analyst. He has served as a portfolio manager since the
Fund was started in 1994.
Securities of issuers in one country may be denominated in the currency of
another country.
44
<PAGE>
================================================================================
Convertible Fund
The Fund's objective is:
================================================================================
to seek capital appreciation together with current income. Certain of the Fund's
investments are speculative.
Who should invest? Investors who want income from securities that may offer
growth potential if converted into common stock or the cash value of a stock or
a basket or index of equity securities.
See page 68 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of net assets in convertible securities (such as preferred
stock, bonds, debentures, corporate notes, and others which can be converted
into common stock or the cash value of a stock or a basket or index of equity
securities).
The Fund takes a flexible approach by investing in a broad range of
securities of a variety of companies and industries.
...not more than 5% of total assets in securities that are:
o rated less than B by Moody's Investors Service, Inc. ("Moody's") or S&P; or
o unrated but judged by the Sub-Adviser to be of comparable quality.
The Fund may invest without restriction in securities rated Ba or B by Moody's
or BB or B by S&P.
...up to 35% of total assets in non-convertible debt, equity securities that do
not pay regular dividends, U.S. government securities, cash, or cash
equivalents.
...short sales against the box.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the NAV rises, and when interest
rates rise, the NAV declines.
A convertible security's total return partly depends on the performance of the
common stock into which it can be converted. The Fund doesn't generally
restrict investments by rating category.
Securities rated Ba (Moody's), BB (S&P) or lower (sometimes called "junk
bonds") aren't considered "investment-grade" and run greater risks of price
fluctuations, loss of principal and interest, default, or bankruptcy by the
issuer, and other risks which is why these securities are considered
speculative. (See page 78, "Risks of Investing in High Yield Securities (`Junk
Bonds')" for more details; and Appendix A for a description of ratings.)
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE,
NEIL FEINBERG AND
THOMAS WYNN OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Laplaige is President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields. He joined the firm in 1982, became a Director in 1988,
Managing Director in 1991, a member of the Board of Directors in 1993, President
in 1994, Senior Managing Director, and Chief Investment Officer in 1996. He has
managed this Fund since 1991 and is also a manager of the Strategic Value Fund,
the Value Fund and the High Yield Corporate Bond Fund. Mr. Feinberg is a
Director of MacKay-Shields and has been a portfolio manager for the Convertible
Fund since he joined the firm in 1992 and is a Manager of the Strategic Income
and Strategic Value Funds. For the previous three years, he was an analyst for
National Securities and Research Corporation, and for the prior four years he
worked as a CPA/auditor for Peat Marwick Main & Company. Mr. Wynn has been a
portfolio manager for the Convertible Fund since 1997 and joined the firm in
1995 as a research analyst. He was previously a portfolio manager at Fiduciary
Trust for nine years and has over twelve years experience in investment
management and research.
In light of the limited market for convertible securities and the size of the
Convertible Fund, the Fund's Manager, Sub-Adviser and Board of Trustees believe
that it is in the best interest of the Fund and its shareholders to limit the
Fund's cash inflow in order to better enable the Fund to continue to find
appropriate investment opportunities. Accordingly, Convertible Fund will not
offer or accept purchase orders from new investors. Existing shareholders of
other MainStay Funds are not permitted to make exchanges into the Convertible
Fund. Convertible Fund shareholders of record as of May 30, 1997 may make
additional purchases of shares or redeem shares. The Board of Trustees and
management may elect to open the Fund in the future if they determine it
appropriate to do so.
45
<PAGE>
================================================================================
Total Return Fund
The Fund's objective is:
================================================================================
to realize current income consistent with reasonable opportunity for future
growth of capital and income.
The Fund takes a flexible approach by investing in a broad range of securities
which may be spread among different companies, industries, and types of
securities. Securities may include common stocks, convertible securities,
warrants, bonds, preferred stocks, and other debt obligations, including money
market instruments.
Who should invest? Investors who seek a combination of income and growth
potential and want to manage risk through diversification.
See page 73 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 30% of net assets in equities. Usually, a majority of stocks of
companies with revenue growth and earnings per share better than the average of
the stocks that comprise the S&P 500 Index. The Fund also invests in stocks and
other equities which the Sub-Adviser believes are "undervalued;"
...at least 30% of net assets in debt securities, including U.S. government
securities, corporate debt securities, asset-backed securities, mortgage-backed
securities and commercial paper. The long-term investments are expected mainly
to be rated A or better by S&P or Moody's, or, unrated but judged by the
Sub-Adviser to be of comparable quality.
...up to 20% of the debt securities may be rated below A but must be rated at
least Ba (Moody's) or BB (S&P), or, if unrated, judged by the Sub-Adviser to be
of comparable quality.
...no more than 5% of the Fund's net assets may be below investment grade.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
Risks? The Fund may allocate its assets among equity and debt securities and,
therefore, has some exposure to the risks of both common stocks and bonds. See,
for example, "Risks?" for the Capital Appreciation Fund (page 40) and Strategic
Income Fund (page 51). Debt securities rated Ba (Moody's) or BB (S&P) run
greater risks of price fluctuations, default by the issuer, and other risks.
Securities rated Ba (Moody's), BB (S&P) are considered speculative and are
sometimes called "junk bonds." (See page 78 for more details; and Appendix A for
ratings descriptions.)
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
RAVI AKHOURY,
EDMUND SPELMAN AND
RUDOLPH CARRYL OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury joined MacKay-Shields as a Director in 1984, became Managing
Director in 1988, President and member, Board of Directors in 1989, Chairman and
CEO in 1992 and Senior Managing Director of MacKay-Shields and Executive Vice
President of New York Life Insurance Company and Chief Executive Officer of New
York Life Asset Management, a division of New York Life Insurance Company in
1997. Previously, he'd served four years as fixed-income manager for Fischer
Francis Trees and Watts and seven years for the Equitable Life Assurance
Society. He has been a portfolio manager of the Total Return Fund since 1987,
and also manages the Government and Tax Free Bond Funds. Biographies for Mr.
Spelman and Mr. Carryl appear on page 40.
46
<PAGE>
===============================================================================
Strategic Value Fund
The Fund's objective is:
================================================================================
to seek maximum long-term total return from a combination of common stocks,
convertible securities and high yield securities. Certain of the Fund's
investments are speculative.
Who should invest? Investors who seek maximum total return by investing in
multiple market sectors.
See pages 69-70 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions, foreign and domestic securities in three asset
classes, limited by the following:
...30% to 80% of net assets in common stocks which:
o the Sub-Adviser believes are "undervalued" (selling below their value) when
purchased;
o typically pay dividends, although there may be non-dividend-paying stocks
if they meet the "undervalued" criteria;
o are listed on a national securities exchange or are traded in the
Over-the-Counter (OTC) market.
...10% to 40% of net assets in corporate debt securities: all types of
debt securities ordinarily in the lower rating categories of Moody's (Baa to B)
and S&P (BBB to B) or judged to be of comparable creditworthiness by the Fund's
Sub-Adviser.
...10% to 40% of net assets in convertible securities (such as preferred stocks,
bonds, debentures, corporate notes, and others which can be converted into
common stock or the cash value of a single equity security or a basket or index
of equity securities), which may be in any rating category or unrated.
Within these limitations, the Fund may also invest in:
...not more than 20% of net assets in securities that are:
rated CCC or below by Moody's or S&P or judged by the Sub-Adviser to be of
comparable quality.
...U.S. government securities, cash or cash equivalents;
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
At times, the actual allocation for each asset class may differ from the
limitations set forth above, due to market fluctuations or cash entering or
leaving the Fund. This could happen for instance, if the Sub-Adviser has
positioned the assets close to a minimum or maximum for one or more asset
classes, and the Fund's cash position changes because of investors buying or
selling the Fund's shares. To correct the situation, the Sub-Adviser intends to
move cash or reallocate assets within seven days.
Generally, the Sub-Adviser seeks out undervalued securities in all asset
classes. Usually, stocks deemed to be at full value will be replaced with new,
"undervalued" stocks. When assessing whether a stock is undervalued, the
Sub-Adviser considers many factors and will compare the market price to the
company's "book" value, estimated value of the company's assets (liquidating
value), and cash flow. To a lesser extent, the Sub-Adviser will also look at
trends and forecasts such as growth rates and future earnings.
- --------------------------------------------------------------------------------
Risks? The NAV of the Fund's shares will fluctuate depending on a number of
factors, including the Sub-Adviser's ability to consistently and correctly
determine the relative attractiveness of the asset classes. Prices change not
only in response to economic factors but to psychological factors as well and
these factors are difficult to interpret and quantify. It is therefore possible
for the Fund to have a lower overall investment in stocks during a period of
rising stock prices, or a small investment in bonds during a period of rising
bond prices.
The risks of investing in particular types of debt securities also may vary. For
example, securities rated below BBB or Baa (sometimes called "junk bonds") are
not considered "investment grade" and run greater risks of price fluctuations,
loss of principal and interest, default or bankruptcy by the issuer, and other
risks which is why these securities are considered speculative.
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. securities, and involve additional risks, including currency
fluctuations and political and economic instabilities.
For additional information regarding risks associated with investment in the
Fund, see pages 73-78, Description of Investments and Investment Practices.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
DENIS LAPLAIGE, STEVEN TANANBAUM AND NEIL FEINBERG OF
MACKAY-SHIELDS FINANCIAL CORPORATION.
Denis Laplaige is primarily responsible for the value portion of the Fund's
portfolio. Mr. Laplaige's biography appears on page 43.
Steven Tananbaum, who is primarily responsible for the high yield portion of the
Fund's portfolio, is a Managing Director of MacKay-Shields. Mr. Tananbaum joined
MacKay-Shields in 1989. Previously, he worked as a high yield and merger
associate intern in the corporate finance department of Kidder Peabody. Neil
Feinberg is primarily responsible for the convertible portion of the Fund's
portfolio. Mr. Feinberg's biography appears on page 43.
47
<PAGE>
================================================================================
Value Fund
The Fund's objective is:
================================================================================
to realize maximum long-term total return from a combination of capital growth
and income. It is not designed or managed primarily to produce current income.
Who should invest? Investors who seek to maximize total return from securities
which may have more potential than the market currently sees.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
The Fund takes a flexible approach, emphasizing investments in common stocks
with the characteristics listed below.
Under normal market conditions...
...at least 65% of net assets in common stocks which:
o the Sub-Adviser believes were "undervalued" (selling below their value)
when purchased;
o typically pay dividends, although there may be non-dividend-paying stocks
if they meet the "undervalued" criteria; and
o are listed on a national securities exchange or are traded in the
Over-the-Counter (OTC) market.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
Usually, stocks deemed to be at full value will be replaced with new,
"undervalued" stocks.
In assessing whether a stock is undervalued, the Sub-Adviser considers many
factors and will compare the market price to the company's "book" value,
estimated value of the company's assets (liquidating value), and cash flow. To a
lesser extent, the Sub-Adviser will also look at trends and forecasts such as
growth rates and future earnings.
- --------------------------------------------------------------------------------
Risks? 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 AND JEFFREY A. SIMON OF
MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Laplaige, President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields, has served as a portfolio manager of the Value Fund since
1988. His biography is on page 43. Mr. Simon joined MacKay-Shields in 1993. Mr.
Simon is a Managing Director of MacKay-Shields and specializes in equity
securities. Previously, Mr. Simon was a senior equity research analyst and
portfolio manager at National Securities and Research Corporation from 1991-1992
and Neuberger & Berman from 1987-1991.
48
<PAGE>
================================================================================
Government Fund
The Fund's objective is:
================================================================================
to seek a high level of current income, consistent with safety of principal.
Who should invest? Investors who seek to combine high current income and safety
of principal.
See page 70 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of net assets in U.S. government securities including:
o U.S. Treasury bills (maturing in one year or less), notes (1-10 years), and
bonds (generally 10+ years);
o debt securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities; and
o Government National Mortgage Association ("GNMA") mortgage-backed
certificates and other U.S. government securities representing ownership
interests in mortgage pools, such as securities issued by the Federal
National Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC").
...up to 35% of total assets in mortgage-backed and asset-backed securities that
are not U.S. government securities.
...enter into agreements to purchase securities on a when-issued or forward
commitment basis.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
Risks? Although some of the instruments the Fund purchases are backed by the
U.S. government and its agencies, shares of the Fund are not guaranteed and the
Fund's NAV will fluctuate. Generally, when interest rates fall, the NAV rises,
and when interest rates rise, the NAV declines.
Mortgage-backed securities may be prepaid prior to maturity. Prepayment rates
may be affected by changes in mortgage rates. During periods of falling rates,
prepayments tend to increase, and during periods of rising rates, they tend to
decrease. Prepayments usually are reinvested at different rates than the
original investment. As a result, these securities can increase in value less
than "non-callable" bonds during falling rate periods, yet involve comparable
risks during rising rate periods.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
RAVI AKHOURY AND EDWARD MUNSHOWER OF
MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Akhoury, Chairman and CEO of MacKay-Shields, has served as portfolio manager
of the Government Fund since 1986. His biography appears on page 44. Mr.
Munshower is a Director of MacKay-Shields and has been a portfolio manager for
the Government Fund since 1986. Mr. Munshower is also the portfolio manager for
the Strategic Income Fund. He joined MacKay-Shields as a fixed income investment
specialist in 1985 after having been an investment analyst for New York Life
Insurance Company. Mr. Munshower has over 14 years of experience in investment
management and research.
49
<PAGE>
================================================================================
High Yield Corporate Bond Fund
The Fund's objective is:
================================================================================
maximum current income through investment in a diversified portfolio of high
yield debt securities. Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher risk. Certain of the Fund's
investments are speculative.
Who should invest? Investors who want to maximize current income and can accept
the higher risk of securities with high yield potential.
See pages 70-71 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in corporate debt securities: all types of
foreign and domestic debt securities ordinarily in the lower rating categories
of Moody's (Baa to B) and S&P (BBB to B).
...without restriction in securities rated at least Ba or B by Moody's, BB or B
by S&P, or unrated securities determined by the Sub-Adviser to be of comparable
quality.
...not more than 15% of net assets in securities rated lower than B by Moody's
or S&P.
...up to 25% of total assets in equity securities, including common stocks,
preferred stocks, warrants, and rights.
...short sales against the box.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of
Investments and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the NAV rises, and when interest
rates rise, the NAV declines.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment-grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer, and other risks
which is why these securities are considered speculative. (For a more complete
discussion of those risks, see page 78, "Risks of Investing in High Yield
Securities (`Junk Bonds').") Seeking to reduce risk, the Fund's Sub-Adviser
diversifies investments and also pays close attention to issuer creditworthiness
and trends across industries and in the economy. (See Appendix A for a
description of ratings.)
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see page 74, "Description of Investments and
Investment Practices--Foreign Securities.")
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease,
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
Denis Laplaige and
Steven Tananbaum of
MacKay-Shields
Financial Corporation.
Mr. Laplaige, President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields, has served as portfolio manager of the High Yield Corporate
Bond Fund since 1991. His biography is on page 43. Mr. Tananbaum has been a
portfolio manager for the Fund since he joined MacKay-Shields in 1989. Mr.
Tananbaum's biography appears on page 45.
50
<PAGE>
================================================================================
International Bond Fund
The Fund's objective is:
================================================================================
to seek to provide competitive overall return commensurate with an acceptable
level of risk by investing primarily in a portfolio consisting of non-U.S.
(primarily government) debt securities.
Who should invest? Investors who prefer the higher return potential of
international bonds or want to add diversification to their domestic
investments.
See page 71 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...any debt or debt-related investment, domestic or foreign, denominated in
foreign or U.S. currencies.
...at least 65% of total assets in debt securities of foreign governments,
agencies and supranational organizations denominated in foreign or U.S.
currencies. These could have fixed, variable, floating or inverse floating rates
of interest. The Fund may also purchase debt securities of corporate issuers.
Some of these securities may be privately issued and/or convertible into common
stock, or they may be traded together with warrants for the purchase of common
stock.
...a variety of countries, with a minimum of five countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including, among others, those in Latin America and Asia, that the
Sub-Adviser believes present favorable opportunities.
...not more than 25% of net assets in debt securities rated below BBB by S&P or
Baa by Moody's, or, if unrated, determined by the Sub-Adviser to be of
comparable quality. (See Appendix A for a description of ratings.)
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts for hedging purposes. The Fund may also buy forward
foreign currency options, securities and securities index options, and enter
into futures contracts and related options. (For more details, see page 71,
"Other Information About the Funds -- International Bond Fund.")
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Alone, this Fund is not a balanced investment plan. It may be appropriate
for investors wanting investments in markets outside the U.S. while seeking to
avoid higher volatility. The orientation is in avoiding excessive risk, although
there are risks associated with any investment. Due to this philosophy, the Fund
may not attain as high a return as more aggressively managed international
funds--although the Fund is expected to outperform some funds in down markets.
There is no guarantee that the Fund will succeed in achieving its objective.
Generally, when interest rates fall, the NAV rises, and when interest rates
rise, the NAV declines.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment-grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer, and other risks,
which is why these securities are considered speculative. (See page 78, "Risks
of Investing in High Yield Securities (`Junk Bonds')", for details and Appendix
A for a description of ratings.)
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see page 74, "Description of Investments and
Investment Practices--Foreign Securities.")
There are certain risks associated with investments in securities with floating
or inverse floating rates of interest. (See page 74, "Description of Investments
and Investment Practices--Floaters and Inverse Floaters.")
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JOSEPH PORTERA OF MACKAY-
SHIELDS FINANCIAL
CORPORATION.
Mr. Portera is a Director of MacKay-Shields specializing in international bonds.
He is also a portfolio manager for the Strategic Income Fund. He returned to
MacKay-Shields in December 1996 after working at Fiduciary Trust Company
International as a portfolio manager in international bonds. Mr. Portera joined
MacKay-Shields in 1991 and was portfolio manager of the International Bond Fund
from its inception in September 1994 to August 1995. Previously, Mr. Portera was
a portfolio manager specializing in international debt securities at ABN-AMRO
Bank, N.V.from 1988 to 1991.
Securities of issuers in one country may be denominated in the currency of
another country.
51
<PAGE>
================================================================================
Money Market Fund
The Fund's objective is:
================================================================================
to seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government. Although the Fund attempts to
maintain a stable net asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
Who should invest? Investors who are averse to risk or want to earn competitive
yields on cash they're planning to spend or invest in the near future.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...short-term securities of the U.S. government (those that mature within 397
days).
...bank and bank holding company obligations (including CDs and bankers'
acceptances).
...commercial paper (short-term, unsecured loans to corporations), including
variable rate master demand notes, and other short-term corporate loans (one
year or less).
...dollar-denominated loans to U.S. and foreign issuers and securities of
foreign branches of U.S. banks (such as negotiable CDs, also known as
Eurodollars) including variable rate master demand notes and floating rate
notes.
...up to 5% of total assets in securities of one issuer, (this doesn't apply to
U.S. government securities and related repurchase agreements and securities
subject to certain puts) except, up to 25% of total assets may be invested in
securities of a single issuer for up to 3 days if they're rated in the highest
category by at least two major rating agencies ("First Tier"), or, if unrated,
determined to be of comparable quality by the Sub-Adviser.
...up to 5% of total assets in securities rated in the top two categories by at
least two nationally recognized rating agencies, but not rated in the highest
category by two or more major rating agencies ("Second Tier"), or, if unrated,
determined to be of comparable quality by the Sub-Adviser when acquired.
...up to 1% of total assets (or $1 million, whichever is greater at the time of
the purchase) in securities of any one issuer which is Second Tier).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Any investment the Fund makes must present minimal credit risk in the
opinion of the Sub-Adviser. If rated, a security must be rated within the two
highest rating categories for short-term debt securities by at least two major
rating agencies (or by one major agency, if only that agency has rated the
security).
- --------------------------------------------------------------------------------
This Fund generally can't invest in securities with remaining maturities longer
than 397 days (13 months). In addition, the weighted average portfolio maturity
may not exceed 90 days. (See the SAI for a more detailed explanation.)
52
<PAGE>
================================================================================
Strategic Income Fund
The Fund's objective is:
================================================================================
to provide current income and competitive overall return by investing primarily
in domestic and foreign debt securities.
Who should invest? Investors who seek an opportunity for potentially higher
income and overall return by investing in multiple bond market sectors.
See page 72 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in a diversified portfolio of domestic and
foreign debt or debt-related securities issued by government and corporate
issuers. The securities may be denominated in U.S. or foreign currencies, and
may have fixed, variable, floating or inverse floating rates of interest.
Maturities of the securities held by the Fund will vary.
...various bond market sectors (U.S. government--including mortgage-related
securities, foreign government, U.S. corporate and foreign corporate including
high yield securities in each of the foregoing sectors). The Sub-Adviser will
allocate the Fund's investments among the various bond market sectors based on
current and projected economic and market conditions.
...a variety of countries, which may include countries with established
economies as well as emerging market countries, including, among others, those
in Latin America and Asia, that the Sub-Adviser believes present favorable
opportunities.
...securities rated below BBB by S&P or Baa by Moody's or, if unrated,
determined by the Sub-Adviser to be of comparable quality.
...not more than 15% of net assets in securities rated lower than B by S&P or
Moody's.
...up to 30% of total assets in equity securities, including common stocks,
preferred stocks, warrants and rights.
...securities in which the Fund may invest include:
o obligations issued or guaranteed by the U.S. or foreign governments, their
agencies, subdivisions or instrumentalities, obligations of supranational
entities or international agencies;
o debt securities issued by domestic or foreign corporate entities, zero
coupon bonds, and municipal bonds;
o mortgage-backed and other asset-backed securities;
o loan participation interests;
o securities that are privately issued and/or convertible into common stock,
or securities traded together with warrants for the purchase of common
stock; and
o cash equivalents.
...futures on debt securities and bond index futures, options on these futures
and options on debt securities.
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts for hedging purposes. The Fund may also buy foreign
currency options.
...other investments suitable for the Fund. (See pages 55-56, "General
Investment Considerations" and pages 73-78, "Description of Investments and
Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The NAV of the Fund's shares will fluctuate depending on a number of
factors. Generally, when interest rates fall, the NAV rises, and when interest
rates rise, the NAV declines. Other factors such as changes in the perceived
creditworthiness of certain issuers, changes in the relative values of currency,
and changes in the average maturity of the Fund's investments can also affect
NAV.
The risks of investing in particular types of debt securities also may vary. For
example, some types of debt securities are particularly sensitive to interest
rate changes (e.g. zero coupon bonds and some mortgage- or asset-backed
securities) and may therefore be especially volatile. Others may entail unique
or special risks that can affect value. For example, securities rated below BBB
or Baa (sometimes called "junk bonds") are not considered "investment-grade" and
run greater risks of price fluctuations, loss of principal and interest, default
or bankruptcy by the issuer, and other risks which is why these securities are
considered speculative.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks, including currency
fluctuations and political and economic instabilities.
There are certain risks associated with investments in securities with floating
or inverse floating rates of interest. Securities of issuers in one country may
be denominated in the currency of another country.
For additional information regarding risks associated with investment in the
Fund, see pages 73-78, "Description of Investments and Investment Practices."
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
NEIL FEINBERG, JOSEPH PORTERA, EDWARD
MUNSHOWER AND STEVEN TANANBAUM
OF MACKAY-SHIELDS FINANCIAL
CORPORATION.
Messrs. Feinberg, Portera and Tananbaum have served as portfolio managers since
the Fund started in 1997. Their biographies appear on pages 43, 49, and 45,
respectively. Mr. Munshower also serves as portfolio manager for the Fund. His
biography appears on page 47.
53
<PAGE>
================================================================================
California Tax Free Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income exempt from regular federal
income tax and California personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal securities issued by the State
of California and its political subdivisions, agencies and instrumentalities.
Who should invest? California residents who want to keep more of what they earn
by investing for income that's double tax-free.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of total assets in California tax-exempt securities. These could
have fixed, variable or floating rates of interest. They may also be zero coupon
municipal bonds, with no coupon rate.
The tax-exempt securities must be:
o rated, at purchase, in one of the top four categories by Moody's or S&P;
o short-term tax-exempt securities which, at purchase, are rated in one of
the top three categories by Moody's or S&P;
o municipal commercial paper which, at purchase, is rated P-1 by Moody's or
A-1 by S&P; or
o unrated securities determined by the Sub-Adviser to be of comparable
quality.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page 75, "Descriptions of Investments and Investment
Practices-Municipal Securities and Municipal Lease Obligations," for details.)
The Fund may also purchase Industrial Development and Pollution Control Bonds,
which are generally not secured by the taxing power of the municipality but are
secured by revenues paid by the industrial user.
...generally not more than 25% of total assets in securities of any one
governmental unit.
...not more than 20% of total assets in tax-exempt securities subject to the
federal alternative minimum tax (AMT) for individual shareholders.
...tax-exempt debt obligations issued by political subdivisions and authorities
of the Commonwealth of Puerto Rico.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
The Fund may also buy and sell call and put options, invest in futures contracts
on debt securities or securities indexes, and invest in options on futures
contracts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The value of these securities--and the Fund's NAV--may rise or fall due
to various factors. These factors include changes in interest rates, and the
ability of the issuers to make their interest and principal payments on these
securities. Generally, when interest rates fall, the NAV rises, and when rates
rise, the NAV declines.
Changes in credit ratings may cause the Fund to hold bonds rated below
"investment-grade." The Fund isn't obligated to sell a security that has been
downgraded below investment-grade, but will sell the security as soon as
reasonably practicable, depending on market conditions, if more than 5% of the
total assets would be invested in securities rated below investment grade.
Securities rated BBB (S&P) or Baa (Moody's) run greater risks of price
fluctuations, default by the issuer, and other risks that may be considered
speculative. (See Appendix A for a description of ratings.)
Issuers of municipal lease securities aren't obligated to continue payments
unless money is appropriated periodically by the legislative body. This could
make collecting difficult in the case of a default.
Since the Fund concentrates its investments in California securities, the NAV of
the Fund's shares can be adversely affected by political developments or
economic events in California, including a default of a municipal issuer or a
financial crisis.
Investments in futures contracts and options carry certain risks. (See page 76,
"Description of Investments and Investment Practices--Risk Management
Techniques.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY AND JAMES FLOOD OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury, Chairman and CEOof MacKay-Shields, has served as portfolio manager
since the Fund started in 1991. His biography appears on page 44. Mr. Flood, a
Director of MacKay-Shields, has been a portfolio manager for the Fund since
1992. His biography appears on page 54.
To help you decide whether taxable or non-taxable yields are better for you, see
Appendix B for a comparative yield table.
54
<PAGE>
================================================================================
New York Tax Free Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income exempt from regular federal
income tax and personal income tax of New York State and its political
subdivisions, including New York City, consistent with preservation of capital.
The Fund invests primarily in municipal securities issued by the State of New
York and its political subdivisions, agencies and instrumentalities.
Who should invest? New York State or New York City residents who want to keep
more of what they earn with income that's double or triple tax-free.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of total assets in New York tax-exempt securities. These could
have fixed, variable or floating rates of interest. They may also be zero coupon
municipal bonds, with no coupon rate.
The tax-exempt securities must be:
o rated, at purchase, in one of the top four categories by Moody's or S&P;
o short-term tax-exempt securities which, at purchase, are rated in one of
the top three categories by Moody's or S&P;
o municipal commercial paper which, at purchase, is rated P-1 by Moody's or
A-1 by S&P; or
o unrated securities determined by the Sub-Adviser to be of comparable
quality.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page 75, "Descriptions of Investments and Investment Practices--
Municipal Securities and Municipal Lease Obligations," for details.)
The Fund may also purchase Industrial Development and Pollution Control Bonds,
which are generally not secured by the taxing power of the municipality but are
secured by revenues paid by the industrial user.
...generally not more than 25% of total assets in securities of any one
governmental unit.
...not more than 20% of total assets in tax-exempt securities subject to the
federal alternative minimum tax (AMT) for individual shareholders.
...tax-exempt debt obligations issued by political subdivisions and authorities
of the Commonwealth of Puerto Rico.
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
The Fund may also buy and sell call and put options, invest in futures contracts
on debt securities or securities indexes, and invest in options on futures
contracts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The value of these securities--and the Fund's NAV--may rise or fall due
to various factors. These factors may include changes in interest rates, and the
ability of the issuers to make their interest and principal payments on these
securities. Generally, when interest rates fall, the NAV rises, and when rates
rise, the NAV declines.
Changes in credit ratings may cause the Fund to hold bonds rated below
"investment-grade." The Fund isn't obligated to sell a security that has been
downgraded below investment-grade; but will sell the security as soon as
reasonably practicable, depending on market conditions, if more than 5% of the
total assets would be invested in securities rated below investment grade.
Securities rated BBB (S&P) or Baa (Moody's) run greater risks of price
fluctuations, default by the issuer, and other risks that may be considered
speculative. (See Appendix A for a description of ratings.)
Issuers of municipal lease securities aren't obligated to continue payments
unless money is appropriated periodically by the legislative body. This could
make collecting difficult in the case of a default.
Since the Fund concentrates its investments in New York securities, the NAV of
the Fund's shares can be adversely affected by political developments or
economic events in New York State, including a default of a municipal issuer or
a financial crisis.
Investments in futures contracts and options carry certain risks. (See page 76,
"Description of Investments and Investment Practices--Risk Management
Techniques.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY AND JAMES FLOOD OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury, Chairman and CEOof MacKay-Shields, has served as portfolio manager
since the Fund started in 1991. His biography appears on page 44. Mr. Flood, a
Director of MacKay-Shields, has been a portfolio manager for the Fund since
1992. His biography appears on page 54.
To help you decide whether taxable or non-taxable yields are better for you, see
Appendix B for a comparative yield table.
55
<PAGE>
================================================================================
Tax Free Bond Fund
The Fund's objective is:
================================================================================
to provide a high level of current income free from regular federal income tax,
consistent with the preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be subject to state and local
taxes.
Who should invest? Investors in a high federal income tax bracket or investors
who want to pay less of their investment earnings to the IRS.
See pages 72-73 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...tax-exempt securities which are, at the time of purchase, rated in one of the
top four categories (or short-term tax-exempt securities rated in one of the top
three categories) by Moody's or S&P or, if unrated, deemed by the Sub-Adviser to
be of comparable quality. The Fund may also buy futures, options on futures and
cash equivalents.
...at least 80% of net assets in "municipal bonds" issued by, or on behalf of,
the states, the District of Columbia, territories and possessions of the United
States and their political subdivisions, and their agencies, authorities and
instrumentalities.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page 75, "Descriptions of Investments and Investment
Practices--Municipal Securities and Municipal Lease Obligations," for details.)
...more than 25% of total assets may be invested in Industrial Development
Bonds, which are generally not secured by the taxing power of the municipality
but are secured by revenues paid by the industrial user.
...not more than 20% of net assets in unrated tax-exempt securities determined
by the Sub-Adviser to be of comparable quality to securities rated within the
four highest grades by S&P and Moody's.
...not more than 10% of net assets in illiquid municipal lease obligations and
other securities that are "illiquid" (can't be easily sold). (See page 56 for
more details.)
...other investments suitable for most or all MainStay Funds. (See pages 55-56,
"General Investment Considerations" and pages 73-78, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The value of these securities--and the Fund's NAV--may rise or fall due
to various factors. These factors include changes in interest rates, and the
ability of the issuers to make their interest and principal payments on these
securities. Generally, when interest rates fall, the NAV rises, and when rates
rise, the NAV declines.
The Fund may not invest in a tax-exempt security rated below "medium-grade."
Securities rated BBB (S&P) or Baa (Moody's) run greater risks of price
fluctuations, default by the issuer, and other risks that may be considered
speculative. (See Appendix A for a description of ratings.)
Issuers of municipal lease securities aren't obligated to continue payments
unless money is appropriated periodically by the legislative body. This could
make collecting difficult in the case of a default.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
RAVI AKHOURY AND JAMES
FLOOD OF MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Akhoury, Chairman and CEOof MacKay-Shields, has served as portfolio manager
since the Fund started in 1986. His biography appears on page 44. Mr. Flood is a
Director of MacKay-Shields and has acted as portfolio manager for this Fund
since 1992, when he joined the firm. Previously, he worked for over 8 years as
portfolio manager for Value Line, Inc.
Laws may change, and issuers may fail to follow tax laws, causing a tax-exempt
item to become a taxable one.
To help you decide whether taxable or non-taxable yields are better for you, see
Appendix B for a comparative yield table.
56
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MUTUAL FUNDS
================================================================================
- --------------------------------------------------------------------------------
The share price of a Fund will fluctuate
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The value of the securities in a Fund and the share price (NAV) of that Fund
(other than the Money Market Fund which seeks to maintain a stable NAV of $1 per
share) will fluctuate. Many factors can affect the value of securities,
including:
o conditions in the securities markets;
o business success of the companies that issued the securities;
o creditworthiness of the companies that issued the securities;
o interest rates;
o average maturity of the Fund's nonequity or debt investments;
o foreign currency exchange rates (where applicable); and
o other factors.
- --------------------------------------------------------------------------------
Funds aren't guaranteed
- --------------------------------------------------------------------------------
Remember, mutual funds are not guaranteed or federally insured, even if you buy
them through a bank. MainStay recommends that you speak with your Registered
Representative to learn about other smart ways to help protect your money based
on the level of risk you are willing to take. The Equity Index Fund comes with a
limited guarantee. MainStay also recommends that you discuss its parameters
fully with your Registered Representative before investing. (See pages 68-69,
"Other Information About the Funds--Equity Index Fund--The Guarantee," for
details.)
- --------------------------------------------------------------------------------
Fundamental investment objectives
- --------------------------------------------------------------------------------
The investment objective of each Fund is fundamental, which means it can't be
changed without shareholder approval.
- --------------------------------------------------------------------------------
Read the prospectus
- --------------------------------------------------------------------------------
You need to consider as many factors as possible when making an investment
decision--which is why it's important to read the prospectus.
FUND DIVERSIFICATION
Each of the Funds, except the Equity Index Fund, International Bond Fund,
California Tax Free Fund, and New York Tax Free Fund, is "diversified" for the
purposes of the Investment Company Act of 1940, as amended ("1940 Act").
The Equity Index Fund, International Bond Fund, California Tax Free Fund, and
New York Tax Free Fund are each "nondiversified" for the purposes of the 1940
Act, meaning that each may invest a greater percentage of its assets in the
securities of one issuer than a diversified Fund. As a "nondiversified" fund, a
Fund may be more susceptible to risks associated with a single economic,
political, or regulatory occurrence than a diversified portfolio might be.
However, each Fund intends to qualify as a "regulated investment company" under
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
therefore will be subject to diversification limits requiring that, as of the
close of each fiscal quarter:
o no more than 25% of its total assets may be invested in the securities of a
single issuer (except for U.S. government securities); and
o with respect to 50% of its total assets, no more than 5% of such assets may
be invested in the securities of a single issuer (except for U.S.
government securities) or invested in more than 10% of the outstanding
voting securities of a single issuer.
The Money Market Fund, in order to comply with Rule 2a-7 of the 1940 Act, has
adopted a non-fundamental investment restriction that with respect to 100% of
its total assets, no more than 5% of such assets may be invested in the
securities of a single issuer (except for U.S. government securities) or
invested in more than 10% of the outstanding voting securities of a single
issuer.
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions--for temporary defensive
purposes--each Fund, except the Equity Index Fund, may invest without limit in
cash and cash equivalents (as defined on pages 73-74 under "Description of
Investments and Investment Practices--Cash Equivalents"). In addition, under
such circumstances:
57
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
...The High Yield Corporate Bond Fund may invest without limit in securities
rated A or higher by Moody's or S&P, and may invest more than 25% of its net
assets in U.S. government securities;
...The International Equity Fund may invest up to 5% of its total assets in debt
instruments rated below investment-grade;
...The California Tax Free Fund and New York Tax Free Fund may, for defensive
purposes, each invest more than 25% of its total assets in Industrial
Development and Pollution Control Bonds whether or not the users of facilities
financed by such bonds are located in the same geographic region or whether the
proceeds are used to finance similar types of projects. In cases where users are
in the same locale, or where proceeds are used for similar projects, there may
be additional risk. In an economic downturn in the area, or if a business or
political development affects the area or type of project, there could generally
be less need for the facilities or use of those facilities. In addition, in
adverse market conditions such as an uncertain interest rate environment or
when, in the opinion of the Sub-Adviser, no suitable tax-exempt securities are
available, the California Tax Free Fund and New YorkTax Free Fund may each
temporarily invest more than 20% of its total assets in taxable money market
instruments, tax-exempt securities of another state (not exempt from taxes of
the Fund's target state), or in tax-exempt securities subject to the Alternative
Minimum Tax. Only those tax-exempt securities of another state which satisfy the
applicable credit and quality standards for California or New York tax-exempt
securities may be purchased by a Fund.
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
Each Fund has a nonfundamental policy that it will not invest more than 10% of
its net assets (15% for the International Bond, International Equity, Strategic
Value and Strategic Income Funds) in "illiquid" securities. These are securities
subject to legal or contractual restrictions on resale (other than restricted
securities eligible for resale pursuant to Rule 144A or Section 4(1) under the
Securities Act of 1933 ("1933 Act") determined to be liquid pursuant to
procedures established by the Board of Trustees), repurchase agreements maturing
in more than seven days, certain options traded over the counter or other
securities which legally or in the opinion of the applicable Sub-Adviser are
deemed illiquid. There may be undesirable delays and added costs in selling
restricted securities.
- --------------------------------------------------------------------------------
The effects of trading costs on your total return
"Portfolio turnover" is the term used in the industry for measuring the amount
of trading that occurs in a fund's portfolio during the year. A 100% turnover
rate, for example, means that, on average, every security in the portfolio has
been replaced once during the year.
Funds with high turnover rates (over 100%) often have higher transaction costs
(which are paid by the fund) and may generate short-term capital gains (on which
you'll pay taxes, even if you don't sell any shares by year-end).
You can find the turnover rate for any fund, except for Money Market Fund, in
any prospectus, as a line item in the "Financial Highlights" table for that
fund. MainStay recommends, however, that you consider all the facts when you
compare the turnover rates of different funds. A fund with consistently higher
total returns and higher turnover rates than another fund may actually be
achieving better performance precisely because the managers are active traders.
You should be aware that the "total return" figure (also found as a line item in
a fund's "Financial Highlights" table) already includes portfolio turnover
costs.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
The High Yield Corporate Bond and International Bond Funds normally must each
invest at least 65% of its total assets in "bonds," and the Tax Free Bond Fund
normally must invest at least 80% of its total assets in "bonds." For this
purpose, each Fund considers the various types of debt or fixed-income
securities in which it invests, as specifically described elsewhere in this
prospectus, to be "bonds" as referenced in the Fund's name. The use of this name
is not meant to restrict each Fund's investment to a narrow category of debt
securities that are formally denominated as "bonds." For additional investment
restrictions, see the Fund descriptions on pages 70-73.
Features of debt securities
Debt securities may have fixed, variable, or floating (including inverse
floating) rates of interest.
58
<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),
or if you sell your shares within one year of purchase (Class C 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
Class A, Class B and Class C shares represent an interest in the same
investments, give you the same rights, and are identical in all other respects,
except each bears its own service and distribution expenses (Rule 12b-1 fees),
and any other specific class expenses the Board of Trustees may approve.
NOT FOR THE MONEY MARKET FUND
The Money Market Fund generally doesn't impose a sales charge and has no Rule
12b-1 fees. There are three classes of shares of the Money Market Fund only to
track exchanges from other Funds within the same class.
- --------------------------------------------------------------------------------
Take note: The Equity Index Fund only offers
Class A shares.
- --------------------------------------------------------------------------------
59
<PAGE>
================================================================================
WHAT ARE THE DIFFERENCES IF YOU...
...PAY UP-FRONT (CLASS A SHARES)?
================================================================================
Since some of your investment goes to pay a sales charge up-front, you start off
owning fewer shares. But, you're usually better off paying up-front if you:
o plan to own the shares for an extended period of time, since the Rule 12b-1
fees on Class B and Class C shares will eventually exceed the cost of the
up-front sales charge; or
o qualify for a reduced sales charge (see page 58, "Consider Reducing Your
Sales Charge," for details).
You pay lower ongoing Rule 12b-1 fees--which means there's more net income to
pay you higher dividends per share.
You pay no sales charge when you redeem/sell your shares (except if you bought
more than $1 million of shares and redeemed within 1 year, see page 58).
- --------------------------------------------------------------------------------
If there aren't enough shares...
When you sell Class B or Class C shares, the Fund is permitted to sell
additional Class B or Class C shares to cover the cost of any applicable sales
charge. If you don't own enough extra Class B or Class C shares to do this, the
sales charge will be taken from the proceeds of your sale, reducing the amount
paid to you.
If it's automatic reinvestment...
You don't pay any sales charge (Class A, Class B or Class C) on shares bought
through the automatic reinvestment of dividends or capital gains. The full
amount goes toward buying more shares.
- --------------------------------------------------------------------------------
VS
================================================================================
...PAY WHEN YOU REDEEM/SELL (CLASS B SHARES)?
================================================================================
You pay no up-front sales charge, your full investment goes toward buying
shares, so you start off owning more shares.
The ongoing Rule 12b-1 fees are higher than the Rule 12b-1 fees charged to
Class A shares, which means:
o you receive lower dividends;
o your NAV will generally be lower than the Class A Shares' NAV; and
o therefore, total performance per share will be lower than the Class A
shares (but you'll own more shares).
You may pay a sales charge if you sell shares within the next 6 years (there are
exceptions; see page 83, "Deferred Sales Charge Class B Shares--Contingent
Deferred Sales Charge, Class B"):
o the sales charge drops from 5% in the first year to 0% after six years,
o it's assumed you're selling the shares you've owned the longest, so you pay
the lowest possible sales charge,
o if you sell a Fund's shares, the sales charge will be based on the lower of
the current NAV of Fund shares less dividends and distributions or the
price you originally paid for those shares.
- --------------------------------------------------------------------------------
Take note: If you hold Class B shares for eight years they will be automatically
converted to Class A shares which pay lower 12b-1 fees on or about December 31,
2005 or at the end of the calendar quarter occurring eight years after the date
a shareholder purchased their shares, whichever is later.
- --------------------------------------------------------------------------------
60
<PAGE>
VS
===============================================================================
...PAY ONLY IF YOU REDEEM/SELL WITHIN ONE YEAR OF
PURCHASE (CLASS C SHARES)?
===============================================================================
You pay no up-front sales charge, your full investment goes toward buying
shares, so you start off owning more shares.
The ongoing Rule 12b-1 fees are higher than the Rule 12b-1 fees applicable to
Class A Shares and Class B Shares in the case of the California Tax Free Fund,
New York Tax Free Fund and Tax Free Bond Fund for the life of the Class C
investment, which means:
o you receive lower dividends;
o your NAV will generally be lower than the Class A Shares' NAV; and
o therefore, total performance per share will be lower than the Class A
shares (but you'll own more shares).
You may pay a 1% contingent deferred sales charge if you sell your shares within
one year from the date of purchase. (See page ----, "Deferred Sales Charge Class
C Shares -- Contingent Deferred Sales Charge, Class C")
- --------------------------------------------------------------------------------
Take note: Unlike Class B shares, there is no conversion feature applicable to
Class C shares. Thus, Class C shareholders pay higher ongoing Rule 12b-1 fees
for the life of their investment.
- --------------------------------------------------------------------------------
61
<PAGE>
- --------------------------------------------------------------------------------
Consider Reducing Your Sales Charge
- --------------------------------------------------------------------------------
THE REINVESTMENT PRIVILEGE MAY HELP YOU AVOID SALES CHARGES
When you sell shares, you have the right--for 30 days--to reinvest any or all of
the money in the same class of any MainStay Fund without paying another sales
charge (as long as those shares haven't been reinvested once already). If you've
paid a sales charge when you redeem (Class B shares), you'll receive a pro-rata
credit for reinvesting.
Note: Reinvestment won't relieve you of any tax consequences on gains realized
from the sale. The deductions for losses may, however, be denied and, in some
cases, sales charges may not be taken into account in computing gains or losses
if the reinvestment privilege is exercised.
COMBINING PURCHASES LOWERS THE CHARGE
Generally, you can reduce a sales charge on purchases of Class A shares based on
how much you've already invested. The sales charge will be calculated on the
total net asset value of all the MainStay Fund shares you own--excluding Money
Market Fund shares. This is helpful because the more you invest with MainStay,
the lower the sales charge. (See "Alternative Sales Arrangements," page 82.)
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, [Class C shares] or
if you purchased $1 million or more of Class A shares) if you redeem shares
under the Systematic Withdrawal Plan to pay scheduled monthly premiums on
insurance issued by New York Life or an affiliate.
SIGN A LETTER OF INTENT (LOI)
If you qualify, you can sign a letter stating your intention to invest at least
$100,000 within the next 24 months in Class A shares of one or more MainStay
Funds and to pay the up-front sales charge. The current sales charge will be
based on the total amount you intend to invest (the more you invest, the smaller
the sales charge). See "Alternative Sales Arrangements," page 82. For more
information on LOIs, call your Registered Representative or MainStay Shareholder
Services, Inc. ("MSS") at 1-800-MAINSTAY and see "Letter of Intent (`LOI')" in
the SAI.
INVEST $1,000,000 OR MORE
If you invest $1,000,000 or more in Class A shares of one or more MainStay
Funds, and don't sell the shares for at least one year, the up-front sales
charge is waived. If you sell the shares within one year, you may pay a sales
charge of 1% upon sale. See page 83, "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 pages 82-83 for the full
listing.)
- --------------------------------------------------------------------------------
62
<PAGE>
- --------------------------------------------------------------------------------
Open an Account and...
- --------------------------------------------------------------------------------
RELY ON YOUR REGISTERED REPRESENTATIVE
MainStay Funds are called "load" funds, meaning you pay a sales charge for the
ongoing assistance and advice of your Registered Representative.
"No-load" (no commission) funds generally require you to buy their shares on
your own, directly from them.
HAVE YOUR REGISTERED REPRESENTATIVE
PLACE THE ORDER
Your Registered Representative can enter your order immediately by calling MSS,
help you complete the application correctly and send it in for you.
MSS must receive payment within 3 business days or MainStay will cancel your
order. You and/or the broker/dealer may also be liable for any losses or fees
incurred.
YOU MUST INVEST AT LEAST THE MINIMUM AMOUNT
To open an account:
o $1,000 for Money Market Fund and Equity Index Fund;
o $500 for all other Funds;
o Each time after that: $50 for all Funds except the Equity Index Fund (which
has a $1,000 minimum).
Except for the Equity Index Fund, the minimum initial investment is waived for
purchases by Trustees of the Trust, New York Life and its subsidiaries and their
employees, officers, directors or agents.
FILL OUT THE APPLICATION COMPLETELY...
...with your Registered Representative's help.
Be sure to include the:
o name(s) you want to appear on the account;
o MainStay Fund(s) you want to invest in;
o choice of Class A, Class B or Class C shares;
o amount of the investment;
o your certified Social Security number or Taxpayer I.D. number;
o financial information;
o employer information; and
o other requested information.
================================================================================
HOW TO BUY SHARES
================================================================================
[GRAPHIC]
SEND A CHECK TO YOUR REGISTERED REPRESENTATIVE WITH THE APPLICATION
You'll pay the next NAV that's set after your order is received and accepted,
plus any sales charge if purchasing Class A shares. Your check must be in U.S.
dollars and drawn on a U.S. bank. Include the account number, Fund name and
class of shares (Class A or Class B) you wish to buy. If the check doesn't
clear, your order will be cancelled and you could be liable for losses or fees.
We also reserve the right to limit the number of checks processed at one time.
You may send additional investments (minimum $50 each check; except $1,000 for
the Equity Index Fund) directly to: The MainStay Funds, PO Box 8401, Boston, MA
02266-8401. Please include your fund and account number and class of shares with
all checks.
[GRAPHIC]
HAVE YOUR REGISTERED REPRESENTATIVE ORDER BY TELEPHONE...
... between 9:00 AM and 4:00 PM Eastern time on any day the New York Stock
Exchange is open. You'll pay the next NAV that's set after your order is
received in good order, plus any sales charge for Class A shares. Have your
Registered Representative call MSS. Purchase orders effected by telephone are
subject to a purchase minimum of $5,000 per Fund. You may not purchase shares of
the Money Market Fund by telephone. MSS must receive your payment (and the
application, if it's your initial investment) within the next 3 business days.
All calls are recorded.
63
<PAGE>
- --------------------------------------------------------------------------------
...Buy Shares
- --------------------------------------------------------------------------------
MAKE SURE YOU ARE USING THE PROPER FORMS
Your order to buy is only accepted when received by MSS with all information,
signatures, documents, and payments required to carry it out. Federal law
requires you to provide a certified Taxpayer I.D. number when you open an
account.
BUY SHARES AT THE CURRENT MARKET PRICE
(known as the net asset value, or NAV) on days the New York Stock Exchange is
open.
The NAV--the price of a share that is used for buying and selling--is determined
each day that the New York Stock Exchange is open. For each Fund, other than the
Money Market Fund, NAV is calculated at the close of business of the New York
Stock Exchange (normally at 4:00 PM Eastern time). For the Money Market Fund,
NAV is determined at noon.
- --------------------------------------------------------------------------------
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, Class B shares or Class C shares)
or, in the case of the Money Market Fund, using the amortized cost method
of valuation;
o subtracting the liabilities attributable to that class; and
o dividing the remainder by the total number of shares owned of that class.
(See pages 86-87 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]
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 81, "How to Purchase Shares of the Funds--By Wire," for the wire
address.) No wires are accepted on days when the New York Stock Exchange is
closed, or on Martin Luther King Day, Columbus Day or Veterans Day, because the
bank that would receive your wire is closed.
The fastest way to invest
Wiring will reduce the waiting time on selling or exchanging shares because your
money will be cleared right away. If you buy by check and quickly decide to
sell, the Fund may withhold payment for up to 10 days to allow the check to
clear.
[GRAPHIC]
SET UP A SYSTEMATIC INVESTMENT PLAN
Through payroll deductions or AutoInvest, you may open an account by authorizing
your bank to automatically send money on a regular schedule to purchase shares
of one or more MainStay Funds. The initial minimum is $100 per Fund per class of
share, except $1,000 for the Money Market Fund and the Equity Index Fund.
Subsequent minimum investments for all Funds are $50, except $1,000 for the
Equity Index Fund. (See page 81, "How to Purchase Shares of the
Funds--Systematic Investment Plans," for waiving minimums and for details on
AutoInvest.)
64
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell and Exchange Shares
- --------------------------------------------------------------------------------
PLACE YOUR SELL ORDER DIRECTLY OR THROUGH YOUR REGISTERED REPRESENTATIVE, IF
ALLOWED BY THE BROKER-DEALER
If you place the order through your Registered Representative:
o MSS must receive the order with all the information, signatures, and
documentation necessary to carry out the order ("good order").
o Your shares are then priced at the next NAV set for the Fund (either 4:00
PM Eastern time that day, or the next day, if the order is placed after
4:00 PM Eastern time) after receipt of your order.
IF YOU PLACE THE ORDER DIRECTLY, YOU CAN DO IT BY WRITTEN REQUEST OR IN ONE OF
THE FOLLOWING THREE WAYS
When you want to use one of MainStay's alternative sell privileges, call
1-800-MAINSTAY to verify that the options you want are on record--before you
need to use them.
You may also establish a Systematic Exchange Program to have a minimum of $100
exchanged periodically from any MainStay Fund (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 85, "Redemptions and
Exchanges--Exchange Privileges," for details.)
OPTION 1
WRITE A CHECK (IF YOU OWN SHARES
OF THE MONEY MARKET FUND)
o Minimum amount: $100
o Authorization: The Fund must receive a completed signature card and
authorization form
You may open a special account with State Street Bank and Trust Company for
writing checks against the money in your Money Market Fund account. (This is not
available for qualified retirement plans or IRAs.) You'll be sent a supply of
checks. When you write a check, the Fund will sell enough shares to cover the
amount and any applicable deferred sales charge.
If you write a check for more than the value of your shares--plus any deferred
sales charge--the Fund will return the check and may assess an extra charge.
You're entitled to the dividends declared on shares you redeem up to the time
the check is processed.
You may not close your account by writing a check.
- --------------------------------------------------------------------------------
Your shares could be sold involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we have the right to sell the shares in any account valued
at less than $250 ($500 for the Money Market Fund), provided that the value
isn't based on fluctuations in market prices.
We'll give you 60 days' written notice to allow you to add to your account and
avoid the redemption.
To avoid paying a reporting penalty, we may also sell your shares if you haven't
given us a certified Taxpayer I.D. number.
- --------------------------------------------------------------------------------
OPTION 2
USE A SYSTEMATIC WITHDRAWAL PLAN
o Requires at least $10,000 in the account at time of request and shares must
not be in certificate form
You may arrange to sell shares equal to $100 or more from any Fund, other than
the Equity Index Fund, on a monthly basis. Shares will be sold automatically to
cover the amount plus any applicable sales charge.
Selling shares may result in a gain or loss and, therefore, may be subject to
taxation. Consult your tax adviser on the consequences.
MainStay may end this plan at any time, or begin charging up to $5 per sale
after 30 days' written notice to you.
No sales charges
There are no deferred sales charges on shares sold systematically to pay
scheduled monthly premiums on policies issued by New York Life or an affiliate
and on systematic withdrawals up to an annual total of 10% of the value of a
shareholder's Class B shares in a Fund.
Words to the wise
We don't recommend using this plan during times when you're regularly buying
shares. You'll be paying new sales charges just to replace the shares you're
selling.
Also remember, the proceeds from the sale of your shares aren't dividends or
income. If you sell more than your Fund is earning for you, eventually, your
account will be worth less than your original investment and, ultimately, you
will sell all of your shares.
Systematic withdrawal plans established by phone are subject to the procedures
applicable to telephone sales.
- --------------------------------------------------------------------------------
You have help
If permitted by the broker-dealer, your Registered
Representative may sell or exchange your shares, set up a systematic withdrawal
plan for you or change your address of record, by phone, unless you notify us in
writing not to allow it.
- --------------------------------------------------------------------------------
65
<PAGE>
OPTION 3
MAKE A TELEPHONE REQUEST:
1-800-MAINSTAY
You may sell or exchange shares directly over the phone.
[GRAPHIC]
o Minimum amount: $500 for exchanges
o You automatically have this privilege unless you notify us in writing that
you do not want it.
Whether you're buying, selling, or requesting a wire transfer or a check, the
price you receive is the next price (NAV) determined for the Fund (either at
4:00 PM Eastern time that day; or at 4:00 PM the next day, if the order is
placed after 4:00 PM Eastern time) after receipt of your order.
Your broker-dealer must receive your order by 4:00 PM, and is responsible for
sending it in by 5:00 PM the day you place it.
o Be ready to present your Social Security number or Taxpayer I.D. number
over the phone.
o You can only exchange by phone between accounts with identical names,
addresses and Social Security numbers/Taxpayer I.D. numbers. Transfers
between different accounts are only allowed if made in writing and include
the proper information--ask your Registered Representative.
Telephone redemptions are not permitted for shares:
o represented by certificates;
o bought within the previous 10 calendar days; or
o owned by someone whose address of record has changed within the previous 30
days.
Telephone exchanges are not permitted for shares represented by certificates.
- --------------------------------------------------------------------------------
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; Class C shares for Class C shares) between MainStay Funds without a
sales charge. There are three 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; or
o exchange Class C shares out of the Money Market Fund and into another Fund
and redeem within 1 year of the original purchase.
You may not exchange shares between classes. If you sell Class B or Class C
shares and then buy Class A shares, you may have to pay a deferred sales charge
on the Class B or Class C 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 84,
"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.
66
<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 Money Market Fund declares dividends daily; you're paid monthly. The High
Yield Corporate Bond, Government, Tax Free Bond, International Bond, Strategic
Income, California Tax Free and New York Tax Free Funds declare and distribute
any dividends monthly. The other Funds, except the Equity Index Fund, declare
and distribute any dividends quarterly. The Equity Index Fund distributes
dividends at least annually.
In the Money Market Fund, you begin earning dividends the business day after the
transfer agent receives your investment and is open for business.
CAPITAL GAINS
Funds earn capital gains when they sell securities in their portfolio at a
profit.
When the Funds pay
At the end of each fiscal year, each MainStay Fund matches its gains against its
losses. If the balance results in a gain, the Fund will distribute the gain to
shareholders.
- --------------------------------------------------------------------------------
When are you paid? On the first business day of each month after a divident 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
o Reinvest the capital gains in:
o the same Fund; or
o in another Fund of your choice.
TAKE THE CAPITAL GAINS IN CASH
o Reinvest the dividends in:
o the same Fund; or
o in another Fund of your choice.
TAKE A PERCENTAGE OF THE DIVIDENDS IN CASH AND
REINVEST THE REMAINDER IN:
o the same Fund.
TAKE A PERCENTAGE OF THE CAPITAL GAINS IN CASH AND
REINVEST THE REMAINDER IN:
o the same Fund.
TAKE EVERYTHING IN CASH
67
<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 (except the
California Tax Free, New York Tax Free and the Tax Free Bond Funds) are taxable,
whether you take them as cash or automatically reinvest them. Some dividends
will be taxable as long-term capital gains, and some long-term gains will be
taxable at a maximum federal tax rate of 28% and others at a maximum federal tax
rate of 20%.
Tax-free dividends are different
Dividends earned from tax-exempt securities will usually be free from federal
tax. Your MainStay year-end statement will provide full tax information.
MainStay keeps track of your tax status and will mail your tax report each year
by January 31. This report will tell you which dividends and redemptions should
be treated as taxable ordinary income, which, if any, as tax-exempt income, and
which, if any, as long- and short-term capital gains.
Retirement plans
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
Taxes on foreign investment income
(Mainly from the International Bond and International Equity Funds.) Income
earned from investments in foreign countries may be withheld by those countries
as income taxes. Under certain circumstances, the Fund may elect to pass along
tax credits or deductions to you for foreign income taxes paid, although there
are no assurances that the Fund will be able to do so, or that the credits or
deductions will result in a tax benefit to you.
See page 87 for the tax consequences of the Equity Index Fund guarantee.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
"Tax Free" rarely means "totally tax-free"
- --------------------------------------------------------------------------------
o The California Tax Free, New York Tax Free and Tax Free Bond Funds (or any
tax-free fund) may earn taxable income--in other words, you may have
taxable income even from a generally tax-free fund.
o Tax-exempt dividends may still be subject to state and local taxes.
o Any time you sell shares--even shares of a tax-free fund--you will be
subject to tax on any gain (the rise in the share price).
o If you sell shares in a tax-free fund before you become entitled to receive
tax-exempt interest as a dividend, a portion of sales proceeds may be
taxable when paid to you. This is because it will be considered to be money
from the sale instead of a dividend.
o Some tax-exempt income may be subject to the alternative minimum tax.
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- --------------------------------------------------------------------------------
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 79, "Manager,
Sub-Advisers and Distributor," and the SAI for more details.)
For its services, the Fund pays the Manager a monthly fee. (See page 79,
"Manager, Sub-Advisers and Distributor".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
MacKay-Shields Financial Corporation ("MacKay-Shields"), 9 West 57th St., New
York, NY 10019, is the Sub-Adviser to all the Funds in this prospectus, except
Equity Index Fund. The firm was incorporated in 1969 as an independent
investment advisory firm and was privately held until 1984 when it became a
wholly owned but autonomously managed subsidiary of New York Life Insurance
Company. As of December 31, 1997, MacKay-Shields managed over $28.8 billion in
assets.
Monitor Capital Advisors, Inc. ("Monitor"), 504 Carnegie Center, Princeton, NJ
08540, is the Sub-Adviser to the Equity Index Fund. Monitor is an indirect
wholly owned subsidiary of New York Life Insurance Company. Monitor, a
registered investment adviser incorporated in 1988, specializes in quantitative
investment techniques such as enhanced indexing and asset allocation. As of
December 31, 1997, Monitor managed assets totaling approximately $2.9 billion,
mainly of index funds.
Under the supervision of the Funds' Trustees and the Manager, MacKay-Shields and
Monitor (the "Sub-Advisers") are responsible for making the specific decisions
about buying, selling and holding securities; selecting brokers and brokerage
firms to trade for them; maintaining accurate records; and, if possible,
negotiating favorable commissions and fees with the brokers and brokerage firms.
For these services, the Sub-Advisers are paid a monthly fee by the Manager, not
the Funds. (See "Manager, Sub-Advisers and Distributor," page 79, 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.
- --------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
WHO DISTRIBUTES THE MAINSTAY FUNDS?
NYLIFE Distributors Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, acts as the principal underwriter and distributor of the Funds' shares.
NYLIFE Distributors Inc. (the "Distributor") is a corporation organized under
New York law and is an indirect wholly owned subsidiary of New York Life
Insurance Company. The Distributor offers shares of each Fund. In addition,
NYLIFE Securities Inc., an indirect wholly owned subsidiary of New York Life
Insurance Company, and other broker-dealers offer shares of some or all of the
Funds pursuant to dealer agreements with the Distributor. The Distributor and
other broker-dealers pay commissions and service fees to Registered
Representatives. The Distributor also pays for printing and mailing prospectuses
and sales literature; and for any advertising for The MainStay Funds. For its
services, the Distributor is paid a monthly fee--the Rule 12b-1 fee--and retains
a portion of sales charges. (See page 79, "Manager, Sub-Advisers, and
Distributor--The Distributor" for more details.)
WHO KEEPS TRACK OF YOUR ACCOUNT?
MainStay Shareholder Services Inc. (MSS) is the Funds' Transfer, Dividend
Disbursing and Shareholder Servicing Agent. MSS, whose address is 260 Cherry
Hill Road, Parsippany, NJ 07054, is an indirect wholly owned subsidiary of New
York Life Insurance Company. MSS provides customer service, is responsible for
preparing and sending statements, confirms and checks, and keeps certain
financial and accounting records. MSS has entered into an agreement with Boston
Financial Data Services (BFDS), whose address is 2 Heritage Drive, North Quincy,
MA 02171. BFDS will perform certain of the services for which MSS is
responsible. In addition, the Funds may contract with other service
organizations, including broker-dealers and other financial institutions, which
will establish a single omnibus account for their clients with the Funds. The
service organizations will provide shareholder services to the shareholders
within the omnibus accounts and receive fees for those services from the Funds.
The Bank of New York is the custodian of the investments of the Equity Index,
International Bond, International Equity, Strategic Income, Strategic Value,
California Tax Free and New York Tax Free Funds and has subcustodial agreements
for holding the Funds' foreign securities.
State Street Bank and Trust Company is the Custodian of the investments of the
Capital Appreciation, Convertible, Government, High Yield Corporate Bond, Money
Market, Tax Free Bond, Total Return and Value Funds, and has subcustodial
agreements for holding the Funds' foreign securities.
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- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS
Any time you have a question about your account, you should:
o ask your Registered Representative;
o call 1-800-MAINSTAY (between 8:00 AM and 6:00 PM Eastern time); or
o write to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts,
02266-8401.
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT -- CALL 1-800-MAINSTAY
You receive quarterly statements (monthly statements for the Money Market Fund)
covering the Funds you own, including the number and value of shares, dividends
declared or paid and other information.
Confirmations
Every time you buy, sell or exchange shares between Funds, you'll receive a
confirmation in the mail shortly thereafter. It summarizes all the key
information: what you bought and sold, what it cost, the sales charge (if any),
and other vital data. The Money Market Fund mails confirmations once a month
detailing dividend and account activity.
Financial reports
You will receive an annual financial statement for your Fund, examined by the
Fund's independent accountants. You will also receive semiannual financial
statements which are unaudited.
Each financial report shows as of the end of the reporting period:
o the investments owned by the Fund;
o the market value of each investment; and
o other financial information.
- --------------------------------------------------------------------------------
Keep your statements.
- --------------------------------------------------------------------------------
You may need them for tax reporting purposes.
- --------------------------------------------------------------------------------
Be alert: Mistakes can happen.
- --------------------------------------------------------------------------------
Always review your confirmations and statements immediately.
THE RIGHT TO HAVE ONE SHARE, ONE VOTE
o Every share issued by a Fund carries equal ownership rights.
o By owning shares, you're entitled to vote on certain issues and policies
regarding the Fund or class of shares you own. You have one vote per share
you own.
o You're entitled to approve the adoption of a new management or sub-advisory
agreement or plan of distribution relating to the Fund.
o You're also entitled to approve any changes in fundamental investment
restrictions or policies of the Fund.
THE RIGHT TO ATTEND MEETINGS
Although MainStay doesn't intend to hold annual shareholder meetings, you have
the right to call a meeting of shareholders for the purpose of voting upon
removal of a Trustee for cause. Removing a Trustee requires the approval of
two-thirds of the outstanding shares of The MainStay Funds. Generally,
shareholder meetings are only held when the Trustees recommend an action which
requires shareholder approval.
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- --------------------------------------------------------------------------------
Tell Me The Details
- --------------------------------------------------------------------------------
================================================================================
THE TRUST
================================================================================
The Trust is registered with the SEC as an open-end management investment
company under the 1940 Act. Each Fund has a separate investment objective or
objectives which it pursues through separate investment policies, as described
in Tell Me the Key Facts on pages 6 through 67 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 [August 1, 1998,
NYLIFE Distributors Inc. owned a controlling interest (as that term is defined
under the 1940 Act) of the New York Tax Free Fund Class A shares, International
Equity Fund Class A shares, International Bond Fund Class A shares and Strategic
Income Fund Class B shares and New York Life Insurance Company General Account
owned a controlling interest of the Strategic Income Fund Class A shares and
Strategic Value Fund Class A shares.]
================================================================================
OTHER INFORMATION ABOUT THE FUNDS
================================================================================
None of the Funds alone constitutes a complete investment program.
Investment decisions for each Fund are made independently from those of the
other accounts and investment companies that may be managed by the Sub-Advisers.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which one Fund invests at the same
time as another Fund, available investments or opportunities for sales will be
allocated equitably to each. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by a Fund or the price paid
or received by a Fund.
- --------------------------------------------------------------------------------
CONVERTIBLE FUND
- --------------------------------------------------------------------------------
In selecting convertible securities for purchase or sale, the Sub-Adviser takes
into account a variety of investment considerations, including credit risk,
projected interest return and the premium for the convertible security relative
to the underlying common stock.
During the fiscal year ended December 31, 1997, based upon the dollar-weighted
average ratings of the Fund's portfolio holdings at the end of each month in the
Fund's fiscal year, the Fund had the following percentages of its net assets
invested in securities rated in the categories indicated (all ratings are by
S&P):
0.34% in securities rated AAA
7.31% in securities rated AA
10.64% in securities rated A
14.70% in securities rated BBB
8.55% in securities rated BB
30.85% in securities rated B
2.84% in securities rated CCC
0.03% in securities rated D
0.12% in unrated securities
21.58% in cash and cash equivalents
3.04% in equity securities
These figures are intended solely to provide disclosure about the Fund's asset
composition during its fiscal year ended December 31, 1997. The asset
composition after this time may or may not be the same as represented by such
figures. In addition, the categories reflect ratings by S&P, and ratings
assigned by Moody's may not be consistent with ratings assigned by S&P or other
credit rating services, and the Sub-Adviser may not necessarily agree with a
rating assigned by any credit rating agency.
The Fund may sell short against the box, among other reasons, to hedge against a
possible market decline in the value of the security owned or to enhance
liquidity. For more information on short sales against the box see page 77.
- --------------------------------------------------------------------------------
EQUITY INDEX FUND
- --------------------------------------------------------------------------------
When the Fund has cash reserves, the Fund may invest in cash equivalents, U.S.
government securities and repurchase agreements with respect thereto. The Fund
may also invest up to 25% of its total assets in securities of issuers in one
industry (unless the Index exceeds that concentration) and lend up to 30% of its
total assets to financial institutions.
The Guarantee
NYLIFE Inc. ("NYLIFE"), a New York corporation and a wholly owned subsidiary of
New York Life Insurance Company ("New York Life"), will guarantee
unconditionally and irrevocably pursuant to a Guaranty Agreement between NYLIFE
and the Fund (the "Guarantee") that if, exactly 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share when purchased, plus the value of all dividends and
distributions paid, including cumulative reinvested dividends and distributions
attributable to such share paid during that 10-year period ("Guaranteed Share"),
is less than the public
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offering price initially paid for the share ("Guaranteed Amount"), NYLIFE will
pay for disbursement to shareholders an amount equal to the difference between
the Guaranteed Amount for each such share and the net asset value of each such
Guaranteed Share outstanding and held by shareholders as of the close of
business on the Guarantee Date. There is no charge to the Fund or its
Shareholders for the Guarantee.
If the Fund pays a dividend or distribution in cash to all Fund shareholders,
the amount of the distribution will reduce the Guaranteed Amount with respect to
each Guaranteed Share in the amount of such cash distribution. Fund shares may
be redeemed or exchanged by shareholders prior to their Guarantee Date. However,
any such redeemed or exchanged shares will lose the benefit of the Guarantee.
Following the Guarantee Date, the shares of the Equity Index Fund will be
subject to those risks normally associated with an investment in shares of a
mutual fund that invests in securities represented in the Index.
NYLIFE is a New York holding company incorporated on January 26, 1984. Audited
financial statements for NYLIFE for its most recent fiscal year ended December
31, 1997, appear in the SAI.
New York Life is a mutual life insurance company. Payment obligations under the
Guarantee will be solely the obligations of NYLIFE. None of the Fund, New York
Life, Monitor, NYLIFE Distributors Inc., NYLIFE Securities Inc., any of their
affiliates nor any other party is undertaking any obligation to the Fund or its
shareholders with respect to the Guarantee. New York Life is not obligated to
pay any claim under the Guarantee or to make additional capital contributions to
NYLIFE.
For more information on the Guarantee, see the SAI.
How the indexing works
The weightings of stocks in the Index are based on each stock's relative total
market capitalization (the stock's market price per share times the number of
shares outstanding). The Sub-Adviser seeks to provide investment results which
mirror the performance of the Index. The Sub-Adviser attempts to achieve this
objective by investing in all stocks in the Index in the same proportion as
their representation in the Index.
It is a reasonable expectation that there will be a close correlation between
the Fund's performance and that of the Index in both rising and falling markets.
The correlation between the performance of the Fund and the Index is expected to
be at least 0.95. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Fund's NAV, including the value of its dividend
and capital gains distributions, increases or decreases in exact proportion to
changes in the Index. The Fund's correlation, however, may be affected by, among
other things, transaction costs, changes in either the composition of the Index
or number of shares outstanding for the components of the Index, and the timing
and amount of shareholder redemptions, if any.
- --------------------------------------------------------------------------------
STRATEGIC VALUE FUND
- --------------------------------------------------------------------------------
In managing the Fund, the Sub-Adviser conducts a rigorous, disciplined valuation
methodology to maximize the most appropriate investment levels among the three
asset classes. Fundamental economic analysis, risk and return estimations,
credit quality and interest rate trends are among the principal factors
considered by the Sub-Adviser in determining whether to increase or decrease the
emphasis placed on a particular type of security or bond within the Fund's
investment portfolio. In the event that the Sub-Adviser's analysis indicates
that the Fund should be fully invested in only one asset group, the Sub-Adviser
will still adhere to the limitations on the amount of assets which may be
allocated to each of the three asset groups.
In analyzing different securities to assess their relative attractiveness, the
Sub-Adviser's value investment process emphasizes such factors as low price to
earnings and price to cash flow ratios, financial strength and earnings
predictability. The Fund intends to purchase those securities which it believes
to be undervalued in the market relative to comparable securities based on the
foregoing analysis.
In assessing whether a stock is undervalued, the Sub-Adviser considers, among
other factors, a company's financial strength and earnings predictability. The
Fund may provide some protection on the downside through its investment in
companies whose current stock prices reflect, in the Sub-Adviser's opinion,
either unwarranted pessimism or unrecognized value.
In selecting convertible securities for purchase or sale, the Sub-Adviser takes
into account a variety of investment considerations, including credit risk,
projected interest return and the premium for the convertible security relative
to the underlying common stock.
In seeking a competitive overall return, capital appreciation may be sought by
lengthening the maturities of high yield debt securities held in the Fund's
portfolio during periods when the Sub-Adviser expects interest rates to decline.
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease;
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper, foreign government securities and U.S.
73
<PAGE>
government securities (including obligations, such as repurchase agreements,
secured by such instruments). For purposes of the Fund's investment policies,
the Fund considers preferred stock to be a debt obligation.
The Fund's investments may include capital notes, which are securities
representing beneficial interest in a trust for which the controlling common
stock is owned by a bank holding company. These beneficial interests are
commonly issued as preferred stock but may also be issued as other types of
instruments. The trust owns debentures issued by the bank holding company and
issues the preferred stock to investors.
In making investments in foreign securities the Sub-Adviser will determine,
using good faith and judgement, (1) country allocation; (2) currency exposure
(asset allocation across currencies); and (3) diversified security holdings
within each market. The Sub-Adviser may consider factors such as prospects for
currency exchange and interest rates, and inflation in each country, relative
economic growth, government policies influencing exchange rates and business
conditions, and quality of individual issuers.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns or to
manage portfolio risk more efficiently.
- --------------------------------------------------------------------------------
GOVERNMENT FUND
- --------------------------------------------------------------------------------
This Fund seeks to achieve its investment objective by investing primarily in
U.S. government securities, which include obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities which are supported by:
(i) the full faith and credit of the U.S. government e.g., GNMA certificates;
(ii) the right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. government; (iii) the credit of the instrumentality (e.g.,
bonds issued by the FNMA); or (iv) the discretionary authority of the U.S.
government to purchase certain obligations of U.S. government agencies or
instrumentalities.
The agencies and instrumentalities that issue U.S. government securities
include, among others specifically mentioned in this prospectus: Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Farm Credit Bank, Student Loan Marketing
Association and U.S. Maritime Administration.
The Fund anticipates that a significant portion of its portfolio may consist of
Treasury bonds, GNMA mortgage-backed certificates and other U.S. government
securities representing ownership interests in mortgage pools, such as
securities issued by FNMA and FHLMC.
Although the mortgage loans in the pool underlying a GNMA certificate will have
maturities of up to 30 years, the actual average life of a GNMA certificate
typically will be substantially less because the mortgages will be subject to
normal principal amortization and may be prepaid prior to maturity.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
- --------------------------------------------------------------------------------
HIGH YIELD CORPORATE BOND FUND
- --------------------------------------------------------------------------------
This Fund seeks to maximize current income through investment in a diversified
portfolio of high yield debt securities. Capital appreciation is a secondary
objective; and will be sought only when consistent with the Fund's primary
objective. For example, capital appreciation will be sought by lengthening the
maturities of high yield debt securities held in the Fund's portfolio during
periods when the Sub-Adviser expects interest rates to decline.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper and U.S. government securities (including
obligations, such as repurchase agreements, secured by such instruments).
The Fund may invest in participation interests in loans. Such participation
interests, which may take the form of interests in, or assignments of, loans,
are acquired from banks which have made loans or are members of lending
syndicates. The Fund's investments in loan participation interests will be
subject to its limitation on investments in illiquid securities and, to the
extent applicable, its limitation on investments in securities rated below
investment grade.
The Sub-Adviser seeks to reduce risk through diversification, credit analysis
and attention to current developments and trends in both the economy and
financial markets. In addition, investments in foreign securities may serve to
provide further diversification. For a further discussion of the special risks
of investing in lower-rated and foreign securities, see "Description of
Investments and Investment Practices-Risks of Investing in High Yield Securities
(`Junk Bonds')" and "Description of Investments and Investment Practices-Foreign
Securities" in this prospectus.
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<PAGE>
During the fiscal year ended December 31, 1997, based upon the dollar-weighted
average ratings of the Fund's portfolio holdings at the end of each month in the
Fund's fiscal year, the Fund had the following percentages of its net assets
invested in securities rated in the categories indicated (all ratings are by
S&P):
10.32% in securities rated AAA
0.22% in securities rated A
4.20% in securities rated BBB
21.59% in securities rated BB
41.05% in securities rated B
7.06% in securities rated CCC
0.20% in securities rated D 0.
72% in unrated securities
8.72% in cash and cash equivalents
5.92% in equity securities
These figures are intended solely to provide disclosure about the Fund's asset
composition during its fiscal year ended December 31, 1997. The asset
composition after this time may or may not be the same as represented by such
figures. In addition, the categories reflect ratings by S&P, and ratings
assigned by Moody's may not be consistent with ratings assigned by S&P or other
credit ratings services, and the Sub-Adviser may not necessarily agree with a
rating assigned by any credit rating agency.
- --------------------------------------------------------------------------------
INTERNATIONAL BOND FUND
- --------------------------------------------------------------------------------
The International Bond Fund is intended for investors who are seeking
competitive overall return commensurate with an acceptable level of risk from an
international portfolio of debt securities, but who also understand that
international fixed income investments involve more risk than comparable
domestic securities, due, in part, to fluctuating currency values.
In making investments for the Fund, the Sub-Adviser considers factors such as
prospects for currency exchange and interest rates, and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers. The
Sub-Adviser will also determine, using good faith and judgement, (1) country
allocation; (2) currency exposure (asset allocation across currencies); and (3)
diversified security holdings within each market.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns or to
manage portfolio risk more efficiently.
Generally, the Fund's average maturity will be shorter when interest rates
worldwide or in a particular country are expected to rise, and longer when
interest rates are expected to fall. The Fund may use various techniques to
shorten or lengthen the dollar-weighted average maturity of its portfolio,
including transactions in futures and options on futures, interest rate swaps,
caps, floors and short sales against the box.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
In making investments for the Fund, the Sub-Adviser considers factors such as
prospects for currency exchange and interest rates, and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers. The
Sub-Adviser will also determine, using good faith judgement, (1) country
allocation; (2) currency exposure (asset allocation across currencies); and (3)
diversified security holdings within each market. To hedge the market value of
securities held, proposed to be held or sold, or relating to foreign currency
exchange rates, the Fund may enter into or purchase securities or securities
index options, foreign currency options, and future contracts and related
options with respect to securities, indexes of securities or currencies. The
Fund also may buy and sell currencies on a spot or forward basis. Subject to
compliance with applicable rules, futures contracts and related options may be
used for any legally permissible purpose, including as a substitute for
acquiring a basket of securities and to reduce transaction costs. The Fund also
may purchase securities on a when-issued or forward commitment basis and engage
in portfolio securities lending. The Fund may use all of these techniques (1) in
an effort to manage cash flow and remain fully invested in the stock and
currency markets, instead of or in addition to buying and selling stocks and
currencies, or (2) in an effort to hedge against a decline in the value of
securities or currencies owned by it or an increase in the price of securities
which it plans to purchase. The Fund may also purchase and sell foreign currency
exchange contracts and foreign currency options for purposes of seeking to
enhance portfolio returns or to manage portfolio risk more efficiently. See
pages 73-78, "Description of Investments and Investment Practices," for
additional information on the Fund's permitted investments.
The International Equity Fund may invest in American Depositary Receipts
("ADRs") European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), International Depositary Receipts ("IDRs") or other similar securities
convertible into securities of foreign issuers. An
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ADR is a receipt typically issued by a U.S. bank or trust company showing that
you own a foreign security. An EDR is a receipt typically issued by a European
bank or trust company showing that you own a foreign security. GDRs and IDRs are
receipts typically issued by global or international depositories showing that
you own a foreign security.
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
In managing the Fund, the Sub-Adviser conducts a continuing review of yields and
other information derived from a data base which it maintains in managing
fixed-income portfolios. Fundamental economic cycle analysis, credit quality and
interest rate trends are among the principal factors considered by the
Sub-Adviser in determining whether to increase or decrease the emphasis placed
upon a particular type of security or bond market sector within the Fund's
investment portfolio.
In making investment decisions with respect to maturity shifts, the Sub-Adviser
takes into account a broad range of fundamental and technical indicators. The
Sub-Adviser will alter the average maturity of the portfolio in accordance with
its judgment based on the research and other methods described above.
In seeking a competitive overall return, capital appreciation may be sought by
lengthening the maturities of high yield debt securities held in the Fund's
portfolio during periods when the Sub-Adviser expects interest rates to decline.
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease;
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper, foreign government securities and U.S.
government securities (including obligations, such as repurchase agreements,
secured by such instruments).
The Fund may invest up to 30% of its total assets in equity securities. These
may include capital notes, which are securities representing beneficial
interests in a trust for which the controlling common stock is owned by a bank
holding company. These beneficial interests are commonly issued as preferred
stock but may also be issued as other types of instruments. The trust owns
debentures issued by the bank holding company and issues the preferred stock to
investors. In making investments in foreign securities the Sub-Adviser will
determine, using good faith and judgement, (1) country allocation; (2) currency
exposure (asset allocation across currencies); and (3) diversified security
holdings within each market. The Sub-Adviser may consider factors such as
prospects for currency exchange and interest rates and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign currency exchange contracts for
purposes of seeking to enhance portfolio returns and manage portfolio risk more
efficiently.
Generally, the average maturity of the foreign securities held by the Fund will
be shorter when interest rates worldwide or in a particular country are expected
to rise, and longer when interest rates are expected to fall. The Fund may use
various techniques to shorten or lengthen the dollar-weighted average maturity
of its portfolio, including transactions in futures and options on futures,
interest rate swaps, caps, floors and short sales against the box.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
The Sub-Adviser seeks to reduce risk through diversification, credit analysis
and attention to current developments and trends in both the economy and
financial markets. For a further discussion of the special risks of investing in
lower-rated and foreign securities, see "Description of Investments and
Investment Practices--Risks of Investing in High Yield Securities (`Junk
Bonds')" and "Description of Investments and Investment Practices--Foreign
Securities" in this prospectus.
- --------------------------------------------------------------------------------
TAX FREE BOND FUND
- --------------------------------------------------------------------------------
This Fund invests in obligations of states and their political subdivisions and
agencies, the interest from which is, in the opinion of the issuer's bond
counsel, exempt from regular federal income tax ("Municipal Bonds" or
"tax-exempt securities"). None of the Fund, the Sub-Adviser nor counsel to the
Fund reviews such opinions or otherwise determines independently that the
interest on a security will be classified as tax-exempt interest. Municipal
Bonds are issued to obtain funds for various public purposes. The interest on
these obligations is generally exempt from regular federal income tax in the
hands of most investors.
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<PAGE>
Because the Fund may hold high-grade Municipal Bonds, the income earned on
shares of the Fund may tend to be less than it might be on a portfolio
emphasizing lower quality securities. Conversely, to the extent that the Fund
holds lower quality securities, the risk of default in the payment of principal
or interest by the issuer of a portfolio security is greater than if the Fund
held only higher quality securities. Although higher quality tax-exempt
securities may produce lower yields, they are generally more marketable. To
protect the Fund's capital under adverse market conditions, the Fund may from
time to time purchase higher quality securities or taxable short-term
investments with a resultant decrease in yield or increase in the proportion of
taxable income.
The Fund may sell a security at any time in order to improve the yield on the
Fund's portfolio. In buying and selling portfolio securities, the Fund seeks to
take advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. The Fund will not engage in arbitrage transactions.
The Fund may invest in Industrial Development and Pollution Control Bonds and
municipal lease obligations. For more information on these types of investments
see page 74, "Description of Investments and Investment Practices--Industrial
Development and Pollution Control Bonds" and page 75, "Description of
Investments and Investment Practices--Municipal Securities and Municipal Lease
Obligations."
From time to time, the Fund may invest 25% or more of the value of its total
assets in Municipal Bonds that are related in such a way that an economic,
business, or political development or change affecting one such security could
also affect the other securities (for example, securities whose issuers are
located in the same state). The Fund may also invest 25% or more of the value of
its total assets in Industrial Development Bonds. Further, the Fund may acquire
all or part of privately negotiated loans made to tax-exempt borrowers. To the
extent that these private placements are not readily marketable, the Fund will
limit its investment in such securities (along with all other illiquid
securities) to no more than 10% of the value of its total assets. Because an
active trading market may not exist for such securities, the price that the Fund
may pay for these securities or receive on their resale may be lower than that
for similar securities with a more liquid market.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
- --------------------------------------------------------------------------------
TOTAL RETURN FUND
- --------------------------------------------------------------------------------
The Fund may invest in common stocks, convertible securities, warrants and
fixed-income securities, such as bonds, preferred stocks and other debt
obligations, including money market instruments. The Fund will also invest in
stocks and other equity securities which it believes to be undervalued based
upon factors such as ratios of market price to book value, estimated liquidating
value and projected cash flow.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Sub-Adviser.
================================================================================
DESCRIPTION OF INVESTMENTS AND
INVESTMENT PRACTICES
================================================================================
Information about the following types of investments, investment practices and
related risks appears below: Brady Bonds, Cash Equivalents, Convertible
Securities, Floaters and Inverse Floaters, Foreign Index-Linked Instruments,
Foreign Securities, Industrial Development and Pollution Control Bonds, Lending
of Portfolio Securities, Loan Participation Interests, Mortgage-Backed and
Asset-Backed Securities, Mortgage Dollar Rolls, Municipal Securities and
Municipal Lease Obligations, Repurchase Agreements, Risk Management Techniques,
Short Sales Against the Box, Swap Agreements, When-Issued Securities and Forward
Commitments, Zero Coupon Bonds, Risks of Investing in High Yield Securities
("Junk Bonds") and Special Risk Considerations for California Tax Free Fund and
NewYork Tax Free Fund. 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 Convertible Fund, High Yield Corporate Bond Fund, International Bond Fund,
Strategic Income Fund, Strategic Value Fund and Total Return Fund may each
invest a portion of its assets in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to sovereign entities for
new obligations in connection with debt restructurings. (For more information,
see the SAI.)
- --------------------------------------------------------------------------------
CASH EQUIVALENTS
- --------------------------------------------------------------------------------
Each of the Funds may invest in cash or cash equivalents, which include, but are
not limited to: short-term obligations 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
77
<PAGE>
loan associations if such obligations are federally insured; commercial paper
which at the date of investment is rated A-1 by S&P or P-1 by Moody's or, if not
rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue rated
AA or better by S&P or Aa or better by Moody's; short-term corporate obligations
which at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and other debt instruments not specifically described if such
instruments are deemed by the Trustees to be of comparable high quality and
liquidity.
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES
- --------------------------------------------------------------------------------
The Capital Appreciation Fund, Convertible Fund, High Yield Corporate Bond Fund,
International Bond Fund, International Equity Fund, Strategic Income Fund,
Strategic Value Fund, Total Return Fund and Value Fund may invest in securities
convertible into common stock or the cash value of a single equity security or a
basket or index of equity securities. Convertible securities eligible for
inclusion in the Fund's portfolio include convertible bonds, convertible
preferred stock, warrants or notes or other debt instruments that may be
exchanged for cash payable in an amount that is linked to the value of a
particular security, basket of securities, index or indices of securities or
currencies.
- --------------------------------------------------------------------------------
FLOATERS AND INVERSE FLOATERS
- --------------------------------------------------------------------------------
Each Fund, other than the Capital Appreciation Fund and the Equity Index Fund,
may invest in floating rate debt instruments ("floaters"). The interest rate on
a floater is a variable rate which is tied to another interest rate, such as a
money-market index or Treasury bill rate. The California Tax Free Fund,
Convertible Fund, High Yield Corporate Bond Fund, International Bond Fund,
International Equity Fund, New York Tax Free Fund, Strategic Income Fund,
Strategic Value Fund, Tax Free Bond Fund and Total Return Fund, may invest in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate on an inverse floater resets in the opposite direction from the
market rate of interest to which the inverse floater is indexed. The leverage
associated with inverse floaters may result in greater volatility in their
market values. Certain inverse floaters may be determined to be illiquid
securities.
- --------------------------------------------------------------------------------
FOREIGN INDEX-LINKED INSTRUMENTS
- --------------------------------------------------------------------------------
The International Bond Fund, International Equity Fund, Strategic Income Fund
and Strategic Value Fund may invest in instruments issued by the U.S. or a
foreign government or by private issuers that return principal and/or pay
interest to investors in amounts which are linked to the level of a particular
foreign index. In the case of foreign-linked instruments linking the interest
component to a foreign index, the amount of interest payable will adjust
periodically in response to changes in the level of the foreign index during the
term of the foreign index-linked instrument. The risks of such investments
reflect the risks of investing in the index or other instrument, the performance
of which determines the return for the instrument. Tax considerations may limit
the Funds' ability to invest in foreign index-linked instruments.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Each Fund, except the California Tax Free Fund, Government Fund, New York Tax
Free Fund, and Tax Free Bond Fund, may purchase foreign securities. The Money
Market Fund may only purchase dollar-denominated foreign securities. Foreign
investments could be more difficult to sell than U.S. investments. They also may
subject the Fund to risks different from investing in domestic securities.
Investments in foreign securities involve difficulties in receiving or
interpreting financial and economic information, possible imposition of taxes,
higher brokerage and custodian fees, possible currency exchange controls or
other government restrictions, including possible seizure or nationalization of
foreign deposits or assets. Foreign securities may also be less liquid and more
volatile than U.S. securities. There may also be difficulty in invoking legal
protections across borders. In addition, investment in emerging market countries
presents risks in greater degree than those presented by investment in foreign
issuers in countries with developed securities markets and more advanced
regulatory systems.
Many of the foreign securities in which the Funds invest will be denominated in
foreign currencies. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in foreign currencies. Exchange rate movements
can be large and can endure for extended periods of time, affecting either
favorably or unfavorably the value of the Funds' assets. A Fund may, however,
engage in foreign currency transactions to protect itself against fluctuations
in currency exchange rates in relation to the U.S. dollar. See pages 76-77,
"Risk Management Techniques."
- --------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT AND POLLUTION
CONTROL BONDS
- --------------------------------------------------------------------------------
The California Tax Free Fund, High Yield Corporate Bond Fund, New York Tax Free
Fund, Strategic Value Fund, Strategic Income Fund, Tax Free Bond Fund and Total
Return Fund may purchase Industrial Development and Pollution Control Bonds.
Industrial Development and Pollution Control Bonds, although nominally issued by
municipal authorities, are generally not secured by the taxing power of the
municipality but are secured by the revenues of the authority derived from
payments by the industrial user. (For more information, see the SAI.)
78
<PAGE>
- --------------------------------------------------------------------------------
LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
Each Fund, except the Money Market Fund and Tax Free Bond Fund may lend its
investment securities to brokers, dealers and financial institutions for the
purpose of realizing additional income pursuant to guideliness adopted by the
Board of Trustees. The total market value of securities loaned will not at any
time exceed 33% of the total assets of a Fund. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible loss of
rights in the collateral should the borrower fail financially. In determining
whether to lend securities, a Fund's Sub-Adviser will consider all relevant
facts and circumstances, including the creditworthiness of the borrower. (For
more information see the SAI.)
- --------------------------------------------------------------------------------
LOAN PARTICIPATION INTERESTS
- --------------------------------------------------------------------------------
The Funds may invest in participation interests in loans. Such participation
interests, which may take the form of interests in, or assignments of, loans,
are acquired from banks which have made loans or are members of lending
syndicates. A Fund's investments in loan participation interests will be subject
to its limitation on investments in illiquid securities and, to the extent
applicable, its limitation on investments in securities rated below investment
grade.
In a typical corporate loan syndication, a number of institutional lenders lend
a corporate borrower a specified sum pursuant to the terms and conditions of a
loan agreement. One of the co-lenders usually agrees to act as the agent bank
with respect to the loan. The loan agreement among the corporate borrower and
the co-lenders identifies the agent bank as well as sets forth the rights and
duties of the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants which must be met by the
borrower.
The principal credit risk associated with acquiring participation interests from
a co-lender or another participant is the credit risk associated with the
underlying corporate borrower. A Fund may incur additional credit risk, however,
when it is in the position of participant rather than a co-lender because the
Fund must assume the risk of insolvency of the co-lender from which the
participation interest was acquired and that of any person interpositioned
between the Fund and the co-lender.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
- --------------------------------------------------------------------------------
Mortgage-backed and asset-backed securities are securities that derive their
value from underlying pools of loans that may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex instruments
such as collateralized mortgage obligations and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of issuers and the
creditworthiness of the parties involved. The ability of a Fund to successfully
utilize these instruments may depend in part upon the ability of the Sub-Adviser
to forecast interest rates and other economic factors correctly. Some securities
may have a structure that makes their reaction to interest rate changes and
other factors difficult to predict, making their value highly volatile. These
securities may also be subject to prepayment risk and if the security has been
purchased at a premium the amount of some or all of the premium may be lost in
the event of prepayment.
- --------------------------------------------------------------------------------
MORTGAGE DOLLAR ROLLS
- --------------------------------------------------------------------------------
A mortgage dollar roll ("MDR") is a transaction in which a Fund sells
mortgage-backed securities ("MBS") from its portfolio to a counterparty from
whom it simultaneously agrees to buy a similar security on a delayed delivery
basis. The Fund maintains a segregated account with its custodian containing
securities from its portfolio having a value not less than the repurchase price,
including accrued interest. MDR transactions involve certain risks, including
the risk that the MBS returned to the Fund at the end of the roll, while
substantially similar, could be inferior to what was initially sold to the
counterparty.
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES AND
MUNICIPAL LEASE OBLIGATIONS
- --------------------------------------------------------------------------------
The two main types of municipal bonds are "general obligation" and "revenue"
bonds. "General obligation" bonds are secured by the issuer's pledge of its full
faith, credit and taxing power to repay the principal and interest. "Revenue"
bonds are repaid from the revenue of a particular facility (or group of
facilities) or from proceeds of a specific revenue source. (Examples: bonds used
to raise funds for highways, airports and hospitals.)
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund may
invest in municipal lease obligations. Municipal lease obligations are
tax-exempt securities that may be supported by a lease or an installment
purchase contract issued by state and local government authorities to acquire
funds to obtain the use of a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets. These
obligations, which may be secured or unsecured, are not general obligations and
have evolved to make it possible for state and local government authorities to
obtain the use of property and equipment without meeting constitutional and
statutory requirements for the issuance of debt. Thus, municipal lease
obligations have special risks not normally associated with municipal bonds.
79
<PAGE>
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Each Fund may enter into domestic repurchase agreements to earn income. The
International Bond Fund, International Equity Fund and Strategic Income Fund may
also enter into foreign repurchase agreements. A repurchase agreement is an
agreement whereby a Fund purchases a portfolio eligible security from a bank or
broker-dealer that agrees to repurchase the security at the Fund's cost plus
interest within a specified time (normally one day).
The Strategic Value Fund, Strategic Income Fund, California Tax Free Fund and
New York Tax Free Fund may enter into reverse repurchase agreements. A reverse
repurchase agreement involves the sale of a security by a Fund and its agreement
to repurchase the instrument at a specified time and price. The Fund will
maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. Each Fund will limit its
investments in reverse repurchase agreements and other borrowing to no more than
one-third of its total assets. The use of reverse repurchase agreements by a
Fund creates leverage which increases a Fund's investment risk. If the income
and gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the cost of the agreements, the Fund's earnings or NAV will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or NAV would decline faster than
otherwise would be the case.
The Trustees have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Funds to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, a Fund could experience delays in recovering its investment or losses.
- --------------------------------------------------------------------------------
RISK MANAGEMENT TECHNIQUES
- --------------------------------------------------------------------------------
The Funds can use various techniques to increase or decrease their exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing put or call options on securities and securities
indexes.
The Funds can use these practices in an attempt to adjust the risk and return
characteristics of their portfolios of investments. When a Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If a Fund's
Sub-Adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the transaction
does not perform as promised.
The California Tax Free Fund, Convertible Fund, Government Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund,
Strategic Value Fund, Strategic Income Fund, New York Tax Free Fund, Tax Free
Bond Fund and Total Return Fund may each enter into contracts for the future
delivery of debt securities or an index of debt securities that are sufficiently
correlated to its portfolio. The Government Fund may enter into futures
contracts and purchase and write options on futures, which are not U.S.
government securities.
Similarly, the Capital Appreciation Fund, Convertible Fund, Equity Index Fund,
International Equity Fund, Total Return Fund, Strategic Value Fund and Value
Fund may enter into contracts for the future delivery of securities and stock
index futures contracts to protect against changes in stock market prices.
In addition, each Fund, except the California Tax Free Fund, Equity Index Fund,
Government Fund, Money Market Fund, New York Tax Free Fund and Tax Free Bond
Fund, may, to the extent it invests in foreign securities, enter into contracts
for the future delivery of foreign currencies to protect against changes in
currency exchange rates for the same type of hedging purposes, purchase and
write put and call options on foreign currencies for the purpose of protecting
against declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired, and
enter into a variety of foreign currency transactions, including forward foreign
currency exchange contracts in order to protect or hedge against the adverse
effect that changes in future foreign currency exchange rates may have on its
investment portfolio or on its investment activities that are undertaken in
foreign currencies.
The Tax Free Bond Fund will only purchase or sell futures or related options
(such as U.S. Treasury or municipal securities index futures and related
options) when, in the opinion of the Sub-Adviser, price movements in such
futures and related options will closely correlate with price movements in the
tax-exempt municipal securities which are subject to the hedge.
Each Fund, except the Equity Index Fund, Money Market Fund and Tax Free Bond
Fund, may sell (write) covered put and call options and purchase put and call
options on any securities in which it may invest that are traded on U.S. and
foreign securities and options exchanges and in the over-the-counter market,
each in accordance with its respective investment objectives and policies. The
Equity Index Fund may purchase calls on individual securities. The Government
Fund may buy and sell options on securities which are not U.S. government
securities in order to attempt to hedge against changes in interest rates and to
seek current income.
<PAGE>
Each Fund, except the Equity Index Fund, Money Market Fund and Tax Free Bond
Fund may engage in a strategy known as "married puts." This strategy is most
typically used when the Fund owns a particular common stock or security
convertible into common stock and wishes to effect a short sale against the box
(see "Short Sales Against the Box") but for various reasons is unable to do so.
Subject to limitations with respect to options described below, the Fund may
enter into a series of stock and related option transactions to achieve the
economic equivalent of a short sale against the box. To implement this trading
strategy, the Fund will simultaneously execute with the same broker a purchase
of shares of the common stock and an "in the money" over-the-counter put option
to sell the common stock to the broker and generally will write an
over-the-counter "out of the money" call option in the same stock with the same
exercise price as the put option. The options are linked and may not be
exercised, transferred or terminated independently of the other.
The Trustees have adopted a nonfundamental policy that each of the Capital
Appreciation Fund, Convertible Fund, Government Fund, High Yield Corporate Bond
Fund, Total Return Fund, Strategic Value Fund and Value Fund may write covered
call or put options with respect to no more than 25% of the value of its net
assets, may purchase protective puts with a value of up to 25% of its net assets
and may purchase calls and puts other than protective puts, with a value of up
to 5% of the Fund's net assets.
The Funds, other than the California Tax Free Fund, Money Market Fund, New York
Tax Free Fund and Tax Free Bond Fund, may purchase put and call options on
securities indexes to hedge against risks of market-wide price fluctuations. The
Equity Index Fund may buy or sell call options on the S&P 500 Index.
The Equity Index Fund will use these techniques primarily as a temporary
substitute for taking positions in the securities that comprise the Index,
particularly if the Sub-Adviser considers these instruments to be undervalued
relative to the prices of the securities that comprise the Index. The Fund may,
in particular, purchase call options on the Index to protect against increases
in the prices of securities underlying the Index that the Fund intends to
purchase pending its ability to invest in such securities in an orderly manner.
(For more information, see the SAI.)
- --------------------------------------------------------------------------------
SHORT SALES AGAINST THE BOX
- --------------------------------------------------------------------------------
A short sale is a transaction in which a Fund sells through a broker a security
it does not own in anticipation of a possible decline in market price. A short
sale "against the box" is a short sale in which, at the time of the short sale,
a Fund owns or has the right to obtain securities equivalent in kind and amount.
Each of the Funds will only enter into short sales against the box. A Fund may
enter into a short sale against the box, among other reasons, to hedge against a
possible market decline in the value of the security owned. To effect a short
sale against the box, the Fund borrows from a broker the securities which are
sold in the short sale, and the broker holds the proceeds until the borrowed
securities are replaced. If the value of a security sold short against the box
increases, the Fund would suffer a loss when it purchases or delivers to the
selling broker the security sold short. If a broker with which the Fund has open
short sales were to become bankrupt, a Fund could experience losses or delays in
recovering gains on short sales. The Funds will only enter into short sales
against the box with brokers the Sub-Advisers believe are creditworthy. Short
sales against the box will be limited to no more than 25% of a Fund's total
assets.
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
- --------------------------------------------------------------------------------
The International Bond Fund, International Equity Fund, Strategic Value Fund and
Strategic Income Fund may enter into interest rate, index and currency exchange
rate swap agreements for purposes of attempting to obtain a particular desired
return at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Sub-Adviser's ability to predict
correctly movements in interest rates, indexes and currency exchange rates.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
Fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Sub-Adviser will cause a Fund to enter into swap agreements
only with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Funds' repurchase agreement guidelines.
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is 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
81
<PAGE>
made by the Fund and no interest accrues to the Fund. The market value of the
when-issued securities on the settlement date may be more or less than the
purchase price payable at settlement date. Similarly, each Fund may commit to
purchase a security at a future date at a price determined at the time of the
commitment. The same procedures for when-issued securities will be followed.
- --------------------------------------------------------------------------------
ZERO COUPON BONDS
- --------------------------------------------------------------------------------
The Funds, except the Equity Index Fund, may purchase zero coupon bonds, which
are debt obligations issued without any requirement for the periodic payment of
interest. Zero coupon bonds are issued at a significant discount from face
value. Zero coupon bonds tend to be more volatile than conventional debt
securities.
- --------------------------------------------------------------------------------
RISKS OF INVESTING IN HIGH YIELD SECURITIES
("JUNK BONDS")
- --------------------------------------------------------------------------------
The Convertible Fund, High Yield Corporate Bond Fund, International Bond Fund,
International Equity Fund, Strategic Value Fund, Strategic Income Fund and Total
Return Fund may, to varying degrees as previously described under "Descriptions
of Each Fund" and "General Investment Considerations," invest in debt securities
rated lower than Baa by Moody's or BBB by S&P or, if not rated, determined to be
of equivalent quality by the Sub-Adviser. Such securities are sometimes referred
to as junk bonds and are considered speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. High yield bonds
may be regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of a
Fund to achieve its investment objective may, to the extent of its investment in
high yield bonds, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, a Fund may incur additional expenses to seek recovery. In the case of
high yield bonds structured as zero coupon or payment-in-kind securities, the
market prices of such securities are affected to a greater extent by interest
rate changes and, therefore, tend to be more volatile than securities which pay
interest periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Fund could sell a high yield
bond, and could adversely affect and cause large fluctuations in the daily NAV
of the Fund's shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the portfolio security if the
Sub-Adviser deems it in the best interest of the shareholders.
- --------------------------------------------------------------------------------
SPECIAL RISK CONSIDERATIONS FOR THE CALIFORNIA
TAX FREE FUND AND NEW YORK TAX FREE FUND
- --------------------------------------------------------------------------------
California Municipal Securities. Investors should be aware that certain
California Constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in certain adverse
consequences affecting California municipal securities. For instance, certain
provisions of the California Constitution and statutes that limit the taxing and
spending authority of California governmental entities may impair the ability of
the issuers of some California municipal securities to maintain debt service on
their obligations. Other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
New York Municipal Securities. Investors should be aware that New York State and
New York City face long-term economic problems which could seriously affect
their ability and that of other issuers of New York municipal securities to meet
their financial obligations. The credit standings of New York State and of
certain local governments (including New York City) have been, and could be
further, reduced.
For a discussion of certain matters relating to the fiscal policies and
financial condition of the states of California and New York and their political
subdivisions, see the SAI.
82
<PAGE>
================================================================================
MANAGER, SUB-ADVISERS AND DISTRIBUTOR
THE MANAGER
================================================================================
The Trust, on behalf of each Fund, pays the Manager a monthly fee for services
performed at an annual percentage of the average daily net assets of that Fund
as follows:
<TABLE>
<CAPTION>
Rate paid for
the year ended
Annual December 31,
Rate 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
California Tax Free Fund 0.50%* 0.48%
Capital Appreciation Fund 0.72%** 0.55%
Convertible Fund 0.72% 0.72%
Equity Index Fund 0.50% 0.31%***
Government Fund 0.60%** 0.60%
High Yield Corporate Bond Fund 0.60%** 0.56%
International Bond Fund 0.70%++ 0.40%
International Equity Fund 1.00% 1.00%
Money Market Fund 0.50%ss. 0.25%
New York Tax Free Fund 0.50%* 0.33%
Strategic Income Fund 0.60% 0.26%***
Strategic Value Fund 0.75% 0.75%
Tax Free Bond Fund 0.60% 0.60%
Total Return Fund 0.64%** 0.62%
Value Fund 0.72%|| 0.57%
- --------------------------------------------------------------------------------
</TABLE>
* The Manager has voluntarily agreed to reimburse the expenses of California
Tax Free Fund and New York Tax Free Fund to the extent that operating
expenses would exceed on an annual basis 1.24% and 1.49% of the average
daily net assets for the Class A and Class B shares, respectively.
** The Manager has voluntarily established fee breakpoints for certain of the
Funds as follows: for the Government Fund of .55% on assets in excess of $1
billion; for the High Yield Corporate Bond Fund of .55% on assets in excess
of $500 million; for the Total Return Fund of .60% on assets in excess of
$500 million; and for the Capital Appreciation Fund of .65% on assets in
excess of $200 million and .50% on assets in excess of $500 million.
*** For the fiscal year ended December 31, 1997, an expense limitation was in
place. The limitation was terminated on February 28, 1998 with respect to
Strategic Income Fund and on April 1, 1998 with respect to Equity Index
Fund.
++ The Manager has agreed to waive a portion of its fee payable by the
International Bond Fund until such time as the Fund reaches $50 million in
net assets.
ss. up to $300 million; .45% from $300 to $700 million; .40% from $700 million
to $1.0 billion; and .35% in excess of $1.0 billion. The Manager has
voluntarily agreed to assume the expenses of Money Market Fund to the
extent that such expenses would exceed on an annual basis .70% of the
average daily net assets of the Fund.
|| up to $200 million; .65% from $200 to $500 million; and .50% in excess of
$500 million.
Each expense limitation, fee waiver and fee breakpoint arrangement discussed
above, except for the fee breakpoints with respect to Money Market and Value
Funds, is voluntary and may be discontinued at any time.
The payment of the Equity Index Fund's investment management fees, as well as
other operating expenses, will have the effect of reducing investors' returns
and will affect the Equity Index Fund's ability to track the S&P 500 Index
exactly.
Each Fund, 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>
Rate Paid
for the
Year Ended
Annual December 31,
Rate 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
California Tax Free Fund 0.25%* 0.24%
Capital Appreciation Fund 0.36%* 0.275%
Convertible Fund 0.36% 0.36%
Equity Index Fund 0.10% 0.10%
Government Fund 0.30%* 0.30%
High Yield Corporate Bond Fund 0.30%* 0.28%
International Bond Fund 0.45%** 0.25%
International Equity Fund 0.60% 0.60%
Money Market Fund 0.25%*+ 0.125%
New York Tax Free Fund 0.25%* 0.165%
Strategic Income Fund 0.30% 0.13%***
Strategic Value Fund 0.375% 0.375%
Tax Free Bond Fund 0.30% 0.30%
Total Return Fund 0.32%* 0.31%
Value Fund 0.36%++ 0.285%
- --------------------------------------------------------------------------------
</TABLE>
* To the extent that the Manager has agreed to voluntarily waive all or a
portion of its fee or reimburse expenses or has established fee
breakpoints, the Sub-Adviser has voluntarily agreed do so proportionately.
** The Sub-Advisor has voluntarily agreed to waive a portion of its fee until
such time as the International Bond Fund reaches $50 million in net assets.
*** For the fiscal year ended December 31, 1997, an expense limitation was in
place. The limitation was terminated on February 28, 1998.
+ up to $300 million; .225% from $300 to $700 million; .20% from $700 million
to $1.0 billion; and .175% in excess of $1.0 billion.
++ up to $200 million; .325% from $200 to $500 million; and .25% in excess of
$500 million.
83
<PAGE>
- --------------------------------------------------------------------------------
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
To compensate the Distributor for the services it provides and for the expenses
it bears in distributing shares and servicing shareholders of the Funds, each
Fund, other than the Money Market Fund, has adopted separate distribution plans
pursuant to Rule 12b-1 under the 1940 Act for each class of shares of that Fund
(the "Class A Plans," the "Class B Plans," and the "Class C Plans,"
collectively, the "Plans"). The Equity Index Fund only offers Class A shares
and, accordingly, only has a Class A Plan. Pursuant to the Class A Plans, each
Fund pays the Distributor a monthly fee, which is an expense of the Class A
shares of each Fund charged against its income, at the annual rate of 0.25% of
the average daily net assets of each Fund's Class A shares for distribution or
service activities, as designated by the Distributor. Pursuant to the Class B
and Class C Plans, each Fund pays the Distributor a monthly fee which is an
expense of the Class B or Class C shares of the Fund, at the annual rate of
0.75% of the average daily net assets of the Fund's Class B or Class C shares
(0.25% of the average daily net assets of Class B shares in the case of
California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund).
Class B and Class C 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 or Class C shares of each Fund as
compensation for personal continuing services rendered to Class B and Class C
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 and Class C 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
83, "Alternative Sales Arrangements--Deferred Sales Charge Class B
Shares--Contingent Deferred Sales Charge, Class B" and page ___, "Alternative
Sales Arrangements--Deferred Sales Charge Class C Shares--Contingent Deferred
Sales Charge, Class C."
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.
The Distributor will advance to dealers who sell Class C shares of the Funds an
amount equal to 1% of the aggregate net asset value of the shares sold. [After
the first full year of a Class C investment, the Distributor will make such
payments quarterly to dealers based on the average net asset value of the Class
C shares which are attributable to shareholders for whom the dealers are
designated as dealers of record.]
In addition, with respect to Class A and Class B shares, the Distributor may pay
dealers an ongoing annual service fee equal to 0.25% of the aggregate net asset
value of shares held by investors serviced by the dealer. In later years, its
expenditures may be less than the distribution fee, thus enabling the
Distributor to realize a profit in those years.
If the Plans for the Funds are terminated, the Funds will owe no payments to the
Distributor other than any portion of the distribution fee accrued through the
effective date of termination but then unpaid.
Plan revenues may be used to reimburse third parties which provide various
services to shareholders who are participants in various retirement plans. These
services include aggregating and processing purchase and redemption orders for
participant shareholders, processing dividend payments, forwarding shareholder
communications, and recordkeeping. Persons selling or servicing different
classes of shares of the Funds may receive different compensation with respect
to one particular class of shares as opposed to another in the same Fund.
Class B shares will be automatically converted to Class A shares, which pay
lower 12b-1 fees, on or about December 31, 2005 or at the end of the calendar
quarter occurring eight years after the date a shareholder purchased their 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. Class C shares do not have a conversion feature.
================================================================================
HOW TO PURCHASE SHARES OF THE FUNDS
================================================================================
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The three 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
and Class C shares and the dividends
84
<PAGE>
payable on Class B and Class C 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 and Class C 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 and Class C shares will be less
competitive than that of Class A shares. For additional information on the
features of Class A, Class B and Class C shares, see Alternative Sales
Arrangements, page 82.
- --------------------------------------------------------------------------------
BY MAIL
- --------------------------------------------------------------------------------
Initial purchases of shares of the Funds should be made by mailing the completed
application form to the investor's Registered Representative. Shares of any
Fund, except the Money Market Fund, may be purchased at the NAV per share plus
any applicable sales charge next determined after receipt in good order of the
purchase order by that Fund plus any applicable sales charge. In the case of the
Money Market Fund (which seeks to maintain a constant net asset value of $1.00
per share), the share purchase is effected as of the NAV next determined after
receipt in good order of the purchase order by MSS.
- --------------------------------------------------------------------------------
BY TELEPHONE
- --------------------------------------------------------------------------------
For all Funds, other than the Money Market Fund, an investor may make an initial
investment by having his or her Registered Representative telephone MSS between
9:00 AM and 4:00 PM, Eastern time, on any day the New York Stock Exchange is
open. The purchase will be effected at the NAV per share plus any applicable
sales charge next determined following receipt of the telephone order as
described above. An application and payment must be received in good order by
MSS within three business days. All telephone calls are recorded to protect
shareholders and MSS. For a description of certain limitations on the liability
of the Funds and MSS for transactions effected by telephone, see pages 61-62,
"Know How to Sell and Exchange Shares."
- --------------------------------------------------------------------------------
BY WIRE
- --------------------------------------------------------------------------------
An investor may open an account and invest by wire by having his or her
Registered Representative telephone MSS between 9:00 AM and 4:00 PM, Eastern
time, to obtain an account number and instructions. For both initial and
subsequent investments, federal funds should be wired to:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
ABA No.: 011 0000 28
Attn.: Custody and Shareholder Services
For Credit: MainStay________________ Fund__ Class______
Shareholder Account No.____________________________
Shareholder Registration ____________________________
DDA Account Number 99029415
An application must be received by MSS within three business days. The
investor's bank may charge the investor a fee for the wire.
To make a purchase effective the same day, the Registered Representative must
call MSS by 12:00 noon Eastern time, and federal funds must be received by the
Shareholder Servicing Agent before 4:00 PM Eastern time.
Wiring money to the Trust will reduce the time a shareholder must wait before
redeeming or exchanging shares because, when a shareholder purchases by check,
the Trust will withhold payment for up to 10 days of purchase or until the check
clears, whichever is first.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENTS
- --------------------------------------------------------------------------------
Additional investments in a Fund may be made at any time by mailing a check
payable to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401.
The shareholder's account number and the name of the Fund and class of shares
must be included with each investment. Purchases will be effected at the NAV per
share plus any applicable sales charge as described above.
- --------------------------------------------------------------------------------
SYSTEMATIC INVESTMENT PLANS
- --------------------------------------------------------------------------------
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of a Fund through AutoInvest. AutoInvest facilitates investments
by using electronic debits, authorized by the shareholder, to a checking 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.
85
<PAGE>
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
Investors may, subject to the approval of the Trust, the Distributor, the
Manager and the Sub-Adviser to the particular Fund, purchase shares of a Fund
with liquid securities that are eligible for purchase by that Fund and that have
a value that is readily ascertainable. These transactions will be effected only
if the Sub-Adviser intends to retain the security in the Fund as an investment.
The Trust reserves the right to amend or terminate this practice at any time. An
investor must call MainStay at 1-800-MAINSTAY before sending any securities.
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. number (or such other information as
the Trust has requested) has been provided.
================================================================================
ALTERNATIVE SALES ARRANGEMENTS
================================================================================
- --------------------------------------------------------------------------------
INITIAL SALES CHARGE ALTERNATIVE CLASS A SHARES
- --------------------------------------------------------------------------------
The sales charge on Class A shares of the Funds is a variable percentage of the
public offering price depending upon the investment orientation of the Fund and
the amount of the sale. The sales charge applicable to an investment in Class A
shares of the Capital Appreciation Fund, Convertible Fund, International Equity
Fund, Strategic Value Fund, Total Return Fund and Value Fund will be determined
according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
------------------- ------------------------
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% 4.75% 0.75%
$50,000 to $99,999 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
- --------------------------------------------------------------------------------
</TABLE>
The sales charge applicable to an investment in Class A shares of the California
Tax Free Fund, Government Fund, High Yield Corporate Bond Fund, International
Bond Fund, New York Tax Free Fund, Strategic Income Fund and Tax Free Bond Fund
will be determined according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
------------------- ------------------------
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
- --------------------------------------------------------------------------------
</TABLE>
The sales charge for Class A Shares of the Equity Index Fund will be determined
according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
------------------- ------------------------
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 3.00% 3.09% 2.75% 0.25%
$100,000 to $249,999 2.50% 2.56% 2.25% 0.25%
$250,000 to $499,999 2.00% 2.04% 1.75% 0.25%
$500,000 to $999,999 1.50% 1.52% 1.25% 0.25%
$1,000,000 or more* None None See Below* None
- -------------------------------------------------------------------------------
</TABLE>
* No sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
such shares within one year of the date of purchase. See "Reduced Sales
Charges on Class A Shares--Contingent Deferred Sales Charge, Class A."
Although an investor will not pay an initial sales charge on investments of
$1,000,000 or more, the Distributor will pay, from its own resources, a
commission to dealers on such investments. The dealer will receive a commission
of 1.00% on the portion of a sale from $1,000,000 to $2,999,999, 0.50% of any
portion from $3,000,000 to $4,999,999 and 0.40% on any portion of $5,000,000 or
more.
The Distributor may allow the full sales charge to be retained by dealers. The
amount retained may be changed from time to time but will remain the same for
all dealers. The Distributor, at its expense, also may from time to time provide
additional promotional incentives to dealers who sell Fund shares. A selected
dealer who receives a reallowance in excess of 90% of such a sales charge may be
deemed to be an "underwriter" under the 1933 Act.
- --------------------------------------------------------------------------------
PURCHASES AT NAV
- --------------------------------------------------------------------------------
A Fund's Class A shares may be purchased at NAV, without payment of any sales
charge, by its Trustees, New York Life and its subsidiaries and their employees,
officers, directors or agents (and immediate family members). Also, any employee
or Registered Representative of an authorized broker-dealer (and immediate
family members) may purchase a Fund's shares at NAV without payment of any sales
charge.
86
<PAGE>
In addition, the Trust will treat Class A share purchases of Funds, other than
the Equity Index Fund and Money Market Fund, in an amount less than $1,000,000
by defined contribution plans, other than 403(b) plans, that are sponsored by
employers with 100 or more eligible employees as if such purchases were equal to
an amount more than $1,000,000 but less than $2,999,999. Such purchases by
defined contribution plans may be subject to a contingent deferred sales charge
of 1% on shares redeemed within one year of the date of purchase. See "Reduced
Sales Charges on Class A Shares--Contingent Deferred Sales Charge, Class A."
Class A shares of the Funds may also be purchased at net asset value through
broker-dealers, investment advisers and other financial institutions which have
entered into a supplemental agreement with the Distributor, which includes a
requirement that such shares be sold for the benefit of clients participating in
a "wrap account" or similar program under which clients pay a fee to the
broker-dealer, investment adviser or other financial institution.
- --------------------------------------------------------------------------------
REDUCED SALES CHARGES ON CLASS A SHARES
- --------------------------------------------------------------------------------
The sales charge varies with the size of the purchase and reduced charges apply
to the aggregate of purchases of a Fund made at one time by any "Qualified
Purchaser," which term includes (i) an individual and his/her spouse and their
children under the age of 21; and (ii) any other organized group of persons,
whether incorporated or not, which is itself a shareholder of the Fund,
including group retirement and benefit plans (other than IRAs and non-Erisa
403(b) plans) whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
at a discount of redeemable securities of a registered investment company. The
circumstances under which "Qualified Purchasers" and other investors in the
Funds may pay reduced sales charges are described on page 58, "Consider Reducing
Your Sales Charges."
Letter of Intent
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested during a 24-month period. A 90-day back-dated period can be used to
include earlier purchases; the 24-month period would then begin on the date of
the first purchase during the 90-day period. For more information, see the SAI
or call your Registered Representative or MainStay at 1-800-MAINSTAY.
Contingent Deferred Sales Charge, Class A
In order to recover commissions paid to dealers on qualified investments of $1
million or more, a contingent deferred sales charge of 1% may be imposed on
redemptions of such investments made within one year of the date of purchase.
Class A shares that are redeemed will not be subject to a contingent deferred
sales charge, however, to the extent that the value of such shares represents:
(1) capital appreciation of Fund assets; (2) reinvestment of dividends or
capital gains distributions; (3) Class A shares redeemed more than one year
after their purchase; (4) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, death, disability, QDROs and excess contributions
pursuant to applicable IRS rules; and Required Minimum Distributions at age 70
1/2 for IRA and 403(b)(7) TSA participants; (5) transfers within a retirement
plan where the proceeds of the redemption are invested in any guaranteed
investment contract written by New York Life or any of its affiliates; transfers
to products offered within a retirement plan which uses New York Life Benefit
Services, Inc. or TRAC-2000 as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; or (6)
redemptions, under the Systematic Withdrawal Plan, used to pay scheduled monthly
premiums on insurance policies issued by New York Life or an affiliate. Class A
shares of a Fund that are purchased without a front-end sales charge may be
exchanged for Class A shares of another Fund without the imposition of a
contingent deferred sales charge, although, upon redemption, contingent deferred
sales charges may apply to the Class A shares that were acquired through an
exchange.
The contingent deferred sales charge will be applicable to amounts invested
pursuant to a right of accumulation or an LOI to the extent that (a) a front-end
sales charge was not paid at the time of the purchase and (b) any shares so
purchased are redeemed within one year of the date of purchase.
For federal income tax purposes, the amount of the contingent deferred sales
charge generally will reduce the gain or increase the loss, as the case may be,
recognized upon redemption.
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE CLASS B SHARES
- --------------------------------------------------------------------------------
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses of 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 C
shares of the Funds, of 1% of the net asset value of Class C shares, at the time
of any redemption by a shareholder which reduces the current value of the
shareholder's Class C account in any Fund to an amount which is lower than the
amount of all payments by the
87
<PAGE>
shareholder for the purchase of Class B shares in that Fund during the preceding
six years. However, no such charge will be imposed to the extent that the net
asset value of the Class B shares redeemed does not exceed (a) the current
aggregate net asset value of Class B shares of that Fund purchased more than six
years prior to the redemption, plus (b) the current aggregate net asset value of
Class B shares of that Fund purchased through reinvestment of dividends or
distributions, plus (c) increases in the net asset value of the investor's Class
B shares of that Fund above the total amount of payments for the purchase of
Class B shares of that Fund made during the preceding six years. The amount of
any contingent deferred sales charge will be paid to and retained by the
Distributor.
The amount of the contingent deferred sales charge, if any, will vary depending
on the number of years from the time of payment for the purchase of Class B
shares of any Fund (other than the Money Market Fund and Equity Index Fund)
until the time of redemption of such shares. Solely for purposes of determining
the number of years from the time of payment for the purchase of shares, all
payments during a month will be aggregated and deemed to have been made on the
last day of the month.
The following table sets forth the rates of the contingent deferred sales
charge:
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Amount Redeemed
Payment Made Subject to the Charge
- --------------------------------------------------------------------------------
First .................................. 5.0%
Second ................................. 4.0%
Third .................................. 3.0%
Fourth ................................. 2.0%
Fifth .................................. 2.0%
Sixth .................................. 1.0%
Thereafter ............................. None
- --------------------------------------------------------------------------------
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, QDROs and excess contributions pursuant to
applicable IRS rules; and Required Minimum Distributions at age 701/2 for IRA
and 403(b) TSA participants; (ii) withdrawals related to the termination of a
retirement plan where no successor plan has been established; (iii) transfers
within a retirement plan where the proceeds of the redemption are invested in
any guaranteed investment contract written by New York Life or any of its
affiliates, transfers to products offered within a retirement plan which uses
New York Life Benefit Services, Inc. as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; (iv) required
distributions by charitable trusts under Section 664 of the Code; (v)
redemptions following the death of the shareholder or the beneficiary of a
living revocable trust or within one year following the disability of a
shareholder occurring subsequent to the purchase of shares; (vi) redemptions
under the Systematic Withdrawal Plan used to pay scheduled monthly premiums on
insurance policies issued by New York Life or an affiliate; (vii) continuing,
periodic monthly or quarterly withdrawals, under the Systematic Withdrawal Plan,
up to an annual total of 10% of the value of a shareholder's Class B shares in a
Fund; (viii) redemptions by New York Life or any of its affiliates or by
accounts managed by New York Life or any of its affiliates; (ix) redemptions
effected by registered investment companies by virtue of transactions with a
Fund; (x) involuntary redemptions of an account with a net asset value of $250
($500 for the Money Market Fund) or less; and (xi) redemptions by shareholders
of shares purchased with the proceeds of a settlement payment made in connection
with the liquidation and dissolution of a limited partnership sponsored by New
York Life or one of its affiliates. Additional waivers in effect prior to
January 1, 1998 will apply to redemptions of Class B shares by accounts
established before that date. The contingent deferred sales charge is waived on
such sales or redemptions to promote goodwill and because the sales effort, if
any, involved in making such sales is negligible.
Shareholders should notify MSS at the time of requesting such redemptions that
they are eligible for a waiver of the contingent deferred sales charge. Class B
shares upon which the contingent deferred sales charge may be waived may not be
resold, except to the Trust. Shareholders who are making withdrawals from
retirement plans and accounts or other tax-sheltered or tax-deferred accounts
should consult their tax advisers regarding the tax consequences of such
withdrawals.
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE CLASS C 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 of providing
distribution related services to the Funds in connection with the sale of the
Class C 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 C shares
without a sales charge being deducted at the time of purchase.
Contingent Deferred Sales Charge, Class C A contingent deferred sales charge of
1% of the net asset value of Class C shares will be imposed on redemptions of
Class C shares of the Funds at the time of any redemption by a shareholder which
reduces the current value of the shareholder's Class C account in any Fund to an
amount which is lower than the amount of all payments by the shareholder for the
purchase of Class C shares in that Fund during the preceding one year. However,
no such charge will be imposed to the extent that the net asset value of the
Class C shares redeemed does not exceed (a) the current aggregate net asset
value of Class C shares of that Fund purchased more than one year prior to the
redemption, plus (b) the current aggregate net asset value of Class C shares of
that Fund purchased through reinvestment of dividends or distributions, plus (c)
increases in the net asset value of the investor's Class C shares of that Fund
above the total amount of payments for the purchase of Class C shares of that
Fund made during the preceding one year.
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[Withdrawals under the Systematic Withdrawal Plan also will not be subject to
this charge.] [However, investors may not withdraw more than -% of the value of
the Fund account under the Plan in the first year after purchase.]
- --------------------------------------------------------------------------------
REDEMPTIONS AND EXCHANGES
- --------------------------------------------------------------------------------
Shares may be redeemed directly from a Fund or through your Registered
Representative. Shares redeemed will be valued at the NAV per share next
determined after MSS receives the redemption request in "good order." "Good
order" with respect to a redemption request generally means that for
certificated shares, a stock power or certificate must be endorsed, and for
uncertificated shares a letter must be signed, by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed by an eligible
guarantor institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to MSS must be submitted before the
redemption request will be accepted. The signature guarantee may be waived on a
redemption of $100,000 or less which is payable to the shareholder(s) of record
and mailed to the address of record, or under such other circumstances as the
Trust may allow. Send your written request to The MainStay Funds, P.O. Box 8401,
Boston, MA 02266-8401.
Upon the redemption of shares the redeeming Fund will make payment in cash,
except as described below, of the net asset value of the shares next determined
after such redemption request was received, less any applicable contingent
deferred sales charge. There will be no redemption, however, during any period
in which the right of redemption is suspended or date of payment is postponed
because the New York Stock Exchange is closed or trading on such Exchange is
restricted or the SEC deems an emergency to exist.
The value of the shares redeemed from a Fund may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned the shares.
Redemption by Check
The Money Market Fund and State Street Bank and Trust Company (the "Bank") each
reserve the right at any time to suspend the procedure permitting redemption by
check and intend to do so in the event that federal legislation or regulations
impose reserve requirements or other restrictions deemed by the Trustees to be
adverse to the interest of other shareholders of the Money Market Fund.
Shareholders who arrange to have checkwriting privileges will be subject to the
rules and regulations of the Bank pertaining to this checkwriting privilege as
amended from time to time. The applicable rules and regulations will be made
available by the Bank upon request when a shareholder establishes checkwriting
privileges.
Systematic Withdrawal Plan
Dividends and capital gains distributions on shares held under the Systematic
Withdrawal Plan are reinvested in additional full and fractional shares of the
same Fund at NAV. MSS acts as agent for the shareholder in redeeming sufficient
full and fractional shares to provide the amount of the systematic withdrawal
payment and any contingent deferred sales charge, if applicable.
Exchange Privileges
Exchanges will be based upon each Fund's NAV per share next computed following
receipt of a properly executed exchange request.
Subject to the conditions and limitations described herein, Class A, Class B and
Class C shares of a Fund may be exchanged for shares of an identical class of a
MainStay Fund registered in the state of residence of the investor or where an
exemption from registration is available and only with respect to Funds that are
available for sale to new investors.
In addition, an exchange privilege between Class A shares of the Funds and
MainStay Equity Index Fund is offered. Shareholders should note, however, that
Guaranteed Shares exchanged before or after the Guarantee Date will lose the
benefit of the Guarantee. Any exchanges between a Fund and MainStay Equity Index
Fund will be subject to the conditions applicable to Class A share exchanges
described herein, as well as any applicable minimum investment requirements. No
exchange privilege between Class B or Class C shares of the Funds and MainStay
Equity Index Fund is offered.
Investors should read the Prospectus carefully before they place an exchange
request.
Generally, shareholders may exchange their Class A shares of a Fund for Class A
shares of another MainStay Fund, without the imposition of a sales charge. Any
such exchanges will be based upon each Fund's NAV per share next computed
following receipt of a properly executed exchange request. However, where a
shareholder seeks to exchange Class A shares of the Money Market Fund for Class
A shares of another MainStay Fund which are subject to a front-end sales charge,
the applicable sales charge will be imposed on the exchange, unless the
shareholder has previously paid a sales charge with respect to such shares.
Class B and Class C shares of a Fund may be exchanged for the same class of
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
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shareholder previously exchanged his or her Class B or Class C 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 and Class C 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 per account are permitted in each
calendar year without the imposition of any transaction fee; subsequently, a $10
fee will be assessed per exchange and additional exchange requests may be
denied.
For purposes of determining the length of time a shareholder owned Class B or
Class C shares prior to redemption or repurchase in order to determine the
applicable contingent deferred sales charge, if any, 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 64, "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 and Redemptions for Equity Index Fund. For the Equity Index Fund,
distributions will be paid in additional shares based on the NAV at the close of
business on the payment date of the distribution, unless the shareholder elects
to receive such distributions in cash. Receipt of dividends in cash by a
shareholder will have the effect of reducing the number of Guaranteed Shares
held by that shareholder, and, therefore, the value of the Guarantee to that
shareholder. If, however, the Fund pays a dividend in cash to all shareholders
for the purpose of assuring the Fund's compliance with applicable provisions of
the Code, any such amounts paid in cash will reduce the Guaranteed Amount
applicable to each Guaranteed Share in the amount of the dividend paid.
For shareholder convenience in monitoring the number and value of a
shareholder's Guaranteed Shares, the Fund currently intends, through reverse
share splits, to combine any additional shares received by a shareholder as
dividends and distributions from the Fund with each originally purchased share
of the Fund to which such dividends and distributions relate, so that a
Guaranteed Share of the Fund will mean a single share of the Fund as purchased
and include in its NAV the value of all dividends and distributions attributable
to such originally purchased share and paid up to that point in time. Following
a reverse share split, a shareholder who has elected to reinvest dividends and
distributions from the Fund will hold the same number of Guaranteed Shares in
the Fund as the shareholder held prior to the reverse share split, but each
share will have a higher NAV (reflecting the added value of the dividends paid).
Shareholders who elect to receive their dividends and distributions from the
Fund in cash will, following a reverse share split, own fewer Guaranteed Shares
of the Fund, but those shares will have the same higher per share NAV as all
other Fund shares. In either case, the overall value of a shareholder's
investment in the Fund will be unaffected by a reverse share split. If reverse
share splits are not authorized, a Guaranteed Share shall mean, on a given date,
that number of shares of the Fund that a shareholder would hold on that date if
he had bought a single share and then held it, plus all shares issued as
dividends and distributions attributable to such share through the Guarantee
Date. This single share and all other shares issued through the reinvestment of
any dividends and distributions attributable to such share will be treated as a
single unit to which the Guaranteed Amount will apply as described above for a
Guaranteed Share. Shareholders who elect to receive dividends and distributions
in cash would hold fewer shares of the Fund and, consequently, fewer units as to
which the Guaranteed Amount would apply.
Equity Index Fund shares may be redeemed by shareholders prior to their
Guarantee Date. However, any such redeemed shares will lose the benefit of the
Guarantee.
Within seven days after acceptance of a redemption request, the Equity Index
Fund is required to make payment of the
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NAV of the shares on the date the order was received in proper form, except that
where a request is made at least 30 days prior to a dividend or distribution
record date to redeem the dividend shares immediately upon issuance (to
effectively receive the dividend in cash), redemption and payment will occur at
that time.
================================================================================
TAX-DEFERRED RETIREMENT PLANS
================================================================================
Shares of each Fund, except the California Tax Free Fund, New York Tax Free Fund
and the Tax Free Bond Fund, may be purchased for retirement plans, providing
tax-deferred investments for individuals and institutions. Shares purchased may
be used as investments for established plans, or the Distributor may provide
plan documents for selected plans. A plan document must be adopted in order for
a plan to be in existence.
Custodial services are provided for IRA/ROTH IRA/SEP/ SARSEP, SIMPLE IRA and
Education IRA plans, and for 403(b)(7) Custodial Accounts. Plan administration
is also available for select qualified retirement plans.
Contributions made to such plans to the extent provided in federal income tax
law currently in effect, and earnings thereon, will not be taxable to the plan
participant until distribution. An investor should consult with his or her tax
adviser before establishing any tax-deferred retirement plan.
The Internal Revenue Code ("IRC") has specific distribution requirements that
apply to investors who reach age 70 1/2. Therefore, investors over the age of 60
1/2 who wish to preserve the full Guarantee with respect to their investment in
the Equity Index Fund should carefully consider whether shares of the Fund
should be purchased for their retirement plan.
================================================================================
NET ASSET VALUE
================================================================================
For purposes of determining NAV, portfolio securities of the Money Market Fund
are valued at their amortized cost, which does not take into account unrealized
securities gains or losses. This method involves initially valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
premium paid or discount received.
Portfolio securities of each other Fund are valued at their fair market values
as determined by the methods described in the SAI with the exception of money
market instruments held by those Funds, which are valued by the amortized cost
method.
================================================================================
PORTFOLIO TRANSACTIONS
================================================================================
The primary consideration in portfolio security transactions is best execution.
Subject to this requirement, securities may be bought from or sold to brokers or
dealers who have furnished statistical, research and other information or
services to the Sub-Advisers. Consistent with the foregoing primary
consideration, the Conduct Rules of the National Association of Securities
Dealers, Inc. and such other policies as the Trustees may determine, the
Sub-Advisers may consider sales of shares of the respective Funds as a factor in
the selection of broker-dealers to execute each Fund's portfolio transactions.
NYLIFE Securities Inc. may act as a broker for the Trust in accordance with
applicable regulations.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Funds' Sub-Advisers. If a purchase or sale of
securities consistent with the investment policies of a Fund and one or more of
the clients served by the Fund's Sub-Adviser is considered at or about the same
time, transactions in such securities may be executed together and will, to the
extent practicable, be allocated among the Fund and clients in a manner deemed
equitable to the Funds and the clients by the Fund's Sub-Adviser. Although there
is no specified formula for allocating such transactions, the various allocation
methods used by a Fund's Sub-Adviser, and the results of such allocations, are
subject to periodic review by the Trustees.
================================================================================
TAX INFORMATION
================================================================================
General. A Fund generally will not be subject to federal income tax on its net
taxable investment income and net realized capital gains to the extent such
income and gains are distributed to its shareholders in accordance with the
timing requirements of the Code.
Taxes in relation to the Equity Index Fund Guarantee. If an amount is paid to
shareholders pursuant to the Guarantee, such amounts probably will be taxable to
shareholders. However, it is possible that such amounts could be regarded as a
tax-free return of capital. The Fund does not undertake to suggest to
shareholders the manner in which any payments that may be made under the
Guarantee are to be treated for tax purposes, and shareholders are specifically
advised to consult their tax advisers about the tax treatment of any payments
that may be made under the Guarantee.
The Guarantee is a relatively new feature that has not previously been offered
by many other mutual funds. As a result, certain tax consequences arising from
the Guarantee are not entirely clear. Consequently, a risk exists that the Fund
would not have attained or be able to retain its status as a regulated
investment company if payments under the Guarantee were made, in which case the
Fund would be liable for corporate level income tax and dividends designated as
capital gain dividends would be taxed as ordinary income to shareholders.
However, management of the Fund believes that the Guarantee will not adversely
affect the status of the Fund as a regulated investment company for federal
income tax purposes. Any withholding of taxes on distributions by the
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Equity Index Fund will result in a reduction of the benefit under the Guarantee.
================================================================================
OTHER INFORMATION
================================================================================
The services provided to the Funds by the Manager, the Sub-Advisers and the
Funds' other service providers are dependent on those service providers'
computer systems. Many computer software and hardware systems in use today
cannot distinguish between the year 2000 and the year 1900 because of the way
dates are encoded and calculated (the "Year 2000 Issue"). The failure to make
this distinction could have a negative implication on handling securities
trades, pricing and account services. The Manager, the Sub-Advisers and the
Funds' other service providers are taking steps that each believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that they use. The Funds have no reason to believe these steps will not
be sufficient to avoid any material adverse impact on the Funds, although there
can be no assurances. The costs or consequences of incomplete or untimely
resolution of the Year 2000 Issue are unknown to the Manager, the Sub-Advisers
and the Funds' other service providers at this time but could have a material
adverse impact on the operations of the Funds and the Manager, the Sub-Advisers
and the Funds' other service providers.
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================================================================================
APPENDIX A
================================================================================
- --------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES RATINGS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
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Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
- --------------------------------------------------------------------------------
STANDARD & POOR'S
- --------------------------------------------------------------------------------
Corporate and Municipal Long-Term Debt Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
- --------------------------------------------------------------------------------
Speculative Grade
- --------------------------------------------------------------------------------
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions for the obligor. In the
event of adverse business, financial or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or a similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
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Short-Term Rating Definitions
A-1: A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign(+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated `C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
================================================================================
APPENDIX B
================================================================================
- --------------------------------------------------------------------------------
TAXABLE EQUIVALENT YIELD TABLE (*)(+)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
If your
federal
marginal
income tax a tax-free yield of
--------------------------------------------------
rate is 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
--------------------------------------------------
would equal a taxable yield of:
<S> <C> <C> <C> <C> <C> <C> <C>
15.00% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
28.00% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%
31.00% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14%
36.00% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%
39.60% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59%
- -------------------------------------------------------------------------------
</TABLE>
* This table reflects application of the regular federal income tax only;
other taxes may be applicable with respect to a particular shareholder.
Such taxes could change the information shown. Tax rates are subject to
change. Investors in the California and New York Tax Free Funds should in
particular note that the chart does not reflect any state and local taxes
that may be deductible in computing federal income tax liability.
+ This table is for illustrative purposes only; investors should consult
their tax advisers with respect to the tax implications of an investment in
a Fund that invests primarily in securities the interest on which is exempt
from regular federal income tax.
95
<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
NY Life 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]
[LOGO] This prospectus is also available in Spanish. For a copy, please call
1-800-MAINSTAY (1-800-624-6782), option 3.
<PAGE>
- --------------------------------------------------------------------------------
The MainStay Funds Prospectus September 1, 1998
- --------------------------------------------------------------------------------
================================================================================
Read This!
================================================================================
These Funds aren't federally insured or guaranteed by the U.S. government--even
if you're investing through a bank. Shares of these Funds are not deposits or
obligations of, or guaranteed or insured by any financial institution, the
Federal Deposit Insurance Corporation, or any other government agency.
Investments in the Funds are subject to investment risks, including possible
loss of principal (see "Description of Investments and Investment Practices" on
page 35).
No guarantees. There are no guarantees that a Fund will meet its objectives. All
mutual funds involve risk, including the potential to lose some or all of your
original investment. The price of a mutual fund share will fluctuate and, when
sold, may be higher or lower than your original purchase price.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
MainStay offers 22 mutual funds. The following 7 funds are offered in this
Prospectus.
<TABLE>
<CAPTION>
================================================================================
Aggressive Growth
================================================================================
<S> <C>
Small Cap Growth Fund ............................................... page 11
Small Cap Value Fund ................................................ page 12
================================================================================
Growth
================================================================================
Blue Chip Growth Fund ............................................... page 13
Equity Income Fund .................................................. page 14
Growth Opportunities Fund ........................................... page 15
Research Value Fund ................................................. page 16
================================================================================
Income
================================================================================
Global High Yield Fund .............................................. page 17
</TABLE>
- --------------------------------------------------------------------------------
Please read this Prospectus carefully before you invest and keep it for future
reference. It includes information you should know before investing. We hope you
will easily find and understand the information you need but if you have any
suggestions for improvement--or if you need any help--please ask your Registered
Representative.
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Building A, Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782), or
visit our website at www.mainstayfunds.com.
The Statement of Additional Information (SAI) is incorporated by reference into
this Prospectus and also has been filed with the Securities and Exchange
Commission (SEC). For a free copy of the current SAI write to NYLIFE
Distributors, Inc. or call 1-800-MAINSTAY. The SEC maintains a website
(www.sec.gov) that contains the SAI, material incorporated by reference, and
other information regarding registrants that file electronically with the SEC.
- --------------------------------------------------------------------------------
[LOGO] MainStay(R) Funds
<PAGE>
This page intentionally left blank
2
<PAGE>
- --------------------------------------------------------------------------------
What's Inside?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
Tell Me Quickly page
================================================================================
<S> <C>
The MainStay Funds ........................................................ 1
A Quick Overview...Understanding The MainStay Funds ....................... 4
<CAPTION>
================================================================================
Tell Me the Key Facts
================================================================================
Analyze the Costs of Investing: Two Kinds of Fees ......................... 6
If You Invest $1,000, You Might Pay ....................................... 6
Descriptions of Each Fund ................................................. 11
General Investment Considerations ......................................... 18
Decide Whether to Pay a Sales Charge Now, Later..or Maybe Never ........... 20
Consider Reducing Your Sales Charge ....................................... 22
Open an Account/Buy Shares ................................................ 23
Know How to Sell and Exchange Shares ...................................... 25
Decide How to Receive Your Earnings ....................................... 27
Understand the Tax Consequences ........................................... 28
Know With Whom You're Investing ........................................... 29
Know Your Rights as a Shareholder ......................................... 33
<CAPTION>
================================================================================
Tell Me the Details
================================================================================
The Trust ................................................................. 34
Other Information About the Funds ......................................... 34
Description of Investments and Investment Practices ....................... 35
Manager, Sub-Advisers and Distributor ..................................... 39
How to Purchase Shares of the Funds ....................................... 40
Alternative Sales Arrangements ............................................ 42
Redemptions and Exchanges ................................................. 44
Tax-Deferred Retirement Plans ............................................. 45
Net Asset Value ........................................................... 46
Portfolio Transactions .................................................... 46
Tax Information ........................................................... 46
Other Information ......................................................... 46
Appendix A: Description of Securities Ratings ............................. 46
</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 11-17. 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 7 for your Fund's one-time and ongoing fees and
the impact of those costs on a $1,000 investment.
- --------------------------------------------------------------------------------
- -----
7
- -----
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application, and have your Registered
Representative place the order. He or she can be invaluable here.
Make sure to provide complete information, including who will own the account,
and certify your Social Security number or Taxpayer I.D. number. This is also
the time to decide how you want to receive earnings--in cash or additional
shares--and whether you want telephone privileges and to make other choices that
will affect how you access your investments. (You may also place the order
directly with MainStay.)
For more on opening an account--including opening an account directly--see page
23.
- --------------------------------------------------------------------------------
- -----
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 24 and 46.
- --------------------------------------------------------------------------------
- -----
9
- -----
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution and
marketing, investment management, and shareholder services. Fees may be charged
on different schedules but the Fund accrues these expenses daily. You're not
charged directly, the Fund pays the fees to the firms who provide the services,
and then deducts the amounts from the Fund's assets. This, consequently, reduces
the NAV of your shares.
To learn more, see pages 6-10.
- --------------------------------------------------------------------------------
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, later ... or maybe never
================================================================================
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. Alternatively, you may pay no sales charge--unless you
sell your shares within one year of purchase (you'll own "Class C" shares).
Purchasing Class B or Class C shares 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. There is no conversion feature applicable to Class C
shares. [Thus, Class C shareholders pay higher ongoing fees than Class A
shareholders for the life of their investment.]
For a list of the pros and cons of each choice, see page 21.
- --------------------------------------------------------------------------------
- -----
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 22 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, have them automatically reinvested
in more shares (with no sales charge) or a combination of both.
To learn more, see page 27.
- --------------------------------------------------------------------------------
- -----
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 MainStay Fund. You can only exchange
shares of the same class. An exchange is considered a sale of one Fund and a
purchase of another and may have tax consequences.
If you own Class B or Class C shares you may pay a charge when you redeem your
shares, depending on the length of time you've held the shares. MainStay
provides a number of convenient ways to redeem your shares.
If you buy $1 million or more of Class Ashares and redeem them within a year of
the purchase, you may pay a sales charge.
To learn more, see pages 25-26 and 44-45.
- --------------------------------------------------------------------------------
- -----
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 28.
- --------------------------------------------------------------------------------
- -----
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 33.
- --------------------------------------------------------------------------------
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 42-44 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 39-40
for more details.
Management fees pay for the investment sub-advisers who invest your money and
for administrative services such as keeping records and providing you with
statements and reports. The Rule 12b-1 fees shown on pages 7-10 pay, for
example, commissions and marketing/promotional expenses. "Other" includes legal,
auditing, custodian, and other fees. See pages 39-40 for more details on fees.
- --------------------------------------------------------------------------------
Why read about costs? Costs are important since they may lower your earnings.
For example, a Fund with higher costs must perform better just to equal the
return of a Fund with lower costs. All things being equal, therefore, a
lower-cost Fund will begin with an advantage.
Lower fees alone, however, will not guarantee better total return performance.
For example, a Fund with no up-front sales charge may actually have higher
ongoing expenses. It may also leave you without a Registered Representative to
advise you. Before investing, you should be sure you understand the nature of
different costs.
Investing a million? The up-front sales charge is waived on investments of $1
million or more in Class A shares. But, there may be a contingent deferred sales
charge of 1% on redemptions (sales of shares) made within a year of the purchase
date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If You Invest $1,000, You Might Pay...
- --------------------------------------------------------------------------------
The "Examples" on the following pages are provided to help you understand the
various costs and expenses that an investor in each Fund will bear directly or
indirectly.
The examples on pages 7-10 are based on a hypothetical 5% annual return on an
investment of $1,000, and the estimated annual fund operating expenses reflected
in each chart under Sales Charges and Operating Expenses. Each pie chart
illustrates the expenses that would be paid by a shareholder for shares held for
a period of three years with the same assumptions.
The actual return on your investment, of course, may be more or less than 5%,
and the actual expenses may also be more or less than those shown. This, of
course, depends on a variety of factors, including the performance of the Fund.
The figures in the following charts, therefore, do not represent how your
investment will perform, nor do they show how the Funds have actually performed
in the past. They are strictly hypothetical examples.
- --------------------------------------------------------------------------------
Take Note: The lowest sales charge won't always be the least expensive option.
- --------------------------------------------------------------------------------
The contingent deferred sales charge for Class B shares declines the longer you
stay invested in the Fund (from 5% in year one to 0% after six years) and the
contingent deferred sales charge for Class C shares only applies for one year
following purchase; 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) with Class B and Class C shares. 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. Class C shares do not convert.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
SMALL CAP GROWTH FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.00% 1.00% 1.00%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.61% 0.61% 0.61%
---- ---- ----
Total Fund Operating Expenses 1.86% 2.61% 2.61%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 73 $ 26 $ 76 $ $
Expenses after 3 years $110 $ 81 $111 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
30 management fees 31 management fees management fees
7 12b-1 fees 31 12b-1 fees 12b-1 fees
18 other expenses 19 other expenses other expenses
-------------------------- -------------------------- --------------------------
$110 total sales charges $111 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
SMALL CAP VALUE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.00% 1.00% 1.00%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.61% 0.61% 0.61%
---- ---- ----
Total Fund Operating Expenses 1.86% 2.61% 2.61%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 73 $ 26 $ 76 $ $
Expenses after 3 years $110 $ 81 $111 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
30 management fees 31 management fees management fees
7 12b-1 fees 31 12b-1 fees 12b-1 fees
18 other expenses 19 other expenses other expenses
-------------------------- -------------------------- --------------------------
$110 total sales charges $111 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
BLUE CHIP GROWTH FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 1.00% 1.00% 1.00%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.62% 0.62% 0.62%
---- ---- ----
Total Fund Operating Expenses 1.87% 2.62% 2.62%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 73 $ 27 $ 77 $ $
Expenses after 3 years $111 $ 81 $111 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
30 management fees 31 management fees management fees
7 12b-1 fees 31 12b-1 fees 12b-1 fees
19 other expenses 19 other expenses other expenses
-------------------------- -------------------------- --------------------------
$111 total sales charges $111 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
EQUITY INCOME FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.70% 0.70% 0.70%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.62% 0.62% 0.62%
---- ---- ----
Total Fund Operating Expenses 1.57% 2.32% 2.32%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 70 $ 24 $ 74 $ $
Expenses after 3 years $102 $ 72 $102 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
21 management fees 22 management fees management fees
7 12b-1 fees 31 12b-1 fees 12b-1 fees
19 other expenses 19 other expenses other expenses
-------------------------- -------------------------- --------------------------
$102 total sales charges $102 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
8
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
GROWTH OPPORTUNITIES FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.70% 0.70% 0.70%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.62% 0.62% 0.62%
---- ---- ----
Total Fund Operating Expenses 1.57% 2.32% 2.32%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 70 $ 24 $ 74 $ $
Expenses after 3 years $102 $ 72 $102 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
21 management fees 22 management fees management fees
7 12b-1 fees 31 12b-1 fees 12b-1 fees
19 other expenses 19 other expenses other expenses
-------------------------- -------------------------- --------------------------
$102 total sales charges $102 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
<TABLE>
<CAPTION>
================================================================================
RESEARCH VALUE FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.85% 0.85% 0.85%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.62% 0.62% 0.62%
---- ---- ----
Total Fund Operating Expenses 1.72% 2.47% 2.47%
==== ==== ====
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 72 $ 25 $ 75 $ $
Expenses after 3 years $106 $ 77 $107 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 55 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
25 management fees 27 management fees management fees
8 12b-1 fees 31 12b-1 fees 12b-1 fees
18 other expenses 19 other expenses other expenses
-------------------------- -------------------------- --------------------------
$106 total sales charges $107 total sales charges $ total sales charges
and expenses and expenses and expenses
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
Sales Charges and Operating Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
GLOBAL HIGH YIELD FUND CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None None
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00% 1.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.50% 0.50% 0.50%
12b-1 Fees(2) 0.25% 1.00% 1.00%
Other Expenses 0.88% 0.88% 0.88%
---- ---- ----
Total Fund Operating Expenses(3) 1.63% 2.38% 2.38%
==== ==== ====
After Reimbursement
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Examples
- -----------------------------------------------------------------------------------------------------------------
=================================================================================================================
CLASS A CLASS B CLASS C
=================================================================================================================
<S> <C> <C> <C> <C>
Assuming No Assuming Redemption Assuming No Assuming Redemption
Redemption at the End of Each Period Redemption at the End of Each Period
---------- ------------------------- ---------- -------------------------
Expenses after 1 year $ 61 $ 24 $ 74 $ $
Expenses after 3 years $ 94 $ 74 $104 $ $
[THE FOLLOWING TABLES WERE REPRESENTED BY
PIE CHARTS IN THE PRINTED MATERIAL.]
$ 45 up-front sales charge $ 30 deferred sales charge $ deferred sales charge
15 management fees 16 management fees management fees
8 12b-1 fees 31 12b-1 fees 12b-1 fees
26 other expenses 27 other expenses other expenses
-------------------------- -------------------------- --------------------------
$ 94 total sales charges $104 total sales charges $ total sales charges
and expenses 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."
With respect to Class C shares, a contingent deferred sales charge of 1.00%
will be imposed on redemptions of Class C shares effected within one year
of the date of purchase.
(2) Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a distribution fee of up to 0.75% of average annual net assets is
treated as a sales charge for certain purposes. Because the distribution
fee is an annual fee charged against the assets of a Fund, long-term
shareholders may indirectly pay an amount that is more than the economic
equivalent of the maximum front-end sales charge permitted by rules of the
NASD. For a description of the distribution plans adopted by the Funds, see
"The Distributor."
(3) Absent voluntary fee waiver, the management fee would be 0.70% and total
fund operating expenses would be 1.83%, 2.58% and 2.58%, for Class A, Class
B and Class C, respectively.
10
<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 18-19,
"General Investment Considerations"; and pages 35-39, "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). Mr. Carryl is a Managing
Director of MacKay-Shields. He joined MacKay-Shields as a Director in 1992 with
twelve years of investment management and research experience. Mr. Carryl was
Research Director and Senior Portfolio Manager at Value Line, Inc. from 1978 to
1992. Messrs. Carryl and Spelman have acted as portfolio managers of the Fund
since its inception and also serve as portfolio managers of the Capital
Appreciation Fund and Total Return Fund.
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.
See page 34 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in common stocks and securities convertible into
common stocks of companies with market capitalizations at the time of purchase
within the capitalization spectrum defined by the Russell 2000 stock index. In
addition, the Fund has adopted a non-fundamental policy whereby it will invest
at least 80% of net assets in such securities.
As a matter of non-fundamental policy, an investment in any one company
generally will not exceed 3% of the Fund's net assets.
...other investments suitable for most or all MainStay Funds. (See pages 18-19,
"General Investment Considerations" and pages 35-39, "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>
================================================================================
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 34 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 18-19,
"General Investment Considerations" and pages 35-39, "Description of Investments
and Investment Practices," for details.)
GAMCO chooses securities for the Fund using fundamental securities analysis to
develop company earnings forecasts, selecting those securities which it
perceives to be undervalued or to otherwise have growth potential.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments and involve additional risks. (For more on risks of
investing in foreign securities, see page 34, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
HOWARD F. WARD
OF GABELLI ASSET MANAGEMENT
COMPANY (GAMCO INVESTORS, INC.)
Mr. Ward is a portfolio manager with Gabelli Asset Management Company. Prior to
joining GAMCO in 1995, Mr. Ward was Managing Director and Director of the
Quality Growth Equity Management Group of Scudder, Stevens and Clark, Inc., with
which he had been associated since 1982 and where he served as lead portfolio
manager for several of its registered investment companies. Mr. Ward has served
as portfolio manager since the Fund's inception.
13
<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 and
other equity income producing securities with the characteristics listed below:
Under normal market conditions...
...at least 65% of total assets in equity income-producing securities which
o the Sub-Adviser believes were undervalued when purchased;
o pay cash dividends;
o are listed on a national securities exchange or traded in the OTC market.
The Sub-Adviser will seek to invest primarily in equities which pay out
dividends and are deemed to be undervalued based on a number of factors. Those
may include: relative valuation, prospects for future earnings growth, ability
to grow dividends and corporate management.
...up to 35% of total assets in equity securities that do not pay regular
dividends, debt securities, U.S. government securities, cash or cash
equivalents.
...other investments suitable for most or all MainStay Funds. (See pages 18-19,
"General Investment Considerations" and pages 35-39, "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, Senior Managing Director and Chief Investment Officer
of MacKay-Shields. He joined the firm in 1982, became a Director in 1988,
Managing Director in 1991, a member of the Board of Directors in 1993, President
in 1994, and Senior Managing Director and Chief Investment Officer in 1996. He
is also a manager of the Convertible Fund, the Strategic Value Fund, the Value
Fund and the High Yield Corporate Bond Fund. Mr. Feinberg is a Director of
MacKay-Shields and has been a portfolio manager with the firm since 1992. For
the three years prior to joining MacKay-Shields he was an analyst for National
Securities and Research Corporation, and for the four years prior to that he
worked as a CPA/auditor for Peat Marwick Main & Company. He is also a manager of
the Convertible Fund, the Strategic Value Fund and the Strategic Income Fund.
Mr. Sheridan joined MacKay-Shields in 1996 and is an Associate Director.
Previously, he was an equity analyst at Arnhold & S. Bleichroder Capital. Each
portfolio manager has managed the Fund since its inception.
14
<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 pages 18-19,
"General Investment Considerations" and pages 35-39, "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 36, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JAMES AGOSTISI AND
PATRICIA S. ROSSI OF
MADISON SQUARE ADVISORS, INC.
Mr. Agostisi is a Director--Portfolio Management of Madison Square Advisors and
of New York Life Insurance Company. He has 14 years of investment experience at
New York Life and has been a Director--Portfolio Management of Madison Square
Advisors since its establishment. Ms. Rossi is Managing Director--Portfolio
Management of Madison Square Advisors and of New York Life. She joined New York
Life in 1995 as Head of Public Equities and has been a Managing
Director--Portfolio Management of Madison Square Advisors since its
establishment. Ms. Rossi has over 20 years of investment management and research
experience. Prior to joining New York Life, Ms. Rossi was a portfolio manager
for the United Church of Christ--Pension Boards. Mr. Agostisi and Ms. Rossi have
served as portfolio managers of the Fund since the Fund's inception.
15
<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 18-19,
"General Investment Considerations" and pages 35-39, "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,
JEFFREY A. KIGNER AND
G. TODD SILVA OF
JOHN A. LEVIN & CO., INC.
Mr. Levin has been Chairman and Chief Executive Officer of John A. Levin &Co.
(and President of its predecessor) since 1982. He has been Director, President
and Chief Executive Officer of Baker Fentress since June 1996. Mr. Kigner is
Co-Chairman and Chief Investment Officer of John A. Levin &Co. Mr. Kigner has
been a securities analyst and portfolio manager of John A. Levin & Co. (and its
predecessor) since 1984. He has been a Director of Baker Fentress since June
1996. Mr. Silva has been a Senior Portfolio Manager at John A. Levin & Co. since
February 1998. Prior to joining John A. Levin & Co., Mr. Silva was a portfolio
manager at Jennison Associates LLC and at Scudder, Stevens & Clark, Inc. and a
securities analyst at Putnam Investments. Messrs. Levin, Kigner and Silva have
been portfolio managers of the Fund since its inception.
16
<PAGE>
================================================================================
Global High Yield Fund
The Fund's objective is:
================================================================================
to seek to provide maximum current income by investing primarily in high yield
debt securities of non-US issuers. Capital appreciation is a secondary
objective. Certain of the Fund's investments are speculative.
Who should invest? Investors who seek an opportunity for potentially higher
income and overall return (and commensurately higher risk) by investing in
multiple global market sectors, including emerging markets.
See page 35 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 (Ba to B) and S&P (BB to B) or unrated securities
determined by the Sub-Adviser to be of comparable quality.
...in at least 3 different countries, which include countries with established
economies and emerging market countries, including, among others, those in Latin
America, Asia and other newly industrialized countries that the Sub-Adviser
believes present favorable opportunities.
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts. The Fund may also buy foreign currency options.
...other investments suitable for most or all MainStay Funds. (See pages 18-19,
"General Investment Considerations" and pages 35-39, "Description of Investments
and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The NAV of the Fund's shares will fluctuate depending on a number of
factors. Generally, when interest rates fall, the NAV rises, and when interest
rates rise, the NAV declines. Other factors such as changes in the perceived
creditworthiness of certain issuers, changes in the relative values of currency,
and changes in the average maturity of the Fund's investments can also affect
NAV.
The risks of investing in particular types of securities also may vary. For
example, some types of debt securities are particularly sensitive to interest
rate changes and may therefore be especially volatile. Others may entail unique
or special risks that can affect value. For example, securities rated BB or Ba
or below (sometimes called "junk bonds") are not considered "investment-grade"
and run greater risks of price fluctuations, loss of principal and interest,
default or bankruptcy by the issuer, and other risks which is why these
securities are considered speculative. (See page 38, "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 35-39, "Description of Investments and Investment Practices."
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JOSEPH PORTERA AND MAUREEN
MCFARLAND
OF MACKAY-SHIELDS FINANCIAL CORPORATION. Mr. Portera is a Director of
MacKay-Shields specializing in international bonds. He returned to
MacKay-Shields in December 1996 after working at Fiduciary Trust Company
International as a portfolio manager in international bonds. Mr. Portera served
as a portfolio manager at MacKay-Shields from 1991 to 1995. Previously, Mr.
Portera was a portfolio manager specializing in international debt securities at
ABN-AMRO Bank, N.V. from 1988 to 1991. Ms. McFarland is an Associate Director at
MacKay-Shields. She joined MacKay-Shields in 1997 as Currency Overlay Manager in
the Global Division. Prior to joining the company, Ms. McFarland was employed at
Brown Brothers Harriman & Co., where she managed global fixed income portfolios.
Mr. Portera and Ms. McFarland have managed the Fund since its inception. Mr.
Portera is also a manager of the International Bond Fund and the Strategic
Income Fund.
17
<PAGE>
================================================================================
General Investment Considerations
================================================================================
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MUTUAL FUNDS
================================================================================
- --------------------------------------------------------------------------------
The share price of a Fund will fluctuate
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The value of the securities in a Fund and the share price (NAV) of that Fund
will fluctuate. Many factors can affect the value of securities, including:
o conditions in the securities markets;
o business success of the companies that issued the securities;
o creditworthiness of the companies that issued the securities;
o interest rates;
o average maturity of the Fund's nonequity or debt investments;
o foreign currency exchange rates (where applicable); and
o other factors.
- --------------------------------------------------------------------------------
Funds aren't guaranteed
- --------------------------------------------------------------------------------
Remember, mutual funds are not guaranteed or federally insured, even if you buy
them through a bank. MainStay recommends that you speak with your Registered
Representative to learn about other smart ways to help protect your money based
on the level of risk you are willing to take.
- --------------------------------------------------------------------------------
Fundamental investment objectives
- --------------------------------------------------------------------------------
The investment objective of each Fund is fundamental, which means it can't be
changed without shareholder approval.
- --------------------------------------------------------------------------------
Read the prospectus
- --------------------------------------------------------------------------------
You need to consider as many factors as possible when making an investment
decision--which is why it's important to read the prospectus.
- --------------------------------------------------------------------------------
FUND DIVERSIFICATION
Each of the Funds, except the Global High Yield Fund, is "diversified" for the
purposes of the Investment Company Act of 1940, as amended ("1940 Act").
Global High Yield Fund is "nondiversified" for the purposes of the 1940 Act,
meaning that it may invest a greater percentage of its assets in the securities
of one issuer than a diversified fund. As a "nondiversified" fund, Global High
Yield Fund may be more susceptible to risks associated with a single economic,
political, or regulatory occurrence than a diversified fund might be. However,
the Global High Yield Fund intends to qualify as a "regulated investment
company" under provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and therefore will be subject to diversification limits requiring that,
as of the close of each fiscal quarter:
o no more than 25% of its total assets may be invested in the securities of a
single issuer (except for U.S. government securities); and
o with respect to 50% of its total assets, no more than 5% of such assets may
be invested in the securities of a single issuer (except for U.S.
government securities) or invested in more than 10% of the outstanding
voting securities of a single issuer.
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions--for temporary defensive
purposes--each Fund may invest without limit in cash and cash equivalents (as
defined on page 35 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.
18
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The effects of trading costs on your total return
"Portfolio turnover" is the term used in the industry for measuring the amount
of trading that occurs in a fund's portfolio during the year. A 100% turnover
rate, for example, means that, on average, every security in the portfolio has
been replaced once during the year.
Funds with high turnover rates (over 100%) often have higher transaction costs
(which are paid by the fund) and may generate short-term capital gains (on which
you'll pay taxes, even if you don't sell any shares by year-end).
The Small Cap Growth Fund estimates that its portfolio turnover rate will not
exceed 150%. The Small Cap Value Fund estimates that its portfolio turnover rate
will be less than 100%. The Blue Chip Growth Fund estimates that its portfolio
turnover rate will not exceed 100%. The Equity Income Fund estimates that its
portfolio turnover rate will not exceed 150%. The Growth Opportunities Fund
estimates that its portfolio turnover rate will not exceed 110%. The Research
Value Fund estimates that its portfolio turnover rate will not exceed 120%. The
Global High Yield Fund estimates that its portfolio turnover rate will not
exceed 175%.
A fund with consistently higher total returns and higher turnover rates than
another fund may actually be achieving better performance precisely because the
managers are active traders. You should be aware that the "total return" figure
(also found as a line item in a fund's "Financial Highlights" table) already
includes portfolio turnover costs.
- --------------------------------------------------------------------------------
19
<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),
or if you sell your shares within one year of purchase (Class C 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
Class A, Class B and Class C 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.
20
<PAGE>
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21
<PAGE>
================================================================================
WHAT ARE THE DIFFERENCES IF YOU...
...PAY UP-FRONT (CLASS A SHARES)?
================================================================================
Since some of your investment goes to pay a sales charge up-front, you start off
owning fewer shares. But, you're usually better off paying up-front if you:
o plan to own the shares for an extended period of time, since the Rule 12b-1
fees on Class B and Class C shares will eventually exceed the cost of the
up-front sales charge; or
o qualify for a reduced sales charge (see page 22, "Consider Reducing Your
Sales Charge," for details).
You pay lower ongoing Rule 12b-1 fees--which means there's more net income to
pay you higher dividends per share.
You pay no sales charge when you redeem/sell your shares (except if you bought
more than $1 million of shares and redeemed within 1 year, see page 22).
- --------------------------------------------------------------------------------
If there aren't enough shares...
When you sell Class B or Class C shares, the Fund is permitted to sell
additional Class B or Class C shares to cover the cost of any applicable sales
charge. If you don't own enough extra Class B or Class C shares to do this, the
sales charge will be taken from the proceeds of your sale, reducing the amount
paid to you.
If it's automatic reinvestment...
You don't pay any sales charge (Class A, Class B or Class C ) on shares bought
through the automatic reinvestment of dividends or capital gains. The full
amount goes toward buying more shares.
- --------------------------------------------------------------------------------
VS
================================================================================
...PAY WHEN YOU REDEEM/SELL (CLASS B SHARES)?
================================================================================
You pay no up-front sales charge, your full investment goes toward buying
shares, so you start off owning more shares.
The ongoing Rule 12b-1 fees are higher than the Rule 12b-1 fees charged to Class
A shares, which means:
o you receive lower dividends;
o your NAV will generally be lower than the Class A shares' NAV; and
o therefore, total performance per share will be lower than the Class A
shares (but you'll own more shares).
You may pay a sales charge if you sell shares within the next 6 years (there are
exceptions; see page 43, "Deferred Sales Charge Class B Shares--Contingent
Deferred Sales Charge, Class B"):
o the sales charge drops from 5% in the first year to 0% after six years,
o it's assumed you're selling the shares you've owned the longest, so you pay
the lowest possible sales charge,
o if you sell a Fund's shares, the sales charge will be based on the lower of
the current NAV of Fund shares less dividends and distributions or the
price you originally paid for those shares.
- --------------------------------------------------------------------------------
Take note: If you hold Class B shares for eight years they will be automatically
converted to Class A shares, which pay lower 12b-1 fees, at the end of the
calendar quarter occurring eight years after the date a shareholder purchases
their shares.
- --------------------------------------------------------------------------------
22
<PAGE>
VS
================================================================================
...PAY ONLY IF YOU REDEEM/SELL WITHIN ONE YEAR OF PURCHASE (CLASS C SHARES)?
================================================================================
You pay no up-front sales charge, your full investment goes toward buying
shares, so you start off owning more shares.
The ongoing Rule 12b-1 fees are higher than the Rule 12b-1 fees applicable to
Class A shares for the life of the Class C investment, which means:
o you receive lower dividends;
o your NAV will generally be lower than the Class A shares' NAV; and
o therefore, total performance per share will be lower than the Class A
shares (but you'll own more shares).
You may pay a 1% contingent deferred sales charge if you sell your shares
within one year from the date of purchase. (See page __, "Deferred Sales
Charge Class C shares - Contingent Deferred Sales Charge, Class C")
- --------------------------------------------------------------------------------
Take note: Unlike Class B shares, there is no conversion feature applicable to
Class C shares. Thus, Class C shareholders pay higher ongoing Rule 12b-1 fees
for the life of their investment.
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
Consider Reducing Your Sales Charge
- --------------------------------------------------------------------------------
THE REINVESTMENT PRIVILEGE MAY HELP YOU AVOID SALES CHARGES
When you sell shares, you have the right--for 30 days--to reinvest any or all of
the money in the same class of any MainStay Fund without paying another sales
charge (as long as those shares haven't been reinvested once already). If you've
paid a sales charge when you redeem (Class B shares), you'll receive a pro-rata
credit for reinvesting.
Note: Reinvestment won't relieve you of any tax consequences on gains realized
from the sale. The deductions for losses may, however, be denied and, in some
cases, sales charges may not be taken into account in computing gains or losses
if the reinvestment privilege is exercised.
COMBINING PURCHASES LOWERS THE CHARGE
Generally, you can reduce a sales charge on purchases of Class A shares based on
how much you've already invested. The sales charge will be calculated on the
total net asset value of all the MainStay Fund shares you own--excluding Money
Market Fund shares. This is helpful because the more you invest with MainStay,
the lower the sales charge. (See "Alternative Sales Arrangements," page 42.)
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, Class C shares or if
you purchased $1 million or more of Class A shares) if you redeem shares under
the Systematic Withdrawal Plan to pay scheduled monthly premiums on insurance
issued by New York Life or an affiliate.
SIGN A LETTER OF INTENT (LOI)
If you qualify, you can sign a letter stating your intention to invest at least
$100,000 within the next 24 months in Class A shares of one or more MainStay
Funds and to pay the up-front sales charge. The current sales charge will be
based on the total amount you intend to invest (the more you invest, the smaller
the sales charge). See "Alternative Sales Arrangements," page 42. For more
information on LOIs, call your Registered Representative or MainStay Shareholder
Services, Inc. ("MSS") at 1-800-MainStay and see "Letter of Intent (`LOI')" in
the SAI.
INVEST $1,000,000 OR MORE
If you invest $1,000,000 or more in Class A shares of one or more MainStay
Funds, and don't sell the shares for at least one year, the up-front sales
charge is waived. If you sell the shares within one year, you may pay a sales
charge of 1% upon sale. See page 43, "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 42 for the full listing.)
- --------------------------------------------------------------------------------
24
<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, Class B or Class C shares;
o amount of the investment;
o your certified Social Security number or Taxpayer I.D. number;
o financial information;
o employer information; and
o other requested information.
================================================================================
HOW TO BUY SHARES
================================================================================
[GRAPHIC]
SEND A CHECK TO YOUR REGISTERED REPRESENTATIVE WITH THE APPLICATION
You'll pay the next NAV that's set after your order is received and accepted,
plus any sales charge if purchasing Class A shares. Your check must be in U.S.
dollars and drawn on a U.S. bank. Include the account number, Fund name and
class of shares (Class A or Class B) you wish to buy. If the check doesn't
clear, your order will be cancelled and you could be liable for losses or fees.
We also reserve the right to limit the number of checks processed at one time.
You may send additional investments (minimum $50 each check) directly to: The
MainStay Funds, PO Box 8401, Boston, MA 02266-8401. Please include your fund and
account number and class of shares with all checks.
[GRAPHIC]
HAVE YOUR REGISTERED REPRESENTATIVE ORDER BY TELEPHONE...
... between 9:00 AM and 4:00 PM Eastern time on any day the New York Stock
Exchange is open. You'll pay the next NAV that's set after your order is
received in good order, plus any sales charge for Class A shares. Have your
Registered Representative call MSS. Purchase orders effected by telephone are
subject to a purchase minimum of $5,000 per Fund. MSS must receive your payment
(and the application, if it's your initial investment) within the next 3
business days. All calls are recorded.
25
<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, Class B shares or Class C
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 46 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]
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 41, "How to Purchase Shares of the Funds--By Wire," for the wire
address.) No wires are accepted on days when the New York Stock Exchange is
closed, or on Martin Luther King Day, Columbus Day or Veterans Day, because the
bank that would receive your wire is closed.
The fastest way to invest
Wiring will reduce the waiting time on selling shares because your money will be
cleared right away. If you buy by check and quickly decide to sell, the Fund may
withhold payment for up to 10 days to allow the check to clear.
[GRAPHIC]
SET UP A SYSTEMATIC INVESTMENT PLAN
Through payroll deductions or AutoInvest, you may open an account by authorizing
your bank to automatically send money on a regular schedule to purchase shares
of one or more MainStay Funds. The initial minimum is $100 per Fund per class of
share for the Funds offered in this prospectus. Subsequent minimum investments
are $50. (See page 41, "How to Purchase Shares of the Funds--Automatic
Investments," for waiving minimums and for details on AutoInvest.)
26
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell and Exchange Shares
- --------------------------------------------------------------------------------
PLACE YOUR SELL ORDER DIRECTLY OR THROUGH YOUR REGISTERED REPRESENTATIVE, IF
ALLOWED BY THE BROKER-DEALER
If you place the order through your Registered Representative:
o MSS must receive the order with all the information, signatures, and
documentation necessary to carry out the order ("good order").
o Your shares are then priced at the next NAV set for the Fund (either 4:00
PM Eastern time that day, or the next day, if the order is placed after
4:00 PM Eastern time) after receipt of your order.
IF YOU PLACE THE ORDER DIRECTLY, YOU CAN DO IT BY WRITTEN REQUEST OR IN ONE OF
THE FOLLOWING THREE WAYS
When you want to use one of MainStay's alternative sell privileges, call
1-800-MainStay to verify that the options you want are on record--before you
need to use them.
You may also establish a Systematic Exchange Program to have a minimum of $100
exchanged periodically from any MainStay Fund to another MainStay Fund within
the same class of shares. The Fund from which exchanges are made must have an
account value of at least $10,000 at the time the Systematic Exchange Program is
established. (See page 45, "Redemptions and Exchanges--Exchange Privileges," for
details.)
- --------------------------------------------------------------------------------
Your shares could be sold involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we have the right to sell the shares in any account valued
at less than $250, provided that the value isn't based on fluctuations in market
prices.
We'll give you 60 days' written notice to allow you to add to your account and
avoid the redemption.
To avoid paying a reporting penalty, we may also sell your shares if you haven't
given us a certified Taxpayer I.D. number.
- --------------------------------------------------------------------------------
OPTION 1
USE A SYSTEMATIC WITHDRAWAL PLAN
[GRAPHIC]
o Requires at least $10,000 in the account at time of request and shares must
not be in certificate form.
You may arrange to sell shares equal to $100 or more from any Fund, on a monthly
basis. Shares will be sold automatically to cover the amount plus any applicable
sales charge.
Selling shares may result in a gain or loss and, therefore, may be subject to
taxation. Consult your tax adviser on the consequences. MainStay may end this
plan at any time, or begin charging up to $5 per sale after 30 days' written
notice to you.
No sales charges
There are no deferred sales charges on shares sold systematically to pay
scheduled monthly premiums on policies issued by New York Life or an affiliate
and on systematic withdrawals up to an annual total of 10% of the value of a
shareholders' Class B shares in a Fund.
Words to the wise
We don't recommend using this plan during times when you're regularly buying
shares. You'll be paying new sales charges just to replace the shares you're
selling. Also remember, the proceeds from the sale of your shares aren't
dividends or income. If you sell more than your Fund is earning for you,
eventually, your account will be worth less than your original investment and,
ultimately, you will sell all of your shares.
Systematic withdrawal plans established by phone are subject to the procedures
applicable to telephone sales.
- --------------------------------------------------------------------------------
You have help
If permitted by the broker-dealer, your Registered Representative may sell or
exchange your shares, set up a systematic withdrawal plan for you or change your
address of record by phone, unless you notify us in writing not to allow it.
- --------------------------------------------------------------------------------
27
<PAGE>
OPTION 2
MAKE A TELEPHONE REQUEST:
1-800-MAINSTAY
You may sell or exchange shares directly over the phone.
[GRAPHIC]
o Minimum amount: $500 for exchanges
o You automatically have this privilege unless you notify us in writing that
you do not want it.
Whether you're buying, selling, or requesting a wire transfer or a check, the
price you receive is the next price (NAV) determined for the Fund (either at
4:00 PM Eastern time that day; or at 4:00 PM the next day, if the order is
placed after 4:00 PM Eastern time) after receipt of your order.
Your broker-dealer must receive your order by 4:00 PM, and is responsible for
sending it in by 5:00 PM the day you place it.
o Be ready to present your Social Security number or Taxpayer I.D. number
over the phone.
o You can only exchange by phone between accounts with identical names,
addresses and Social Security numbers/Taxpayer I.D. numbers. Transfers
between different accounts are only allowed if made in writing and include
the proper information--ask your Registered Representative.
Telephone redemptions are not permitted for shares:
o represented by certificates;
o bought within the previous 10 calendar days; or
o owned by someone whose address of record has changed within the previous 30
days.
Telephone exchanges are not permitted for shares represented by certificates.
- --------------------------------------------------------------------------------
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; Class C shares for Class C shares) between MainStay Funds without a
sales charge. There are three 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; or
o exchange Class C shares out of the Money Market Fund and into another Fund
and redeem within 1 year of the original purchase.
You may not exchange shares between classes, or vice versa. If you sell Class B
or Class C shares and then buy Class A shares, you may have to pay a deferred
sales charge on the Class B or Class C shares, as applicable, and pay an initial
sales charge on the Class A shares.
When exchanged shares are redeemed, any applicable sales charge will be charged.
What if you buy by check then quickly sell? We may withhold payment for up to 10
days to allow the check to clear.
- --------------------------------------------------------------------------------
If you're requesting a wire transfer by phone
o Minimum amount: $5,000
o Limit: One every 30 days
o Authorization: You must select this option on your application initially or
request it in writing at a later date.
After receiving your sell order by phone, we will send the proceeds by bank wire
to your designated bank account the next business day. There is a $5.00 fee for
this service and, in addition, your bank may charge you a fee to receive the
wire transfer.
If you're requesting a check by phone
o Maximum amount: $100,000
The check will be payable to you--as the name (or names) appear on the
account--and mailed to the address appearing on the account. (See page 44,
"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.
28
<PAGE>
- --------------------------------------------------------------------------------
Decide How to Receive Your Earnings
- --------------------------------------------------------------------------------
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most Funds earn either dividends from stocks, interest from bonds and other
securities, or both. A mutual fund, however, always pays this income to you as
"dividends." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
When the Funds pay
The Global High Yield Fund declares and distributes any dividends monthly. The
other Funds declare and distribute any dividends quarterly.
CAPITAL GAINS
Funds earn capital gains when they sell securities in their portfolio at a
profit.
When the Funds pay
At the end of each fiscal year, each MainStay Fund matches its gains against its
losses. If the balance results in a gain, the Fund will distribute the gain to
shareholders.
- --------------------------------------------------------------------------------
When are you paid? On the first business day of each month after a dividend is
declared.
- --------------------------------------------------------------------------------
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your Registered Representative (if permitted by the
broker-dealer) or MainStay directly. If you don't make a choice on your
application, your earnings will be automatically reinvested in the same class of
shares of the same Fund. In order to reinvest dividends and/or capital gains in
another Fund, you must have an established account in that class of shares of
that Fund. Here are your choices:
REINVEST EVERYTHING IN:
o the same Fund; or
o in another Fund of your choice.
TAKE THE DIVIDENDS IN CASH
Reinvest the capital gains in:
o the same Fund; or
o in another Fund of your choice.
TAKE THE CAPITAL GAINS IN CASH
Reinvest the dividends in:
o the same Fund; or
o in another Fund of your choice.
TAKE A PERCENTAGE OF THE DIVIDENDS IN CASH AND REINVEST THE REMAINDER IN:
o the same Fund.
TAKE A PERCENTAGE OF THE CAPITAL GAINS IN CASH AND REINVEST THE REMAINDER IN:
o the same Fund.
TAKE EVERYTHING IN CASH
29
<PAGE>
- --------------------------------------------------------------------------------
Understand the Tax Consequences
- --------------------------------------------------------------------------------
Each Fund intends to be treated as a regulated investment company under
subchapter M of the Code. As a regulated investment company, each MainStay Fund
is required to distribute at least 90% of its:
o investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of any net
long-term capital losses); and
o net tax-exempt income.
"Net" means the amount remaining after tax deductible expenses (expenses reduce
"gross" earnings: in other words, the amount the Fund can pay to you.)
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends you receive from The MainStay Funds are taxable,
whether you take them as cash or automatically reinvest them. Some dividends
will be taxable as long-term capital gains, and some long-term gains will be
taxable at a maximum federal tax rate of 28% and others at a maximum federal tax
rate of 20%.
Tax-free dividends are different
Dividends earned from tax-exempt securities will usually be free from federal
tax. Your MainStay year-end statement will provide full tax information.
MainStay keeps track of your tax status and will mail your tax report each year
by January 31. This report will tell you which dividends and redemptions should
be treated as taxable ordinary income, which, if any, as tax-exempt income, and
which, if any, as long- and short-term capital gains.
Retirement plans
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
Taxes on foreign investment income
Income earned from investments in foreign countries may be withheld by those
countries as income taxes. Under certain circumstances, the Fund may elect to
pass along tax credits or deductions to you for foreign income taxes paid,
although there are no assurances that the Fund will be able to do so, or that
the credits or deductions will result in a tax benefit to you.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
================================================================================
WHO RUNS THE FUNDS' DAY-TO-DAY BUSINESS?
================================================================================
MainStay Management, Inc. (the "Manager"), 300 Interpace Parkway, Building A,
Parsippany, NJ 07054, serves as the Funds' manager, handling business affairs
for the Funds. MainStay Management, Inc. is a corporation organized under the
laws of Delaware and is an indirect wholly-owned subsidiary of New York Life
Insurance Company. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and keeps most of the financial and
accounting records required for the Funds. The Manager has delegated its
portfolio management responsibilities to the Sub-Advisers.
The Manager pays the salaries and expenses of all personnel affiliated with the
Funds, and all the operational expenses that aren't the responsibility of the
Funds, including the fee paid to the Sub-Advisers. (See page 39, "Manager,
Sub-Advisers and Distributor," and the SAI for more details.)
For its services, the Fund pays the Manager a monthly fee. (See page 39,
"Manager, Sub-Advisers and Distributor".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
MacKay-Shields Financial Corporation ("MacKay-Shields"), 9 West 57th St., New
York, NY 10019, is the Sub-Adviser to the Small Cap Growth Fund, Equity Income
Fund and Global High Yield Fund. The firm was incorporated in 1969 as an
independent investment advisory firm and was privately held until 1984 when it
became a wholly-owned but autonomously-managed subsidiary of New York Life
Insurance Company; it is now an indirect wholly-owned subsidiary of New York
Life Insurance Company. As of December 31, 1997, MacKay-Shields managed over
$28.8 billion in assets.
Madison Square Advisors, Inc. ("MSA"), 51 Madison Avenue, New York, New York
10010, is the Sub-Adviser to the Growth Opportunities Fund. MSA, which was
formed in 1997, is an indirect wholly-owned subsidiary of New York Life
Insurance Company. Although MSA is a newly formed investment adviser, its
investment professionals have provided investment advisory services to clients
through New York Life Insurance Company.
Gabelli Asset Management Company ("GAMCO"), One Corporate Center, Rye, New York
10580, serves as Sub-Adviser to the Blue Chip Growth Fund. GAMCO was formed in
1978, and as of December 31, 1997, acts as investment adviser to institutional
and individual investors with aggregate assets of approximately $4 billion.
GAMCO is a majority-owned subsidiary of Gabelli Funds, Inc.
John A. Levin & Co., Inc. ("John A. Levin & Co."), One Rockefeller Plaza, 25th
Floor, New York, New York 10020, serves as Sub-Adviser to the Research Value
Fund. Together with its predecessor, John A. Levin & Co. has provided investment
advisory services to clients since 1982. John A. Levin & Co. is an indirect
wholly-owned subsidiary of Baker, Fentress & Company ("Baker Fentress"), a
closed-end investment company listed on the New York Stock Exchange. As of March
31, 1998, John A. Levin & Co. manages approximately $8.4 billion in assets for
its clients.
Dalton, Greiner, Hartman, Maher & Co. ("DGHM"), 1100 Fifth Avenue South, Suite
301, Naples, FL 34102, serves as Sub-Adviser to the Small Cap Value Fund. DGHM
is a value driven investment manager specializing in smaller capitalization
equities. The firm, founded in 1982, manages more than $1 billion in assets.
DGHM is a partnership 51% owned by Value Asset Management, an investment manager
holding company. The remaining 49% of the firm is owned by Messrs. Dalton,
Greiner and seven other full time employees who autonomously manage the firm.
Under the supervision of the Funds' Trustees and the Manager, MacKay-Shields,
MSA, GAMCO, John A. Levin & Co., and DGHM (the "Sub-Advisers") are responsible
for making the specific decisions about buying, selling and holding securities;
selecting brokers and brokerage firms to trade for them; maintaining accurate
records; and, if possible, negotiating favorable commissions and fees with the
brokers and brokerage firms. For these services, the Sub-Advisers are paid a
monthly fee by the Manager, not the Funds. (See "Manager, Sub-Advisers and
Distributor," page 39, 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.
31
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
Prior performance does not represent historical performance of a Fund, nor is it
an indication or guarantee of future performance of a Fund, which may be higher
or lower than the performance shown below. Performance data for the Gabelli
Growth Fund and the MainStay VP Growth Equity Portfolio was calculated in
compliance with the method of performance calculation prescribed by the SEC for
mutual funds. Except as described below, performance data for each composite has
been prepared in compliance with the performance Presentation Standards of the
Association for Investment management and Research (AIMR-PPS(TM)).(1)(2)(3) AIMR
did not prepare or review this data. All performance information has been
provided by the Sub-Advisers and has not been verified or audited by the manager
or the Funds. For the periods prior to January 1, 1993, performance data for the
John A. Levin & Co. Large Cap Value Composite was not calculated in compliance
with AIMR standards because size-weighted composite returns were calculated
using end-of-period market values. Accounts in the composites were not subject
to the same types of expenses as the Funds or (except for one account in the
John A. Levin & Co. Large Cap Value Composite) the requirements of the
Investment Company Act of 1940 or the Internal Revenue Code, the limitations of
which might have adversely affected performance results. Prior performance
reflects actual expenses incurred by the comparison fund and/or accounts in the
composite.(2) Estimated Fund expenses are higher, and therefore, if Fund
expenses had been applied, performance of the comparison fund and/or accounts in
the composite would have been lower.
GABELLI FUNDS, INC. AND GAMCO - PRIOR PERFORMANCE
Set forth below is the performance record for another mutual fund which is
managed by Gabelli Funds, Inc., an affiliate of GAMCO, which has investment
objectives and policies that are substantially similar though not identical to
those of the Blue Chip Growth Fund. In addition, Gabelli Funds, Inc. and GAMCO
intend that the Blue Chip Growth Fund and Gabelli Growth Fund will be managed by
the same personnel and will have substantially similar investment strategies,
techniques, and characteristics. The investment performance of Gabelli Growth
Fund is provided merely to indicate the experience of Gabelli personnel in
managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses of the Gabelli Growth Fund. Included for
comparison purposes are performance figures of the S&P 500 Index. It has been
adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
As of 12/31/97
--------------------------------------------------------------------------
One Three Five Ten
Year Year Year Year
Inception Total Total Total Total
Date Return Return Return Return
--------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Gabelli Growth Fund 4/10/87 42.6% 31.2% 19.4% 20.6%
S&P 500 Index 33.4% 31.2% 20.3% 18.0%
</TABLE>
JOHN A. LEVIN & CO. - PRIOR PERFORMANCE
The figures below show the past performance of John A. Levin & Co. in managing
accounts with investment objectives, policies, techniques and restrictions
substantially similar though not identical to those of the Research Value Fund.
The chart below shows average annual returns for a composite of the actual
performance of all large cap value accounts managed by John A. Levin & Co. since
October 31, 1982, except for accounts with assets under $1 million and accounts
managed under a broker-sponsored wrap-fee program.(2)
The figures reflect reinvestment of dividends and are net of expenses. Included
for comparison purposes are performance figures of the S&P 500 Index and the
Lipper Growth & Income Index. They have been adjusted to reflect reinvestment of
dividends.
(1) MacKay-Shields (and its small cap growth equity composite) has received a
Level 1 verification from an independent party for the period January 1,
1988 through the most recent quarter. An opinion is available on request,
as is a complete list and description of the firm's composites. No leverage
has been used in this composite. The asset mix of small cap growth equity
accounts may not be precisely comparable to the Russell 2000 Index. Net
returns are calculated quarterly, based on an assumed account size of $50
million which, based on MacKay's-Shields' standard fee schedule would be
subject to one-fourth of the annual fee of $245,000 or 0.12% per quarter.
The composite consisted of less than five accounts for the entire period.
Annual net returns, composite assets (in millions) and percentage of firm
assets were as follows at year ends 1988-1997: 10.6%, $19.8, 0.4%; 26.0%,
$24.7, 0.4%; 11.3%, $48.0, 0.7%; 65.5%, $78.8, 1.0%; 3.0%, $65.0, 0.8%;
23.9%, $53.5, 0.5%; -3.7%, $51.8, 0.4%; 34.9%, $45.5, 0.2%; 21.1%, $44.0,
0.2%; 14.4%, $103.5, 0.4%.
(2) With respect to the John A. Levin & Co. Large Cap Value Composite, for the
period through June 30, 1996, performance is that of the company's
predecessor. For the period from 1986 through 1989, the results shown
reflect the deduction of a 1% investment management fee payable quarterly
at the rate of .25% of ending market value. This is the maximum investment
management fee charged by John A. Levin & Co. Individual account fees may
have varied. For the period from January 1, 1990 through December 31, 1996,
returns reflect the deduction of the actual dollar-weighted fee rate paid
by all accounts in the composite. The dollar-weighted fee rate has been
calculated by dividing the quarterly investment management fees paid by the
accounts in the composite by the total composite asset value. This
dollar-weighed fee rate includes the performance fees paid by certain
accounts. Inclusion of the performance-based fee does not materially affect
the dollar-weighted fee rate. Composite assets (in millions) were as
follows at year-ends 1982-1997: $3; $16; $10; $43; $182; $245; $397; $823;
$960; $1,289; $1,531; $2,373; $2,889; $3,714; $5,110; and $5,723.
(3) With respect to DGHM's Small Cap Value Composite, performance is net of
actual management fees paid which were 1% per annum. The composite consists
of fewer than five accounts since its inception in July 1994. A complete
list of composites is available upon request. Annual net returns, composite
assets (in millions), percentage of firm assets and the standard deviation
of composite accounts were as follows: 1994 - .3%, $25, greater than 1%, 0;
1995 -13.4%, $20, greater than 1%, .30; 1996 - 30.2%, $21, 1%, .17; 1997 -
40%, $27, 2%, .33.
32
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of 12/31/97
-----------------------------------------------------------------------------
One Three Five Ten Since
Year Year Year Year Inception
Total Total Total Total Total
Return Return Return Return Return
<S> <C> <C> <C> <C> <C>
------ ------ ------ ------ ---------
John A. Levin & Co.
Large Cap Value Composite 23.12% 25.49% 17.77% 17.39% 18.87%*
S&P 500 Index 33.4% 31.2% 20.3% 18.0% 17.75%**
Lipper Growth & Income Index 26.96% 26.19% 18.06% 16.03% 15.86%**
</TABLE>
* From October 13, 1982
** From October 31, 1982
DGHM - PRIOR PERFORMANCE
The figures below show the past performance of DGHM in managing accounts with
investment objectives, policies, techniques and restrictions substantially
similar though not identical to those of the Small Cap Value Fund. The chart
below shows average annual returns for a composite of the actual performance of
all small cap value accounts managed by DGHM since July 1, 1994.
The figures reflect reinvestment of dividends and are net of fees. Included for
comparison purposes are performance figures of the Russell 2000 Index. It has
been adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
As of 12/31/97
-----------------------------------------------------------------------------
One Three Since
Year Year Inception
Total Total Total
Return Return Return
------ ------ ---------
<S> <C> <C> <C>
Dalton, Greiner, Hartman, Maher & Co.
Small Cap Value Composite 40.0% 27.4% 23.1%
Russell 2000 Index 22.4% 22.3% 20.5%
</TABLE>
NEW YORK LIFE AND MSA - PRIOR PERFORMANCE
Set forth below is the performance of a mutual fund which is managed by New York
Life, the parent of MSA, which has investment objectives and policies that are
substantially similar though not identical to those of the Growth Opportunities
Fund. In addition, New York Life and MSA intend that the Growth Opportunities
Fund and MainStay VP Growth Equity Portfolio will be managed by the same
personnel and will have substantially similar investment strategies, techniques,
and characteristics. The investment performance of MainStay VP Growth Equity
Portfolio is provided merely to indicate the experience of MSA personnel in
managing a similar portfolio.
These figures reflect reinvestment of dividends and distributions and are after
deduction of all fund fees and expenses of the MainStay VP Growth Equity
Portfolio. Included for comparison purposes are performance figures of the S&P
500 Index. It has been adjusted to reflect reinvestment of dividends.
<TABLE>
<CAPTION>
As of 12/31/97
----------------------------------------------------------------------------
One Three Five Ten
Year Year Year Year
Total Total Total Total
Return Return Return Return
------ ------ ------ ------
<S> <C> <C> <C> <C>
MainStay VP Growth Equity Portfolio 26.75% 26.79% 18.59% 16.87%
S&P 500 Index 33.4% 31.2% 20.3% 18.0%
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
MACKAY-SHIELDS - PRIOR PERFORMANCE
The figures below show the past performance of MacKay-Shields in managing
accounts with investment objectives, policies, techniques and restrictions
substantially similar though not identical to those of the Small Cap Growth
Fund. The chart below shows the market weighted average of the time weighted
returns for a composite of the actual performance of all small cap growth
accounts managed by MacKay-Shields since January 1, 1985.
The figures reflect reinvestment of income and dividends and are net of
expenses. Included for comparison purposes are performance figures of the
Russell 2000 Growth Index, which also reflects reinvestment of income and
dividends.
<TABLE>
<CAPTION>
As of 12/31/97
-----------------------------------------------------------------------------
One Three Five Ten
Year Year Year Year
Total Total Total Total
Return Return Return Return
------ ------ ------ ------
<S> <C> <C> <C> <C>
MacKay-Shields
Small Cap Growth Composite 14.4% 23.2% 17.4% 19.4%
Russell 2000 Growth Index 12.9% 18.1% 12.7% 13.5%
</TABLE>
WHO DISTRIBUTES THE MAINSTAY FUNDS?
NYLIFE Distributors Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, acts as the principal underwriter and distributor of the Funds' shares.
NYLIFE Distributors Inc. (the "Distributor") is a corporation organized under
New York law and is an indirect wholly-owned subsidiary of New York Life
Insurance Company. The Distributor offers shares of each Fund. In addition,
NYLIFE Securities Inc., an indirect wholly-owned subsidiary of New York Life
Insurance Company, and other broker-dealers offer shares of some or all of the
Funds pursuant to dealer agreements with the Distributor. The Distributor and
other broker-dealers pay commissions and service fees to Registered
Representatives. The Distributor also pays for printing and mailing prospectuses
and sales literature; and for any advertising for The MainStay Funds. For its
services, the Distributor is paid a monthly fee--the Rule 12b-1 fee--and retains
a portion of sales charges. (See page 37, "Manager, Sub-Advisers and
Distributor--The Distributor" for more details.)
WHO KEEPS TRACK OF YOUR ACCOUNT?
MainStay Shareholder Services Inc. (MSS) is the Funds' Transfer, Dividend
Disbursing and Shareholder Servicing Agent. MSS, whose address is 260 Cherry
Hill Road, Parsippany, NJ 07054, is an indirect wholly-owned subsidiary of New
York Life Insurance Company. MSS provides customer service, is responsible for
preparing and sending statements, confirms and checks, and keeps certain
financial and accounting records. MSS has entered into an agreement with Boston
Financial Data Services (BFDS), whose address is 2 Heritage Drive, North Quincy,
MA 02171. BFDS will perform certain of the services for which MSS is
responsible. In addition, the Funds may contract with other service
organizations, including broker-dealers and other financial institutions, which
will establish a single omnibus account for their clients with the Funds. The
service organizations will provide shareholder services to the shareholders
within the omnibus accounts and receive fees for those services from the Funds.
The Bank of New York is the custodian of the investments of the Funds and has
subcustodial agreements for holding the Funds' foreign securities.
34
<PAGE>
- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS
Any time you have a question about your account, you should:
o ask your Registered Representative;
o call 1-800-MainStay (1-800-624-6782) (between 8:00 AM and 6:00 PM Eastern
time); or
o write to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts,
02266-8401.
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT -- CALL 1-800-MAINSTAY
(1-800-624-6782)
You receive quarterly statements covering the Funds you own, including the
number and value of shares, dividends declared or paid and other information.
Confirmations
Every time you buy, sell or exchange shares between Funds, you'll receive a
confirmation in the mail shortly thereafter. It summarizes all the key
information: what you bought and sold, what it cost, the sales charge (if any),
and other vital data.
Financial reports
You will receive an annual financial statement for your Fund, examined by the
Fund's independent accountants. You will also receive semiannual financial
statements which are unaudited.
Each financial report shows as of the end of the reporting period:
o the investments owned by the Fund;
o the market value of each investment; and
o other financial information.
- --------------------------------------------------------------------------------
Keep your statements.
- --------------------------------------------------------------------------------
You may need them for tax reporting purposes.
- --------------------------------------------------------------------------------
Be alert: Mistakes can happen.
- --------------------------------------------------------------------------------
Always review your confirmations and statements immediately.
THE RIGHT TO HAVE ONE SHARE, ONE VOTE
o Every share issued by a Fund carries equal ownership rights.
o By owning shares, you're entitled to vote on certain issues and policies
regarding the Fund or class of shares you own. You have one vote per share
you own.
o You're entitled to approve the adoption of a new management or sub-advisory
agreement or plan of distribution relating to the Fund.
o You're also entitled to approve changes in the Fund's investment objective
or fundamental investment restrictions of the Fund.
THE RIGHT TO ATTEND MEETINGS
Although MainStay doesn't intend to hold annual shareholder meetings, you have
the right to call a meeting of shareholders for the purpose of voting upon
removal of a Trustee for cause. Removing a Trustee requires the approval of
two-thirds of the outstanding shares of The MainStay Funds. Generally,
shareholder meetings are only held when the Trustees recommend an action which
requires shareholder approval.
35
<PAGE>
- --------------------------------------------------------------------------------
Tell Me The Details
- --------------------------------------------------------------------------------
================================================================================
THE TRUST
================================================================================
The Trust is registered with the SEC as an open-end management investment
company under the 1940 Act. Each Fund has a separate investment objective or
objectives which it pursues through separate investment policies, as described
in Tell Me the Key Facts on pages 6 through 33 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 August 1, 1998,
___________ owned a controlling interest (as that term is defined in the 1940
Act) of the ______ Fund Class _ shares.]
================================================================================
OTHER INFORMATION ABOUT THE FUNDS
================================================================================
None of the Funds alone constitutes a complete investment program.
Investment decisions for each Fund are made independently from those of the
other accounts and investment companies that may be managed by the Sub-Advisers.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which one Fund invests at the same
time as another Fund, available investments or opportunities for sales will be
allocated equitably to each. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by a Fund or the price paid
or received by a Fund.
- --------------------------------------------------------------------------------
SMALL CAP VALUE FUND
- --------------------------------------------------------------------------------
It is expected that stock price performance for those firms that generate cash
flow substantially exceeding normal capital spending requirements generally
betters that of the equity market as a whole. At any given time, a large
percentage of the Fund's portfolio may consist of substantial free cash flow
generators. Sell decisions are driven by the Sub-Adviser's proprietary
multifactor model or a change in fundamental expectations. Positions are
eliminated when price appreciation renders a sale rating based on the
Sub-Adviser's valuation model.
The Fund may invest up to 15% of net assets in real estate investment trusts
("REITs"). REITs are pooled investment vehicles that invest primarily in either
real estate or real estate-related loans. The value of a REIT is affected by
changes in the value of the properties owned by the REIT or securing mortgage
loans held by the REIT. REITs are dependent upon cash flow from their
investments to repay financing costs. REITs are also subject to risks generally
associated with investments in real estate.
- --------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND
- --------------------------------------------------------------------------------
The Fund will generally invest in Blue Chip companies, with the Sub-Adviser
selecting those securities which it perceives to be undervalued or to otherwise
have growth potential. Blue Chip companies are those which occupy (or in the
Sub-Adviser's judgement have the potential to occupy) leading market positions
that are expected to be maintained or enhanced over time. Market leaders can be
identified within an industry as those companies which have: superior growth
prospects compared with other companies in the same industry; possession of
proprietary technology with the potential to bring about major changes within an
industry; and/or leading sales within an industry, or the potential to become a
market leader.
In addition, Blue Chip companies possess at least one of the following
attributes: faster earnings growth than its competitors and the market in
general; higher profit margins relative to its competitors; strong cash flow
relative to its competitors; and/or a balance sheet with relatively low debt and
a high return on equity relative to its competitors.
The Fund's investments will usually be sold when they lose their perceived value
relative to other similar or alternative investments. Specific sources of
information used to select securities for the Fund include: general economic and
industry data provided by the U.S. government, various trade associations;
annual and quarterly reports and Form 10-Ks; and direct interviews with company
management. Research is directed towards locating stocks that are undervalued
relative to their future earnings potential.
- --------------------------------------------------------------------------------
RESEARCH VALUE FUND
- --------------------------------------------------------------------------------
Under normal market conditions, the Fund invests at least 80% of its total
assets in common stock and other securities having equity characteristics. For
hedging purposes, the Fund may use options on securities, stock index options,
and stock index futures and related options. These investments involve certain
risks. See "Description of Investments and Investment Practices--Risk Management
Techniques". The Fund may also invest in debt securities, including U.S.
Government securities and corporate debt securities (such as bonds, notes and
debentures). Certain of the Fund's investments in debt securities will be
obligations which, at the time of purchase, are rated "A" or better by S&P or
Moody's or, if unrated, are of comparable quality as determined by the
Sub-Adviser.
36
<PAGE>
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 exposure. During periods of
high market valuations or adverse market conditions or for liquidity purposes,
all or any portion of the Fund's assets may be invested temporarily in high
quality debt securities or money market instruments, or held as cash.
- --------------------------------------------------------------------------------
GLOBAL HIGH YIELD FUND
- --------------------------------------------------------------------------------
Investors should understand that international fixed income investments involve
more risk than comparable domestic securities, due, in part, to fluctuating
currency values.
In making investments for the foreign and emerging markets sectors of the Fund,
the Sub-Adviser considers factors such as prospects for currency exchange and
interest rates, and inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions, and
credit quality of individual issuers. The Sub-Adviser will also determine, using
good faith and judgement, (1) the percentage of the Fund's assets to be invested
in each emerging market; (2) currency exposure (asset allocation across
currencies); and (3) diversified security holdings within each market.
The Fund may invest in participation interests in loans. Such participation
interests, which may take the form of interests in, or assignments of, loans,
are acquired from banks which have made loans or are members of lending
syndicates. The Fund's investments in loan participation interests will be
subject to its limitation on investments in illiquid securities and, to the
extent applicable, its limitation on investments in securities rated below
investment grade.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns and manage
portfolio risk more efficiently.
================================================================================
DESCRIPTION OF INVESTMENTS AND INVESTMENT PRACTICES
================================================================================
Information about the following types of investments, investment practices and
related risks appears below: Brady Bonds, Cash Equivalents, Floaters and Inverse
Floaters, Foreign Index-Linked Instruments, Foreign Securities, Lending of
Portfolio Securities, Loan Participation Interests, Mortgage-Backed and
Asset-Backed Securities, Repurchase Agreements, Risk Management Techniques,
Short Sales Against the Box, Swap Agreements, When-Issued Securities and Forward
Commitments, Zero Coupon Bonds and Risks of Investing in High Yield Securities
("Junk Bonds"). Investment restrictions that appear below or elsewhere in this
Prospectus that involve a maximum percentage of securities or assets shall not
be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, a Fund. For more information
about the investments, investment practices and risks described in this section,
please see the SAI.
- --------------------------------------------------------------------------------
BRADY BONDS
- --------------------------------------------------------------------------------
The Global High Yield Fund may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings. (For more information, see the SAI.)
- --------------------------------------------------------------------------------
CASH EQUIVALENTS
- --------------------------------------------------------------------------------
Each of the Funds may invest in cash or cash equivalents, which include, but are
not limited to: short-term obligations issued or guaranteed as to interest and
principal by any U.S. or foreign government or government agencies or
instrumentality thereof (including repurchase agreements collateralized by such
securities); obligations of banks (certificates of deposit, bankers' acceptances
and time deposits) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000, and obligations of other banks or savings
and loan associations if such obligations are federally insured; commercial
paper which at the date of investment is rated A-1 by S&P or P-1 by Moody's or,
if not rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue rated
AA or better by S&P or Aa or better by Moody's; short-term corporate obligations
which at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and other debt instruments not specifically described if such
instruments are deemed by the Trustees to be of comparable high quality and
liquidity.
37
<PAGE>
- --------------------------------------------------------------------------------
FLOATERS AND INVERSE FLOATERS
- --------------------------------------------------------------------------------
Each Fund may invest in floating rate debt instruments ("floaters"). The
interest rate on a floater is a variable rate which is tied to another interest
rate, such as a money-market index or Treasury bill rate. The Equity Income and
Global High Yield Funds may invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an inverse floater resets
in the opposite direction from the market rate of interest to which the inverse
floater is indexed. The leverage associated with inverse floaters may result in
greater volatility in their market values. Certain inverse floaters may be
determined to be illiquid securities.
- --------------------------------------------------------------------------------
FOREIGN INDEX-LINKED INSTRUMENTS
- --------------------------------------------------------------------------------
The Global High Yield Fund may invest in instruments issued by the U.S. or a
foreign government or by private issuers that return principal and/or pay
interest to investors in amounts which are linked to the level of a particular
foreign index. In the case of foreign-linked instruments linking the interest
component to a foreign index, the amount of interest payable will adjust
periodically in response to changes in the level of the foreign index during the
term of the foreign index-linked instrument. The risks of such investments
reflect the risks of investing in the index or other instrument, the performance
of which determines the return for the instrument. Tax considerations may limit
the Funds' ability to invest in foreign index-linked instruments.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES
- --------------------------------------------------------------------------------
Each Fund may purchase foreign securities. Foreign investments could be more
difficult to sell than U.S. investments. They also may subject the Fund to risks
different from investing in domestic securities. Investments in foreign
securities involve difficulties in receiving or interpreting financial and
economic information, possible imposition of taxes, higher brokerage and
custodian fees, possible currency exchange controls or other government
restrictions, including possible seizure or nationalization of foreign deposits
or assets. Foreign securities may also be less liquid and more volatile than
U.S. securities. There may also be difficulty in invoking legal protections
across borders.
In addition, investment in emerging market countries presents risks in greater
degree than those presented by investment in foreign issuers in countries with
developed securities markets and more advanced regulatory systems. Developing
countries have economic structures that are less mature. Furthermore, developing
countries have less stable political systems and may have high inflation,
rapidly changing interest and currency exchange rates, and their securities
markets are substantially less developed.
A portion of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will affect
the value of securities denominated or quoted in foreign currencies. Exchange
rate movements can be large and can endure for extended periods of time,
affecting either favorably or unfavorably the value of the Funds' assets. A Fund
may, however, engage in foreign currency transactions to protect itself against
fluctuations in currency exchange rates in relation to the U.S. dollar. See page
37, "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.
38
<PAGE>
- --------------------------------------------------------------------------------
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
- --------------------------------------------------------------------------------
Mortgage-backed and asset-backed securities are securities that derive their
value from underlying pools of loans that may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex instruments
such as collateralized mortgage obligations and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of issuers and the
creditworthiness of the parties involved. The ability of a Fund to successfully
utilize these instruments may depend in part upon the ability of the Sub-Adviser
to forecast interest rates and other economic factors correctly. Some securities
may have a structure that makes their reaction to interest rate changes and
other factors difficult to predict, making their value highly volatile. These
securities may also be subject to prepayment risk and if the security has been
purchased at a premium the amount of some or all of the premium may be lost in
the event of prepayment.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Each Fund may enter into domestic repurchase agreements to earn income. The
Global High Yield Fund may also enter into foreign repurchase agreements. A
repurchase agreement is an agreement whereby a Fund purchases a portfolio
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Fund's cost plus interest within a specified time (normally one
day).
The Funds may enter into reverse repurchase agreements. A reverse repurchase
agreement involves the sale of a security by a Fund and its agreement to
repurchase the instrument at a specified time and price. The Fund will maintain
a segregated account consisting of liquid assets to cover its obligations under
reverse repurchase agreements. Each Fund will limit its investments in reverse
repurchase agreements and other borrowing to no more than one-third of its total
assets. The use of reverse repurchase agreements by a Fund creates leverage
which increases a Fund's investment risk. If the income and gains on securities
purchased with the proceeds of reverse repurchase agreements exceed the cost of
the agreements, the Fund's earnings or NAV will increase faster than otherwise
would be the case; conversely, if the income and gains fail to exceed the costs,
earnings or NAV would decline faster than otherwise would be the case.
The Trustees have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Funds to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, a Fund could experience delays in recovering its investment or losses.
- --------------------------------------------------------------------------------
RISK MANAGEMENT TECHNIQUES
- --------------------------------------------------------------------------------
The Funds can use various techniques to increase or decrease their exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing put or call options on securities and securities
indexes.
The Funds can use these practices in an attempt to adjust the risk and return
characteristics of their portfolios of investments. When a Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If a Fund's
Sub-Adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the transaction
does not perform as promised.
The Equity Income and Global High Yield Funds may each enter into contracts for
the future delivery of debt securities or an index of debt securities that are
sufficiently correlated to its portfolio.
Each of the Funds may enter into contracts for the future delivery of securities
and stock index futures contracts to protect against changes in stock market
prices.
In addition, each Fund may, to the extent it invests in foreign securities,
enter into contracts for the future delivery of foreign currencies to protect
against changes in currency exchange rates for the same type of hedging
purposes, purchase and write put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the U.S. dollar cost of foreign securities
to be acquired, and enter into a variety of foreign currency transactions,
including forward foreign currency exchange contracts in order to protect or
hedge against the adverse effect that changes in future foreign currency
exchange rates may have on its investment portfolio or on its investment
activities that are undertaken in foreign currencies.
Each Fund may sell (write) covered put and call options and purchase put and
call options on any securities in which it may invest that are traded on U.S.
and foreign securities and options exchanges and in the over-the-counter market,
each in accordance with its respective investment objectives and policies.
Each Fund may engage in a strategy known as "married puts." This strategy is
most typically used when the Fund owns a particular common stock or security
convertible into common stock and wishes to effect a short sale against the box
(see "Short Sales Against the Box") but for various reasons is unable to do so.
39
<PAGE>
Subject to limitations with respect to options, the Fund may enter into a series
of stock and related option transactions to achieve the economic equivalent of a
short sale against the box. To implement this trading strategy, the Fund will
simultaneously execute with the same broker a purchase of shares of the common
stock and an "in the money" over-the-counter put option to sell the common stock
to the broker and generally will write an over-the-counter "out of the money"
call option in the same stock with the same exercise price as the put option.
The options are linked and may not be exercised, transferred or terminated
independently of the other.
The Funds may purchase put and call options on securities indexes to hedge
against risks of market-wide price fluctuations.
- --------------------------------------------------------------------------------
SHORT SALES AGAINST THE BOX
- --------------------------------------------------------------------------------
A short sale is a transaction in which a Fund sells through a broker a security
it does not own in anticipation of a possible decline in market price. A short
sale "against the box" is a short sale in which, at the time of the short sale,
a Fund owns or has the right to obtain securities equivalent in kind and amount.
Each of the Funds will only enter into short sales against the box. A Fund may
enter into a short sale against the box, among other reasons, to hedge against a
possible market decline in the value of the security owned. To effect a short
sale against the box, the Fund borrows from a broker the securities which are
sold in the short sale, and the broker holds the proceeds until the borrowed
securities are replaced. If the value of a security sold short against the box
increases, the Fund would suffer a loss when it purchases or delivers to the
selling broker the security sold short. If a broker with which the Fund has open
short sales were to become bankrupt, a Fund could experience losses or delays in
recovering gains on short sales. The Funds will only enter into short sales
against the box with brokers the Sub-Advisers believe are creditworthy. Short
sales against the box will be limited to no more than 25% of a Fund's total
assets.
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
- --------------------------------------------------------------------------------
The Funds may enter into interest rate, index and currency exchange rate swap
agreements for purposes of attempting to obtain a particular desired return at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Sub-Adviser's ability to predict
correctly movements in interest rates, indexes and currency exchange rates.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
Fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Sub-Adviser will cause a Fund to enter into swap agreements
only with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Funds' repurchase agreement guidelines.
Certain restrictions imposed on the Funds by the Internal Revenue Code may limit
the Funds' ability to use swap agreements. The swaps market is largely
unregulated. It is possible that developments in the swaps market and the laws
relating to swaps, including potential government regulation, could adversely
affect a Fund's ability to terminate existing swap agreements, to realize
amounts to be received under such agreements, or to enter into swap agreements.
Furthermore, swap agreements could have adverse tax consequences. See Tax Status
in the SAI for information regarding the tax considerations relating to swap
agreements.
- --------------------------------------------------------------------------------
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
- --------------------------------------------------------------------------------
Each Fund may from time to time purchase securities on a when-issued basis. Debt
securities are often issued on this basis. The price (or yield)of such
securities is fixed at the time a commitment to purchase is made, but delivery
and payment for the when-issued securities take place at a later date. During
the period between purchase and settlement, no payment is made by the Fund and
no interest accrues to the Fund. The market value of the when-issued securities
on the settlement date may be more or less than the purchase price payable at
settlement date. Similarly, each Fund may commit to purchase a security at a
future date at a price determined at the time of the commitment. The same
procedures for when-issued securities will be followed.
- --------------------------------------------------------------------------------
ZERO COUPON BONDS
- --------------------------------------------------------------------------------
The Funds may purchase zero coupon bonds, which are debt obligations issued
without any requirement for the periodic payment of interest. Zero coupon bonds
are issued at a significant discount from face value. Zero coupon bonds tend to
be more volatile than conventional debt securities.
- --------------------------------------------------------------------------------
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
- --------------------------------------------------------------------------------
The Research Value and Global High Yield Funds may, to varying degrees as
previously described under "Descriptions of Each Fund" and "Tell Me the
Details," invest in debt securities rated lower than Baa by Moody's or BBB by
S&P or, if not rated, determined to be of equivalent quality by the Sub-Adviser.
Such securities are sometimes referred to as junk bonds and are considered
speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. High yield bonds
may be regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of a
Fund to achieve its
40
<PAGE>
investment objective may, to the extent of its investment in high yield bonds,
be more dependent upon such creditworthiness analysis than would be the case if
the Fund were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, a Fund may incur additional expenses to seek recovery. In the case of
high yield bonds structured as zero coupon or payment-in-kind securities, the
market prices of such securities are affected to a greater extent by interest
rate changes and, therefore, tend to be more volatile than securities which pay
interest periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Fund could sell a high yield
bond, and could adversely affect and cause large fluctuations in the daily NAV
of the Fund's shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the portfolio security if the
Sub-Adviser deems it in the best interest of the shareholders.
================================================================================
MANAGER, SUB-ADVISERS AND DISTRIBUTOR
================================================================================
- --------------------------------------------------------------------------------
THE MANAGER
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, pays the Manager a monthly fee for services
performed at an annual percentage of the average daily net assets of that Fund
as follows:
<TABLE>
<CAPTION>
Annual
Rate
- --------------------------------------------------------------------------------
<S> <C>
Small Cap Growth Fund 1.00%
Small Cap Value Fund 1.00%
Blue Chip Growth Fund 1.00%
Equity Income Fund 0.70%
Growth Opportunities Fund 0.70%
Research Value Fund 0.85%
Global High Yield Fund 0.70%*
- --------------------------------------------------------------------------------
</TABLE>
* The manager has agreed to voluntarily reduce its fee payable to an annual
percentage of 0.50% of average daily net assets.
Each Fund, pursuant to an Accounting Agreement with the Manager, will bear an
allocable portion of the Manager's cost of performing certain bookkeeping and
pricing services. Each Fund pays the Manager a monthly fee for services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. The Manager is not responsible for
records maintained by the Funds' Custodian, Transfer Agent, Dividend Disbursing
and Shareholder Servicing Agent, or Sub-Advisers.
- --------------------------------------------------------------------------------
THE SUB-ADVISERS
- --------------------------------------------------------------------------------
Pursuant to the terms of the Sub-Advisory Agreements between the Manager and the
Sub-Advisers on behalf of each Fund, the Manager, not the Fund, pays the
Sub-Advisers a monthly fee for services performed at the annual rates as
follows:
<TABLE>
<CAPTION>
Annual
Rate
- --------------------------------------------------------------------------------
<S> <C>
Small Cap Growth Fund 0.50%
Small Cap Value Fund 0.50%*
Blue Chip Growth Fund 0.50%**
Equity Income Fund 0.35%
Growth Opportunities Fund 0.35%
Research Value Fund 0.425%***
Global High Yield Fund 0.35%****
- --------------------------------------------------------------------------------
</TABLE>
* of average daily net assets up to $250 million; .45% from $250 million to
$500 million and .40% in excess of $500 million.
** of average daily net assets up to $500 million; and .40% of average daily
net assets in excess of $500 million.
*** of average daily net assets up to $250 million; .3825% of average daily net
assets from $250 million to $500 million; and .34% of average daily net
assets in excess of $500 million.
**** To the extent that the Manager has agreed to voluntarily reduce its fee,
the Sub-Adviser has voluntarily agreed to do so proportionately.
- --------------------------------------------------------------------------------
THE DISTRIBUTOR
- --------------------------------------------------------------------------------
To compensate the Distributor for the services it provides and for the expenses
it bears in distributing shares and servicing shareholders of the Funds, each
Fund has adopted separate distribution plans pursuant to Rule 12b-1 under the
1940 Act for each class of shares of that Fund (the "Class A Plans," the "Class
B Plans," and the "Class C Plans," 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 and Class C Plans, each Fund pays the Distributor a monthly fee
which is an expense of the Class B or Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B or Class C
shares.
41
<PAGE>
Class B and Class C 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 or Class C shares of each Fund as
compensation for personal continuing services rendered to Class B and Class C
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 and Class C 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
43, "Alternative Sales Arrangements--Deferred Sales Charge Class B
Shares--Contingent Deferred Sales Charge, Class B" and page 44, "Alternative
Sales Arrangements--Deferred Sales Charge Class C Shares--Contingent Deferred
Sales Charge, Class C."
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.
The Distributor will advance to dealers who sell Class C shares of the Funds an
amount equal to 1% of the aggregate net asset value of the shares sold. [After
the first full year of a Class C investment, the Distributor will make such
payments quarterly to dealers based on the average net asset value of the Class
C shares which are attributable to shareholders for whom the dealers are
designated as dealers of record.]
In addition, with respect to Class A and Class B shares, the Distributor may pay
dealers an ongoing annual service fee equal to 0.25% of the aggregate net asset
value of shares held by investors serviced by the dealer. In later years, its
expenditures may be less than the distribution fee, thus enabling the
Distributor to realize a profit in those years. If the Plans for the Funds are
terminated, the Funds will owe no payments to the Distributor other than any
portion of the distribution fee accrued through the effective date of
termination but then unpaid.
Plan revenues may be used to reimburse third parties which provide various
services to shareholders who are participants in various retirement plans. These
services include aggregating and processing purchase and redemption orders for
participant shareholders, processing dividend payments, forwarding shareholder
communications, and recordkeeping. Persons selling or servicing different
classes of shares of the Funds may receive different compensation with respect
to one particular class of shares as opposed to another in the same Fund.
Class B shares will be automatically converted to Class A shares, which pay
lower 12b-1 fees, at the end of the calendar quarter occurring eight years after
the date a shareholder purchased their Class B shares. It is the Trust's
intention that all share conversions be made on a tax-free basis, and if this
cannot be reasonably assured, the Trustees reserve the right to modify or
eliminate this share class conversion feature. Class C shares do not have a
conversion feature.
================================================================================
HOW TO PURCHASE SHARES OF THE FUNDS
================================================================================
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
The three 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
and Class C shares and the dividends payable on Class B and Class C 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 and Class C 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 and
Class C shares will be less competitive than that of Class A shares. For
additional information on the features of Class A, Class B and Class C shares,
see Alternative Sales Arrangements, page 40.
- --------------------------------------------------------------------------------
BY MAIL
- --------------------------------------------------------------------------------
Initial purchases of shares of the Funds should be made by mailing the completed
application form to the investor's Registered Representative. Shares of any Fund
may be purchased at the NAV per share plus any applicable sales charge next
determined after receipt in good order of the purchase order by that Fund plus
any applicable sales charge.
- --------------------------------------------------------------------------------
BY TELEPHONE
- --------------------------------------------------------------------------------
An investor may make an initial investment by having his or her Registered
Representative telephone MSS between 9:00 AM and 4:00 PM, Eastern time, on any
day the New York Stock Exchange is open. The purchase will be effected at the
42
<PAGE>
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 25-26, "Know How to Sell and Exchange Shares."
- --------------------------------------------------------------------------------
BY WIRE
- --------------------------------------------------------------------------------
An investor may open an account and invest by wire by having his or her
Registered Representative telephone MSS between 9:00 AM and 4:00 PM, Eastern
time, to obtain an account number and instructions. For both initial and
subsequent investments, federal funds should be wired to:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
ABA No.: 011 0000 28
Attn.: Custody and Shareholder Services
For Credit: MainStay________________Fund--Class______
Shareholder Account No.____________________________
Shareholder Registration ____________________________
DDA Account Number 99029415
An application must be received by MSS within three business days. The
investor's bank may charge the investor a fee for the wire.
To make a purchase effective the same day, the Registered Representative must
call MSS by 12:00 noon Eastern time, and federal funds must be received by the
Shareholder Servicing Agent before 4:00 PM Eastern time.
Wiring money to the Trust will reduce the time a shareholder must wait before
redeeming shares because, when a shareholder purchases by check, the Trust will
withhold payment for up to 10 days of purchase or until the check clears,
whichever is first.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENTS
- --------------------------------------------------------------------------------
Additional investments in a Fund may be made at any time by mailing a check
payable to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401.
The shareholder's account number and the name of the Fund and class of shares
must be included with each investment. Purchases will be effected at the NAV per
share plus any applicable sales charge as described above.
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENTS
- --------------------------------------------------------------------------------
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of a Fund through AutoInvest. AutoInvest facilitates investments
by using electronic debits, authorized by the shareholder, to a checking or
savings account, for share purchases. When the authorization is accepted
(usually within two weeks of receipt) a shareholder may purchase shares by
calling MSS, toll free at 1-800-MAINSTAY (between 8:00 AM and 6:00 PM, Eastern
time). To make an investment effective the same day, MSS must receive the order,
in good order, by 2:00 PM Eastern time. The investment normally will be credited
to the shareholder's Fund account within two business days thereafter.
Shareholders whose bank is an ACH member also may use AutoInvest to
automatically purchase shares of a Fund on a scheduled basis by electronic debit
for an account designated by the shareholder on an application form. The initial
investment must be in accordance with the investment amounts previously
mentioned. Subsequent minimum investments are $50 monthly, $100 quarterly, $250
semiannually, or $500 annually. The investment day may be any day from the first
through the twenty-eighth of the respective month. Redemption proceeds from Fund
shares purchased by AutoInvest may not be paid until 10 days or more after the
purchase date. Fund shares may not be redeemed by AutoInvest.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
Investors may, subject to the approval of the Trust, the Distributor, the
Manager and the Sub-Adviser to the particular Fund, purchase shares of a Fund
with liquid securities that are eligible for purchase by that Fund and that have
a value that is readily ascertainable. These transactions will be effected only
if the Sub-Adviser intends to retain the security in the Fund as an investment.
The Trust reserves the right to amend or terminate this practice at any time. An
investor must call MainStay at 1-800-MAINSTAY before sending any securities.
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. number (or such other information as
the Trust has requested) has been provided.
43
<PAGE>
================================================================================
ALTERNATIVE SALES ARRANGEMENTS
================================================================================
- --------------------------------------------------------------------------------
INITIAL SALES CHARGE ALTERNATIVE CLASS A SHARES
- --------------------------------------------------------------------------------
The sales charge on Class A shares of the Funds is a variable percentage of the
public offering price depending upon the investment orientation of the Fund and
the amount of the sale.
The sales charge applicable to an investment in Class A shares of each of the
Funds other than the Global High Yield Fund will be determined according to the
following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
----------------------- ----------------------------
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% 4.75% 0.75%
$50,000 to $99,999 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
- --------------------------------------------------------------------------------
</TABLE>
The sales charge applicable to an investment in Class A shares of the Global
High Yield Fund will be determined according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
----------------------- ----------------------------
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
- --------------------------------------------------------------------------------
</TABLE>
* No sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
such shares within one year of the date of purchase. See "Reduced Sales
Charges on Class A Shares--Contingent Deferred Sales Charge, Class A."
Although an investor will not pay an initial sales charge on investments of
$1,000,000 or more, the Distributor will pay, from its own resources, a
commission to dealers on such investments. The dealer will receive a commission
of 1.00% on the portion of a sale from $1,000,000 to $2,999,999, 0.50% of any
portion from $3,000,000 to $4,999,999 and 0.40% on any portion of $5,000,000 or
more.
The Distributor may allow the full sales charge to be retained by dealers. The
amount retained may be changed from time to time but will remain the same for
all dealers. The Distributor, at its expense, also may from time to time provide
additional promotional incentives to dealers who sell Fund shares. A selected
dealer who receives a reallowance in excess of 90% of such a sales charge may be
deemed to be an "underwriter" under the 1933 Act.
- --------------------------------------------------------------------------------
PURCHASES AT NAV
- --------------------------------------------------------------------------------
A Fund's Class A shares may be purchased at NAV, without payment of any sales
charge, by its Trustees, New York Life and its subsidiaries and their employees,
officers, directors or agents (and immediate family members); employees and
clients (and immediate family members) of John A. Levin & Co. and DGHM; and
investors who are recommended to invest in the Research Value and Small Cap
Value Funds by John A. Levin & Co. and DGHM, respectively. Also, any employee or
Registered Representative of an authorized broker-dealer (and immediate family
members) may purchase a Fund's shares at NAV without payment of any sales
charge.
In addition, the Trust will treat Class A share purchases of Funds in an amount
less than $1,000,000 by defined contribution plans, other than 403(b) plans,
that are sponsored by employers with 100 or more eligible employees as if such
purchases were equal to an amount more than $1,000,000 but less than $2,999,999.
Such purchases by defined contribution plans may be subject to a contingent
deferred sales charge of 1% on shares redeemed within one year of the date of
purchase. See "Reduced Sales Charges on Class A Shares--Contingent Deferred
Sales Charge, Class A."
Class A shares of the Funds may also be purchased at net asset value through
broker-dealers, investment advisers and other financial institutions which have
entered into a supplemental agreement with the Distributor, which includes a
requirement that such shares be sold for the benefit of clients participating in
a "wrap account" or similar program under which clients pay a fee to the
broker-dealer, investment adviser or other financial institution.
- --------------------------------------------------------------------------------
REDUCED SALES CHARGES ON CLASS A SHARES
- --------------------------------------------------------------------------------
The sales charge varies with the size of the purchase and reduced charges apply
to the aggregate of purchases of a Fund made at one time by any "Qualified
Purchaser," which term includes (i) an individual and his/her spouse and their
children under the age of 21; and (ii) any other organized group of persons,
whether incorporated or not, which is itself a shareholder of the Fund,
including group retirement and benefit plans (other than IRAs and non-Erisa
403(b) plans) whether incorporated or not, provided the organization has been in
existence for at least six months and has some purpose other than the purchase
at a discount of redeemable securities of a registered investment company. The
circumstances under which "Qualified Purchasers" and other investors in the
Funds may pay reduced sales charges are described on page 22, "Consider Reducing
Your Sales Charge."
Letter of Intent
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested
44
<PAGE>
during a 24-month period. A 90-day back-dated period can be used to include
earlier purchases; the 24-month period would then begin on the date of the first
purchase during the 90-day period. For more information, see the SAI or call
your Registered Representative or MainStay at 1-800-MainStay.
Contingent Deferred Sales Charge, Class A
In order to recover commissions paid to dealers on qualified investments of $1
million or more, a contingent deferred sales charge of 1% may be imposed on
redemptions of such investments made within one year of the date of purchase.
Class A shares that are redeemed will not be subject to a contingent deferred
sales charge, however, to the extent that the value of such shares represents:
(1) capital appreciation of Fund assets; (2) reinvestment of dividends or
capital gains distributions; (3) Class A shares redeemed more than one year
after their purchase; (4) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, death, disability, QDROs and excess contributions
pursuant to applicable IRS rules; and Required Minimum Distributions at age 70
1/2 for IRA and 403(b)(7) TSA participants; (5) transfers within a retirement
plan where the proceeds of the redemption are invested in any guaranteed
investment contract written by New York Life or any of its affiliates; transfers
to products offered within a retirement plan which uses New York Life Benefit
Services, Inc. or TRAC-2000 as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; or (6)
redemptions, under the Systematic Withdrawal Plan, used to pay scheduled monthly
premiums on insurance policies issued by New York Life or an affiliate. Class A
shares of a Fund that are purchased without a front-end sales charge may be
exchanged for Class A shares of another Fund without the imposition of a
contingent deferred sales charge, although, upon redemption, contingent deferred
sales charges may apply to the Class A shares that were acquired through an
exchange.
The contingent deferred sales charge will be applicable to amounts invested
pursuant to a right of accumulation or an LOI to the extent that (a) a front-end
sales charge was not paid at the time of the purchase and (b) any shares so
purchased are redeemed within one year of the date of purchase.
For federal income tax purposes, the amount of the contingent deferred sales
charge generally will reduce the gain or increase the loss, as the case may be,
recognized upon redemption.
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE CLASS B SHARES
- --------------------------------------------------------------------------------
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses of 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.
45
<PAGE>
The contingent deferred sales charge will be waived in connection with the
following redemptions: (i) withdrawals from qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, QDROs and excess contributions pursuant to
applicable IRS rules; and Required Minimum Distributions at age 70 1/2 for IRA
and 403(b) TSA participants; (ii) withdrawals related to the termination of a
retirement plan where no successor plan has been established; (iii) transfers
within a retirement plan where the proceeds of the redemption are invested in
any guaranteed investment contract written by New York Life or any of its
affiliates, transfers to products offered within a retirement plan which uses
New York Life Benefit Services, Inc. as the recordkeeper; as well as participant
transfers or rollovers from a retirement plan to a MainStay IRA; (iv) required
distributions by charitable trusts under Section 664 of the Code; (v)
redemptions following the death of the shareholder or the beneficiary of a
living revocable trust or within one year following the disability of a
shareholder occurring subsequent to the purchase of shares; (vi) redemptions
under the Systematic Withdrawal Plan used to pay scheduled monthly premiums on
insurance policies issued by New York Life or an affiliate; (vii) continuing,
periodic monthly or quarterly withdrawals, under the Systematic Withdrawal Plan,
up to an annual total of 10% of the value of a shareholder's Class B shares in a
Fund; (viii) redemptions by New York Life or any of its affiliates or by
accounts managed by New York Life or any of its affiliates; (ix) redemptions
effected by registered investment companies by virtue of transactions with a
Fund; (x) involuntary redemptions of an account with a net asset value of $250
or less; and (xi) redemptions by shareholders of shares purchased with the
proceeds of a settlement payment made in connection with the liquidation and
dissolution of a limited partnership sponsored by New York Life or one of its
affiliates. The contingent deferred sales charge is waived on such sales or
redemptions to promote goodwill and because the sales effort, if any, involved
in making such sales is negligible.
Shareholders should notify MSS at the time of requesting such redemptions that
they are eligible for a waiver of the contingent deferred sales charge. Class B
shares upon which the contingent deferred sales charge may be waived may not be
resold, except to the Trust. Shareholders who are making withdrawals from
retirement plans and accounts or other tax-sheltered or tax-deferred accounts
should consult their tax advisers regarding the tax consequences of such
withdrawals.
- --------------------------------------------------------------------------------
DEFERRED SALES CHARGE CLASS C 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 of providing
distribution related services to the Funds in connection with the sale of the
Class C 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 C shares
without a sales charge being deducted at the time of purchase.
Contingent Deferred Sales Charge, Class C
A contingent deferred sales charge of 1% of the net asset value of Class C
shares will be imposed on redemptions of Class C shares of the Funds at the time
of any redemption by a shareholder which reduces the current value of the
shareholder's Class C account in any Fund to an amount which is lower than the
amount of all payments by the shareholder for the purchase of Class C shares in
that Fund during the preceding one year. However, no such charge will be imposed
to the extent that the net asset value of the Class C shares redeemed does not
exceed (a) the current aggregate net asset value of Class C shares of that Fund
purchased more than one year prior to the redemption, plus (b) the current
aggregate net asset value of Class C shares of that Fund purchased through
reinvestment of dividends or distributions, plus (c) increases in the net asset
value of the investor's Class C shares of that Fund above the total amount of
payments for the purchase of Class C shares of that Fund made during the
preceding one year. [Withdrawals under the Systematic Withdrawal Plan also will
not be subject to this charge.] [However, investors may not withdraw more than
__% of the value of the Fund account under the Plan in the first year after
purchase.]
================================================================================
REDEMPTIONS AND EXCHANGES
================================================================================
Shares may be redeemed directly from a Fund or through your Registered
Representative. Shares redeemed will be valued at the NAV per share next
determined after MSS receives the redemption request in "good order." "Good
order" with respect to a redemption request generally means that for
certificated shares, a stock power or certificate must be endorsed, and for
uncertificated shares a letter must be signed, by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed by an eligible
guarantor institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to MSS must be submitted before the
redemption request will be accepted. The signature guarantee may be waived on a
redemption of $100,000 or less which is payable to the shareholder(s) of record
and mailed to the address of record, or under such other circumstances as the
Trust may allow. Send your written request to The MainStay Funds, P.O. Box 8401,
Boston, MA 02266-8401.
Upon the redemption of shares the redeeming Fund will make payment in cash,
except as described below, of the net asset value of the shares next determined
after such redemption request was received, less any applicable contingent
deferred sales charge. There will be no redemption, however, during any period
in which the right of redemption is suspended or date of payment is postponed
because the New York Stock Exchange is closed or trading on such Exchange is
restricted or the SEC deems an emergency to exist.
The value of the shares redeemed from a Fund may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned the shares.
Systematic Withdrawal Plan
Dividends and capital gains distributions on shares held under the Systematic
Withdrawal Plan are reinvested in additional full and fractional shares of the
same Fund at NAV. MSS acts as agent for the shareholder in redeeming sufficient
full and fractional shares to provide the amount of the systematic withdrawal
payment and any contingent deferred sales charge, if applicable.
46
<PAGE>
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, Class B and
Class C shares of a MainStay Fund may be exchanged for shares of an identical
class of a MainStay Fund registered in the state of residence of the investor or
where an exemption from registration is available and only with respect to Funds
that are available for sale to new investors.
In addition, an exchange privilege between Class A shares of the Funds and
MainStay Equity Index Fund is offered. Any exchanges between a Fund and MainStay
Equity Index Fund will be subject to the conditions applicable to Class A share
exchanges described herein, as well as any applicable minimum investment
requirements. No exchange privilege between Class B or Class C 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
(either 4:00 PM Eastern time that day, or the next day, if the request is placed
after 4:00 PM Eastern time) following receipt of a properly executed exchange
request. However, where a shareholder seeks to exchange Class A shares of the
Money Market Fund for Class A shares of another MainStay Fund which are subject
to a front-end sales charge, the applicable sales charge will be imposed on the
exchange, unless the shareholder has previously paid a sales charge with respect
to such shares.
Class B and Class C shares of a Fund may be exchanged for the same class of
shares of another MainStay Fund at the NAV next computed (either 4:00 PM Eastern
time that day, or the next day, if the request is placed after 4:00 PM Eastern
time) following receipt of a properly executed exchange request, without the
payment of a contingent deferred sales charge; the sales charge will be
assessed, if applicable, when the shareholder redeems his or her shares without
a corresponding purchase of shares of another MainStay Fund. However, where a
shareholder previously exchanged his or her Class B or Class C 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 and Class C shares of a Fund
acquired as a result of subsequent investments, except reinvested dividends and
distributions, will be subject to the contingent deferred sales charge when
ultimately redeemed or repurchased without purchasing shares of another MainStay
Fund.
An exchange may be made by either writing to MSS at the following address: The
MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401, or by calling
MSS at 1-800-MAINSTAY (8:00 am to 6:00 pm Eastern time).
In times when the volume of telephone exchanges is heavy, additional phone lines
will automatically be added by MSS. However, in times of drastic economic or
market changes, the telephone exchange privilege may be difficult to implement.
When calling MSS to make a telephone exchange, shareholders should have
available their account number and Social Security or Taxpayer I.D. numbers.
Under the telephone exchange privilege, shares may only be exchanged among
accounts with identical names, addresses and Social Security or Taxpayer I.D.
numbers. Shares may be transferred among accounts with different names,
addresses and Social Security or Taxpayer I.D. numbers only if the exchange
request is in writing and is received in "good order." If the dealer permits,
the dealer representative of record may initiate telephone exchanges on behalf
of a shareholder, unless the shareholder notifies the Fund in writing not to
permit such exchanges.
It is the policy of The MainStay Funds to discourage frequent trading by
shareholders among the Funds in response to market fluctuations. Accordingly, in
order to maintain a stable asset base in each Fund and to reduce administrative
expenses borne by each Fund, five exchanges per account are permitted in each
calendar year without the imposition of any transaction fee; subsequently, a $10
fee will be assessed per exchange and additional exchange requests may be
denied.
For purposes of determining the length of time a shareholder owned Class B or
Class C shares prior to redemption or repurchase in order to determine the
applicable contingent deferred sales charge, if any, 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 28, "Understand
the Tax Consequences," for information concerning the federal income tax
treatment of a disposition of shares. All exchanges are subject to the minimum
investment requirements of the Funds involved. The exchange privilege may be
modified or withdrawn at any time without notice.
================================================================================
TAX-DEFERRED RETIREMENT PLANS
================================================================================
Shares of each Fund may be purchased for retirement plans, providing
tax-deferred investments for individuals and institutions. Shares purchased may
be used as investments for established plans, or the Distributor may provide
plan documents for selected plans. A plan document must be adopted in order for
a plan to be in existence.
Custodial services are provided for IRA/ROTH IRA/SEP/ SARSEP and SIMPLE IRA and
Education IRA plans, and for 403(b)(7) Custodial Accounts. Plan administration
is also available for select qualified retirement plans.
47
<PAGE>
Contributions made to such plans to the extent provided in federal income tax
law currently in effect, and earnings thereon, will not be taxable to the plan
participant until distribution. An investor should consult with his or her tax
adviser before establishing any tax-deferred retirement plan.
================================================================================
NET ASSET VALUE
================================================================================
For purposes of determining NAV, portfolio securities of the Funds are valued at
their fair market values as determined by the methods described in the SAI with
the exception of money market instruments held by those Funds, which are valued
by the amortized cost method.
================================================================================
PORTFOLIO TRANSACTIONS
================================================================================
The primary consideration in portfolio security transactions is best execution.
Subject to this requirement, securities may be bought from or sold to brokers or
dealers who have furnished statistical, research and other information or
services to the Sub-Advisers. Consistent with the foregoing primary
consideration, the Conduct Rules of the National Association of Securities
Dealers, Inc. and such other policies as the Trustees may determine, the
Sub-Advisers may consider sales of shares of the respective Funds as a factor in
the selection of broker-dealers to execute each Fund's portfolio transactions.
NYLIFE Securities Inc. may act as a broker for the Trust in accordance with
applicable regulations.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Funds' Sub-Advisers. If a purchase or sale of
securities consistent with the investment policies of a Fund and one or more of
the clients served by the Fund's Sub-Adviser is considered at or about the same
time, transactions in such securities may be executed together and will, to the
extent practicable, be allocated among the Fund and clients in a manner deemed
equitable to the Funds and the clients by the Fund's Sub-Adviser. Although there
is no specified formula for allocating such transactions, the various allocation
methods used by a Fund's Sub-Adviser, and the results of such allocations, are
subject to periodic review by the Trustees.
================================================================================
TAX INFORMATION
================================================================================
A Fund generally will not be subject to federal income tax on its net taxable
investment income and net realized capital gains to the extent such income and
gains are distributed to its shareholders in accordance with the timing
requirements of the Code.
================================================================================
OTHER INFORMATION
================================================================================
The services provided to the Funds by the Manager, the Sub-Advisers and the
Funds' other service providers are dependent on those service providers'
computer systems. Many computer software and hardware systems in use today
cannot distinguish between the year 2000 and the year 1900 because of the way
dates are encoded and calculated (the "Year 2000 Issue"). The failure to make
this distinction could have a negative implication on handling securities
trades, pricing and account services. The Manager, the Sub-Advisers and the
Funds' other service providers are taking steps that each believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that they use. The Funds have no reason to believe these steps will not
be sufficient to avoid any material adverse impact on the Funds, although there
can be no assurances. The costs or consequences of incomplete or untimely
resolution of the Year 2000 Issue are unknown to the Manager, the Sub-Advisers
and the Funds' other service providers at this time but could have a material
adverse impact on the operations of the Funds and the Manager, the Sub-Advisers
and the Funds' other service providers.
================================================================================
APPENDIX A
================================================================================
- --------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES RATINGS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
- --------------------------------------------------------------------------------
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
48
<PAGE>
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
Issues or the features associated with MIG, VMIG or SG ratings are identified by
date of issue, date of maturity or maturities or rating expiration date and
description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issue's specific structural or
credit features.
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
49
<PAGE>
- --------------------------------------------------------------------------------
STANDARD & POOR'S
- --------------------------------------------------------------------------------
Corporate and Municipal Long-Term Debt Ratings Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B,CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC:Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions for the obligor. In the
event of adverse business, financial or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or a similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
A-1: A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated `C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
50
<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
NY Life 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]
[LOGO] This prospectus is also available in Spanish. For a copy, please call
1-800-MAINSTAY (1-800-624-6782), option 3.
<PAGE>
THE MAINSTAY FUNDS
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STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1998
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The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of twenty-two series. The
following fifteen series are discussed herein: California Tax Free Fund, Capital
Appreciation Fund, Convertible Fund, Equity Index Fund, Government Fund, High
Yield Corporate Bond Fund, International Bond Fund, International Equity Fund,
Money Market Fund, New York Tax Free Fund, Strategic Income Fund, Strategic
Value Fund, Tax Free Bond Fund, Total Return Fund and Value Fund (individually
or collectively referred to as a "Fund" or the "Funds"). MainStay Management,
Inc. (the "Manager") serves as the manager for the Funds and has entered into
Sub-Advisory agreements with MacKay-Shields Financial Corporation ("MacKay-
Shields") the Sub-Adviser for fourteen of the Funds and Monitor Capital
Advisors, Inc. ("Monitor"), Sub-Adviser for the Equity Index Fund. MacKay-
Shields and Monitor are sometimes jointly referred to as the "Sub-Advisers."
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectuses of the Trust dated May 1, 1998 and
September 1, 1998, as amended or supplemented from time to time, a copy of which
may be obtained without charge by writing to NYLIFE Distributors Inc., (the
"Distributor") 300 Interpace Parkway, Parsippany, NJ 07054 or by calling 1-800-
MAINSTAY (1-800-624-6782).
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the related Prospectus, in connection
with the offers contained herein, and, if given or made, such other information
or representations must not be relied upon as having been authorized by the
Funds or the Distributor. This Statement of Additional Information and the
related Prospectus do not constitute an offer by the Trust or by the Distributor
to sell or a solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction.
Shareholder inquiries should be made by writing directly to MainStay
Shareholder Services, Inc., P.O. Box 8401, Boston, Massachusetts 02266-8401, or
by calling 1-800-MAINSTAY. In addition, you can make inquiries through your
registered representative.
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TABLE OF CONTENTS
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PAGE IN
STATEMENT OF
ADDITIONAL
INFORMATION
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ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND....................... 5
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS................. 8
Repurchase Agreements.................................................... 8
Lending of Portfolio Securities.......................................... 10
Bank Obligations......................................................... 11
U.S. Government Securities............................................... 12
Debt Securities.......................................................... 12
Convertible Securities................................................... 13
Arbitrage................................................................ 14
Foreign Securities....................................................... 15
Foreign Currency Transactions............................................ 16
Foreign Index-Linked Instruments......................................... 20
Brady Bonds.............................................................. 20
Municipal Securities..................................................... 21
Industrial Development and Pollution Control Bonds....................... 26
Variable Rate Demand Notes ("VRDNs")..................................... 27
Floating and Variable Rate Securities.................................... 28
Zero Coupon Bonds........................................................ 28
Standby Commitments -- Obligations with Puts Attached.................... 29
When-Issued Securities................................................... 30
Mortgage-Related and Other Asset-Backed Securities....................... 31
Short Sales Against the Box.............................................. 41
Options on Securities.................................................... 41
Options on Foreign Currencies............................................ 48
Securities Index Options................................................. 50
Futures Transactions..................................................... 52
Swap Agreements.......................................................... 63
Loan Participation Interests............................................. 65
Risks Associated with Debt Securities.................................... 68
Risks of Investing in High Yield Securities ("Junk Bonds")............... 68
HIGH YIELD CORPORATE BOND FUND, STRATEGIC VALUE FUND AND STRATEGIC
INCOME FUND SPECIAL CONSIDERATIONS....................................... 69
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EQUITY INDEX FUNDSPECIAL CONSIDERATIONS....................................... 70
TOTAL RETURN FUNDSPECIAL CONSIDERATIONS....................................... 71
CALIFORNIA TAX FREE FUND AND NEW YORK TAX FREE FUND
SPECIAL CONSIDERATIONS................................................... 71
Risk Factors Affecting California Municipal Securities................... 71
Risk Factors Affecting New York Municipal Securities..................... 84
Special Considerations Affecting Puerto Rico............................. 100
THE EQUITY INDEX FUND GUARANTEE............................................... 106
FUNDAMENTAL INVESTMENT RESTRICTIONS........................................... 109
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS....................................... 111
TRUSTEES AND OFFICERS......................................................... 117
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR............................. 125
Management Agreement..................................................... 125
Distribution Agreement................................................... 129
Other Services........................................................... 136
Expenses Borne by the Trust.............................................. 138
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 139
NET ASSET VALUE............................................................... 144
SHAREHOLDER INVESTMENT ACCOUNT................................................ 147
SHAREHOLDER SERVICING AGENT................................................... 148
PURCHASES, REDEMPTION AND REPURCHASE.......................................... 148
Letter of Intent ("LOI")................................................. 148
Distributions in Kind.................................................... 148
Suspension of Redemptions................................................ 149
CDSC Waivers............................................................. 149
TAX-DEFERRED RETIREMENT PLANS................................................. 150
Cash or Deferred Profit Sharing Plans Under Section 401(k)
for Corporations and Self-Employed Individuals
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Individual Retirement Account ("IRA").................................... 150
403(b)(7) Tax Sheltered Account.......................................... 153
General Information...................................................... 153
CALCULATION OF PERFORMANCE QUOTATIONS......................................... 154
TAX STATUS.................................................................... 163
Taxation of the Funds.................................................... 163
Character of Distributions to Shareholders -- General.................... 166
Character of Distributions to Shareholders -- The Tax-Free
Funds................................................................. 168
Discount................................................................. 169
Users of Bond-Financed Facilities........................................ 170
Taxation of Options, Futures and Similar Instruments..................... 170
Passive Foreign Investment Companies..................................... 172
Foreign Currency Gains and Losses........................................ 173
Commodity Investments.................................................... 173
Dispositions of Fund Shares.............................................. 174
Tax Reporting Requirements............................................... 175
Foreign Taxes............................................................ 176
State and Local Taxes - General.......................................... 177
Explanation of Fund Distributions........................................ 178
Additional Information Regarding the Equity Index Fund................... 178
Additional Information Regarding the California Tax Free
Fund and New York Tax Free Fund
Annual Statements........................................................ 180
General Information...................................................... 181
ORGANIZATION AND CAPITALIZATION............................................... 181
General.................................................................. 181
Voting Rights............................................................ 182
Shareholder and Trustee Liability........................................ 182
OTHER INFORMATION............................................................. 183
Independent Accountants.................................................. 183
Legal Counsel............................................................ 183
Share Ownership of the Funds............................................. 183
Code of Ethics........................................................... 187
FINANCIAL STATEMENTS.......................................................... 187
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ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND
Each Fund has a separate investment objective or objectives which it
pursues through separate investment policies, as described in the Prospectus.
The following discussion elaborates on the presentation of the Money Market
Fund's investment policies contained in the Prospectus.
The Fund may invest its assets in U.S. dollar-denominated securities of
U.S. or foreign issuers and in securities of foreign branches of U.S. banks,
such as negotiable certificates of deposit (Eurodollars. Since the portfolio of
the Fund may contain such securities, an investment therein involves investment
risks that are different in some respects from an investment in a fund which
invests only in debt obligations of U.S. domestic issuers. Such risks may
include future political and economic developments, the possible imposition of
foreign withholding taxes on interest income payable on the securities held in
the portfolio, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of the
principal of and interest on securities in the portfolio.
All of the assets of the Fund generally will be invested in obligations
which mature in 397 days or less and substantially all of these investments will
be held to maturity; however, securities collateralizing repurchase agreements
may have maturities in excess of 397 days. The Fund will, to the extent
feasible, make portfolio investments primarily in anticipation of or in response
to changing economic and money market conditions and trends. The dollar-
weighted average maturity of the Fund's portfolio may not exceed 90 days.
Consistent with the provisions of a rule of the Securities and Exchange
Commission ("SEC"), the Fund invests only in U.S. dollar-denominated money
market instruments that present minimal credit risk and, with respect to 95% of
its total assets, measured at the time of investment, that are of the highest
quality. The Sub-Adviser shall determine whether a security presents minimal
credit risk under procedures adopted by the Fund's Board of Trustees. A money
market instrument will be considered to be of the highest quality (1) if rated
in the highest rating category (i.e., Aaa or Prime-1 by Moody's, AAA or A-1 by
S&P's) by (i) any two nationally recognized statistical rating organizations
("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by
an issuer that has received a short-term rating from an NRSRO with
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respect to a class debt obligations that is comparable priority and security,
and that are rated in the highest rating category by (i) any two NRSRO's or,
(ii) if rated by only one NRSRO, by that NRSRO;(3) an unrated security that is
of comparable quality to a security in the highest rating category as determined
by the Sub-Adviser;(4)(i) with respect to a security that is subject to any
features that entitle the holder, under certain circumstances, to receive the
approximate amortized cost of the underlying security or securities plus accrued
interest "Demand Feature" or obligations of a person other than the issuer of
the security, under certain circumstances, to undertake to pay the principal
amount of the underlying security plus interest "Guarantees", the Guarantee has
received a rating from an NRSRO or the Guarantee is issued by a guarantor that
has received a rating from an NRSRO with respect to a class of debt obligations
that is comparable in priority and security to the Guarantee, with certain
exceptions, and (ii) the issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the security in the
event that the Demand Feature or Guarantee is substituted with another Demand
Feature or Guarantee,(5) if it is a security issued by a money market fund
registered with the SEC under the 1940 Act; or (6) if it is a Government
Security. With respect to 5% of its total assets, measured at the time of
investment, the Fund may also invest in money market instruments that are in the
second-highest rating category for short-term debt obligations (i.e., rated Aa
or Prime-2 by Moody's or AA or A-2 by S&P).
The Fund may not invest more than 5% of its total assets, measured at the
time of investment, in securities of any one issuer that are of the highest
quality, except that the Fund may exceed this 5% limitation with respect to 25%
of its total assets for up to three business days after the purchase of
securities of any one issuer and except that this limitation shall not apply to
U.S. government securities or securities subject to certain Guarantees. The
Fund may not invest more than the greater of 1% of its total assets or one
million dollars, measured at the time of investment, in securities of any one
issuer that are in the second-highest rating category. Immediately after the
acquisition of any Demand Feature or Guarantee, the Fund, with respect to
seventy five percent of its total assets, shall not have invested more than ten
percent of its assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or Guarantee,
with certain exceptions. In addition, immediately after the acquisition of any
Demand Feature or Guarantee (or a security
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after giving effect to the Demand Feature or Guarantee) that is a not within the
highest rating category by NRSROs, the Fund shall not have invested more than
five percent of its total assets in securities issued by or subject to Demand
Features or Guarantees from the institution that issued the Demand Feature or
Guarantee. In the event that an instrument acquired by the Fund is downgraded or
otherwise ceases to be of the quality that is eligible for the Fund, the Sub-
Adviser, under procedures approved by the Board of Trustees shall promptly
reassess whether such security presents minimal credit risk and shall recommend
to the Valuation Committee of the Board (the "Valuation Committee") that the
Fund take such action as it determines is in the best interest of the Fund and
its shareholders. The Valuation Committee, after consideration of the
recommendation of the Sub-Adviser and such other information as it deems
appropriate, shall cause the Fund to take such action as it deems appropriate,
and shall report promptly to the Board the action it has taken and the reasons
for such action.
Pursuant to the rule, the Fund uses the amortized cost method of valuing
its investments, which facilitates the maintenance of the Fund's per share net
asset value at $1.00. The amortized cost method, which is normally used to value
all of the Fund's portfolio securities, involves initially valuing a security at
its cost and thereafter amortizing to maturity any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument.
The Trustees have also established procedures designed to stabilize, to the
extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
the Fund's portfolio by the Trustees, at such intervals as they deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations or market equivalents (the determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair
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results to investors or existing shareholders, they will take such corrective
action as they regard to be necessary and appropriate, including the sale of
portfolio instruments prior to maturity to realize capital gains or losses or to
shorten average portfolio maturity; withholding part or all of dividends or
payment of distributions from capital or capital gains; redemptions of shares in
kind; or establishing a net asset value per share by using available market
quotations or equivalents. In addition, in order to stabilize the net asset
value per share at $1.00, the Trustees have the authority (1) to reduce or
increase the number of shares outstanding on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends.
The Fund may hold cash for the purpose of stabilizing its net asset value
per share. Holdings of cash, on which no return is earned, would tend to lower
the yield on the Fund's shares.
The Fund may also, consistent with the provisions of the rule, invest in
securities with a face maturity of more than 397 days, provided that the
security is a variable or floating rate security that meets the guidelines of
Rule 2a-7 with respect to maturity.
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
The Funds may engage in the following investment practices or invest in the
following instruments to the extent permitted in the Prospectus.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with member banks of the
Federal Reserve System or member firms of the National Association of Securities
Dealers, Inc. that meet the repurchase agreement creditworthiness guidelines
established by the Trustees. The Equity Index Fund will enter into repurchase
agreements only with domestic banks with total assets in excess of one billion
dollars or primary government securities dealers reporting to the Federal
Reserve Bank of New York, and with respect to securities of the type in which
the Fund may invest. In addition, the International Bond and International
Equity Funds may enter into domestic or foreign repurchase agreements
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with certain sellers deemed to be creditworthy pursuant to guidelines adopted by
the Trustees.
A repurchase agreement, which provides a means for a Fund to earn income on
uninvested cash for periods as short as overnight, is an arrangement under which
the purchaser (i.e., the Fund) purchases a U.S. government or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time (usually not more than
a week in the case of the Equity Index Fund, California Tax Free Fund and New
York Tax Free Fund) and price. Repurchase agreements with foreign banks may be
available with respect to government securities of the particular foreign
jurisdiction. The custody of the Obligation will be maintained by the Fund's
Custodian. The value of the purchased securities, including any accrued
interest, will at all times exceed the value of the repurchase agreement. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price
upon repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Obligation subject to the repurchase agreement.
The income on repurchase agreements may be subject to federal and state
income taxes when distributed by a Fund as a dividend to shareholders. Subject
to applicable limitations, the Tax Free Bond Fund will enter into repurchase
agreements as a means of earning income on its cash reserves when, in the
judgment of the Sub-Adviser, shareholders would benefit more from receiving
taxable income thereon than from earning no income or tax-free income at a lower
rate on such reserves.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan
from the Fund to the seller of the Obligation. It is not clear whether a court
would consider the Obligation purchased by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. In the event of the commencement of bankruptcy or
insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund
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may be required to return the Obligation to the seller's estate and be treated
as an unsecured creditor of the seller. As an unsecured creditor, the Fund
would be at risk of losing some or all of the principal and income involved in
the transaction. As with any unsecured debt instrument purchased for the Funds,
the Sub-Advisers seek to minimize the risk of loss from repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the security. However,
if the market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including accrued interest), the Fund
will direct the seller of the Obligation to deliver additional securities so
that the market value of all securities subject to the repurchase agreement
equals or exceeds the repurchase price.
The Strategic Income Fund, Strategic Value Fund, California Tax Free Fund
and New York Tax Free Fund may enter into reverse repurchase agreements. A Fund
will maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. Each of the California Tax
Free Fund and New York Tax Free Fund will limit its investments in reverse
repurchase agreements and other borrowing to no more than 10% of its total
assets. Each of the Strategic Income Fund and Strategic Value Fund will limit
its investments in reverse repurchase agreements to no more than 5% of its total
assets.
LENDING OF PORTFOLIO SECURITIES
Each Fund, except the Tax Free Bond Fund and the Money Market Fund, may
seek to increase its income by lending portfolio securities. Under guidelines
adopted by the Funds' Board, such loans may be made to institutions, such as
broker-dealers, and are required to be secured continuously by collateral in
cash or U.S. government securities maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would have
the right to call a loan and obtain the securities loaned at any time generally
on less than five days' notice. For the duration of a loan, the Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and would also receive compensation from the
investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to
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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 most recently published financials) in excess
of $100,000,000, or if, with respect to the obligations of other banks and
savings
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and loan associations, such obligations are federally insured. The Equity Index
Fund will not be subject to the above restriction to the extent it invests in
bank obligations of United States banks (including foreign branches) which have
more than $1 billion in total assets at the time of investment and are members
of the Federal Reserve System or are examined by the Comptroller of the Currency
or whose deposits are insured by the Federal Deposit Insurance Corporation. The
Equity Index Fund also may invest in certificates of deposit of savings and loan
associations (federally or state chartered and federally insured) having total
assets in excess of $1 billion.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. government agencies
and instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-through certificates, are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal Home Loan Banks, by
the right of the issuer to borrow from the Treasury; others, such as those
issued by the Federal National Mortgage Association ("FNMA"), by the
discretionary authority of the U.S. government to purchase certain obligations
of the agency or instrumentality; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. government provides financial support to such
U.S. government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so, and it is not so obligated by law. See
"Mortgage-Related and Other Asset-Backed Securities." The Equity Index Fund
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
DEBT SECURITIES
Debt securities may have fixed, variable or floating (including inverse
floating) rates of interest. To the extent that a Fund invests in debt
securities, it will be subject to certain risks. The value of the debt
securities held by a Fund, and thus the NAV of the shares of a Fund, generally
will
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fluctuate depending on a number of factors, including, among others, changes in
the perceived creditworthiness of the issuers of those securities, movements in
interest rates, the average maturity of a Fund's investments, changes in
relative values of the currencies in which a Fund's investments are denominated
relative to the U.S. dollar, and the extent to which a Fund hedges its interest
rate, credit and currency exchange rate risks. Generally, a rise in interest
rates will reduce the value of fixed income securities held by a Fund, and a
decline in interest rates will increase the value of fixed income securities
held by a Fund.
CONVERTIBLE SECURITIES
The Capital Appreciation Fund, Convertible Fund, High Yield Corporate Bond
Fund, International Bond Fund, International Equity Fund, Strategic Income Fund,
Strategic Value Fund, Total Return Fund and Value Fund may invest in securities
convertible into common stock or the cash value of a single equity security or a
basket or index of equity securities. Such investments may be made, for
example, if the Sub-Adviser believes that a company's convertible securities are
undervalued in the market. Convertible securities eligible for inclusion in the
Funds' portfolios include convertible bonds, convertible preferred stocks,
warrants or notes or other debt instruments that may be exchanged for cash
payable in an amount that is linked to the value of a particular security,
basket of securities, index or indices of securities or currencies.
Convertible securities, until converted, have the same general
characteristics as other fixed income securities insofar as they generally
provide a stable stream of income with generally higher yields than those of
equity securities of the same or similar issuers. By permitting the holder to
exchange his investment for common stock or the cash value of a security or a
basket or index of securities, convertible securities may also enable the
investor to benefit from increases in the market price of the underlying
securities. Therefore, convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality.
As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The unique feature of the convertible
security is that as the market price of the underlying common stock declines, a
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convertible security tends to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
price of a convertible security increasingly reflects the value of the
underlying common stock and may rise accordingly. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than investments in the common stock of the same issuer.
Holders of fixed income securities (including convertible securities) have
a claim on the assets of the issuer prior to the holders of common stock in case
of liquidation. However, convertible securities are typically subordinated to
similar non-convertible securities of the same issuer.
Accordingly, convertible securities have unique investment characteristics
because (i) they have relatively high yields as compared to common stocks, (ii)
they have defensive characteristics since they provide a fixed return even if
the market price of the underlying common stock declines, and (iii) they provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by a
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or cash or
sell it to a third party.
ARBITRAGE
Each Fund, except the California Tax Free Fund, Equity Index Fund,
International Bond Fund, International Equity Fund, New York Tax Free Fund and
Tax Free Bond Fund, may sell in one market a security which it owns and
simultaneously purchase the same security in another market, or it may buy a
security in one market and simultaneously sell it in another market, in order to
take advantage of differences between the prices of the security in the
different markets. Although the Funds do not actively engage in arbitrage, such
transactions may be entered into only with respect to debt securities and will
occur only in a dealer's market where the buying and selling dealers involved
confirm
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their prices to the Fund at the time of the transaction, thus eliminating any
risk to the assets of a Fund.
FOREIGN SECURITIES
Except for the California Tax Free Fund, Government Fund, New York Tax Free
Fund and Tax Free Bond Fund, each Fund may invest, without limit, subject to the
other investment policies applicable to the Fund, in U.S. dollar-denominated and
non-dollar-denominated foreign debt and equity securities and in certificates of
deposit issued by foreign banks and foreign branches of U.S. banks. Under
current SEC rules relating to the use of the amortized cost method of portfolio
securities valuation, the Money Market Fund is restricted to purchasing U.S.
dollar-denominated securities, but it is not otherwise precluded from purchasing
securities of foreign issuers.
Investors should carefully consider the appropriateness of foreign
investing in light of their financial objectives and goals. While foreign
markets may present unique investment opportunities, foreign investing involves
risks not associated with domestic investing. Securities markets in other
countries are not always as efficient as those in the U.S. and are sometimes
less liquid and more volatile. Other risks involved in investing in the
securities of foreign issuers include differences in accounting, auditing and
financial reporting standards; limited publicly available information; the
difficulty of assessing economic trends in foreign countries; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); government interference, including
government ownership of companies in certain sectors, wage and price controls,
or imposition of trade barriers and other protectionist measures; difficulties
in invoking legal process abroad and enforcing contractual obligations;
political, social or economic instability which could affect U.S. investments in
foreign countries; and potential restrictions on the flow of international
capital. Additionally, foreign securities and dividends and interest payable on
those securities may be subject to foreign taxes, including foreign withholding
taxes, and other foreign taxes may apply with respect to securities
transactions. Additional costs associated with an investment in foreign
securities may include higher transaction, custody and foreign currency
conversion costs. In the event of
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litigation relating to a portfolio investment, the Funds may encounter
substantial difficulties in obtaining and enforcing judgments against non-U.S.
resident individuals and companies. Investment in emerging market countries
presents risks in greater degree than, and in addition to, those presented by
investment in foreign issuers in general.
FOREIGN CURRENCY TRANSACTIONS
Many of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will
affect the value of securities denominated or quoted in foreign currencies.
Exchange rate movements can be large and can endure for extended periods of
time, affecting either favorably or unfavorably the value of the Funds' assets.
However, each Fund, except the California Tax Free Fund, the Equity Index Fund,
the Government Fund, the Money Market Fund, the New York Tax Free Fund and the
Tax Free Bond Fund, may, to the extent it invests in foreign securities, enter
into forward foreign currency transactions in order to protect against
uncertainty in the level of future foreign currency exchange rates. Each of
these Funds may enter into contracts to purchase foreign currencies to protect
against an anticipated rise in the U.S. dollar price of securities it intends to
purchase and may enter into contracts to sell foreign currencies to protect
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
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dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the price at which they are buying and
selling various currencies.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, the Sub-Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of a Fund will be served by entering into such
a contract. Generally, the Sub-Adviser believes that the best interest of a
Fund will be served if a Fund is permitted to enter into forward contracts under
specified circumstances. First, when a Fund enters into, or anticipates
entering into, a contract for the purchase or sale of a security denominated in
a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, a Fund will be able to insulate itself from a
possible loss resulting from a change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold and the date on which payment is made or
received, although a Fund would also forego any gain it might have realized had
rates moved in the opposite direction. This technique is sometimes referred to
as a "settlement" hedge or "transaction" hedge.
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
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contract is entered into and the date it matures. With respect to positions
that constitute "transaction" or "position" hedges (including "proxy" hedges), a
Fund will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency (or the
related currency, in the case of a "proxy" hedge).
Finally, a Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. "Cross-currency" hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.
At the consummation of the forward contract, a Fund may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating it
to purchase at the same maturity date the same amount of such foreign currency.
If a Fund chooses to make delivery of the foreign currency, it may be required
to obtain such currency for delivery through the sale of portfolio securities
denominated in such currency or through conversion of other assets of the Fund
into such currency. If a Fund engages in an offsetting transaction, the 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.
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In cases of transactions which constitute "transaction" hedges, or
"position" hedges (including "proxy" hedges) or "cross-currency" hedges that
involve purchase and sale of two different foreign currencies directly through
the same foreign currency contract, a Fund may deem its forward currency hedge
position to be covered by underlying Fund portfolio securities or may establish
a Segregated Account with its Custodian in an amount equal to the value of the
Fund's total assets committed to the consummation of the subject hedge. The
Segregated Account will consist of liquid assets. In the case of "anticipatory"
hedges and "cross-currency" hedges that involve the purchase and sale of two
different foreign currencies indirectly through separate forward currency
contracts, the Fund will establish a Segregated Account with its Custodian as
described above. In the event a Fund establishes a Segregated Account, the Fund
will mark-to-market the value of the assets in the Segregated Account. If the
value of the liquid assets placed in the Segregated Account declines, additional
liquid assets will be placed in the account by the Fund on a daily basis so that
the value of the account will equal the amount of the Fund's commitments with
respect to such contracts.
It should be realized that this method of protecting the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. It also reduces any potential gain which may have otherwise occurred had
the currency value increased above the settlement price of the contract. The
Funds cannot assure that the techniques discussed above will be successful.
Successful use of forward contracts depends on the investment manager's skill in
analyzing and predicting relative currency values. Forward contracts alter a
Fund's exposure to currency exchange rate activity and could result in losses to
the Fund if currencies do not perform as investment managers anticipate. A Fund
may also incur significant costs when converting assets from 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
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investing in specific foreign markets can at times be reduced by currency
strategies which may not involve the currency in which the foreign security is
denominated.
A Fund's foreign currency transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility, the
International Bond Fund, International Equity Fund and Strategic Income Fund
may, subject to compliance with each Fund's limitations applicable to its
investment in debt securities, invest in instruments issued by the U.S. or a
foreign government or by private issuers that return principal and/or pay
interest to investors in amounts which are linked to the level of a particular
foreign index ("foreign index-linked instruments"). Foreign index-linked
instruments have the investment characteristics of particular securities,
securities indexes, futures contracts or currencies. Such instruments may take
a variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries, or the differential in
interest rates between particular countries. In the case of foreign index-
linked instruments linking the interest component to a foreign index, the amount
of interest payable will adjust periodically in response to changes in the level
of the foreign index during the term of the foreign index-linked instrument.
BRADY BONDS
Each of the Convertible Fund, High Yield Corporate Bond Fund, International
Bond Fund, Strategic Income Fund, Strategic Value Fund and Total Return Fund may
invest a portion of its assets in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to sovereign entities for
new obligations in connection with debt restructurings. Brady 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.
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U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Brady Bonds involve various risk factors including the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds. There can be no assurance that Brady Bonds in
which the Fund may invest will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Fund to suffer a loss of
interest or principal on any of its holdings.
MUNICIPAL SECURITIES
Municipal securities generally are understood to include debt obligations
issued by, or on behalf of, states, territories and possessions of the United
States and their political sub-divisions, agencies and instrumentalities and the
District of Columbia, to obtain funds for various public purposes, including
construction of a wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and extensions of loans to
public institutions and facilities. The yields on municipal securities depend
upon a variety of factors, including general economic and monetary conditions,
general money market conditions, general conditions of the municipal securities
market, the financial condition of the issuer, the size of a particular
offering, the maturity of the obligations offered and the rating of the issue or
issues. Municipal securities also may be subject to the provisions of
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bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, the principal of,
and interest on, its or their municipal securities may be materially and
adversely affected.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power for the payment of
principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues. They, also, are usually general
obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financial
assistance until long-term financing can be arranged. The long-term bonds then
provide funds for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the FHA under the FNMA or GNMA.
Project Notes are instruments sold by the Department of Housing and Urban
Development ("HUD") but issued by a state or local housing agency to provide
financing for a variety of programs. They are backed by the full faith and
credit of the U.S. government, and generally carry a term of one year or less.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365
days or less) promissory notes issued by municipalities to supplement their cash
flow.
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and
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revenue bonds. Issuers of general obligation bonds include states, counties,
cities, towns and regional districts. The proceeds of these obligations are
used to fund a wide range of public projects, including construction or
improvement of schools, highways and roads, and water and sewer systems. The
basic security behind general obligation bonds is the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
The taxes that can be levied for the payment of debt service may be limited or
unlimited as to the rate or amount of special assessments.
A revenue bond is not secured by the full faith, credit and taxing power of
an issuer. Rather, the principal security for a revenue bond is generally the
net revenue derived from a particular facility, group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects,
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund which may be used
to make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security and credit enhancement
guarantees available to them, including partially or fully insured mortgages,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. Some authorities are provided further
security in the form of a state's assurance (although without obligation) to
make up deficiencies in the debt service reserve fund.
An entire issue of Municipal Bonds may be purchased by one or a small
number of institutional investors such as the Funds. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the Securities Act of 1933 prior to offer and sale, unless an exemption from
such registration is available, Municipal Bonds which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for Municipal
Bonds which were not publicly offered initially.
The Tax Free Bond Fund may invest more than 25% of its total assets in
Municipal Bonds the issuers of which are located in the same state and may
invest more than 25% of its total assets in Municipal Bonds the security of
which is derived from any one of
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the following categories: hospitals and health facilities; turnpikes and toll
roads; ports and airports; colleges and universities; public housing
authorities; general obligations of states and localities; lease rental
obligations of states and local authorities; state and local housing finance
authorities; municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. government guaranteed securities; or industrial
development and pollution control bonds. There could be economic, business or
political developments which might affect all Municipal Bonds of a similar type.
However, the Fund believes that the most important consideration affecting risk
is the quality of Municipal Bonds.
The Tax Free Bond Fund may engage in short-term trading (selling securities
held for brief periods of time, usually less than three months) if the Sub-
Adviser believes that such transactions, net of costs including taxes, if any,
would improve the overall return on its portfolio. The needs of different
classes of lenders and borrowers and their changing preferences and
circumstances have in the past caused market dislocations unrelated to
fundamental creditworthiness and trends in interest rates which have presented
market trading opportunities. There can be no assurance that such dislocations
will occur in the future or that the Fund will be able to take advantage of
them.
There are, in addition, a variety of hybrid and special types of municipal
obligations, such as municipal lease obligations, as well as numerous
differences in the security of Municipal Bonds both within and between the two
principal classifications described above. Municipal lease obligations are
municipal securities that may be supported by a lease or an installment purchase
contract issued by state and local government authorities to acquire funds to
obtain the use of a wide variety of equipment and facilities such as fire and
sanitation vehicles, computer equipment and other capital assets. These
obligations, which may be secured or unsecured, are not general obligations and
have evolved to make it possible for state and local governments to obtain the
use of property and equipment without meeting constitutional and statutory
requirements for the issuance of debt. Thus, municipal lease obligations have
special risks not normally associated with Municipal Bonds. These obligations
frequently contain "non-appropriation" clauses that provide that the
governmental issuer of the obligation has no obligation to make future payments
under the lease or contract unless money is appropriated for such purposes by
the legislative body on a yearly or other periodic
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basis. In addition to the "nonappropriation" risk, many municipal lease
obligations have not yet developed the depth of marketability associated with
Municipal Bonds; moreover, although the obligations may be secured by the leased
equipment, the disposition of the equipment in the event of foreclosure might
prove difficult. For the purpose of each Fund's investment restrictions, the
identification of the "issuer" of Municipal Bonds which are not General
Obligation Bonds is made by the Sub-Adviser on the basis of the characteristics
of the Municipal Bonds as described above, the most significant of which is the
source of funds for the payment of principal of and interest on such Bonds.
In order to limit certain of these risks, the California Tax Free Fund, New
York Tax Free Fund and Tax Free Bond Fund will not invest more than 10% (15% in
the case of the Strategic Income Fund) of its total assets in municipal lease
obligations that are illiquid (along with all other illiquid securities). The
liquidity of municipal lease obligations purchased by the Funds will be
determined pursuant to guidelines approved by the Board of Trustees. Factors
considered in making such determinations may include: the frequency of trades
and quotes for the obligation; the number of dealers willing to purchase or sell
the security and the number of other potential buyers; the willingness of
dealers to undertake to make a market in the security; the nature of marketplace
trades; the obligation's rating; and, if the security is unrated, the factors
generally considered by a rating agency.
There may be other types of municipal securities that become available
which are similar to the foregoing described municipal securities in which each
Fund may invest.
INCOME LEVEL AND CREDIT RISK Municipal obligations are subject to the
----------------------------
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal or
interest on its or their municipal obligations may be materially affected.
Although the Funds' quality standards are designed to minimize the credit
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risk of investing in Municipal Bonds, that risk cannot be entirely eliminated.
TAX CONSIDERATIONS With respect to the California Tax Free Fund, New York
------------------
Tax Free Fund and Tax Free Bond Fund, income derived by a Fund from taxable
investments, including but not limited to securities lending transactions,
repurchase transactions, options and futures transactions, and investments in
commercial paper, bankers' acceptances and certificates of deposit will be
taxable for federal, state and local income tax purposes when distributed to
shareholders. Income derived by a Fund from interest on direct obligations of
the U.S. government will be taxable for federal income tax purposes when
distributed to shareholders but, provided that the Fund meets the requirements
of state law and properly designates distributions to shareholders, such
distributions may be excludable from income for state personal income tax
purposes. A portion of original issue discount relating to stripped Municipal
Bonds and their coupons may also be treated as taxable income under certain
circumstances.
The Tax Reform Act of 1986 ("TRA") limited the types and volume of
Municipal Bonds qualifying for the federal income tax exemption for interest,
and the Code treats tax-exempt interest on certain Municipal Bonds as a tax
preference item included in the alternative minimum tax base for corporate and
noncorporate shareholders. In addition, all tax-exempt interest may result in
or increase a corporation's liability under the corporate alternative minimum
tax, because a portion of the difference between corporate "adjusted current
earnings" and alternative minimum taxable income is treated as a tax preference
item. Further, an issuer's failure to comply with the detailed and numerous
requirements imposed by the Code after bonds have been issued may cause the
retroactive revocation of the tax-exempt status of certain Municipal Bonds after
their issuance. The Funds intend to monitor developments in the municipal bond
market to determine whether any defensive action should be taken.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
Industrial Development Bonds which pay tax-exempt interest are, in most
cases, revenue bonds and are issued by, or on behalf of, public authorities to
raise money to finance various privately operated facilities for business,
manufacturing, housing, sports, and pollution control. These bonds are also
used to finance public facilities such as airports, mass transit
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systems, ports, and parking. The payment of the principal and interest on such
bonds is solely dependent on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of the real and personal property
so financed as security for such payments. These bonds are generally not
secured by the taxing power of the municipality but are secured by the revenues
of the authority derived from payments by the industrial user.
Industrial Development and Pollution Control Bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Industrial Development Bonds issued after
the effective date of the TRA, as well as certain other bonds, are now
classified as "private activity bonds." Some, but not all, private activity
bonds issued after that date qualify to pay tax-exempt interest.
VARIABLE RATE DEMAND NOTES ("VRDNS")
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund
may invest in tax-exempt obligations which contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30, 60, 90, 180 or 365-day
intervals. The interest rates are adjustable at various intervals to the
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDN at approximately the par
value of the VRDN on the adjustment date. The adjustments are typically based
upon the prime rate of a bank or some other appropriate interest rate adjustment
index.
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund
may also invest in VRDNs in the form of participation interests ("Participating
VRDNs") in variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank ("Institution"). Participating VRDNs provide a Fund
with a specified undivided interest (up to 100%) of the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDNs from the Institution upon a specified number
of days' notice, not to exceed seven days. In addition, the Participating VRDN
is backed up by an irrevocable letter of credit or guaranty of the Institution.
A Fund has an undivided
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interest in the underlying obligation and thus participates on the same basis as
the Institution in such obligation, except that the Institution typically
retains fees out of the interest paid or the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase
commitment.
FLOATING AND VARIABLE RATE SECURITIES
Floating and variable rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or may be based
on an event, such as a change in the prime rate.
The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money-market
index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. While, because of the interest rate
reset feature, floaters provide the Funds with a certain degree of protection
against rises in interest rates, the Funds will participate in any declines in
interest rates as well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of the
Funds' limitations on investments in such securities.
ZERO COUPON BONDS
The Funds, except the Equity Index Fund, may purchase zero coupon bonds,
which are debt obligations issued without any requirement for the periodic
payment of interest. Zero coupon bonds are issued at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would accrue and compound over the period until maturity at a
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rate of interest reflecting market rate at the time of issuance. Because
interest on zero coupon bonds is not distributed on a current basis but is, in
effect, compounded, zero coupon bonds tend to be subject to greater market risk
than interest paying securities of similar maturities. The discount represents
income, a portion of which the Funds must accrue and distribute every year even
though a Fund receives no payment on the investment in that year. Zero coupon
bonds tend to be more volatile than conventional debt securities.
STANDBY COMMITMENTS -- OBLIGATIONS WITH PUTS ATTACHED
The California Tax Free Fund, New York Tax Free Fund, Strategic Income Fund
and Tax Free Bond Fund may purchase municipal securities together with the right
to resell the securities to the seller at an agreed-upon price or yield within a
specified period prior to the maturity date of the securities. Although it is
not a put option in the usual sense, such a right to resell is commonly known as
a "put" and is also referred to as a "standby commitment." Each Fund may pay
for a standby commitment either separately, in cash, or in the form of a higher
price for the securities which are acquired subject to the standby commitment,
thus increasing the cost of securities and reducing the yield otherwise
available from the same security. The Sub-Adviser understands that the Internal
Revenue Service (the "IRS") has issued a revenue ruling to the effect that,
under specified circumstances, a registered investment company will be the owner
of tax-exempt municipal obligations acquired subject to a put option. The IRS
has also issued private letter rulings to certain taxpayers (which do not serve
as precedent for other taxpayers) to the effect that tax-exempt interest
received by a regulated investment company with respect to such obligations will
be tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The IRS has subsequently announced
that it will not ordinarily issue advance ruling letters as to the identity of
the true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the
security, or the participation interest therein, to be purchased by either the
seller or a third party. Each of the California Tax Free Fund, New York Tax
Free Fund and Tax Free Bond Fund intends to take the position that it is the
owner of any municipal obligations acquired subject to a standby commitment and
that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands; however, no assurance can be given that this
position would
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<PAGE>
prevail if challenged. In addition, there is no assurance that standby
commitments will be available to a Fund, nor has the California Tax Free Fund,
New York Tax Free Fund or Tax Free Bond Fund assumed that such commitments would
continue to be available under all market conditions.
A standby commitment may not be used to affect a Fund's valuation of the
municipal security underlying the commitment. Any consideration paid by a Fund
for the standby commitment, whether paid in cash or by paying a premium for the
underlying security, which increases the cost of the security and reduces the
yield otherwise available from the same security, will be accounted for by the
Fund as unrealized depreciation until the standby commitment is exercised or has
expired.
WHEN-ISSUED SECURITIES
The Funds may from time to time purchase securities on a "when-issued"
basis. Debt securities, including municipal bonds, are often issued in this
manner. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery of and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase (60 days for municipal
bonds and notes). During the period between purchase and settlement, no payment
is made by the Fund and no interest accrues to the Fund. To the extent that
assets of a Fund are held in cash pending the settlement of a purchase of
securities, that Fund would earn no income; however, it is the Trust's intention
that each Fund will be fully invested to the extent practicable and subject to
the policies stated herein. Although when-issued securities may be sold prior to
the settlement date, the Trust intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
At the time the Trust makes the commitment on behalf of a Fund to purchase
a security on a when-issued basis, it will record the transaction and reflect
the amount due and the value of the security in determining the Fund's net asset
value. The market value of the when-issued security may be more or less than
the purchase price payable at the settlement date. The Trustees do not believe
that a Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued basis. Each Fund will establish a
segregated account in which it will maintain liquid assets at least equal in
value
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<PAGE>
to commitments for when-issued securities. Such segregated securities either
will mature or, if necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each Fund may buy Mortgage-related securities. Mortgage-related securities
are interests in pools of residential or commercial mortgage loans or leases,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Funds, to
the extent permitted in the Prospectus, may also invest in debt securities which
are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of a mortgage-related security with
prepayment features may not increase as much as other fixed-income securities.
MORTGAGE PASS-THROUGH SECURITIES Interests in pools of mortgage-related
--------------------------------
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, mortgage pass-through securities
provide a monthly payment which consists of both interest and principal
payments. In effect, these payments are a "pass-through" of the monthly
payments made by the individual borrowers on their residential mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or foreclosure, net of fees or
costs which may be incurred. Some mortgage-related securities (such as
securities issued by the GNMA) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment. Some
mortgage pass-through certificates may include securities backed by adjustable-
rate mortgages which bear interest at a rate that will be adjusted periodically.
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<PAGE>
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 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.
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<PAGE>
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation and acts as a government instrumentality under authority
granted by Congress. FHLMC was formerly owned by the twelve Federal Home Loan
Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCs") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and collection of principal, but PCs are not backed by the full
faith and credit of the U.S. government.
If either fixed or variable rate pass-through securities issued by the U.S.
government or its agencies or instrumentalities are developed in the future, the
Funds reserve the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the Funds'
investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance policies
or guarantee arrangements. The Funds may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of 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
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<PAGE>
of mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (ii) privately
issued securities which are collateralized by pools of mortgages in which
payment of principal and interest is guaranteed by the issuer and such guarantee
is collateralized by U.S. government securities; and (iii) other privately
issued securities in which the proceeds of the issuance are invested in
mortgage-backed securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality of the U.S. government.
The California Tax Free Fund, New York Tax Free Fund and Equity Index Fund,
however, may not invest in non-government mortgage pass-through securities.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. No Fund will purchase mortgage-related securities or any other
assets which in the Sub-Advisers' opinion are illiquid if, as a result, more
than 10% (15% in the case of the International Equity, International Bond,
Strategic Income and Strategic Value Funds) of the value of the Fund's total
assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) A CMO is a hybrid between a
------------------------------------------
mortgage-backed bond and a mortgage pass-through security. Interest and prepaid
principal is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs are structured into multiple classes, each
bearing a different stated maturity - actual maturing and average life will
depend upon the prepayment experience of the collateral. CMOs provide for a
modified form of call protection through a de facto breakdown of the underlying
--------
pool of mortgages according to how quickly the loans are repaid. Monthly
payment of principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.
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<PAGE>
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond Offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added
to principal and a like amount is paid as principal on the Series A, B or C Bond
currently being paid off. When the Series A, B and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
The eligible Funds will not invest in any privately issued CMOs that do not
meet the requirements of Rule 3a-7 under the 1940 Act if, as a result of such
investment, more than 5% of a Fund's net assets would be invested in any one
CMO, more than 10% of the Fund's net assets would be invested in CMOs and other
investment company securities in the aggregate, or the Fund would hold more than
3% of any outstanding issue of CMOs.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt obligations
-----------------------------------------
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because 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-37
<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.
GOVERNMENT FUND The Government Fund may invest in securities
---------------
collateralized by mortgages or pools of mortgages the issuer of which has
qualified to be treated as a "REMIC". CMOs and REMICs may offer a higher yield
than U.S. government securities, but they may also be subject to greater price
fluctuation and credit risk. In addition, CMOs and REMICs typically will be
issued in a variety of classes or series, which have different maturities and
are retired in sequence. Privately issued CMOs and REMICs are not government
securities nor are they supported in any way by any governmental agency or
instrumen tality. In the event of a default by an issuer of a CMO or a REMIC,
there is no assurance that the collateral securing such CMO or REMIC will be
sufficient to pay principal and interest. It is possible that there will be
limited opportunities for trading CMOs and REMICs in the over-the-counter
market, the depth and liquidity of which will vary from issue to issue and from
time to time. Holders of "residual" interests in REMICs (including the Fund)
could be required to recognize potential phantom income, as could shareholders
(including unrelated business taxable income for tax-exempt shareholders) of
funds that hold such interests. The Government Fund will consider this 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
B-38
<PAGE>
on a pool of mortgage assets. A common type of SMBS will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Fund's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES The value of some
------------------------------------------------
mortgage-backed securities in which the 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
B-39
<PAGE>
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
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
OTHER ASSET-BACKED SECURITIES Several types of asset-backed securities
-----------------------------
have already been offered to investors, including CARS/SM/ ("Certificates for
Automobile Receivables/SM/"). CARS/SM/ represent undivided fractional interests
in a trust ("trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/SM/ are passed-through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor's return
on CARS/SM/ may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws, or other
B-40
<PAGE>
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
account with the Fund's custodian. The segregated assets are pledged to the
broker pursuant to applicable margin rules. If a broker with which the Fund has
open short sales, were to become bankrupt, a Fund could experience losses or
delays in recovering gains on short sales. The Funds will only enter into short
sales against the box with brokers the Sub-Advisers believe are creditworthy.
Short sales against the box will be limited to no more than 25% of a Fund's
total assets.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS Any Fund, except the Money Market Fund and the Tax
--------------------
Free Bond Fund, may sell ("write") covered call options on the portfolio
securities of such Fund in an attempt to enhance investment performance. The
California Tax Free Fund and New York Tax Free Fund may purchase and sell both
put and call options on debt securities in standardized contracts traded on
national securities exchanges, boards of trade, or similar entities, or quoted
on NASDAQ, and agreements, sometimes called "cash puts," which may accompany the
purchase of a new issue of bonds from a dealer. A call option sold by a Fund is
a
B-41
<PAGE>
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.
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.
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<PAGE>
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 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
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call and put option writing transactions be covered, and limitations imposed on
regulated investment companies under federal tax law, the International Bond
Fund and International Equity Fund may, to the extent determined appropriate by
the Sub-Adviser, engage without limitation in the writing of options on their
portfolio securities.
WRITING PUT OPTIONS Each Fund, except the Money Market Fund and the Tax
-------------------
Free Bond Fund, may also write covered put options. Put options written by a
Fund are agreements by a Fund, for a premium received by the Fund, to purchase
specified securities at a specified price if the option is exercised during the
option period. A put option written by the Fund is "covered" if the Fund
maintains liquid assets with a value equal to the exercise price in a segregated
account with its custodian. A put option is also "covered" if the Fund holds on
a share-for-share basis a put on the same security as the put written, where the
exercise price of the put held is equal to or greater than the exercise price of
the put written, or less than the exercise price of the put written if the
difference is maintained by the Fund in liquid assets in a segregated account
with its custodian.
The premium which the Funds receive from writing a put option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the option period, supply and demand and
interest rates.
A covered put writer assumes the risk that the market price for the
underlying security will fall below the exercise price, in which case the writer
could be required to purchase the security at a higher price than the then-
current market price of the security. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option.
The Funds may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. The Funds also may effect a closing purchase transaction, in the
case of a put option, to permit the Funds to maintain their holdings of the
deposited U.S. Treasury obligations, to write another put option to the extent
that the exercise price thereof is secured by the deposited U.S. Treasury
obligations, or to utilize the proceeds from the sale of such obligations to
make other investments.
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If a Fund is able to enter into a closing purchase transaction, the Fund
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option respectively. After writing a put option, the Fund may incur a loss equal
to the difference between the exercise price of the option and the sum of the
market value of the underlying security plus the premium received from the sale
of the option.
In addition, the Funds may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the Funds
may write covered put and call options and enter into so-called "straddle"
transactions involving put or call options may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") for qualification as
a regulated investment company and the Trust's intention that each Fund qualify
as such. Subject to the limitation that all call and put option writing
transactions be covered, the Funds may, to the extent determined appropriate by
the Sub-Advisers, engage without limitation in the writing of options on U.S.
government securities.
PURCHASING OPTIONS Each Fund, except Money Market Fund and the Tax Free
------------------
Bond Fund, may purchase put or call options which are traded on an Exchange or
in the over-the-counter market. Options traded in the over-the-counter market
may not be as actively traded as those listed on an Exchange. Accordingly, it
may be more difficult to value such options and to be assured that they can be
closed out at any time. The Funds will engage in such transactions only with
firms the Sub-Advisers deem to be of sufficient creditworthiness so as to
minimize these risks.
The Funds may purchase put options on securities to protect their holdings
in an underlying or related security against a substantial decline in market
value. Securities are considered related if their price movements generally
correlate with one another. A Fund would buy a put option in anticipation of a
decline in the market value of such securities. The purchase of a put option
would entitle the Fund, in exchange for the premium paid, to sell a security at
a specified price upon exercise of the option during the option period. The
purchase of put options on securities held in the portfolio or related to such
securities will enable a Fund to preserve, at least partially, unrealized gains
occurring prior to the purchase of the option on a portfolio security without
actually selling the security. In addition, the Fund will continue to receive
interest or dividend
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income on the security. The put options purchased by the Fund may include, but
are not limited to, "protective puts" in which the security to be sold is
identical or substantially identical to a security already held by the Fund or
to a security which the Fund has the right to purchase. The Fund would
ordinarily recognize a gain if the value of the securities decreased during the
option period below the exercise price sufficiently to cover the premium. The
Fund would recognize a loss if the value of the securities remained above the
difference between the exercise price and the premium.
The Funds may also purchase call options on securities the Funds intend to
purchase to protect against substantial increases in prices of such securities
pending their ability to invest in an orderly manner in such securities. The
purchase of a call option would entitle the Fund, in exchange for the premium
paid, to purchase a security at a specified price upon exercise of the option
during the option period. The Fund would ordinarily realize a gain if the value
of the securities increased during the option period above the exercise price
sufficiently to cover the premium. The Fund would have a loss if the value of
the securities remained below the sum of the premium and the exercise price
during the option period. In order to terminate an option position, the Funds
may sell put or call options identical to those previously purchased, which
could result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put or call option when it was purchased.
MARRIED PUTS. Each Fund, except the Equity Index Fund, Money Market Fund
------------
and Tax Free Bond Fund may engage in a strategy known as "married puts." This
strategy is most typically used when the Fund owns a particular common stock or
security convertible into common stock and wishes to effect a short sale against
the box (see "Short Sales Against the Box") but for various reasons is unable to
---
do so. The Fund may then enter into a series of stock and related option
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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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 Capital Appreciation Fund, Convertible Fund,
Government Fund, High Yield Corporate Bond Fund, Money Market Fund, Total Return
Fund and Value Fund will not purchase a put or call option if, as a result, the
amount of premiums paid for all put and call options then outstanding would
exceed 10% of the value of the Fund's total assets.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period.
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The ability of a Fund to successfully utilize options may depend in part upon
the ability of the Sub-Adviser to forecast interest rates and other economic
factors correctly.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
OPTIONS ON FOREIGN CURRENCIES
Each Fund, except the California Tax Free Fund, the Equity Index Fund, the
Government Fund, the Money Market Fund, the New York Tax Free Fund and the Tax
Free Bond Fund, may, to the extent that it invests in foreign securities,
purchase and write options on foreign currencies for hedging purposes in a
manner similar to that of the Fund's transactions in currency futures contracts
or forward contracts. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such declines in the value of portfolio
securities, a Fund may purchase put options on the foreign currency. If the
value of the currency does decline, that Fund will have the right to sell such
currency for a fixed amount of dollars which exceeds the market value of such
currency, resulting in a gain that may offset, in whole or in part, the negative
effect of currency depreciation on the value of the Fund's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Fund may purchase call options on such currency. If the value of
such currency does increase, the purchase of such call options would enable the
Fund to purchase currency for a fixed amount of 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
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or to the extent anticipated, a Fund could sustain losses on transactions in
foreign currency options which would deprive it of a portion or all of the
benefits of advantageous changes in such rates.
A Fund may also write options on foreign currencies for hedging purposes.
For example, if a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the decrease in value of portfolio securities will be offset by
the amount of the premium received by the Fund.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.
A call option written on foreign currency by a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in liquid assets in a segregated account with
its custodian.
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<PAGE>
As with other kinds of options transactions, the writing of an option on
foreign currency will constitute only a partial hedge up to the amount of the
premium received and a Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to a Fund's position, a Fund may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by a Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
A Fund also may use foreign currency options to protect against potential
losses in positions denominated in one foreign currency against another foreign
currency in which the Fund's assets are or may be denominated. There can be no
assurance that a liquid market will exist when a Fund seeks to close out an
option position. Furthermore, if trading restrictions or suspensions are
imposed on the options markets, a Fund may be unable to close out a position.
Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchanged-traded options. Foreign currency exchange-traded options generally
settle in cash, whereas options traded over-the-counter may settle in cash or
result in delivery of the underlying currency upon exercise of the option.
SECURITIES INDEX OPTIONS
The Funds may purchase call and put options on securities indexes (only
call options on the S&P 500 Composite Price Index in the case of the Equity
Index Fund) for the purpose of hedging against the risk of unfavorable price
movements which may adversely affect the value of a Fund's securities. The
Equity Index Fund may purchase call options on the S&P 500 Index to protect
against increases in the prices of securities underlying the Index that the
Equity Index Fund intends to purchase pending its ability to invest in such
securities in an orderly manner.
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<PAGE>
Unlike a securities option, which gives the holder the right to purchase or
sell specified securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the difference between the value of the underlying securities index on
the exercise date and the exercise price of the option, multiplied by (ii) a
fixed "index multiplier." In exchange for undertaking the obligation to make
such a cash payment, the writer of the securities index option receives a
premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 Composite Price Index or
the N.Y.S.E. Composite Index, or a narrower market index such as the S&P 100
Index. Indexes may also be based on an industry or market segment such as the
AMEX Oil and Gas Index or the Computer and Business Equipment Index. Options on
stock indexes are currently traded on the following exchanges, among others:
The Chicago Board Options Exchange, New York Stock Exchange, and American Stock
Exchange. Options on other types of securities indexes, which do not currently
exist, including indexes on debt securities, may be introduced and traded on
exchanges in the future. If such options are introduced, the Funds will not
purchase them until they have appropriately amended or supplemented the
Prospectus or Statement of Additional Information, or both.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Fund will not exactly match the
securities represented in the securities indexes on which options are based. In
addition, the purchase of securities index options involves essentially the same
risks as the purchase of options on futures contracts. The principal risk is
that the premium and transaction costs paid by a Fund in purchasing an option
will be lost as a result of unanticipated movements in prices of the securities
comprising the securities index on which the option is based. Gains or losses
on a Fund's transactions in securities index options depend on price movements
in the securities market generally (or, for narrow market indexes, in a
particular industry or segment of the market) rather than the price movements of
individual securities held by a Fund. In this
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<PAGE>
respect, purchasing a securities index put (or call) option is analogous to the
purchase of a put (or call) on a securities index futures contract.
A Fund may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Fund may also allow options to expire unexercised.
FUTURES TRANSACTIONS
The California Tax Free Fund, Convertible Fund, Government Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, New
York Tax Free Fund, Strategic Income Fund, Strategic Value Fund, Tax Free Bond
Fund and Total Return Fund may purchase and sell futures contracts on debt
securities and on indexes of debt securities in order to attempt to protect
against the effects of adverse changes in interest rates, to lengthen or shorten
the average maturity or duration of a Fund's portfolio and for other appropriate
risk management purposes. For example, a Fund may purchase futures contracts as
a substitute for the purchase of longer-term debt securities to lengthen the
average duration of a Fund's portfolio of fixed-income securities. The
Government Fund may enter into futures contracts and purchase and write options
on futures, which are not U.S. government securities, in order to attempt to
hedge against changes in interest rates and to seek current income. Such
futures contracts would obligate the Fund to make or take delivery of certain
debt securities or an amount of cash upon expiration of the futures contract,
although most futures positions typically are closed out through an offsetting
transaction prior to expiration. The Capital Appreciation Fund, Convertible
Fund, Equity Index Fund, International Equity Fund, Strategic Income Fund,
Strategic Value Fund, Total Return Fund and Value Fund may purchase and sell
stock index futures to hedge the equity portion of those Funds' securities
portfolios with regard to market (systematic) risk (involving the market's
assessment of overall economic prospects), as distinguished from stock-specific
risk (involving the market's evaluation of the merits of the issuer of a
particular security). These Funds, and the International Bond Fund, may also
purchase and sell other futures when deemed appropriate, in order to hedge the
equity or non-equity portions of their portfolios. In addition, each Fund,
except the California Tax Free Fund, Equity Index Fund, Government Fund, Money
Market Fund, New York Tax Free Fund and Tax Free Bond Fund may, to the extent it
invests in foreign
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securities, enter into contracts for the future delivery of foreign currencies
to hedge against changes in currency exchange rates. Each of the Funds may also
purchase and write put and call options on futures contracts of the type into
which such Fund is authorized to enter and may engage in related closing
transactions. In the United States, all such futures on debt securities, debt
index futures, stock index futures, foreign currency futures and related options
will be traded on exchanges that are regulated by the Commodity Futures Trading
Commission ("CFTC"). Subject to applicable CFTC rules, the Funds also may enter
into futures contracts traded on the following foreign futures exchanges:
Frankfurt, Tokyo, London and Paris, as long as trading on the aforesaid foreign
futures exchanges does not subject a Fund to risks that are materially greater
than the risks associated with trading on U.S. exchanges. The International
Bond Fund and International Equity Fund are not limited to the above-listed
exchanges.
A futures contract is an agreement to buy or sell a security or currency
(or to deliver a final cash settlement price in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contracts), for a set price at a future date. When interest rates are
changing and portfolio values are falling, futures contracts can offset a
decline in the value of a Fund's current portfolio securities. When interest
rates are changing and portfolio values are rising, the purchase of futures
contracts can secure better effective rates or 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
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of the contract assuming all contractual obligations have been satisfied. Each
Fund expects to earn interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark-to-
market its open futures positions.
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
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settlement price, unless such price does not appear to the Sub-Advisers to
reflect the fair value of the contract, in which case the positions will be
valued by or under the direction of the Trustees.
Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
on debt securities. This would be done, for example, when the Fund intends to
purchase particular securities and it has the necessary cash, but expects the
rate of return available in the securities markets at that time to be less
favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Fund of purchasing
the securities will be offset, at least to some extent, by the rise in the value
of the futures position taken in anticipation of the subsequent securities
purchase. A Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to lengthen the average duration of the
Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
Because the only futures contracts currently available to hedge the Tax
Free Bond Fund's portfolio of municipal obligations are futures on various U.S.
government securities and futures on
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a municipal securities index, perfect correlation between that Fund's futures
positions and portfolio positions may be difficult to achieve.
SECURITIES INDEX FUTURES A securities index futures contract does not
------------------------
require the physical delivery of securities, but merely provides for profits and
losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A
stock index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the
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
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for a specified price. A purchase of a currency futures contract creates an
obligation by a Fund, as purchaser, to take delivery of an amount of currency at
a specified future time at a specified price. A Fund may sell a currency
futures contract, if the Sub-Adviser anticipates that exchange rates for a
particular currency will fall, as a hedge against a decline in the value of the
Fund's securities denominated in such currency. If the Sub-Adviser anticipates
that exchange rates will rise, the Fund may purchase a currency futures contract
to protect against an increase in the price of securities denominated in a
particular currency the Fund intends to purchase. Although the terms of
currency futures contracts specify actual delivery or receipt, in most instances
the contracts are closed out before the settlement date without the making or
taking of delivery of the currency. Closing out of a currency futures contract
is effected by entering into an offsetting purchase or sale transaction. To
offset a currency futures contract sold by a Fund, the Fund purchases a currency
futures contract for the same aggregate amount of currency and delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the Fund
is immediately paid the difference. Similarly, to close out a currency futures
contract purchased by the Fund, the Fund sells a currency futures contract. If
the offsetting sale price exceeds the purchase price, the Fund realizes a gain,
and if the offsetting sale price is less than the purchase price, the Fund
realizes a loss.
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
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traded on exchanges that are licensed and regulated by the CFTC for the purpose
of options trading, or, subject to applicable CFTC rules, on foreign exchanges.
It is the current policy of the Trust that the Funds will purchase or write only
options on futures contracts that are traded on a U.S. or foreign exchange or
board of trade. The Funds also may engage in related closing transactions with
respect to options on futures. A "call" option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a "long" position) at a specified exercise price at any time
before the option expires. A "put" option gives the purchaser the right, in
return for the premium paid, to sell a futures contract (assume a "short"
position), for a specified exercise price at any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a "long" futures
position, in the case of a "call," or a "short" futures position, in the case of
a "put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However,
as with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their 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
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rates, declining securities prices or declining exchange rates for a particular
currency. The purchase of a call option on a futures contract represents a
means of hedging against a market advance affecting securities prices or
currency exchange rates when the Fund is not fully invested or of lengthening
the average maturity or duration of a Fund's portfolio. Depending on the
pricing of the option compared to either the futures contract upon which it is
based or upon the price of the underlying securities or currencies, it may or
may not be less risky than ownership of the futures contract or underlying
securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are denominated. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of securities or the currencies in which such
securities are denominated.
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The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost to a Fund of the debt securities acquired by it will be reduced by the
amount of the option premium received. Of course, if market prices have
declined, the Fund's purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
--------------------------------------------------------------------
FUTURES CONTRACTS In general, the Funds will engage in transactions in futures
- -----------------
contracts and related options only for bona fide hedging and other appropriate
risk management purposes, and not for speculation. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
a Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price.
A put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
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.
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When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Tax Status."
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
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there will be a correlation between price movements in the hedging vehicle and
in the Fund's securities being hedged. In addition, there are significant
differences between the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge not to achieve
its objectives. The degree of imperfection of correlation depends on
circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends. It is also possible that, when a Fund has sold stock index futures
to hedge its portfolio against a decline in the market, the market may advance
while the value of the particular securities held in the Fund's portfolio may
decline. If this occurred, the Fund would incur a loss on the futures contracts
and also experience a decline in the value of its portfolio securities.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid market in the options. It is not
certain
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that such a market will develop. Although the Funds generally will purchase
only those options and futures contracts for which there appears to be an active
market, there is no assurance that a liquid market on an exchange will exist for
any particular option or futures contract at any particular time. In the event
no such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Fund would have to
exercise options it has purchased in order to realize any profit and would be
less able to limit its exposure to losses on options it has written.
Many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist. If the price
of a futures contract changes more than the price of the securities or
currencies, the Fund will experience either a loss or a gain on the futures
contracts which will not be completely offset by changes in the price of the
securities or currencies which are the subject of the hedge. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations affecting
the value of securities denominated in foreign currencies because the value of
such securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations.
SWAP AGREEMENTS
The International Bond Fund, International Equity Fund, Strategic Value
Fund and Strategic Income Fund may enter into interest rate, index and currency
exchange rate swap agreements for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded that desired return or for other
portfolio management purposes. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
----
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which
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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.
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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
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receive payments of principal and interest and other amounts directly from the
borrower and to enforce its rights as a lender directly against the borrower.
As an alternative, a Fund may purchase an assignment of all or a portion of a
lender's interest in a corporate loan, in which case, a Fund may be required
generally to rely on the assigning lender to demand payment and enforce its
rights against the borrower, but would otherwise be entitled to all of such
lender's rights in the corporate loan. A Fund also may purchase a Participation
Interest in a portion of the rights of a lender in a corporate loan. In such a
case, a Fund will be entitled to receive payments of principal, interest and
fees, if any, but generally will not be entitled to enforce its rights directly
against the agent bank or the borrower; rather a Fund must rely on the lending
institution for that purpose. A Fund will not act as an agent bank, a guarantor
or sole negotiator of a structure with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation Interests,
the agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Trust. A Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse against the borrower (which
is unlikely), a Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for
monitoring compliance with covenants contained in the corporate loan agreement
and for notifying holders of corporate loans of any failures of compliance.
Typically, under corporate loan agreements, the agent bank is given broad
discretion in enforcing the corporate loan agreement, and is obligated to use
only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on
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structuring and funding the corporate loan and other fees paid on a continuing
basis.
A financial institution's employment as an agent bank may be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, a Fund might incur certain costs and
delays in realizing payment on a corporate loan, or suffer a loss of principal
and/or interest. In situations involving intermediate Participants similar risks
may arise.
When a Fund acts as co-lender in connection with a participation interest
or when a Fund acquires a participation interest the terms of which provide that
a Fund will be in privity of contract with the corporate borrower, a Fund will
have direct recourse against the borrower in the event the borrower fails to pay
scheduled principal and interest. In all other cases, a Fund will look to the
agent bank to enforce appropriate credit remedies against the borrower. In
acquiring participation interests a Fund will conduct analysis and evaluation of
the financial condition of each such co-lender and participant to ensure that
the participation interest meets a Fund's qualitative standards. There is a
risk that there may not be a readily available market for loan participation
interests and, in some cases, this could result in a Fund disposing of such
securities at a substantial discount from face value or holding such security
until maturity. When a Fund is required to rely upon a lending institution to
pay the Fund principal, interest, and other amounts received by the lending
institution for the loan participation, the Fund will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification
and concentration of the Fund's portfolio. The Funds consider loan
participation interests not subject to puts to be illiquid.
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RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that a Fund invests in debt securities, it will be subject to
certain risks. The value of the debt securities held by a Fund, and thus the
net asset value of the shares of beneficial interest of the Fund, generally will
fluctuate depending on a number of factors, including, among others, changes in
the perceived creditworthiness of the issuers of those securities, movements in
interest rates, the average maturity of the Fund's investments, changes in the
relative values of the currencies in which the Fund's investments are
denominated relative to the U.S. dollar, and the extent to which the Fund hedges
its interest rate, credit and currency exchange rate risks. Generally, a rise
in interest rates will reduce the value of fixed income securities held by a
Fund, and a decline in interest rates will increase the value of fixed income
securities held by a Fund.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest-rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Fund's net asset value and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. A Fund records the interest on these securities
annually as income even though it receives no cash interest until the security's
maturity or payment date. Also, distributions on account of such interest
generally will be taxable to
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shareholders even if the Fund does not distribute cash to them. Therefore, in
order to pay taxes on this interest, shareholders may have to redeem some of
their shares to pay the tax or the Fund may have to sell some of its assets to
reduce the Fund's assets and may thereby increase its expense ratio and decrease
its rate of return.
HIGH YIELD CORPORATE BOND FUND, STRATEGIC
VALUE FUND AND STRATEGIC INCOME FUND
SPECIAL CONSIDERATIONS
Corporate debt securities may bear fixed, contingent, or variable rates of
interest and may involve equity features, such as conversion or exchange rights
or warrants for the acquisition of stock of the same or a different issuer,
participations based on revenues, sales or profits, or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
When and if available, debt securities may be purchased at a discount from
face value. However, the Funds do not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time, each Fund may
purchase securities not paying interest or dividends at the time acquired if, in
the opinion of the Sub-Adviser, such securities 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.
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EQUITY INDEX FUND
SPECIAL CONSIDERATIONS
The Equity Index Fund is managed using mathematical algorithms to determine
which stocks are to be purchased or sold to replicate the S&P 500 Index to the
extent feasible. From time to time, adjustments may be made in the Fund's
portfolio because of changes in the composition of the Index, but such changes
should be infrequent. No attempt is made to manage the portfolio in the
traditional sense using economic, financial and market analysis.
The Sub-Adviser believes that the indexing approach described above is an
effective method of simulating percentage changes in the S&P 500 Index.
"Standard & Poor's", "S&P 500", "S&P", "S&P 500", "Standard & Poor's 500"
and "500" are trademarks of Standard & Poor's Corporation and have been licensed
for use by Monitor Capital Advisors, Inc. S&P does not sponsor, endorse, sell
or promote the Fund or represent the advisability of investing in the Fund.
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the owners of the Fund or any
member of the public regarding the advisability of investing in securities
generally or in the Fund particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to Monitor is
the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to
Monitor or the Fund. S&P has no obligation to take the needs of Monitor or the
owners of the Fund into consideration in determining, composing or calculating
the S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of the Fund or the timing of the issuance
or sale of the Fund or in the determination or calculation of the equation by
which the Fund is to be converted into cash. S&P has no obligation or liability
in connection with the administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions
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therein. S&P makes no warranty, express or implied, as to results to be
obtained by Monitor, owners of the Fund, or any other person or entity from the
use of the S&P 500 Index or any data included therein. S&P makes no express or
implied warranties, and expressly disclaims all warranties of merchantability or
fitness for a particular purpose or use with respect to the S&P 500 Index or any
data included therein. Without limiting any of the foregoing, in no event shall
S&P have any liability for any special, punitive, indirect, or consequential
damages (including lost profits), even if notified of the possibility of such
damages.
TOTAL RETURN FUND
SPECIAL CONSIDERATIONS
Although the Total Return Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Sub-Adviser believes it is
appropriate to do so without regard to the length of time the particular
security may have been held, subject to certain tax requirements for
qualification as a regulated investment company under the Code. A high turnover
rate involves greater expenses to the Fund and may increase the possibility of
shareholders realizing taxable capital gains. The Fund engages in portfolio
trading if it believes a transaction, net of costs (including custodian
charges), will help in achieving its investment objective.
CALIFORNIA TAX FREE FUND AND NEW YORK TAX FREE FUND
SPECIAL CONSIDERATIONS
[TO BE UPDATED]
RISK FACTORS AFFECTING CALIFORNIA MUNICIPAL SECURITIES
The following information as to certain California State ("State") risk
factors is given to investors in view of the policy of the MainStay California
Tax Free Fund of concentrating its investments in California municipal issuers.
Such information constitutes only a brief discussion, does not purport to be a
complete description and is based on information from sources believed by the
Trust to be reliable, including official statements relating to securities
offerings of California and
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municipal issuers, and periodic publications by national ratings organizations.
Such information, however, has not been independently verified by the Trust.
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives, as discussed
below, could adversely affect the market values and marketability of, or result
in default of, existing obligations of the State. Obligations of the State or
local governments may also be affected by budgetary pressures affecting the
State and economic conditions in the State. The following information
constitutes only a brief summary and is not intended as a complete description.
Certain of the California municipal securities in which the Fund may invest
may be obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's General Fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of
the State's General Fund will be distributed in the future to counties, cities
and their various entities, is unclear.
Certain of the California municipal securities may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, Proposition 13 added Article XIIIA to the
California Constitu tion. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Legislation enacted by the California legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation. The apportionment of property taxes in
fiscal years after 1978-79 was revised pursuant to Statutes of 1979, Chapter
282, which provides relief funds from State moneys beginning in fiscal year
1979-80 and is designed to provide a permanent system for sharing State taxes
and budget funds with local agencies. Under Chapter 282, cities and counties
receive more of the remaining property tax revenues collected under Proposition
13 instead of direct State aid. School districts receive a correspondingly
reduced amount
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of property taxes, but receive compensation directly from the State and are
given additional relief.
On November 4, 1986, California voters approved an initiative statute known
as "Proposition 62." This statute (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity; (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction; (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed; (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA of the California Constitution; (v) prohibits the imposition of
transaction taxes and sales taxes on the sale of real property by local
governments; (vi) requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority of the electorate within two
years of the adoption of the initiative or be terminated by November 15, 1988;
(vii) requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of tax revenue allocated
to such local government occur in an amount equal to the revenues received by
such entity attributable to the tax levied in violation of the initiative; and
(viii) permits these provisions to be amended exclusively by the voters of the
State of California. In September 1988, the California Court of Appeals held
that it was unconstitutional to require that local tax measures be submitted to
the electorate, as described in (vi) above.
In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by non-charter cities in California without voter
approval.
In November 1996, California voters approved Proposition 218. The
initiative applied the provisions of Proposition 62 to all entities, including
charter cities. It requires that all taxes for general purposes obtain a simple
majority popular vote and that taxes for special purposes obtain a two-thirds
majority vote. Prior to the effectiveness of Proposition 218, charter cities
could levy certain taxes such as transient occupancy taxes and utility user's
taxes without a popular vote. Proposition 218 will also limit the authority of
local governments to impose property-related assessments, fees and charges,
requiring that
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such assessments be limited to the special benefit conferred and prohibiting
their use for general governmental services. Proposition 218 also allows voters
to use their initiative power to reduce or repeal previously-authorized taxes,
assessments, fees and charges.
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on the
bonds or other voter-authorized bonds. Article XIIIB prohibits the State from
spending "appropriations subject to limitation" in excess of the Appropriations
Limit. "Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues, and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed "the cost reasonably borne
by that entity in providing the regulation, product or service," but "proceeds
of taxes" exclude most State subventions to local governments, tax refunds and
some benefit payments such as unemployment insurance. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government and, pursuant to Proposition 111,
appropriations for qualified capital outlay projects and appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle weight
fees above January 1, 1990 levels, and appropriation of certain special taxes
imposed by initiative (e.g., increased cigarette and tobacco taxes enacted by
Proposition 99 in 1988). The Appropriations Limit may also be exceeded in cases
of emergency.
The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in State per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. The measurement of change in population is a blended average of
statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. As amended by Proposition 111, the
Appropriations Limit is tested over consecutive two-year periods. Any excess of
the aggregate "proceeds of taxes" received over such a two-year
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period above the combined Appropriations Limits for those two years is divided
equally between transfers to K-14 districts and refunds to taxpayers.
The legislature enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIIIB and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
On November 9, 1988, the State's voters approved Proposition 98, a combined
initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, enacted on June 5, 1990), K-14 schools are guaranteed the
greater of (a) in general, a fixed percent of General Fund revenues ("Test 1"),
(b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIIIB by reference to
State per capita personal income) and enrollment ("Test 2"), or (c) a third
test, which would replace Test 2 in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one percent is
less than the percentage growth in State per capita personal income ("Test 3").
Under Test 3, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 fiscal year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. The
percentage has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain
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State tax revenues in excess of the Article XIIIB limit to K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The legislature responded to these developments by designating "extra"
Proposition 98 payments in one year as a "loan" from future years' Proposition
98 entitlements, and also intended that the "extra" payments would not be
included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, called California Teachers'
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Association v. Gould, which challenged the validity of these off-budget loans.
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As part of the negotiations leading to the 1995-96 Budget Act, an oral agreement
was reached to settle this case. The formal settlement required adoption of
legislation satisfactory to the parties to implement its terms, which has
occurred. The court gave final approval of the settlement in late July, 1996.
The settlement provides, among other things, that both the State and K-14
schools share in the repayment of prior years' emergency loans to schools. Of
the total $1.76 billion in loans, the State will repay $935 million by
forgiveness of the amount owed, while schools will repay $825 million. The
State's share of the repayment will be reflected as an appropriation above the
current Proposition 98 base calculation. The schools' share of the repayment
will count as appropriations that count toward satisfying the Proposition 98
guarantee, or from "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact. The Director of Finance has certified that a settlement has occurred,
allowing approximately $351 million in appropriations from the 1995-96 fiscal
year to be disbursed to schools in August 1996.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal year 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues, per-pupil
funding at the K-12 level has increased by about 22% from the level in place
from 1991-92 through 1993-94, and is estimated at about $5,150 per ADA in 1997-
98. A significant amount of the "extra" Proposition 98 monies in the last few
years have been allocated to special programs, most particularly an initiative
to allow each classroom from grades K-3 to have no more than 20 pupils by the
end of the 1997-98 school year. There are also new
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initiatives for reading skills and to upgrade technology in high schools.
Certain California municipal securities in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
home mortgage by making any overdue payments. Under standard loan servicing
procedures, the filing of the formal notice of default does not occur unless at
least three full monthly payments have become due and remain unpaid. The power
of sale is exercised by posting and publishing a notice of sale for at least 20
days after expiration of the three-month reinstatement period. Therefore, the
effective minimum period for foreclosing on a mortgage could be in excess of
seven months after the initial default. Such time delays in collections could
disrupt the flow of revenues available to an issuer for the payment of debt
service on the outstanding obligations if such defaults occur with respect to a
substantial number of home mortgages or deeds of trust securing an issuer's
obligations.
Certain California municipal securities in the Fund may be obligations
which finance the acquisition of single family home mortgages for low- and
moderate-income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to the California
statutory limitations described above applicable to obligations secured by real
property. Under California anti-deficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage.
Under California law, mortgage loans secured by single family owner-
occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years of the term of the mortgage loan, and cannot in any
event exceed six months' advance interest on the amount prepaid in excess of 20
percent of the original principal amount of the mortgage loan. This limitation
could affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
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On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties. The
possibility exists that another such earthquake could create a major dislocation
of the State economy.
Congress passed and the President signed (on August 22, 1996) the Personal
Responsibility and Work Opportunity Act of 1996 making a fundamental reform of
the current welfare system. Among many provisions, the Law includes: (i)
conversion of Aid to Families with Dependent Children from an entitlement
program to a block grant titled Temporary Assistance for Needy Families (TANF),
with lifetime time limits on TANF recipients, work requirements and other
changes; (ii) provisions denying certain federal welfare and public benefits to
legal noncitizens, allowing states to elect to deny additional benefits
(including TANF) to legal noncitizens, and generally denying almost all benefits
to illegal immigrants; and (iii) changes in the Food Stamp program, including
reducing maximum benefits and imposing work requirements.
As part of the 1997-98 Budget Act legislative package, the Legislature and
Governor agreed on a comprehensive reform of the State's public assistance
programs to implement the new federal law. The new basic State welfare program
is called California Work Opportunity and Responsibility to Kids Act
("CalWORKs"), which replaces the former Aid to Families with Dependent Children
(AFDC) and Greater Avenues to Independence (GAIN) programs effective January 1,
1998. Consistent with the federal law, CalWORKs contains new time limits on
receipt of welfare aid, both lifetime as well as for any current period of aid.
The centerpiece of CalWORKs is the linkage of eligibility to work participation
requirements. Administration of the new Welfare-to-Work programs will be
largely at the county level, and counties are given financial incentives for
success in this program.
Although the long-term impact of the new federal Law and CalWORKs cannot be
determined until there has been more experience, the State does not presently
anticipate that these new programs will have an adverse financial impact on the
General Fund. Overall TANF grants from the federal government are expected to
equal or exceed the amounts the State would have received under the old AFDC
program.
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic
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conditions (including a recession which began in 1990) and growth of the largest
General Fund Programs - K-14 education, health, welfare and corrections - at
rates faster than the revenue base. During this period, expenditures exceeded
revenues in four out of six years up to 1992-93, and the State accumulated and
sustained a budget deficit approaching $2.8 billion at its peak at June 30,
1993. Between the 1991-92 and 1994-95 Fiscal Years, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance, including significant cuts in health and welfare program expenditures;
transfers of program responsibilities and funding from the State to local
governments; transfer of about $3.6 billion in annual local property tax
revenues from other local governments to local school districts, thereby
reducing State funding for schools under Proposition 98; and revenue increases
(particularly in the 1991-92 Fiscal Year budget), most of which were for a short
duration.
Despite these budget actions, the effects of the recession led to large,
unanticipated budget deficits. By the 1993-94 Fiscal Year, the accumulated
deficit was so large that it was impractical to budget to retire it in one year,
so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with other
factors such as disbursement of funds to local school districts "borrowed" from
future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to rely
on external debt markets to meet its cash needs, as a succession of notes and
revenue anticipation warrants were
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issued in the period from June 1992 to July 1994, often needed to pay previously
maturing notes or warrants. These borrowings were used also in part to spread
out the repayment of the accumulated budget deficit over the end of a fiscal
year, as noted earlier. The last and largest of these borrowings was $4.0
billion of revenue anticipation warrants which were issued in July, 1994 and
matured on April 25, 1996.
The State's financial condition improved markedly during the 1995-96 and
1996-97 fiscal years, with a combination of better than expected revenues,
slowdown in growth of social welfare programs, and continued spending restraint
based on the actions taken in earlier years. The State's cash position also
improved, and no external deficit borrowing has occurred over the end of these
two fiscal years.
The economy grew strongly during these fiscal years, and as a result, the
General Fund took in substantially greater tax revenues (around $2.2 billion in
1995-96 and $1.6 billion in 1996-97) than were initially planned when the
budgets were enacted. These additional funds were largely directed to school
spending as mandated by Proposition 98, and to make up shortfalls from reduced
federal health and welfare aid. The accumulated budget deficit from the
recession years was finally eliminated. In the Governor's 1998-99 Budget
Proposal, released January 9, 1998, the Department of Finance reported that the
State's budget reserve (the SFEU) totaled $461 million as of June 30, 1997.
On January 9, 1997, the Governor released his proposed budget for the 1997-
98 Fiscal Year (the "Proposed Budget"). The Proposed Budget estimated General
Fund revenues and transfers of about $50.7 billion, and proposed expenditures of
$50.3 billion. In May 1997, the Department of Finance increased its revenue
estimate for the upcoming fiscal year by $1.3 billion, in response to the
continued strong growth in the State's economy.
In May, 1997, action was taken by the California Supreme Court in an
ongoing lawsuit, PERS v. Wilson, which made final a judgment against the State
requiring an immediate payment from the General Fund to the Public Employees
Retirement Fund ("PERF") to make up certain deferrals in annual retirement fund
contributions which had been legislated in earlier years for budget savings, and
which the courts found to be unconstitutional. On July 30, 1997, following a
direction from the Governor, the Controller transferred $1.228 billion from the
General Fund to the PERF in satisfaction of the judgment, representing the
principal amount of the improperly deferred payments from 1995-96 and 1996-97.
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In late 1997, the plaintiffs filed a claim with the State Board of Control
for payment of interest under the Court rulings in an amount of $308 million.
The Department of Finance has recommended approval of this claim. If approved by
the Board of Control, the claim would become part of a claims bill to be paid in
the 1998-99 Fiscal Year.
Once the pension payment of $1.228 billion eliminated essentially all the
"increased" revenue in the budget, final agreement was reached within a few
weeks on a welfare reform package and the remainder of the budget. The
Legislature passed the Budget Bill on August 11, 1997, along with numerous
related bills to implement its provisions. On August 18, 1997, the Governor
signed the Budget Act, but vetoed approximately $314 million of specific
spending items, primarily in health and welfare and education areas from both
the General Fund and Special Funds. Most of this spending (approximately $200
million) was restored in later legislation passed before the end of the
Legislative Session.
The Budget Act anticipated General Fund revenues and transfers of $52.5
billion (a 6.8 percent increase over the final 1996-97 amount), and expenditures
of $52.8 billion (an 8.0 percent increase from the 1996-97 levels). The Budget
Act also included Special Fund expenditures of $14.4 billion (as against
estimated Special Fund revenues of $14.0 billion), and $2.1 billion of
expenditures from various Bond Funds. Following enactment of the Budget Act, the
State implemented its normal annual cash flow borrowing program, issuing $3.0
billion of notes which mature on June 30, 1998.
The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large increase in
funding for K-14 education under Proposition 98, reflecting strong revenues
which exceeded initial budgeted amounts. Part of the nearly $1.75 billion in
increased spending was allocated to prior fiscal years. Funds were provided to
fully pay for the cost-of-living-increase component of Proposition 98, and to
extend the class size reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension case judgment
payment, and brought funding of the State's pension contribution back to the
quarterly basis which existed prior to the deferral actions which were
invalidated by the courts.
3. Funding from the General Fund for the University of California and
California State University was increased by about
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6 percent ($121 million and $107 million, respectively), and there was no
increase in student fees.
4. Because of the effect of the pension payment, most other State programs
were continued at 1996-97 levels, adjusted for caseload changes.
5. Health and welfare costs were contained, continuing generally the grant
levels from prior years, as part of the initial implementation of the new
CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on uncertain federal
budget actions. About $300 million in federal funds, already included in the
federal FY 1997 and 1998 budgets, was included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax reductions. The
Renters Tax Credit was suspended for another year, saving approximately $500
million.
At the end of the Legislative Session on September 13, 1997, the
Legislature passed and the Governor later signed several bills encompassing a
coordinated package of fiscal reforms, mostly to take effect after the 1997-98
Fiscal Year. Included in the package are a variety of phased-in tax cuts,
conformity with certain provisions of the federal tax reform law passed earlier
in the year, and reform of funding for county trial courts, with the State to
assume greater financial responsibility. The Department of Finance estimates
that the major impact of these fiscal reforms will occur in Fiscal Year 1998-99
and subsequent years.
On January 9, 1998, the Governor released his Budget Proposal for the 1998-
99 Fiscal Year (the "Governor's Budget"). The Governor's Budget projects total
General Fund revenues and transfers of $55.4 billion, a $2.5 billion increase
(4.7 percent) over revised 1997-98 revenues. This revenue increase takes into
account reduced revenues of approximately $600 million from the 1997 tax cut
package, but also assumes approximately $500 million additional revenues
primarily associated with capital gains realizations. The Governor's Budget
notes, however, that capital gains activity and the resultant revenues derived
from it are very hard to predict.
Total General Fund expenditures for 1998-99 are recommended at $55.4
billion an increase of $2.4 billion (4.5 percent) above the revised 1997-98
level. The Governor's Budget includes funds to pay the interest claim relating
to the court decision on
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pension fund payments, PERS v. Wilson. The Governor's Budget projects that the
State will carry out its normal intra-year cash flow external borrowing in 1998-
99, in an estimated amount of $3.0 billion. The Governor's Budget projects that
the budget reserve, the SFEU, will be $296 million at June 30, 1999, slightly
lower than the projected level at June 30, 1998 PERS liability.
The Governor's Budget projects Special Fund revenues of $14.7 billion, and
Special Fund expenditures of $15.2 billion, in the 1998-99 Fiscal Year. A total
of $3.2 billion of bond fund expenditures are also proposed.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Funds had
suffered significant market losses in their investments, causing a liquidity
crisis for the Funds and the County. More than 200 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Funds. The bankruptcy filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to investments in high risk
"derivative" securities. On June 12, 1996, it emerged from bankruptcy after the
successful sale of $880 million in municipal bonds allowed the County to pay off
the last of its creditors. On January 7, 1997, the County returned to the
municipal bond market with a $136 million bond issue maturing in 13 years at an
insured yield of 7.23%.
The State is a party to numerous legal proceedings, many of which normally
recur in governmental operations. In addition, the State is involved in certain
other legal proceedings which, if decided against the State, may require the
State to make significant future expenditures or may impair future revenue
sources.
Due to the State's continuing budget problems, the State's general
obligation bonds were downgraded in July 1994 from A1" to "Aa" by Moody's, from
"A+" to "A" by S&P. The ratings companies expressed uncertainty in the State's
ability to balance its budget by 1996. However, on July 30, 1996, citing the
State's improving economy and budget situation, S&P upgraded the State's general
obligation bonds from "A" to "A+." There can be no assurance that such ratings
will continue for any given period of time or that they will not in the future
be further revised or withdrawn.
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RISK FACTORS AFFECTING NEW YORK MUNICIPAL SECURITIES
The following information as to certain New York State ("State") and New
York City ("City") risk factors is given to investors in view of the policy of
the MainStay New York Tax Free Fund of concentrating its investments in New York
municipal issuers. Such information constitutes only a brief discussion, does
not purport to be a complete description and is based on information from
sources believed by the Trust to be reliable, including official statements
relating to securities offerings of New York and municipal issuers, and periodic
publications by national ratings organizations. Such information, however, has
not been independently verified by the Trust.
There are a number of methods by which the State may incur debt. The State
may issue general obligations bonds. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes; and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State's authorities
("Authorities"). Payments of debt service on State general obligation and
State-guaranteed bonds and notes are legally enforceable obligations of the
State.
The State also employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but not general
obligations of the State. The fiscal stability of the State is related in part
to the fiscal stability of its public authorities.
Public authority operating expenses and debt service costs are generally
paid by revenues generated by the projects financed or operated, such as tolls
charged for the use of highways, bridges or tunnels, rentals charged for housing
units, and charges for occupancy at medical care facilities. In addition, State
legislation authorizes several financing techniques for
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public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, if local
assistance payments are diverted, the affected localities could seek additional
State assistance. Some authorities also receive moneys from State
appropriations to pay for the operating costs of certain of their programs. The
Metropolitan Transit Authority (the "MTA") receives the bulk of this money in
order to provide transit and commuter services.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating the "New York Local Government Assistance Corporation" ("LGAC"), a
public benefit corporation empowered to issue long-term obligations to fund
certain payments to local governments traditionally funded through the State's
annual seasonal borrowing. Over a period of years, the issuance of those long-
term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one-quarter of the four cent State
sales and use tax to pay debt service on these bonds. In addition, the
legislation imposed a cap on the annual seasonal borrowing of the State at $4.7
billion, less net proceeds of bonds issued by LGAC and bonds issued to provide
for capitalized interest, except in cases where the Governor and the legislative
leaders have certified both the need for additional borrowing and a schedule for
reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded.
On January 6, 1992, Moody's lowered from "A" to "Baa1" its rating of those
State bonds that are backed by annual legislative appropriations. As of
September 1997, S&P rated the same bonds as "BBB+" On February 11, 1997, Moody's
downgraded its rating of the State's general obligation bonds from "A" to "A2."
On January 13, 1992, S&P lowered its rating of the State's general obligation
bonds from "A" to "A-." As of September 1997, S&P rated general obligation
bonds as an "A".
The Governor presented his 1998-99 Executive Budget to the Legislature on
January 20, 1998. The Executive Budget contains financial projections for the
State's 1997-98 through 2000-01 fiscal years, detailed estimates of receipts and
a proposed Capital Program and Financing Plan for the 1997-98 through 2002-03
fiscal years. It is expected that the Governor will prepare
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amendments to his Executive Budget as permitted under law and that these
amendments will be reflected in a revised Financial Plan to be released on or
before February 19, 1998. There can be no assurance that the Legislature will
enact into law the Executive Budget as proposed by the Governor, or that the
State's adopted budget projections will not differ materially and adversely from
the projections set forth in this Update.
The 1998-99 Financial Plan is projected to be balanced on a cash basis in
the General Fund. Total General Fund receipts, including transfers from other
funds, are projected to be $36.22 billion, an increase of $1.02 billion over
projected receipts in the current fiscal year. Total General Fund
disbursements, including transfers to other funds, are projected to be $36.18
billion, an increase of $1.02 billion over the projected expenditures (including
prepayments), for the current fiscal year. As compared to the 1997-98 State
Financial Plan, the Executive Budget proposes year-to-year growth in General
Fund spending of 2.89 percent. State Funds spending (i.e., General Fund plus
other dedicated funds, with the exception of federal aid) is projected to grow
by 8.5 percent. Spending from All Governmental Funds (excluding transfers) is
proposed to increase by 7.6 percent from the prior fiscal year.
Current law and programmatic requirements are primarily responsible for the
year-to-date growth in General Fund spending. These include a current law
increase in school aid ($607 million), cost and enrollment growth in handicapped
education ($91 million) and Medicaid ($212 million), and employee contract
increases and inflation adjustments for State agency operations. The Executive
Budget also includes increases of $84 million for corrections programs to cover
new capacity demands and $152 million for mental health programs to finance
current law increases and the expansion of community beds. Other spending
growth reflects a requested increase of $108 million for the Judiciary and $117
million for long-term transfers due to the financing of CEFAP from resources
available in 1997-98, $37 million in welfare assistance savings, $36 million
from lower spending in General State charges, and $68 million in lower transfers
primarily due to the elimination of the Lottery transfer made in 1997-98.
The 1998-99 Financial Plan projects that the State will end 1998-99 with a
closing balance in the General Fund of $500 million, which reflects $400 million
in the TSRF and $100 million in the CRF, following an anticipated deposit of $35
million in the latter fund during the year. Detailed explanations of the 1998-
99 Financial Plan follow a discussion of the economic outlook.
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Moderate growth is projected to continue in 1998 and 1999 for employment,
wages and personal income, although the growth rates will lessen gradually
during the course of the two years. Personal income is estimated to grow by 5.4
percent in 1997, fueled in part by a continued large increase in financial
sector bonus payments, and is projected to grow 4.7 percent in 1998 and 4.4
percent in 1999. Increases in bonus payments at year-end 1998 are projected to
be modest, a substantial change from the rate of increase of the last few years.
Overall employment growth is expected to continue at a modest rate, reflecting
the slowing growth in the national economy, continued spending restraint in
government, and restructuring in the health care, social service, and banking
sectors.
The 1998-99 Financial Plan projects General Fund receipts (including
transfers from other funds) of $36.22 billion, an increase of $1.02 billion over
the estimated 1997-98 level. Recurring growth in the State General Fund tax base
is projected to be approximately six percent during 1998-99, after adjusting for
tax law and administrative changes. This growth rate is lower than the rates for
1996-97 or currently estimated for 1997-98, but roughly equivalent to the rate
for 1995-96.
The forecast of General Fund receipts in 1998-99 incorporates several
Executive Budget tax proposals that, if enacted, would further reduce receipts
otherwise available to the General Fund by approximately $700 million during
1998-99. The Executive Budget proposes accelerating school tax relief for
senior citizens under STAR, which is projected to reduce General Fund receipts
by $537 million in 1998-99. The proposed reduction supplements STAR tax
reductions already scheduled in law, which are projected at $187 million in
1998-99. The Budget also proposes several new tax-cut initiatives and other
funding changes that include reducing the fee to register passenger motor
vehicles and earmarking a larger portion of such fees to dedicated funds and
other purposes; extending the number of weeks in which certain clothing
purchases are exempt from sales taxes; more fully conforming State law to
reflect recent Federal changes in estate taxes; continuing lower pari-mutuel tax
rates; and accelerating scheduled property tax relief for farmers from 1999 to
1998. In addition to the specific tax and fee reductions discussed above, the
Executive Budget also proposes establishing a reserve of $100 million to permit
the acceleration into 1998-99 of other tax reductions that are otherwise
scheduled in law for implementation in future fiscal years.
General Fund receipts in 1998-99 will also be affected by the loss of
certain one-time receipts recorded in 1997-98, the largest of which include
approximately $200 million in
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retroactive federal reimbursements for prior-year social service spending
recorded as a transfer from other funds and about $55 million in retroactive
assessments on Office of Mental Retardation and Developmental Disabilities
facilities that were received in 1997-98 as miscellaneous receipts. Estimates
for 1998-99 also reflect the loss of one-time receipts from a tax amnesty
program.
Personal income tax collections in the General Fund are projected to
increase by $1.32 billion over 1997-98, from $18.50 billion to $19.82 billion.
The increase reflects growth in constant law liability of over six percent in
1998, down from an estimated 12 percent growth in 1997. Growth in personal
income tax liability in 1997 benefitted from a temporary surge in capital-gains
income in response to 1997 reductions in the federal tax rate on such income.
In addition to the General Fund receipts, approximately $724 million in personal
income tax collections will be deposited in special revenue funds to finance the
School Tax Assistance Program (STAR).
User tax collections and fee receipts are projected to reach $7.2 billion
in 1988-99, an increase of $144 million over the current year. The largest
source of receipts in this category is the sales and use tax, which accounts for
nearly 80 percent of projected receipts. Sales tax receipts are the most
responsive to economic trends such as nominal growth in income, prices,
employment, and consumer confidence. The strong growth in income experienced
this year produced continuing growth in the base of the sales and use tax of 5.2
percent in 1997-98. The sales tax growth rate projected for the coming year is
expected to be marginally higher.
The 1998-99 forecast for user taxes and fees also reflects the impact of
scheduled tax reductions that will lower receipts by $38 million, as well as the
impact of two Executive Budget proposals that are projected to lower receipts by
an additional $79 million. The first proposal would divert $30 million in motor
vehicle registration fees from the General Fund to the Dedicated Highway and
Bridge Trust Fund; the second would reduce fees for motor vehicle registrations,
which would further lower receipts by $49 million. The underlying growth of
receipts in this category is projected at 4 percent, after adjusting for these
scheduled and recommended changes.
In comparison to the current fiscal year, business tax receipts are
projected to decline slightly in 1998-99, falling from $4.98 billion. The
decline in this category is largely attributable to scheduled tax reductions.
In total, collections for corporation and utility taxes and the petroleum
business tax
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are projected to fall by $107 million from 1997-98. The decline in receipts in
these categories is partially offset by growth in the corporation franchise,
insurance and bank taxes, which are projected to grow by $88 million over the
current fiscal year.
Receipts from other taxes, which include taxes on estate and gifts, real
property gains, and pari-mutuel wagering, are projected to total $1.01 billion
in 1998-99, a decline of $78 million from the current year. The main reason for
the decline is an expected fall in the number and value of large estate tax
payments from the extraordinary level achieved in 1997-98. The decline also
reflects the first full-year impact of the repeal of the gains tax.
Miscellaneous receipts, which include license revenues, fee and fine
income, investment income and abandoned property proceeds, as well as the yield
of the largest share of the State's medical provider assessments, are projected
to fall from $1.57 billion in the current year to $1.4 billion in 1998-99, a
decline of $170 million. The decline is largely a result of the loss of over
$90 million in one-time transactions and $56 million in statutory reductions in
medical provider assessments.
Transfers to the General Fund from other funds consist primarily of tax
revenues in excess of debt service requirements. Proceeds from the one-cent
sales tax in excess of those used to support debt service payments to the Local
Government Assistance Corporation (LGAC) account for 85 percent of the 1998-99
receipts in this category. LGAC transfers to the General Fund are projected to
increase by $72 million to $1.55 billion in 1998-99, consistent with estimates
for sales and use receipts. Other transfers periodically include non-recurring
transactions, which result in significant annual increases and decreases for
this category. All other transfers are projected to decrease by $250 million to
$270 million in 1998-99 and thereafter.
The 1998-99 Financial Plan projects General Fund disbursements of $36.18
billion, an increase of $1.02 billion over projected spending for the current
year.
Disbursements from the category of Grants to Local Governments constitute
approximately 67.9 percent of all General Fund spending, and include payments to
local governments, non-profit providers and individuals. Disbursements in this
category are projected to increase by $931 million to $24.55 billion in 1998-99,
or 3.9 percent above 1997-98. The largest increases are for school aid and
Medicaid.
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School aid is projected at $9.47 billion in 1998-99, an increase of $607
million on a State fiscal year basis. This increase funds both the balance of
aid payable for the 1997-98 school year and a proposed 1998-99 school year
increase of $518 million. Medicaid costs are estimated to increase $212 million
to $5.68 billion, about the same spending level as in 1994-95. After adjusting
1997-98 spending for the one-time acceleration of a 53rd weekly Medicaid payment
scheduled for 1998-99, Medicaid spending is projected to increase by $348
million or 6.5 percent. The adjustment eliminates this extraordinary payment in
1997-98 for purposes of comparison with 1998-99. Spending in local assistance
programs for higher education, handicapped education, mental hygiene, local
public health and revenue sharing are also proposed to increase.
Support for State operations, which pays for the costs of operating the
Executive, Legislative, and Judicial branches of government, is projected to
increase by $524 million to $6.73 billion, or 8.4 percent higher than 1997-98.
This projected increase is primarily due to costs associated with an additional
27th payroll and current collective bargaining agreements, the loss of Federal
disproportionate share receipts that offset General Fund spending in mental
hygiene programs, and a $108 million requested increase in the Judiciary's
budget. Adjusting for the extra payroll, State operations spending increases by
a projected 6.1 percent. The State workforce is roughly 191,000 at present and
is projected to remain stable over the year.
Total spending in General State charges is projected to decline slightly
from 1997-98 to $2.23 billion. This annual decline reflects projected decreases
in one-time costs for pension and Court of Claims payments, offset by projected
increases for health insurance contributions, social security costs, and the
loss of reimbursements due to a reduction in the fringe benefit rate charged to
positions financed by non-General funds.
Transfers in support of debt service are projected to grow at 5.8 percent
in 1998-99, from $2.03 billion to $2.15 billion. Transfers in support of capital
projects for 1998-99 are estimated to total $190 million, a decrease of $453
million from 1997-98, reflecting the absence of one-time transfers for the
Hudson River Park and CEFAP in 1997-98.
All other transfers reflect remaining transfers from the General Fund to
other funds. These transfers decline by $68 million to $323 million in 1998-99,
reflecting non-recurring transfers in 1997-98 to the State University Tuition
Stabilization Fund ($29 million) and to the Lottery fund to
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support school aid as a result of lower-than-projected 1997-98 Lottery receipts
($70 million), offset by a $34 million increase in the State subsidy to the
Roswell Park Cancer Institute.
The Division of the Budget estimates that the 1998-99 Financial Plan
includes approximately $62 million in non-recurring resources, comprising less
than two-tenths of one percent of General Fund disbursements. The non-recurring
resources projected for use in 1998-99 consist of $27 million in retroactive
federal welfare reimbursements for family assistance recipients with HIV/AIDS,
$25 million in receipts from the Housing Finance Agency that were originally
anticipated in 1997-98, and $10 million in other measures, including $5 million
in asset sales.
For 1998-99, the Financial Plan projects disbursements of $30.16 billion
from Special Revenue Funds (SRFs), an increase of $2.32 billion or 8.3 percent
over 1997-98. Disbursements in State SRFs are projected at $8.29 billion, an
increase of $1.09 billion or 15.2 percent from 1997-98. Disbursements from
federal funds, which account for approximately three-quarters of all SRF
spending, are estimated at $21.87 billion in 1998-99, an increase of $1.22
billion or 5.9 percent from 1997-98.
The implementation of the first phase of the STAR program accounts for $724
million of the 1.09 billion increase in proposed State SRF spending in 1998-99.
Other projected State SRF spending increases include: $149 million in additional
operating assistance for mass transit systems; $82 million to expand the Child
Health Plus program, which provides health insurance for uninsured children
under 19 years of age; and $138 million for various State agency activities.
Spending from the State Lottery Fund is projected to increase slightly over
1997-98, while disbursements from the Indigent Care Fund are projected to remain
flat.
The $1.22 billion year-to-year growth in federal SRF spending is primarily
due to increases in Medicaid ($433 million), Children and Family Assistance
Programs ($297 million), education programs ($172 million), the expanded Child
Health Plus program ($144 million), and the welfare program ($50 million).
Disbursements from Capital Projects funds in 1998-99 are estimated at $4.82
billion, or $1.07 billion higher than 1997-98. The proposed spending plan
includes: $2.51 billion in disbursements for transportation purposes, including
the State and local highway and bridge program; $815 million for environmental
activities; $379 million for correctional services;
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$228 million for SUNY and CUNY; $290 million for mental hygiene projects; and
$375 million for CEFAP.
The projected 1998-99 General Fund cash flow will not depend on either
short-term spring borrowing or the issuance of LGAC bonds. The new-money bond
issuance portion of the LGAC program was completed in 1995-96, and provisions
prohibiting the State from returning to a reliance upon cash flow manipulation
to balance its budget will remain in bond covenants until the LGAC bonds are
retired.
The 1998-99 cash flow projects substantial closing balances in each quarter
of the fiscal year, with excesses in receipts over disbursements in every
quarter of the fiscal year and no monthly balance (prior to March) lower than
$1.5 billion. The closing fund balance is projected at $500 million.
The Executive Budget projects budget gaps of approximately $1.75 billion in
1999-00 growing to $3.75 billion in 2000-01.
General Fund receipts are projected at $36.14 billion and $35.75 billion
for 1999-00 and 2000-01, respectively. The receipt projections were prepared on
the basis of an economic forecast of a steadily growing national economy, in an
environment of low inflation and slow employment growth. The forecast for the
State's economic performance likewise is for slow but steady economic growth.
Personal income is expected to rise between 4.25 and 4.5 percent over this
period, with average total employment growth of slightly less than one percent a
year. Private sector employment is expected to rise slightly more rapidly.
Statutory changes affecting General Fund receipts are dominated by the
dedication of a portion of the income tax to fund school tax reductions under
STAR. Personal income receipts dedicated to STAR are estimated at $1.39 billion
in 1999-00 and at $2.04 billion in 2000-01. The General Fund tax relief
provided by the estate and gift tax reduction program, sales tax reductions and
other 1997 enactments further reduce taxes and fees by roughly $1 billion by the
last year of the forecast period. Other 1998-99 budget proposals that lower
General Fund taxes and fees will annualize to approximately $110 million in
1999-00 and $100 million in 2000-01.
The receipt projections reflect constant law income tax liability growth of
approximately 5.3 percent annually and sales tax growth averaging slightly less
than 5 percent over the period. Constant law business tax liability is
projected to rise slowly over the two years.
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Miscellaneous receipt projections reflect $250 million in each of the
outyears as the potential State benefit from a broader national settlement
involving tobacco taxes and health liability.
Disbursements from the General Fund are projected at $37.84 billion in
1999-00 and $39.45 billion in 2000-01, after assuming implementation of spending
proposals contained in the Executive Budget, the value of which is annualized
and assumed to continue. The projections include additional school aid increases
of roughly 7 percent annually to finance present law and implement proposals
enacted under the STAR/School Aid program. Additional funding to implement
welfare reform is also included, as well as funding for mental health community
reinvestment, prison expansion, and other previous multi-year spending
commitments. Growth in General Fund Medicaid spending is projected at just over
6 percent annually. Other spending growth is projected to follow recent trends.
Consistent with past practice, funding is not included for any costs associated
with new collective bargaining agreements after the expiration of the current
round of contracts at the end of the 1998-99 fiscal year.
Savings actions totaling $600 million in 1999-00 and growing to $800
million in 2000-01 are assumed in these spending projections. It is expected
that the 1999-00 Financial Plan will include continued actions by State agencies
to deliver services more efficiently, continued savings from workforce
management efforts, aggressive efforts to maximize federal and other non-General
Fund spending offsets, and other efforts to control State spending.
The Governor is required by law to propose a balanced budget each year. In
order to address any potential remaining budget gap, the Governor is expected to
make additional proposals to bring receipts in line with disbursements. The
State has closed projected budget gaps of $5.0 billion, $3.9 billion and $2.3
billion in its 1995-96, 1996-97 and 1997-98 fiscal years, respectively.
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors,
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their impact cannot be fully included in the assumptions underlying the State's
projections. For example, there can be no assurance that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance or to align recurring receipts and disbursements in
either 1998-99 or in future fiscal years.
Uncertainties with regard to the economy present the largest potential risk
to future budget balance in New York State. This risk includes either a
financial market or broader economic "correction" during the period, a risk
heightened by the relatively lengthy expansions currently underway. The
securities industry is more important to the New York economy than the national
economy, and a significant deterioration in stock market performance could
ultimately produce adverse changes in wage and employment levels. In addition,
a normal "forecast error" of one percentage point in the expected growth rate
could cumulatively raise or lower receipts by over $1 billion by the last year
of the 1998 through 2001 projection period. On the other hand, the national or
State economy may continue to perform better than projected, which could produce
beneficial short-term results in State receipts.
On August 11, 1997 President Clinton exercised his line item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care provider taxes to be approved by the federal
government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of
taxation and redistribution of health care dollars was sanctioned by federal
legislation in 1987 and 1991. However, the federal Health Care Financing
Administration (HCFA) regulations governing the use of provider taxes require
the State to seek waivers from HCFA that would grant explicit approval of the
provider taxing system now in place. The State filed the majority of these
waivers with HCFA in 1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The
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Governor has stated that this proposal does not appear to address all of the
State's concerns, and negotiations are ongoing between the State and HCFA. In
addition, the City of New York and other affected parties in the health care
industry have filed a lawsuit challenging the constitutionality of the
President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability attributable
to such taxpayers for the 1997 and earlier open tax years, as well as on a
prospective basis. The impact of this decision on receipts estimates for the
current and future fiscal years will be reflected in the Financial Plan and
Financial Plan Update that will accompany the 1998-99 Executive Budget.
Section 22-c of the State Finance Law, as amended by Chapter 389 of the
Laws of 1997, now requires the Governor to submit the five-year Capital Program
and Financing Plan with the Executive Budget. That Plan also is required to be
updated by the later of July 30 or 90 days after enactment of the State budget.
The Update to the five-year Capital Program and Financing Plan was released
on November 18, 1997. The Update reflected voter disapproval of the School
Facility Health and Safety Bond Act, additional issuances for 1997-98 of
approximately $225 million for CEFAP, $42 million for the Albany County Airport,
and $228 million in Certificates of Participation (COPs) to finance welfare
information systems.
The proposed 1997-98 through 2002-03 Capital Program and Financing Plan was
released with the 1998-99 Executive Budget on January 20, 1998. As a part of
that Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: the delay in the issuance of COPs to finance welfare information
systems until 1998-99 to permit a thorough assessment of needs; and the
elimination of issuances for the CEFAP to reflect the proposed conversion of
that bond-financed program to pay-as-you-go financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million for
purposes of redeeming outstanding BANs) and $140 million in general obligation
commercial paper; the issuance of $83 million in COPs for equipment purchases;
and approximately $1.8 billion in borrowings by public authorities pursuant to
lease-purchase and contractual-obligation financings
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for capital programs of the State, including costs of issuance, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1997-98
capital projects. The projection of State borrowings for the 1997-98 fiscal
year is subject to change as market conditions, interest rates and other factors
vary through the end of the fiscal year.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The new law abolishes the federal Aid to Families with Dependent Children
program (AFDC), and creates a new Temporary Assistance to Needy Families program
(TANF) funded with a fixed federal block grant to states. The new law also
imposes (with certain exceptions) a five-year durational limit on TANF
recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
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relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or
revenue sources is generally made by estimating the change in yield of such tax
or revenue source caused by economic and other factors, rather than by
estimating the total yield of such tax or revenue source from its estimated tax
base. The forecasting methodology, however, ensures that State fiscal year
estimates for taxes that are based on a computation of annual liability, such as
the business and personal income taxes, are consistent with estimates of total
liability under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations. Factors that may
affect the level of disbursements in the fiscal year include uncertainties
relating to the economy of the nation and the State, the policies of the federal
government, and changes in the demand for and use of State services.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from any projections. In the past, the State has taken
management actions and made use of internal sources to address potential State
Financial Plan shortfalls, and DOB believes it could take similar actions should
variances occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
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Constitutional challenges to State laws have limited the amount of taxes
which political subdivisions can impose on real property. In 1979, the State's
highest court declared unconstitutional a State law allowing localities and
school districts to impose a special increase in real estate property taxes in
order to raise funds for pensions and other uses. Additional court actions have
been brought against the State, certain agencies and municipalities relating to
financing, the amount of real estate tax, the use of tax revenues and other
matters.
An additional risk to the 1998-99 State Financial Plan arises from the
potential impact of certain litigation now pending against the State, which
could produce adverse effects on the State's projections of receipts and
disbursements.
Certain litigation pending against the State, its subdivisions and their
officers and employees could have a substantial and long-term adverse effect on
State finances. The State is a party to numerous legal proceedings, many of
which normally recur in governmental operations. Because of the prospective
nature of these proceedings, no estimate of the potential loss can be made.
The State is a defendant in numerous legal proceedings pertaining to
matters incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws.
Included in the State's outstanding litigation are a number of cases
challenging the legality or the adequacy of a variety of significant social
welfare programs primarily involving the State's Medicaid and mental health
programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the future.
Because of the prospective nature of these matters, no provision for this
potential exposure has been made in the accompanying general purpose financial
statements.
Actions commenced by several Indian nations claim that significant amounts
of land were unconstitutionally taken from the Indians in violation of various
treaties and agreements during the eighteenth and nineteenth centuries. The
claimants seek recovery of approximately six million acres of land as well as
compensatory and punitive damages.
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In addition, the State is party to other claims and litigation which its
legal counsel has advised are not probable of adverse court decisions. Although
the amounts of potential losses, if any, are not presently determinable, it is
the State's opinion that its ultimate liability in these cases is not expected
to have a material adverse effect on the State's financial position.
The fiscal health of the State may also be affected by the fiscal health of
New York City ("the City"), which continues to require significant financial
assistance from the State. The City depends on State aid both to enable the
City to balance its budget and to meet its cash requirements. The State could
also be affected by the ability of the City to market its securities
successfully in the public credit markets.
Both the State and City face potential economic problems which could
seriously affect the ability of both the State and City to meet their financial
obligations. The economic problems of New York City adversely affect the State
in numerous ways. In addition, for decades the State economy has grown more
slowly than that of the nation as a whole, resulting in a decline in the
position of New York as one of the country's wealthier states. The causes of
this decline are varied and complex and some causes reflect international and
national trends beyond the State's and City's control.
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1998-1999
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the re-
establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the City of Troy from
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seeking federal bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and that was largely continued in 1997.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than New York City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, federal expenditure reductions could reduce, or in some
cases eliminate, federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State could be adversely affected. Localities also face anticipated and
potential problems resulting from certain pending litigation, judicial decisions
and long-range economic trends. Long-range potential problems of declining
urban population, increasing expenditures and other economic trends could
adversely affect localities and require increasing State assistance in the
future.
SPECIAL CONSIDERATIONS AFFECTING PUERTO RICO
The following highlights some of the more significant financial trends and
problems affecting the Commonwealth of Puerto Rico (the Commonwealth or Puerto
Rico) and is based on information drawn from official statements and
prospectuses relating to the securities offerings of Puerto Rico and its
agencies and instrumentalities. Such information, however, has not been
independently verified by the Trust.
The economy of Puerto Rico is closely integrated with that of the United
States. Since 1983, Puerto Rico has experienced a wide ranging economic
expansion with growth in almost every sector of its economy and record levels of
employment.
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Puerto Rico's more than decade-long economic expansion continued throughout
the five-year period from fiscal 1993 through fiscal 1997. Almost every sector
of the economy participated and record levels of employment were achieved.
Factors behind this expansion included government-sponsored economic development
programs, periodic declines in the exchange value of the United States dollar,
increases in the level of federal transfers, and the relatively low cost of
borrowing.
Gross product in fiscal 1993 was $25.1 billion ($24.5 billion in 1992
prices) and gross product in fiscal 1997 was $32.0 billion ($27.6 billion in
1992 prices). This represents an increase in gross product of 27.5% from fiscal
1993 to 1997 (12.6% in 1992 prices). Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently each fiscal year. In
fiscal 1996, aggregate personal income was $29.4 billion ($27.8 billion in 1992
prices) and personal income per capita was $7,882 ($7,459 in 1992 prices).
Puerto Rico's economy continued to expand throughout the period from fiscal
1990 through fiscal 1997. While trends in the Puerto Rico economy generally
follow those of the United States, Puerto Rico did not experience a recession in
1991 as the United States did. This was primarily because of low oil prices,
low interest rates, and Puerto Rico's strong manufacturing base, which has a
large component of non-cyclical industries. Other factors contributing to Puerto
Rico's decade-long expansion include commonwealth-sponsored economic development
programs, the relatively stable prices of oil imports, low exchange rates for
the U.S. dollar, the level of federal transfers, and the relatively low cost of
borrowing funds during the period. These factors will continue to affect Puerto
Rico's economic growth rate.
According to the Labor Department's Household Employment Survey, during the
first five months of fiscal 1998, total employment increased 1.9% over fiscal
1997. Total employment averaged 1,137,200 during the first five months of
fiscal 1998, compared to 1,115,600 in the same period of fiscal 1997. The
seasonally adjusted unemployment rate for November 1997 was 14.0%.
The Planning Board's gross product forecast for fiscal 1998, made in
February 1997, projected an increase of 2.6% over fiscal 1997.
Puerto Rico has a diversified economy with the manufacturing and service
sectors comprising the principal sectors. Manufacturing is the largest sector in
terms of gross domestic
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product. According to the Planning Board's preliminary figures, in fiscal 1996
manufacturing generated $18.9 billion, or 41.4% of gross domestic product and
accounted for 15.3% of total employment; as compared with fiscal 1995, when it
generated $17.9 billion, or 41.9%, of gross domestic product and accounted for
16.4% of total employment. Manufacturing in Puerto Rico is now more diversified
than during the earlier phases of its industrial development. In the last two
decades, industrial development has tended to be more capital intensive and more
dependent on skilled labor. This gradual shift in emphasis is best exemplified
by the heavy investment in the pharmaceutical, scientific instruments, computer,
microprocessor, medical product and electrical product industries over the last
decade. One of the factors assisting the development of the manufacturing
sector has been the tax incentives offered by the federal and Puerto Rico
governments. Recently enacted federal legislation amending Internal Revenue Code
Section 936, however, phases out the federal tax incentives during a ten-year
period.
The service sector, which includes hotel and related services and which,
during fiscal 1997, accounted for approximately 48.8% of total employment,
accounted for $17.1 billion, or 37.6%, of Puerto Rico's gross domestic product
in fiscal 1996, as compared with $16.2 billion, or 38.1%, of gross domestic
product in fiscal 1995. The services sector, particularly wholesale and retail
trade and finance, insurance and real estate, has experienced significant growth
partly in response to the expansion of the manufacturing sector.
Growth in construction and tourism has also contributed to increased
economic activity in fiscal 1997. The growth in the construction industry has
been evidenced by a nominal increase of 14.7% in construction investment for
fiscal 1997 over fiscal 1996. Tourism has grown in each fiscal year since
fiscal 1985. More than 4.3 million visitors spent over $2.0 billion in Puerto
Rico in fiscal 1997. San Juan has become the largest home port for cruise ships
in the Caribbean and the second largest home port for cruise ships in the world.
Twenty-four U.S. and international airlines offer scheduled service to and from
San Juan, and a major U.S. airline uses San Juan as a hub for its intra-
Caribbean operations. This reflects the importance of Puerto Rico as a tourist
destination and as a transportation hub in the Caribbean.
For many years, United States companies operating in Puerto Rico enjoyed a
special tax credit that was available under Section 936 of the Internal Revenue
Code. Originally, the credit provided an effective 100% federal income tax
exemption for most operating income, as well as qualifying investment income
from
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Puerto Rico sources. Amendments to Section 936 made in 1993 (the "1993
Amendments") instituted two alternative methods for calculating the tax credit
and limited the amount of the credit that a qualifying company can claim. These
limitations are based on a percentage of qualifying income (the "percentage of
income limitation") and on qualifying expenditures for wages, other wage related
benefits and other qualifying costs and expenses (the "economic activity
limitation", also known as the "wage credit limitation").
As a result of amendments incorporated in the Small Business Job Protection
Act of 1996, enacted by the United States Congress and signed into law by
President Clinton on August 20, 1996 (the "1996 Amendments"), the tax credit is
now being phased out over a ten-year period for existing 936 credit claimants
and is no longer available for corporations that establish operations in Puerto
Rico after October 13, 1995 (including existing Section 936 Corporations, if
they establish new product lines in Puerto Rico). The 1996 Amendments also
moved the credit based on the economic activity limitation to Section 30A of the
Code and phased it out over 10 years.
In addition, the 1996 Amendment eliminated the credit previously available
for income derived from certain qualified investments in Puerto Rico.
During 1997, the Governor proposed to Congress the enactment of a new
permanent federal incentive program similar to what is now provided under
Section 30A. Such program would provide U.S. companies a tax credit based on
qualifying wages paid and other wage related expenses, such as fringe benefits,
as well as depreciation expenses for certain tangible assets and research and
development expenses. Under the Governor's proposal, the credit granted to
qualifying companies would continue in effect until Puerto Rico shows, among
other things, substantial economic improvements in terms of certain economic
parameters. The fiscal 1998 federal budget submitted by President Clinton to
Congress in February 1997, included a proposal to modify Section 30A to extend
the availability of the Section 30A credit indefinitely, make it available to
companies establishing operations in Puerto Rico after October 13, 1995, and
eliminate the income cap. However, President Clinton's proposal was not included
in the fiscal 1998 federal budget. While the Government of Puerto Rico intends
to continue lobbying for this proposal, it is not impossible at this time to
predict whether the Section 30A credit will be modified, nor to determine the
long term effect on the Puerto Rico economy of the enactment of the 1996
Amendments. The Commonwealth of Puerto Rico does not believe there will be
short-term or medium-term material adverse effects on Puerto Rico's
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economy as a result of the enactment of the 1996 Amendments. The Commonwealth
of Puerto Rico further believes that the phase-out period allows sufficient time
to implement additional incentive programs to safeguard Puerto Rico's
competitive position.
The Industrial Incentives Program, through the 1987 Industrial Incentives
Act, grants corporations engaged in certain qualified activities a fixed 90%
exemption from Commonwealth income and property taxes and a 60% exemption from
municipal license taxes. Under the 1987 Act, as amended, applications for
grants of tax exemption could be filed until December 31, 1996. On September 12,
1996 the Governor of Puerto Rico signed into law Act No. 212 which postponed the
deadline for filing applications until December 31, 1997.
On December 2, 1997 the Governor of Puerto Rico signed into law Act No. 135
(the "1998 Tax Incentives Law"), a new industrial incentives law aimed at
attracting and retaining foreign investment in Puerto Rico.
The benefits provided by the 1998 Tax Incentives Law are available to new
companies as well as companies currently conducting tax exempt operations in
Puerto Rico which choose to renegotiate their existing tax exemption grant. The
activities eligible for tax exemption include manufacturing, certain designated
services performed for markets outside Puerto Rico, the production of energy
from local renewable sources for consumption in Puerto Rico and laboratories for
scientific and industrial research. For companies qualifying thereunder, the
1998 Tax Incentive Law would impose income tax rates ranging from 2% to 75%. In
addition, it would grant 90% exemption from property taxes, 100% exemption from
municipal license taxes during the first eighteen months of operation and
between 80% and 60% thereafter, and 100% exemption from municipal excise taxes.
The 1998 Tax Incentive Law also provides various special deductions designed to
stimulate employment and productivity, research and development and capital
investment in Puerto Rico.
Under the 1998 Tax Incentives Law, companies can repatriate or distribute
their profits free of tollgate taxes. In addition, passive income derived from
the investment of eligible funds in Puerto Rico financial institutions,
obligations of the Government of Puerto Rico and other designated investments
continue to be fully exempt from income and municipal license taxes. Individual
shareholders of an exempted business are allowed a credit against their Puerto
Rico income taxes equal to 30% of their proportionate share in the exempted
business' income tax liability. Gain from the sale or exchange of shares of an
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exempted business by its shareholders during the exemption period is subject to
a 4% income tax rate.
The Constitution authorizes the contracting of debts as determined by the
Legislature. Nevertheless, the Constitution provides that direct obligations of
the Commonwealth evidenced by bonds or notes and backed by the full faith,
credit and taxing power of the Commonwealth, shall not be issued if the amount
of the principal of, and interest on, such bonds and notes and on all such bonds
and notes issued thereafter which is payable in any fiscal year, together with
any amount paid by the Commonwealth in the preceding fiscal year on account of
bonds or notes guaranteed by the Commonwealth, exceed 15% of the average annual
revenues raised under the provisions of Commonwealth legislation and conveyed
into the Treasury (hereinafter "internal revenues") in two fiscal years
preceding the then current fiscal year. Section 2, Article VI of the
Constitution does not limit the amount of debt that the Commonwealth may
guarantee so long as the 15% limitation is not exceeded. Internal revenues
consist principally of income taxes and excise taxes. Certain revenues, such as
federal excise taxes on offshore shipments of alcoholic beverages, tobacco
products and customs duties, which are collected by the United States Government
and returned to the Commonwealth, and motor vehicle fuel taxes and license fees,
which are allocated to the Puerto Rico Highway and Transportation Authority, a
blended component unit, are not included as revenues for the purpose of
calculating the debt limit, although they may be available for the payment of
debt service. The Commonwealth has never defaulted on the payment of principal
or interest on any of its general long-term debt obligations. At June 30, 1997,
the Commonwealth was in compliance with the debt limitation requirement.
On February 26, 1997, legislation was introduced in the U.S. House of
Representatives proposing a mechanism to settle permanently the political
relationship between Puerto Rico and the United States, either through full self
government (e.g., statehood or independence, including, as an alternative, free
association via a bilateral treaty) or continued commonwealth. Under the
legislation, failure to settle on full self government after completion of the
referendum process provided therein would result in retention of commonwealth
status. Any change in the current status of Puerto Rico could have an adverse
impact on such matters as the basic characteristics of future Puerto Rico debt
obligations, the markets for these obligations, and the types, levels and
quality of revenue sources pledged for the payment of existing and future debt
obligations.
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With respect to pending and threatened litigation, excluding the litigation
mentioned in the following paragraph, the Commonwealth has reported liabilities
of approximately $106 million for awarded and anticipated unfavorable judgments.
This amount was included as other long-term liabilities in the general long-term
debt account group and represents the amount estimated as a probable liability
or a liability with a fixed or expected due date which will require future
available financial resources for its payment. Management believes that the
ultimate liability in excess of amounts provided, if any, would not be
significant.
The Commonwealth and various component units are defendants in a lawsuit
alleging violations of civil rights. Preliminary hearings and discovery
proceedings are in progress. The amounts claimed exceed $50 billion; however,
the ultimate liability cannot be presently determined. It is the opinion of
management that the claim is excessive and exaggerated. No provision for any
liability that may result upon adjudication of this lawsuit has been recognized
in the financial statements by the Commonwealth.
On January 22, 1996, the US District Court in Puerto Rico consolidated all
cases against the Commonwealth related to the complaints filed in 1979 by the
inmates of the correctional facilities in Puerto Rico. The Court ruled a
permanent order requiring the Commonwealth to comply with the requirement of the
minimum fixed living space per inmate. In the opinion of management, based on
advice of their legal counsel, this order will limit the imposition of further
fines and the fines already paid together with the accrued liability the general
long-term debt account group, (which amount to approximately $200 million at
June 30, 1997) shall be sufficient to carry out the Court's requirements.
THE EQUITY INDEX FUND GUARANTEE
NYLIFE Inc. ("NYLIFE") and the Equity Index Fund have entered into a
Guaranty Agreement (the "Guarantee") for the benefit of shareholders. The
Guarantee has been issued for the benefit of all shareholders and has been
issued at no cost to the Equity Index Fund or its shareholders. The Guarantee
Date (as defined in the Prospectus) with respect to a particular Equity Index
Fund share will be 10 years after the purchase date of such share. If, on a
particular Guarantee Date, payments must be made under the terms of the
Guarantee, the terms of the Guarantee will obligate NYLIFE unconditionally and
irrevocably to pay to the
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Equity Index Fund's transfer and dividend disbursing agent for the benefit of
shareholders with that Guarantee Date an amount equal to the difference between
the Guaranteed Amount and net asset value per each Guaranteed Share (as defined
in the Prospectus) outstanding. The Equity Index Fund's transfer and dividend
disbursing agent will forward the difference between the Guaranteed Amount and
the net asset value directly to each individual shareholder.
A Guaranteed Share is a unit that will at all times be equal to the net
asset value of one share initially purchased by the investor plus the net asset
value of all dividends and distributions attributable to such share (which
includes cumulative dividends and distributions paid with respect to any
additional shares of the Fund received as dividends and distributions) paid
during the period from the date of purchase to the Guarantee Date. A Guaranteed
Share (the unit to which the Guaranteed Amount will apply) is not the same as a
share of the Fund. Shareholders who redeem shares, or who elect to receive
dividends and distributions in cash, will own fewer units to which the
Guaranteed Amount applies (i.e., they will own fewer Guaranteed Shares) and
----
therefore will lose a portion of the benefit of the Guarantee with respect to
any such redemption or dividends or distributions received in cash.
NYLIFE will pay any amounts owing under the Guarantee to the Fund's
transfer and dividend disbursing agent on the third business day following a
Guarantee Date. A pro rata portion of any amounts so paid will then be
forwarded to each shareholder holding, as of the close of business on such date,
Guaranteed Shares with that Guarantee Date. If the Guarantee Date should fall
on a weekend or on a holiday, the Guarantee Date shall be the first business day
following the Guarantee Date. The Guarantee is intended to assure each owner of
Guaranteed Shares on a Guarantee Date that he or she will be able to recover, as
of the Guarantee Date, at a minimum, the Guaranteed Amount (with no adjustment
for inflation or the time value of money). The Guarantee will benefit any
holder of such Guaranteed Shares on the relevant Guarantee Date, who need not be
the original purchaser, and who, for example, may own such shares by gift or
inheritance.
Although the Equity Index Fund does not intend to pay dividends and
distributions in cash to shareholders (unless a shareholder elects to receive
payments in cash), such dividends and distributions which are reinvested will be
taxable to
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shareholders. See "Tax Status." The Guaranteed Amount does not reflect any
adjustment for the payment of taxes by a shareholder on dividends and
distributions received from the Equity Index Fund.
The obligations, if any, of NYLIFE under the Guarantee shall be discharged
when all required payments are made in full to the transfer and dividend
disbursing agent for the benefit of the shareholders or if the Equity Index
Fund's net asset value on a Guarantee Date is such that no amounts are payable
to shareholders under the terms of the Guarantee. Payment obligations under the
Guarantee will be solely the obligations of NYLIFE. Neither the Equity Index
Fund, New York Life Insurance Company, Monitor, NYLIFE Distributors, any of
their affiliates nor any other party is undertaking any obligation to the Equity
Index Fund or its shareholders with respect to the Guarantee.
Although the Guarantee has been arranged for by the Equity Index Fund and
is created under contract between the Equity Index Fund and NYLIFE, the Equity
Index Fund has no interest in, and specifically disclaims any interest in, the
proceeds payable under the Guarantee, which are payable solely to the
shareholders with a particular Guarantee Date. The designation of such
shareholders as the sole beneficiaries of the Guarantee may not be changed by
either the Equity Index Fund or such shareholders. The Guarantee is neither
transferable nor assignable by the Equity Index Fund or the shareholders it
benefits, nor may the Equity Index Fund or its shareholders cancel or waive
rights under the Guarantee. The Guarantee cannot be surrendered by either the
Fund or its shareholders for cash, except in the event that payment is made
pursuant to its terms. Neither the Equity Index Fund nor its shareholders may
use the Guarantee as a pledge for a loan, nor may the Equity Index Fund or its
shareholders obtain any loan from NYLIFE with respect to amounts that may be
payable pursuant to the Guarantee.
The foregoing is only a summary, and not a complete statement of the
principal terms of the Guarantee. Reference is made to the Guarantee, a
specimen copy of which has been filed as an exhibit to the Registration
Statement. This summary is subject thereto and qualified in its entirety by
such reference.
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FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to any Fund
without the approval of the majority of the outstanding voting securities of
that Fund (as defined in the 1940 Act). Investment restrictions that appear
below or elsewhere in this Statement of Additional Information that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Fund.
The Trust may not, on behalf of any Fund:
1. With respect to 75% of each Fund's total assets invest more than
5% of the value of the total assets of a Fund in the securities of any one
issuer, except U.S. government securities, or purchase the securities of any
issuer if such purchase would cause more than 10% of the voting securities of
such issuer to be held by a Fund. This restriction does not apply to the
California Tax Free Fund, Equity Index Fund, International Bond Fund and New
York Tax Free Fund.
2. Borrow money except from banks on a temporary basis for
extraordinary or emergency purposes, including the meeting of redemption
requests, or by engaging in reverse repurchase agreements or comparable
portfolio transactions provided that these Funds maintain asset coverage of at
least 300% for all such borrowings, and no purchases of securities will be made
while such borrowings exceed 5% of the value of the Fund's total assets (10% in
the case of the California Tax Free Fund and New York Tax Free Fund).
3. Purchase securities (or with respect to the California Tax Free
Fund, New York Tax Free Fund, and Tax Free Bond Fund purchase (i) Pollution
Control and Industrial Development Bonds or (ii) securities the interest from
which is not exempt from regular federal income tax) if such purchase would
cause 25% or more in the aggregate of the market value of the total assets of a
Fund to be invested in the securities of one or more issuers having their
principal business activities in the same industry, provided that there is no
limitation in respect to investments in U.S. government securities or, with
respect to each Fund except Strategic Value Fund, investments in repurchase
agreements with respect thereto (for the purposes of this restriction, telephone
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companies are considered to be a separate industry from gas or electric
utilities, and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of the parents) except that (a) the above limitation does not
apply to the Equity Index Fund to the extent that the Standard & Poor's 500
Composite Stock Price Index is so concentrated; (b) up to 40% of the High Yield
Corporate Bond Fund's, Strategic Income Fund's and Strategic Value Fund's total
assets, taken at market value, may be invested in each of the electric utility
and telephone industries, but each Fund will not invest 25% or more in either of
those industries unless yields available for four consecutive weeks in the four
highest rating categories on new issue bonds in such industry (issue size of $50
million or more) have averaged in excess of 105% of yields of new issue long-
term industrial bonds similarly rated (issue size of $50 million or more); (c)
25% or more of the market value of the total assets of the Money Market Fund
will be invested in the securities of banks and bank holding companies,
including certificates of deposit and bankers' acceptances; and (d) at such time
that the 1940 Act is amended to permit a registered investment company to elect
to be "periodically industry concentrated" (i.e., a fund that does not
concentrate its investments in a particular industry would be permitted, but not
required, to invest 25% or more of its total assets in a particular industry)
the Funds elect to be so classified and the foregoing limitation shall no longer
apply with respect to the Funds. With respect to the California Tax Free Fund
and New York Tax Free Fund, private activity bonds ultimately payable by
companies within the same industry are treated as if they were issued by issuers
in the same industry for purposes of this restriction.
4. Purchase or sell real estate (excluding securities secured by real
estate or interests therein or issued by companies that invest in or deal in
real estate) or, in the case of the California Tax Free Fund and New York Tax
Free Fund, real estate investment trust securities; commodities and commodity
contracts. The Trust reserves the freedom of action to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities.
Purchases and sales of foreign currencies on a spot basis and forward foreign
currency exchange contracts, options on currency, futures contracts on
currencies (securities, with respect to the Strategic Value Fund) 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.
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5. Make loans to other persons, except loans of portfolio securities
(in the case of the California Tax Free Fund and New York Tax Free Fund, in an
amount not to exceed 10% of the value of each Fund's total assets in accordance
with applicable guidelines approved by the Board of Trustees and 30% in the case
of the Equity Index Fund). The purchase of debt obligations (and bankers'
acceptances and commercial paper in the case of the Equity Index Fund) and the
entry into repurchase agreements in accordance with such Fund's investment
objectives and policies are not deemed to be loans for this purpose.
6. 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.
7. Issue senior securities, except to the extent permitted under the
Investment Company Act of 1940.
The following fundamental investment restriction is applicable to the
Tax Free Bond Fund only. The Tax Free Bond Fund must:
1. Invest at least 80% of the Fund's net assets in securities the
interest on which is exempt from regular federal income tax, except that the
Fund may temporarily invest more than 20% of its net assets in securities the
interest income on which may be subject to regular federal income tax.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the
Trustees of the Trust have voluntarily adopted certain policies and restrictions
which are observed in the conduct of the affairs of the Funds, except the
California Tax Free Fund, New York Tax Free Fund, International Bond Fund,
International Equity Fund, Equity Index Fund, Strategic Income Fund and
Strategic Value Fund. These represent intentions of the Trustees based upon
current circumstances. They differ from fundamental investment policies in that
the following additional investment restrictions may be changed or amended by
action of the Trustees without requiring prior notice to or approval of
shareholders.
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In accordance with such policies and restrictions, a Fund may not:
(a) purchase from or sell portfolio securities of a Fund to any of the
officers or Trustees of the Trust, its investment advisers, its principal
underwriter or the officers, or directors of its Sub-Advisers or principal
underwriter;
(b) invest more than 10% of the net assets of a Fund (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include securities subject to legal or
contractual restrictions on resale (other than restricted securities
eligible for resale pursuant to Rule 144A or Section 4(1) under the
Securities Act of 1933 determined to be liquid pursuant to guidelines
adopted by the Board), repurchase agreements maturing in more than seven
days, certain options traded over the counter that a Fund has written,
securities for which market quotations are not available, or other
securities which legally or in the opinion of the Sub-Adviser are deemed
illiquid;
(c) invest assets in securities of other open-end investment
companies, but a Fund may invest in shares of the Money Market Fund if
double advisory fees are not assessed, may invest up to 5% total of its
assets in closed-end investment companies (which would cause a Fund to pay
duplicate fees), and may purchase or acquire up to 10% of the outstanding
voting stock of a closed-end investment company (foreign banks or their
agencies or subsidiaries are not considered investment companies for the
purposes of this limitation);
(d) invest in other companies for the purpose of exercising control or
management;
(e) purchase securities on margin except in connection with arbitrage
transactions or make short sales, unless by virtue of its ownership of
other securities, it has the right to obtain securities equivalent in kind
and amount to the securities sold and, if the right is conditional, the
sale is made upon the same conditions, except that the Trust may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities and in
B-112
<PAGE>
connection with transactions involving forward foreign currency exchange
contracts;
(f) purchase or sell any put or call options or any combination
thereof, except that the Trust may purchase and sell or write (i) options
on any futures contracts into which it may enter, (ii) put and call options
on currencies, securities indexes and covered put and call options on
securities, and (iii) may also engage in closing purchase transactions with
respect to any put and call option position it has entered into; and except
that the Government Fund may not write any covered put options on U.S.
government securities if, as a result, more than 50% of its total assets
(taken at current value) would be subject to put options written by such
Fund; or
(g) purchase, with respect to the Government Fund, any call option,
long futures contract or long option on a futures contract if, at the date
of purchase, realized net losses from such transactions during the fiscal
year to date exceed 5% of such Fund's average net assets during such
period.
The following are non-fundamental restrictions of the California Tax Free
Fund, Equity Index Fund and New York Tax Free Fund:
(a) A Fund may not purchase the securities of other investment
companies except to the extent permitted by the 1940 Act or in connection
with a merger, consolidation or reorganization.
(b) The Funds may not invest more than 10% of the net assets of a
Fund (taken at market value at the time of the investment) in "illiquid
securities," illiquid securities being defined to include securities
subject to legal or contractual restrictions on resale (other than
restricted securities eligible for resale pursuant to Rule 144A or Section
4(1) under the Securities Act of 1933 determined to be liquid pursuant to
guidelines adopted by the Board).
(c) A Fund may not invest in other companies for the purpose of
exercising control or management.
(d) A Fund may not purchase securities on margin, except in connection
with arbitrage transactions, or make
B-113
<PAGE>
short sales, unless it owns the securities sold short or it has the right
to obtain securities equivalent in kind and amount to the securities sold
and, if the right is conditional, the sale is made upon the same
conditions, except that the Trust may obtain such short-term credits as may
be necessary for the clearance of purchases and sales of securities. (This
restriction has no application to transactions in futures, options and
foreign currency exchange contracts).
The following investment restrictions are non-fundamental, operating
policies of the International Bond Fund, International Equity Fund, Strategic
Income Fund and Strategic Value Fund, and may be amended by the Board of
Trustees without shareholder approval:
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, futures and forward contracts are
deemed not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute the purchase of securities on margin. This
restriction is not applicable to the Strategic Income Fund.
(c) As an operating policy, a Fund may not invest in securities which
are not readily marketable, or the disposition of which is restricted under
federal securities laws (collectively, "illiquid securities"), other than
Rule 144A securities or 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
B-114
<PAGE>
over-the-counter market, and securities being used to cover options a Fund
has written.
(d) As an operating policy, a Fund (except for the Strategic Value
Fund) may not acquire or retain the securities of any other investment
company if, as a result, more than 3% of such investment company's
outstanding shares would be held by the Fund, more than 5% of the value of
the Fund's total assets would be invested in shares of such investment
company or more than 10% of the value of the Fund's assets would be
invested in shares of investment companies in the aggregate, except in
connection with a merger, consolidation, acquisition, or reorganization.
The Strategic Value Fund, as an operating policy, may not purchase the
securities of other investment companies, except to the extent permitted by
the 1940 Act or in connection with a merger, consolidation, acquisition or
reorganization.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
In addition, though not a fundamental policy, the California Tax Free and
New York Tax Free Funds will not sell securities short, except that each Fund
reserves the right to sell securities short "against the box."
In addition, though not a fundamental policy, the Equity Index Fund may not
engage in arbitrage transactions, nor may it purchase warrants (excluding those
acquired by the Equity Index Fund in units or attached to securities), nor will
the Equity Index Fund sell securities short or buy on margin, except that the
Fund reserves the right to sell securities short "against the box."
The Trustees have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Trustees have delegated the
function of making day-to-day determinations of liquidity to the Sub-Advisers,
pursuant to guidelines approved by the Trustees.
Each Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by a Fund is liquid,
including at least the following:
B-115
<PAGE>
(i) the frequency and size of trades and quotes for the Rule 144A
security relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the 144A
security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the 144A security; and
(iv) the nature of the 144A security and the nature of the market for
the 144A security (i.e., the time needed to dispose of the security, the method
----
of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is liquid, a
Sub-Adviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in default as
to principal or interest;
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs");or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper
is rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Sub-Adviser has determined that
the security is of equivalent quality based on factors commonly used by rating
agencies; and
(c) there is a viable trading market for the specific security,
taking into account all relevant factors (e.g., whether the security is the
-----
subject of a commercial paper program that is administered by an issuing and
paying agent bank and for which there exists a dealer willing to make a market
in the security, the size of trades relative to the size of the Fund's holding
or whether the 4(2) commercial paper is administered by a direct issuer pursuant
to a direct placement program).
B-116
<PAGE>
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-117
<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
953 Cherokee Lane Executive Officer, New York Life
Franklin Lakes, NJ 07417 Insurance Company; Director, New
Age: 72 York Life Insurance Company, 1978 to 1996;
President, New York Life Insurance Company,
1986 to 1990; Chairman of the Board, New
York Life Insurance Company, 1981 to 1990;
Chief Executive Officer, New York Life
Insurance Company, 1981 to 1990; Director,
MacKay-Shields Financial Corporation, 1984 to
present; and Trustee, Consolidated Edison
Company of New York, Inc., 1976 to present.
Stephen C. Roussin* President, Chief Executive Director and Chairperson, MainStay
51 Madison Avenue Officer and Trustee Institutional Funds, Inc., 1997 to
New York, NY 10010 present; Senior Vice President, New
Age: 34 York Life Insurance Company, 1997 to present;
Senior Vice President, Smith Barney, 1994 to
1997; and Division Sales Manager, Prudential
Securities, 1989 to 1994.
Harry G. Hohn* Trustee Retired Chairman and Chief Executive
51 Madison Avenue Officer, New York Life Insurance Company;
New York, NY 10010 Chairman of the Board and Chief Executive
Age: 66 Officer, New York Life Insurance Company,
1990 to 1997; Vice Chairman of the Board,
New York Life Insurance Company, 1986 to
1990; Director, New York Life Insurance
Company, 1985 to 1986; Director, Million
Dollar Roundtable Foundation, 1996 to 1997;
Director, Insurance Marketplace Standards
Association, 1996 to 1997; Director, Witco
Corporation, 1989 to present; Member,
International Advisory Board of Credit
Commercial de France, 1995 to present; and
a Life Fellow of the American Bar
Foundation.
</TABLE>
B-118
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name, Address and Age Position(s) with Trust During Past 5 Years
- --------------------- ---------------------- -------------------
<S> <C> <C>
Edward J. Hogan Trustee Rear Admiral U.S. Navy (Retired);
Box 2321 Independent Management Consultant, 1992
Sun Valley, ID 83353 to 1997.
Age: 65
Richard M. Kernan, Jr. * Trustee Director of MainStay VP Series Fund, Inc.
51 Madison Avenue from January 1987 to present; Chairman of
New York, NY 10010 the Board and Chief Executive Officer of
Age: 57 MainStay VP Series Fund, Inc. from August
1989 to present; Executive Vice President
and Chief Investment Officer of New York
Life Insurance Company from March 1995
to present; Executive Vice President prior
thereto; Member of the Board of Directors of
New York Life Insurance Company from
November 1996 to present and Chairman of
the Investment Committee from January
1997 to present; and Director, Greystone
Realty Corp. January 1997 to present.
Nancy Maginnes Trustee Member, Council of Rockefeller University,
Kissinger New York, NY, 1991 to present; Trustee,
Henderson Road Rockefeller University, 1995 to present;
South Kent, CT 06785 Trustee, Animal Medical Center, 1993 to
Age: 64 present; and Trustee, The Masters School, 1994
to present; Member, Board of Overseers,
Rockefeller Institute of Government, Albany,
NY, 1983-1992 (Board dissolved).
Terry L. Lierman Trustee President, Capitol Associates, Inc., 1984 to
426 C Street, N.E. present; President, Employee Health
Washington, D.C. 20002 Programs, 1990 to present; Vice Chairman,
Age: 50 TheraCom Inc., 1994 to present; Member,
UNICEF National Board, 1993 to present;
Director, Harvard University, Pollin
Institute, 1995 to present; Director,
PeacePac, 1994 to present; Commissioner,
State of Maryland, Higher Education
Commission, 1995 to present; Vice
Chairman, National Organization on
Fetal Alcohol Syndrome, 1993 to present;
Chief Executive Officer, Medical Crisis
Systems, 1997 to present; and Board
Member, Hollings Cancer Center, Medical
University of South Carolina, 1993 to
present.
</TABLE>
B-119
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name, Address and Age Position(s) with Trust During Past 5 Years
- --------------------- ---------------------- -------------------
<S> <C> <C>
John B. McGuckian Trustee Chairman of the Board, Ulster Television
Ardverna plc, 1990 to present; Director, Ulster
Cloughmills Television plc, 1970 to present; Chairman of
Northern Ireland the Board, Tedcastle Holding Ltd. (energy),
BT4 49NL 1995 to present; Director, Cooneen Textiles
Age: 58 Ltd. (clothing manufacturer), 1967 to
present; Director Allied Irish Banks plc,
1977 to present; Director, First Trust Bank,
1991 to present; Director, Unidare plc
(engineering), 1986 to present; Director,
Irish Continental Group plc (ferry
operations), 1988 to present; Director,
Harbour Group Ltd. (management company),
1980 to present; Chairman, Industrial
Development Board, 1990 to 1997; and
Chairman of Senate and Senior Pro-
Chancellor, Queen's University, 1986 to
present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group
1701 Highway A-1-A Industries, Inc., 1991 to present;
Suite 218 Director, PaineWebber Group, 1980 to
Vero Beach, FL 32963 1993; President, PaineWebber Group,
Age: 65 1988 to 1990; Chairman of the Board,
Paine Webber Properties, 1985 to 1989;
Director, Harbour Group, 1986 to
present; Chairman of the Board and
Director, Rapid Rock Industries, Inc.,
1986 to present; Director and Chairman of
the Board, Del Industries, 1990 to
present; Trustee, Jones Foundation (Los
Angeles), 1978 to present; Director,
Sugen, Inc., 1992 to present; Chairman of
the Board, Omniquip International, Inc.,
1996 to present; Director, Carey
Diversified, L.L.C., January 1,1998 to
present.
</TABLE>
B-120
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name, Address and Age Position(s) with Trust During Past 5 Years
- --------------------- ---------------------- -------------------
<S> <C> <C>
Richard S. Trutanic Trustee Managing Director, The Somerset Group
1155 Connecticut Ave. N.W., (financial advisory firm), 1990 to present; Chief
Suite 400 Executive Officer and President, Americap
Washington, DC 20036 L.L.C. (Financial Advisory Firm), 1997 to
Age: 45 present; Senior Vice President, Washington
National Investment Corporation (financial
advisory firm), 1985 to 1990; Director, Allin
Communications Corporation, 1996 to 1997; and
Director and Member of Executive Committee,
Southern Net, Inc., 1986 to 1990.
Walter W. Ubl* Trustee Senior Vice President, New York Life Insurance
85 East End Avenue Company, 1995 to 1997; Vice President, 1984 to
Apt. 2N 1995; Vice President in charge of Mutual Funds
New York, NY 10028 Department, 1989 to 1997 ; Director and Vice
Age: 56 President, NYLIFE Distributors Inc., 1993 to
1997; and Director and Senior Vice President
NYLIFE Securities Inc., 1996 to 1997.
- ----------------------------------------------------------------------------------------------------------------------
Officers (other than Trustees)
- ----------------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice President Chairman, Monitor Capital Advisors, Inc.,
51 Madison Avenue 1997 to present; Senior Vice President,
New York, NY 10010 MainStay Institutional Funds Inc., 1995 to
Age: 40 present; Senior Vice President, New York Life
Insurance Company, 1994 to present; Director,
NYLIFE Distributors Inc., 1993 to present; and
Chief Administrative Officer, Pension, Mutual
Funds, Structured Finance, Corporate Quality,
Human Resources and Employees' Health
Departments, New York Life Insurance
Company, 1992 to 1994.
Frank A. Mistero Senior Vice President Senior Vice President, New York Life
51 Madison Avenue Insurance Company, 1990 to present; and
New York, NY 10010 Director, Senior Vice President and Chief
Age: 52 Operating Officer, MainStay Management, Inc.,
1997 to present.
</TABLE>
B-121
<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 Chief Vice President, New York Life Insurance
51 Madison Avenue Financial Officer Company, 1988 to present; Director, Vice
New York, NY 10010 President and Chief Financial Officer, NYLIFE
Age: 54 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-122
<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
Age: 48 to 1995; Tax Vice President, NYLIFE Securities
Inc., 1987 to present; Tax Vice President,
NAFCO, Inc., 1990 to present; Tax Vice
President, NYLIFE Depositary Inc., 1990 to
present; Tax Vice President, NYLIFE Inc., 1990
to present; Tax Vice President, NYLIFE
Insurance Company of Arizona, 1990 to present;
Tax Vice President, NYLIFE Realty Inc., 1991
to present; Tax Vice President, NYLICO Inc.,
1991 to present; Tax Vice President, New York
Life Fund Inc., 1991 to present; Tax Vice
President, New York Life International
Investment, Inc., 1991 to present; Tax Vice
President, NYLIFE Equity Inc., 1991 to present;
Tax Vice President, NYLIFE Funding Inc.,
1991 to present; Tax Vice President, NYLCO
Inc., 1991 to present; Tax Vice President,
MainStay VP Series Fund, Inc., 1991 to present;
Tax Vice President, CNP Realty, 1991 to
present; Tax Vice President, New York Life
Worldwide Holding Inc., 1992 to present; Tax
Vice President, NYLIFE Structured Asset
Management Co. Ltd., 1992 to present; Tax
Vice President, MainStay Institutional Funds
Inc., 1992 to present; Tax Vice President,
NYLIFE Distributors Inc., 1993 to present; Vice
President & Assistant Controller, New York
Life Insurance and Annuity Corp., 1995 to
present, and Assistant Controller, 1991 to
present; Vice President, NYLCARE Health
Plans, Inc., 1995 to present; Vice President -
Tax, New York Life and Health Insurance Co.,
1996 to present; and Tax Vice President, NYL
Trust Company, 1996 to present.
</TABLE>
B-123
<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
New York, NY 10010 present; Associate General Counsel, New York
Age: 41 Life Insurance Company, 1996 to 1997;
Assistant General Counsel, New York Life
Insurance Company, 1994 to 1996; Secretary,
Eclipse Financial Asset Trust, 1994 to present;
Secretary, MainStay Institutional Funds Inc.,
MainStay VP Series Fund, Inc., New York Life
Fund Inc., 1994 to 1997; Assistant Secretary,
Eagle Strategies Corp. (registered investment
adviser), 1997 to present; Secretary, Eagle
Strategies Corp. (registered investment adviser),
1996 to present; and Assistant General Counsel,
Dreyfus Corporation, 1991 to 1993.
</TABLE>
*Messrs. Ross, Roussin, Hohn, Kernan and Ubl are deemed to be interested
persons of the Trust under the 1940 Act.
As indicated in the above table, certain Trustees and officers also
hold positions with MacKay-Shields, Monitor, New York Life Insurance Company,
NYLIFE Securities Inc. and/or NYLIFE Distributors Inc.
The Independent Trustees of the Trust receive from the Trust an annual
retainer of $40,000 and a fee of $1,000 for each Board of Trustees meeting and
for each Board committee meeting attended and are reimbursed for all out-of-
pocket expenses related to attendance at such meetings. Trustees who are
affiliated with New York Life Insurance Company do not receive compensation from
the Trust.
For the fiscal year ended December 31, 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-124
<PAGE>
Total Compensation
Aggregate From Registrant
Name of Compensation and Fund Complex
Trustee from the Trust Paid to Trustees
- ------- -------------- ----------------
Edward J. Hogan $48,000 $48,000
Nancy M. Kissinger $46,000 $46,000
Terry L. Lierman $48,000 $48,000
Donald E. Nickelson $52,000 $52,000
Richard S. Trutanic $46,000 $46,000
John B. McGuckian* $12,000 $12,000
* Mr. McGuckian was elected to his position as Trustee of the Trust on July 28,
1997.
As of August 1, 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 October 24, 1997, the
shareholders of each of the Funds other than the Strategic Value Fund approved
the Management Agreement. The Management Agreement for the Strategic Value Fund
was approved by the Fund's sole shareholder on October 21, 1997. The Management
Agreement will remain in effect for two years following its effective date, and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by the Trustees or by vote of a majority of the
outstanding voting securities of each of the Funds (as defined in the 1940 Act
and in a rule under the 1940 Act) and, in either case, by a majority of the
Trustees who are not "interested persons" of the Trust or the Manager (as the
term is defined in the 1940 Act). The Management Agreement for each Fund was
last approved by the Trustees, including a majority of the Trustees who are not
"interested
B-125
<PAGE>
persons" of the Trust or the Manager (as that term is defined in the 1940 Act),
at a meeting held on April 27, 1998.
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 MacKay-Shields
and between the Manager and Monitor on behalf of each Fund (each a "Sub-Adviser"
and collectively the "Sub-Advisers"), MacKay-Shields and Monitor, subject to the
supervision of the Trustees of the Trust and the Manager and in conformity with
the stated policies of each of the Funds and the Trust, manage the Funds'
portfolios, including the purchase, retention, disposition and loan of
securities.
The Trustees, including the Independent Trustees, approved the Sub-Advisory
Agreements at an in-person meeting held July 28, 1997.
B-126
<PAGE>
On October 24, 1997, the shareholders of each of the Funds other than the
Strategic Value Fund approved the Sub-Advisory Agreements with MacKay-Shields
and Monitor. The Sub-Advisory Agreement with respect to the Strategic Value
Fund was approved by that Fund's sole shareholder on October 21, 1998. 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, MacKay-Shields or Monitor (as the term is defined in the 1940 Act).
The Sub-Advisory Agreements for each Fund were last approved by the Trustees,
including a majority of the Trustees who are not "interested persons" of the
Trust, the Manager, MacKay-Shields or Monitor (as defined in the 1940 Act), at a
meeting held on April 27, 1998.
The Sub-Advisers have authorized any of their directors, officers and
employees who have been elected or appointed as Trustees or officers of the
Trust to serve in the capacities in which they have been elected or appointed.
In connection with the services they render, the Sub-Advisers bear the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreements provide that MacKay-Shields and Monitor shall not
be liable for any error of judgment by MacKay-Shields or Monitor or for any loss
suffered by any of the Funds except in the case of MacKay-Shields' or Monitor's
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Agreements also provide that they shall terminate automatically if assigned
and that they may be terminated without penalty by either party upon no more
than 60 days' nor less than 30 days' written notice.
For the period from October 27, 1997 through December 31, 1997, the amount of
the Management fee paid and waived and/or reimbursed by each Fund; the amount of
the Sub-Advisory fee paid by the Manager from the Management fee; and the amount
of the Sub-Advisory fee waived and/or reimbursed were as follows:
B-127
<PAGE>
<TABLE>
<CAPTION>
Management Sub-Advisory
Management Fee Waived Sub-Advisory Fee Waived
Fund Fee Paid* and/or Reimbursed Fee Paid* and/or Reimbursed
- --------------------------- ---------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
California Tax Free Fund... $ 22,562 $ -- $ 11,281 $ --
Capital Appreciation Fund.. 1,996,154 -- 998,077 --
Convertible Fund........... 1,210,730 -- 605,365 --
Equity Index Fund+......... 149,354 223,441 74,559 --
Government Fund............ 712,902 -- 356,451 --
High Yield Corporate Bond
Fund................... 3,590,202 -- 1,795,101 --
International Bond Fund.... 24,178 18,134 15,111 12,089
International Equity Fund.. 145,829 -- 87,497 --
Money Market Fund.......... 165,694 205,316 82,847 102,658
New York Tax Free Fund..... 11,863 5,413 5,932 2,707
Strategic Income Fund++.... -- 74,218 -- 37,109
Strategic Value Fund++..... 23,276 -- 11,638 --
Tax Free Bond Fund......... 533,914 -- 266,957 --
Total Return Fund.......... 1,431,434 -- 715,717 --
Value Fund................. 1,479,934 -- 739,967 --
</TABLE>
* After expense reimbursement or waiver.
+ The Equity Index Fund's expense limitation was terminated April 1, 1998.
++ The Strategic Income Fund commenced operations on February 28, 1997.
Effective February 28, 1998, the Fund's expense cap was terminated.
The Strategic Value Fund commenced operations on October 21, 1997.
In previous years, prior to a change in management structure, the Funds
paid an advisory fee directly to MacKay-Shields or Monitor. For the period from
January 1, 1997 through October 26, 1997 and the fiscal years ended December 31,
1996 and 1995, the amount of the advisory fee paid and waived and/or reimbursed,
by each Fund to MacKay-Shields or Monitor was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ------------
Advisory Fee Advisory Fee Advisory Fee
Advisory Waived and/or Advisory Waived and/or Advisory Waived and/or
Fee Paid* Reimbursed Fee Paid* Reimbursed Fee Paid* Reimbursed
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
California Tax Free Fund... $ 44,678 $ 2,589 $ 45,307 $ 11,228 $ 29,964 $ 16,845
Capital Appreciation Fund.. 3,934,494 -- 3,429,258 -- 2,155,386 --
Convertible Fund........... 2,710,393 -- 2,444,000 -- 1,027,604 --
Equity Index Fund.......... 256,066 -- 163,785 -- 81,072 --
Government Fund............ 1,760,807 -- 2,643,801 -- 3,056,716 --
High Yield Corporate Bond
Fund...................... 6,921,965 5,816,110 -- 3,930,939 --
International Bond Fund.... 65,696 52,556 68,489 54,933 52,534 42,028
International Equity Fund.. 384,003 -- 342,100 -- 166,703 --
Money Market Fund.......... 407,638 396,862 397,071 473,155 391,304 282,975
New York Tax Free Fund..... 25,025 13,579 29,457 19,911 31,482 14,241
Strategic Income Fund+..... 61,282 40,291 N/A N/A N/A N/A
Strategic Value Fund+...... N/A N/A N/A N/A N/A N/A
Tax Free Bond Fund......... 1,217,473 -- 1,579,820 -- 1,610,982 --
Total Return Fund.......... 3,025,045 -- 3,087,111 -- 2,396,247 --
</TABLE>
B-128
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Value Fund................. 2,976,469 -- 2,682,642 -- 1,932,406 --
- -------------------------
</TABLE>
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
* After expense reimbursement or waiver.
In previous years, prior to a change in management structure, the Funds paid
an administrative fee directly to NYLIFE Distributors Inc. as administrator.
For the period from January 1, 1997 through October 26, 1997 and the fiscal
years ended December 31, 1996 and 1995 the amount of the administration fee paid
and waived and/or reimbursed by each Fund was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
Fee Waived Fee Waived Fee Waived
and/or and/or and/or
Fee Paid* Reimbursed Fee Paid* Reimbursed Fee Paid* Reimbursed
---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
California Tax Free Fund... $ 44,678 $ 2,589 $ 45,307 $ 11,228 $ 29,964 $ 16,845
Capital Appreciation Fund.. 3,934,494 -- 3,429,258 -- 2,155,386 --
Convertible Fund........... 2,710,393 -- 2,444,000 -- 1,027,604 --
Equity Index Fund.......... 605,767 418,496 365,118 290,022 324,287
Government Fund............ 1,760,807 -- 2,643,801 -- 3,056,716
High Yield Corporate Bond
Fund...................... 6,921,965 -- 5,816,110 -- 3,930,939
International Bond Fund.... 39,417 26,278 41,100 27,467 31,522 21,013
International Equity Fund.. 256,002 -- 228,066 -- 111,135 --
Money Market Fund.......... 407,638 396,862 397,071 473,155 391,304 282,975
New York Tax Free Fund..... 25,025 13,579 29,457 19,911 31,481 14,242
Strategic Income Fund+..... 61,282 40,291 N/A N/A N/A N/A
Strategic Value Fund+...... N/A N/A N/A N/A N/A N/A
Tax Free Bond Fund......... 1,217,473 -- 1,579,820 -- 1,610,982 --
Total Return Fund.......... 3,025,045 -- 3,087,111 -- 2,396,247 --
Value Fund................. 2,976,469 -- 2,682,642 -- 1,932,406 --
- -----------------------
</TABLE>
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
* After expense reimbursement or waiver.
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
B-129
<PAGE>
pay for a variety of account maintenance and personal services to shareholders
after the sale.
The Distribution Agreement for the Funds was approved by the Trustees,
including a majority of the Trustees who are not "interested persons" (as the
term is defined in the 1940 Act) of the Trust nor have any direct or indirect
financial interest in the operation of the distribution plan or in any related
agreement (the "Independent Trustees") at a meeting held on October 25, 1993.
The Distribution Agreement for the International Bond Fund and the International
Equity Fund was approved by the Trustees, including a majority of the
Independent Trustees at a meeting held on July 25, 1994. The Distribution
Agreement for the Strategic Income Fund was approved by the Trustees, including
a majority of the Independent Trustees at a meeting held on January 27, 1997.
The Distribution Agreement for the Strategic Value Fund was approved by the
Trustees, including a majority of the Independent Trustees, at a meeting held on
July 28, 1997. The Distribution Agreements were reapproved by the Trustees,
including a majority of the Independent Trustees, at a meeting held on April 27,
1998.
Each of the Funds (except the Money Market Fund and the Equity Index Fund,
which does not offer Class B or Class C shares) has adopted separate plans of
distribution pursuant to Rule 12b-1 under the 1940 Act for each class of shares
of each Fund (the "Class A Plans", the "Class B Plans," the "Class C Plans" and,
collectively, the "Plans"). Under the Class A Plans, Class A shares of each
Fund pay the Distributor a monthly fee at the annual rate of 0.25% of the
average daily net assets of each Fund's Class A shares for distribution or
service activities, as designated by the Distributor. The Class A Plans for
each of the Funds other than the California Tax Free Fund, New York Tax Free
Fund, Equity Index Fund and Strategic Income Fund were approved by the sole
initial shareholder of the Class A of shares of each Fund on December 31, 1994.
The Class A Plans were approved by the shareholders of the California Tax Free
Fund, New York Tax Free Fund and the Equity Index Fund at a Special Meeting of
Shareholders held on December 28, 1994 and the Class A Plan was approved by the
sole initial shareholder of the Strategic Income Fund on February 3, 1997 and by
the sole initial shareholder of the Strategic Value Fund on October 21, 1997.
Regarding the California Tax Free Fund, the New York Tax Free Fund and the
Equity Index
B-130
<PAGE>
Fund, the Trustees of the Trust, including a majority of the
Independent Trustees, by vote cast in person at a meeting called for the purpose
of voting on such Plans, initially approved the Plan now designated as the Class
A Plans on July 25, 1994. Regarding the Strategic Income Fund, the Trustees of
the Trust, including a majority of the Independent Trustees, by vote cast in
person at a meeting called for the purpose of voting on such Plan, initially
approved the Class A Plan on January 27, 1997.
As noted above, the Class B shares of each Fund (except the Money Market
Fund and the Equity Index Fund, which does not offer Class B shares) also have
adopted Rule 12b-1 distribution plans. Originally, Rule 12b-1 plans of
distribution were adopted by each of the Funds (except the California Tax Free
Fund, New York Tax Free Fund and Money Market Fund) for the then sole existing
class of shares of the Funds. More specifically, Rule 12b-1 distribution plans
were approved on October 21, 1997 by the sole initial Class B shareholder of the
Strategic Value Fund, on February 3, 1997 by the sole initial shareholder of the
Strategic Income Fund, on September 8, 1994 by the sole initial shareholder of
each of the International Bond Fund and International Equity Fund, on April 25,
1988 by the shareholders of the Total Return Fund, on May 29, 1987 by the sole
initial shareholder of the Tax Free Bond Fund and on April 27, 1987 by the
shareholders of the Capital Appreciation Fund, Convertible Fund, Government
Fund, High Yield Corporate Bond Fund and Value Fund. The Trustees of the Trust,
including a majority of the Independent Trustees, by vote cast in person at
meetings called for the purpose of voting on such Plans, initially approved the
Plans of the Total Return Fund on October 26, 1987, initially approved the Plans
of the Tax Free Bond Fund on April 27, 1987, and initially approved the Plans of
the Capital Appreciation Fund, Convertible Fund, Government Fund, High Yield
Corporate Bond Fund and Value Fund on April 28, 1986. In addition, on October
31, 1988, the Trustees of the Trust, including a majority of the Independent
Trustees, amended the Tax Free Bond Fund's Plan to permanently reduce the amount
of the distribution fee to be imposed subsequent to that date. On October 26,
1992, the Trustees of the Trust, including a majority of the Independent
Trustees, amended each of the plans of distribution to provide that a portion of
total amount of the distribution fee as a service fee, to pay for a variety of
account maintenance and personal services to shareholders after the sale. On
October 25, 1993, the Trustees of the Trust, including a majority of the
Independent Trustees, amended each of the plans of distribution to reflect that
NYLIFE Distributors would serve as principal underwriter of the Funds' shares,
effective January 1, 1994. Prior to the implementation of the multi-class
distribution system the distribution plans in effect for the Funds were amended
and redesignated and, now, are applicable only to the Class B shares of each
Fund. On October 30, 1995, the Trustees of the Trust, including a majority of
the
B-131
<PAGE>
Independent Trustees, amended the Class A Plans and the Class B Plans to clarify
that the Plans contemplate payment for expenses that may generally be
characterized as administrative.
Regarding the California Tax Free Fund and New York Tax Free Fund, the
Class B Plans were approved by the sole initial shareholder of the Class B
shares of each Fund on December 31, 1994. The Trustees of the Trust, including
a majority of the Independent Trustees, by vote cast in person at meetings
called for the purpose of voting on such Plans, initially approved such Plans
now designated as the Class B Plans on October 24, 1994.
Regarding the International Bond Fund and International Equity Fund, the
Trustees of the Trust, including a majority of the Independent Trustees, by vote
cast in person at meetings called for the purpose of voting on such Plans,
initially approved the distribution plans now designated as the Class B Plans on
July 25, 1994, and the Class A Plans on October 24, 1994. The Trustees of the
Trust, including a majority of the Independent Trustees, by vote cast in person
at a meeting called for the purpose of voting on such Plan, initially approved
the Class B Plan of the Strategic Income Fund on January 27, 1997. The Trustees
of the Trust, including a majority of the Independent Trustees, by vote cast in
person at a meeting called for the purpose of voting on such Plan, initially
approved the Class B Plan of the Strategic Value Fund on July 28, 1997.
On October 24, 1997, Class B shareholders for each of the Funds, other than
the Equity Index Fund, Money Market Fund, Strategic Income Fund and Strategic
Value Fund, approved a revision to the Class B Plans of each Fund to revise the
method of calculation of the distribution fee. The Trustees, including a
majority of the Independent Trustees, approved the revision at an in-person
meeting held July 28, 1997. The Class B shareholders approved the revision at a
meeting held October 24, 1997.
Under the current Class B plans, each Fund's Class B shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% (0.25% in the
case of the California Tax Free Fund, New York Tax Free Fund and the Tax Free
Bond Fund) of the average daily net assets attributable to the Fund's Class B
shares. Pursuant to the Class B Plan, the Class B shares also pay a service fee
to the Distributor at the annual rate of 0.25% of the average daily net assets
of the Funds' Class B shares.
B-132
<PAGE>
The Class C shares of each Fund (except the Money Market Fund and the
Equity Index Fund, which does not offer Class C shares) also have adopted Rule
12b-1 distribution plans. Rule 12b-1 distribution plans were approved on August
__, 1998 by the sole initial Class C 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 C Plans of the Funds on July 27, 1998.
Under the Class C plans, each Fund's Class C shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% (0.50% in the
case of the California Tax Free Fund, New York Tax Free Fund and the Tax Free
Bond Fund) of the average daily net assets attributable to the Fund's Class C
shares. Pursuant to the Class C Plans, the Class C 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 C shares.
Once approved by a vote of a majority of the outstanding voting securities
of a class of shares of a Fund, each Plan shall continue in effect thereafter,
provided such continuance is approved annually by a vote of the Trustees in the
manner described above. No Plan may be amended to increase materially the
amount to be spent for the services described therein without approval of the
shareholders of the affected class of shares of a Fund, and all material
amendments of each Plan must also be approved by the Trustees in the manner
described above. Each Plan may be terminated at any time, without payment of
any penalty, by vote of a majority of the Independent Trustees, or by a vote of
a majority of the outstanding voting securities of the affected Fund (as defined
in the 1940 Act) on not more than 30 days' written notice to any other party to
the Plan. So long as any Plan is in effect, the selection and nomination of
Trustees who are not such interested persons has been committed to those
Trustees who are not such interested persons. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that each Plan will
benefit the respective Fund and its shareholders. Pursuant to the Class A,
Class B and Class C 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.
B-133
<PAGE>
Pursuant to a rule of the National Association of Securities Dealers, Inc.,
the amount which a Fund may pay for distribution expenses, excluding service
fees, is limited to 6.25% of the gross sales of the Fund's shares since
inception of the Fund's Plan, plus interest at the prime rate plus 1% per annum
(less any contingent deferred sales charges paid by shareholders to the
Distributor or distribution fee (other than service fees) paid by the Funds to
the Distributor).
For the fiscal year ended December 31, 1997, the Funds paid distribution
and service fees pursuant to the Class A and Class B Plans as follows (Class C
shares were not offered prior to September 1, 1998):
Amount of Fee Amount of Fee
Pursuant to Pursuant to
Class A Plan Class B Plan
------------- -------------
California Tax Free Fund+........ $ 43,324 $ 29,795
Capital Appreciation Fund+....... 436,614 12,479,365
Convertible Fund+................ 160,596 7,496,884
Equity Index Fund................ 826,562 N/A
Government Fund+................. 41,839 5,572,110
High Yield Corporate Bond Fund+.. 447,670 25,344,441
International Bond Fund+......... 29,391 188,387
International Equity Fund+....... 44,218 567,206
Money Market Fund................ N/A N/A
New York Tax Free Fund+.......... 35,389 23,696
Strategic Income Fund++.......... 58,867 226,126
Strategic Value Fund++........... 5,136 10,314
Tax Free Bond Fund+.............. 32,364 2,207,368
Total Return Fund+............... 229,294 8,376,017
Value Fund+...................... 241,617 9,356,170
_______________________
+ The Class B Plan was amended effective October 27, 1997. Figures reflect
calculation of fee pursuant to previous method for the period from January
1, 1997 through October 26, 1997 and calculation of fee pursuant to the
current method for the period from October 27, 1997 through December 31,
1997.
++ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
For the fiscal year ended December 31, 1997, 1996 and 1995, NYLIFE
Distributors retained the following amounts in sales charges for sales of Class
A shares of the Funds:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
California Tax Free Fund.... $ 6,958 $ 35,009 $ 57,181
Capital Appreciation Fund+.. 201,562 1,430,417 718,806
Convertible Fund+........... 39,646 903,782 529,361
Equity Index Fund........... 329,059 1,968,993 308,486
Government Fund+............ 5,803 96,545 95,975
High Yield Corporate Bond
B-134
<PAGE>
Fund+................... 308,282 1,413,313 782,534
International Bond Fund+.... 5,235 54,586 10,984
International Equity Fund+.. 121,009 91,571 63,684
Money Market Fund+.......... N/A N/A N/A
New York Tax Free Fund...... 2,297 22,774 35,722
Strategic Income Fund++..... 14,008 N/A N/A
Strategic Value Fund++...... 344 N/A N/A
Tax Free Bond Fund+......... 5,710 51,345 62,656
Total Return Fund+.......... 50,232 334,470 233,202
Value Fund+................. 112,844 574,807 413,692
- -----------------------
+ The Fund began offering Class A shares on January 3, 1995.
++ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
For the fiscal years ended December 31, 1997 and 1996, contingent deferred
sales charges were paid by investors on the redemption of Class B shares of each
Fund, as follows:
Year Ended
Year Ended December 31,
December 31, 1997 1996
----------------- ------------
California Tax Free Fund........ $ 3,586 $ 2,008
Capital Appreciation Fund....... 1,485,899 966,555
Convertible Fund................ 1,466,588 852,359
Equity Index Fund............... N/A N/A
Government Fund................. 788,647 952,234
High Yield Corporate Bond Fund.. 2,684,352 1,482,294
International Bond Fund......... 31,152 27,332
International Equity Fund....... 88,010 48,979
Money Market Fund+.............. 779,844 640,623
New York Tax Free Fund.......... 2,531 2,810
Strategic Income Fund++......... 11,479 N/A
Strategic Value Fund++.......... -- N/A
Tax Free Bond Fund.............. 492,542 605,386
Total Return Fund............... 871,336 745,382
Value Fund...................... 996,052 712,915
_______________________
+ The amount shown represents proceeds from contingent deferred sales charges
which were assessed on redemptions of shares which had previously been
exchanged from other Funds into the Money Market Fund.
++ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 21, 1997.
For the fiscal year ended December 31, 1997, it is estimated that the
following amounts were spent on compensation to dealers with respect to the
Class A shares of each Fund: California Tax Free Fund spent $36,835; Capital
Appreciation Fund spent $1,231,407; Convertible Fund spent $246,918; Equity
Index Fund spent $3,332,052; Government Fund spent $33,248; High Yield Corporate
Bond Fund spent $2,144,790; International Bond Fund spent
B-135
<PAGE>
$34,080; International Equity Fund spent $75,027; New York Tax Free Bond Fund
spent $16,433; Strategic Income Fund spent $169,199; Strategic Value Fund spent
$141,685 Tax Free Bond Fund spent $32,283; Total Return Fund spent $307,772; and
Value Fund spent $665,119.
For the fiscal year ended December 31, 1997, it is estimated that the
following amounts were spent for distribution-related activities with respect to
the Class B shares of each Fund:
<TABLE>
<CAPTION> Approximate
Printing And Total Amount
Mailing Spent by
Sales Prospectuses to Compensation NYLIFE
Material other than to Compensation Sales Distributors
and Current Distribution to Sales Distribution With Respect
Advertising Shareholders Personnel Personnel Other Costs to Each Fund
----------- ------------ --------- --------- ----- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
California Tax Free $ 451 $ 5,941 $ 12,935 $ 4,638 $ 7,356 $ 84,185 $ 115,506
Fund
Capital Appreciation 87,010 1,547,023 3,159,974 625,088 1,888,695 13,803,858 21,111,648
Fund
Convertible Fund 22,979 727,746 537,699 88,566 279,208 4,640,527 6,296,725
Govt. Fund 8,234 547,016 323,510 72,554 178,934 1,867,222 2,997,470
High Yield Corp. Fund 130,347 2,796,481 4,100,335 771,492 2,419,468 41,119,642 51,337,765
International Bond 1,446 17,869 52,794 8,395 29,550 249,823 359,877
Fund
International Equity 5,115 53,876 185,125 32,625 106,364 756,109 1,139,214
Fund
New York Tax Free 1,345 4,517 6,991 2,553 6,197 64,232 85,835
Fund
Tax Free Fund 3,774 407,263 269,467 53,290 172,880 1,277,394 2,184,068
Total Return Fund 39,072 1,007,008 1,307,798 262,631 777,495 5,737,640 9,131,644
Value Fund 56,482 1,149,205 1,983,639 394,408 1,177,580 9,955,251 14,716,565
Strategic Income 5,873 33,872 209,498 38,134 119,979 1,062,130 1,469,486
Fund*
Strategic Value Fund* (535) 6,051 (60,004) 12,737 (18,061) 286,835 227,023
Total 361,593 8,303,868 12,089,761 2,367,111 7,145,645 80,904,848 111,172,826
</TABLE>
_______________________
* The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operations on October 22, 1997.
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated October 24, 1997,
the Manager performs certain bookkeeping and pricing services for the Funds.
Each Fund will bear an allocable portion of the cost of providing these services
to the Trust.
B-136
<PAGE>
For the period from October 27, 1997 through December 31, 1997, the amount
of recordkeeping fees paid to the Manager by each Fund was as follows:
Year Ended
December 31,
1997
-----------
California Tax Free Fund............................................ N/A
Capital Appreciation Fund........................................... 41,466
Convertible Fund.................................................... 21,595
Equity Index Fund................................................... N/A
Government Fund..................................................... 16,639
High Yield Corporate Bond
Fund............................................................... 68,994
International Bond Fund............................................. 2,608
International Equity Fund........................................... 5,460
Money Market Fund................................................... 12,407
New York Tax Free Fund.............................................. N/A
Strategic Income Fund............................................... 4,701
Strategic Value Fund................................................ 2,323
Tax Free Bond Fund.................................................. 13,665
Total Return Fund................................................... 28,016
Value Fund.......................................................... 31,142
For the period January 1, 1997 through October 26, 1997 and the fiscal
years ended December 31, 1996 and 1995, the amount of recordkeeping fee paid to
NYLIFE Distributors, the previous Accounting Agent, by each Fund was as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
California Tax Free Fund......... $ N/A $ N/A $ N/A
Capital Appreciation Fund........ 164,868 145,721 95,042
Convertible Fund................. 108,332 81,568 57,184
Equity Index Fund................ N/A N/A N/A
Government Fund.................. 80,879 114,622 128,798
High Yield Corporate Bond Fund... 270,515 233,333 164,329
International Bond Fund.......... 11,358 12,511 12,000
International Equity Fund........ 24,683 22,075 12,668
Money Market Fund................ 54,915 62,593 53,064
New York Tax Free Fund........... N/A N/A N/A
Strategic Income Fund +.......... 13,624 N/A N/A
Strategic Value Fund +........... N/A N/A N/A
Tax Free Bond Fund............... 60,703 80,430 79,801
Total Return Fund................ 119,962 126,154 103,032
Value Fund....................... 125,541 16,985 85,935
</TABLE>
________________
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operation on October 21, 1997.
B-137
<PAGE>
In addition, each Fund may reimburse NYLIFE Securities, NYLIFE Distributors
and MainStay Shareholder Services for the cost of certain correspondence to
shareholders and the establishment of shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of each Fund, is responsible under its
Management Agreement for the payment of expenses related to each Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trustees who are not affiliated with the Manager or Sub-Advisers,
(iii) certain fees and expenses of the Trust's Custo dians and Transfer
Agent,(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,(xii)
all taxes and business fees payable by a Fund to federal, state or other
governmental agencies, and (xiii) costs associated with the pricing of the
Funds' shares. Fees and expenses of legal counsel, registering shares, holding
meetings and communicating with shareholders include an allocable portion of the
cost of maintaining an internal legal and compliance department.
Certain of the Funds have entered into a committed line of credit with The
Bank of New York as agent, and various other lenders from whom a Fund may borrow
up to 5% of its net assets in order to honor redemptions. The credit facility is
expected
B-138
<PAGE>
to be utilized in periods when the Funds experience unusually large redemption
requests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected
by brokers, and the Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in certain
over-the-counter securities also may be effected on an agency basis, when the
total price paid (including commission) is equal to or better than the best
total prices available from other sources. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
Regarding the California Tax Free Fund and New York Tax Free Fund, newly
issued securities normally are purchased directly from the issuer or from an
underwriter acting as principal. Other purchases and sales usually are placed
with those dealers from which it appears that the best price or execution will
be obtained; those dealers may be acting as either agents or principals. The
purchase price paid by a Fund to underwriters of newly issued securities usually
includes a concession paid by the issuer to the underwriter, and purchases of
after-market securities from dealers normally are executed at a price between
the bid and asked prices.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Sub- Advisers attempt to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of each Fund and
their other clients on the basis of the broker-dealers' professional capability,
the value and quality of their brokerage services and the level of their
brokerage
B-139
<PAGE>
commissions. Consistent with the foregoing primary considerations, the Conduct
Rules of the NASD and such other policies as the Trustees may determine, the
Sub-Advisers may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Trust. In order for the Affiliated Broker to effect any portfolio transactions
for the Trust on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
Affiliated Broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The Trust will not deal with the Affiliated Broker in any portfolio
transaction in which the Affiliated Broker acts as principal.
Under each Sub-Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act"), a Sub-Adviser may cause a
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Sub-Adviser an amount of commission for
effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the 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
B-140
<PAGE>
value of the brokerage services provided, commissions exceeding those which
another broker might charge may be paid to broker-dealers (except the Affiliated
Broker) who were selected to execute transactions on behalf of the Trust and the
Sub- Advisers' other clients in part for providing advice as to the availability
of securities or of purchasers or sellers of securities and services in
effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Sub-Advisers for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Trust, a commission higher than one charged elsewhere will not
be paid to such a firm solely because it provided Research to an Sub-Adviser.
Research provided by brokers is used for the benefit of all of the Sub-Advisers'
clients and not solely or necessarily for the benefit of the Trust. The
Sub-Advisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Sub-Advisers as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Sub-Advisers. Investment decisions for a Fund and for the
Sub-Advisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be 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
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Trust believes that over time its ability to participate in volume transactions
will produce better executions for the Funds.
The Sub-Advisory fee that the Manager pays on behalf of each Fund to the
Sub-Advisers will not be reduced as a consequence of the Sub-Advisers' receipt
of brokerage and research services. To the extent a Fund's portfolio
transactions are used to obtain such services, the brokerage commissions paid by
the Fund will exceed those that might otherwise be paid, by an amount which
cannot be presently determined. Such services would be useful and of value to
the Sub-Advisers in serving both the Funds and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Sub-Advisers in carrying out their obligations to the
Funds.
For the fiscal years ended December 31, 1997, 1996 and 1995 each of the
following Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Brokerage Total Brokerage Commissions
Commissions Paid Paid to Affiliated Persons
---------------- --------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund.... 1,349,716 $ 882,877 $ 681,250 $ -- $ --- $ ---
Convertible Fund............. 1,728,411 1,952,991 674,139 -- --- ---
Equity Index Fund............ 24,704 63,111 7,018 -- --- ---
Government Fund.............. 1,719 20,809 71,818 -- --- ---
High Yield Corporate Bond
Fund....................... 1,297,005 1,187,150 1,207,587 -- --- 1,970(0%)(1)
International Equity Fund.... 239,373 215,696 135,267 -- --- ---
Strategic Income Fund+....... 11,739 N/A N/A -- N/A N/A
Strategic Value Fund+........ 21,314 N/A N/A -- N/A N/A
Total Return Fund............ 609,009 399,858 436,507 -- --- ---
Value Fund................... 2,347,711 1,354,707 1,055,169 -- --- 5,074(0%)(1)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Total Brokerage
Commissions Paid
Total Amount of Transactions to Brokers that
Where Commissions Paid Provided Research
--------------------------------------------------------------------- ------------------
Year Ended Year Ended Year Ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Capital Appreciation Fund...... 987,618,526 $ 571,478,397(0.0%)(2) $ 391,017,677(0.0%)(2) 1,349,716
Convertible Fund............... 1,608,359,897 1,296,465,108(0.0%)(2) 395,570,645(0.0%)(2) 1,728,411
Equity Index Fund.............. 21,540,769 64,348,135(0.0%)(2) 5,863,505(0.0%)(2) 24,704
Government Fund................ 12,111,250 275,083,720(0.0%)(2) 712,117,650(0.0%)(2) 1,719
High Yield Corporate Bond
Fund......................... 1,451,737,826 2,471,387,854(0.0%)(2) 1,414,045,455(0.0%)(2) 1,297,005
International Equity Fund...... 60,462,344 49,098,906(0.0%)(2) 33,559,758(0.0%)(2) 239,373
Strategic Income Fund+......... 41,537,454 N/A N/A 11,739
Strategic Value Fund+.......... 12,723,841 N/A N/A 21,314
Total Return Fund ............. 459,057,404 271,187,968(0.0%)(2) 604,631,476(0.0%)(2) 609,009
Value Fund .................... 1,523,756,743 848,170,710(0.0%)(2) 544,224,812(0.0%)(2) 2,347,711
</TABLE>
-------------------------
(1) Percent of total commissions paid.
(2) Percent of total transactions involving the payment of commissions
effected through affiliated persons.
+ The Strategic Income Fund commenced operations on February 28, 1997. The
Strategic Value Fund commenced operations on October 21, 1997.
The California Tax Free Fund, International Bond Fund, Money Market Fund, New
York Tax Free Fund and Tax Free Bond Fund paid no brokerage commissions during
the fiscal years ended December 31, 1997, 1996 and 1995.
Capital Appreciation Fund held commercial paper of American Express Credit
Corp. valued at $30,000,000 and commercial paper of Prudential Funding Corp.
valued at $62,926,000; Equity Index Fund held common stock in Merrill Lynch &
Co., Inc. valued at $1,358,753, common stock of Schwab (Charles) Corp. valued at
$624,156, common stock of American Express Co. valued at $2,333,620 and common
stock of Morgan Stanley, Dean Witter, Discover & Co. valued at $1,970,814;
International Equity Fund held commercial paper of Merrill Lynch & Co. Inc.
valued at $3,599,399 and common stock of HSBC Holdings PLC valued $258,829;
Convertible Fund held commercial paper of American Express Credit Corp. Valued
at $1,700,000, and common stock and preferred stock of Merrill Lynch & Co., Inc.
valued at $10,913,400 and $1,228,200, respectively; Total Return Fund held
commercial paper of American Express Credit Corp. valued at $43,450,000, and
bonds of Lehman Brothers Holdings Inc., 7.375%, due 5/15/07, valued at $984,537;
Value Fund held commercial paper of American Express Credit Corp. valued at
$29,820,000 and commercial paper of Prudential Funding Corp. valued at
$20,694,000; Government Fund held commercial paper of American
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Express Credit Corp. valued at $32,000,000 and commercial paper of Prudential
Funding Corp. Valued at $6,000,000; High Yield Corporate Bond Fund held
commercial paper of American Express Credit Corp. valued at $137,292,000 and
commercial paper of Prudential Funding Corp. valued at $25,000,000; Money Market
Fund held commercial paper of American Express Credit Corp. valued at $3,173,000
and commercial paper of Goldman Sachs Group L.P. valued at $14,483,450;
Strategic Income Fund held commercial paper of American Express Credit Corp.
valued at $3,000,000, bonds of Lehman Large Loan, Series 1997-LL1 Class A,
6.79%, due 6/12/04, valued at $203,666 and bonds of Merrill Lynch Mortgage
Investors, Inc., Series 1995-C2 Class A1, 7.1817%, due 6/15/21, valued at
$238,560; and Strategic Value Fund held commercial paper of American Express
Credit Corp. valued at $1,187,000 and commercial paper of Prudential Funding
Corp. valued at $1,115,000.
Investors may, subject to the approval of the Trust, the Manager and the
Sub-Adviser, purchase shares of a Fund with liquid securities that are eligible
for purchase by that Fund and that have a value that is readily ascertainable.
These transactions will be effected only if the Sub-Adviser intends to retain
the security in the Fund as an investment. The Trust reserves the right to amend
or terminate this practice at any time.
NET ASSET VALUE
The net asset value per share of each Fund (other than the Money Market Fund)
is determined by the Trust daily as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., Eastern time) on each day when the New
York Stock Exchange is open for trading. The net asset value per share of the
Money Market Fund is also determined at noon on such days.
Portfolio securities of the Money Market Fund are valued at their amortized
cost, which does not take into account unrealized securities gains or losses.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Market Fund would receive if it sold the instrument. During
periods of declining interest rates, the quoted yield on shares of the Money
Market Fund may tend to be higher than a like computation made by a fund with
identical investments utilizing a method of valuation based upon market
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prices and estimates of market prices for all of its portfolio instruments.
Thus, if the use of amortized cost by the Money Market Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Money Market Fund would be able to obtain a somewhat higher yield if he or she
purchased shares of the Money Market Fund on that day, than would result from
investment in a fund utilizing solely market values, and existing investors in
the Money Market Fund would receive less investment income. The converse would
apply in a period of rising interest rates.
Portfolio securities of each other Fund are valued (a) by appraising common
and preferred stocks which are traded on the New York Stock Exchange at the last
sale price on that Exchange on the day as of which assets are valued or, if no
sale occurs, at the mean between the closing bid price and asked price, (b) by
appraising other common and preferred stocks as nearly as possible in the manner
described in clause (a) if traded on any other exchange, including the National
Association of Securities Dealers National Market System and foreign securities
exchanges, (c) by appraising over-the-counter common and preferred stocks quoted
on the National Association of Securities Dealers NASDAQ system (but not listed
on the National Market System) at the closing bid price supplied through such
system, (d) by appraising over-the-counter common and preferred stocks not
quoted on the NASDAQ system and securities listed or traded on certain foreign
exchanges whose operations are similar to the U.S. over-the-counter market at
prices supplied by a pricing agent selected by the Sub-Adviser if those prices
are deemed by the Sub-Adviser to be representative of market values at the first
close of business of the New York Stock Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
which prices reflect broker-dealer- supplied valuations and electronic data
processing techniques if those prices are deemed by the Sub-Adviser to be
representative of market values at the first close of business of the New York
Stock Exchange, (f) by appraising exchange-traded options and futures contracts
at the last posted settlement price on the market where any such option or
futures contract is principally traded and (g) by appraising all other
securities and other assets, including over-the-counter common and preferred
stocks not quoted on the NASDAQ system, securities listed or traded on certain
foreign exchanges whose operations are similar to the U.S. over-the-counter
market and debt securities for which prices are supplied by a pricing agent but
are not deemed by the Sub-Adviser to be representative of market values, but
excluding
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money market instruments with a remaining maturity of 60 days or less and
including restricted securities and securities for which no market quotation is
available, at fair value in accordance with procedures approved by and
determined in good faith by the Trustees, although the actual calculation may be
done by others. Money market instruments held by the Funds with a remaining
maturity of 60 days or less will be valued by the amortized cost method unless
such method does not represent fair value. Forward foreign currency exchange
contracts held by the Funds are valued at their respective fair market values
determined on the basis of the mean between the last current bid and asked
prices based on dealer or exchange quotations.
Portfolio securities traded on more than one U.S. national securities exchange
or foreign securities exchange are valued at the last sale price on the business
day as of which such value is being determined at the close of the exchange
representing the principal market for such securities. The value of all assets
and liabilities expressed in foreign currencies will be converted into U.S.
dollar values at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank or broker-dealer.
If such quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Trustees. The Trust recognizes
dividend income and other distributions on the ex- dividend date, except that
certain dividends from foreign securities are recognized as soon as the Trust is
informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open for trading). In addition, European or Far Eastern securities
trading generally in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Funds' net asset values are not
calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that oc cur between the
time their prices are determined and the close
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<PAGE>
of the New York Stock Exchange will not be reflected in the Funds' calculation
of net asset values unless the Sub-Adviser deems that the particular event would
materially affect net asset value, in which case an adjustment will be made.
Because the Guarantee regarding the Equity Index Fund is payable to
shareholders directly (and not payable to the Equity Index Fund), and because it
represents only a contingent liability rather than an agreement to pay a
definite amount on the Guarantee Date, the Trustees believe that the Guarantee
should have no impact in determining the Equity Index Fund's net asset value.
The proceeds received by each Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to such
Fund and constitute the underlying assets of that Fund. The underlying assets of
each Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to such Fund and with a share of the general
liabilities of the Trust. Expenses with respect to any two or more Funds will be
allocated in proportion to the net asset values of the respective Funds except
where allocations of direct expenses can otherwise be fairly made.
To the extent that any newly organized fund or class of shares receives, on or
before December 31, any seed capital, the net asset value of such fund(s) or
class(es) will be calculated as of December 31.
SHAREHOLDER INVESTMENT ACCOUNT
A Shareholder Investment Account is established for each investor in the
Funds, under which a record of the shares of each Fund held is maintained by the
Transfer Agent. If a share certificate is desired, it must be requested in
writing for each transaction. There is no charge to the investor for issuance of
a certificate. Whenever a transaction takes place in a Fund (other than the
Money Market Fund), the shareholder will be mailed a confirmation showing the
transaction. Shareholders will be sent a quarterly statement showing the status
of the Account. In addition, shareholders will be sent a monthly statement for
each month in which a transaction occurs.
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<PAGE>
SHAREHOLDER SERVICING AGENT
The Glass-Steagall Act prohibits national banks from engaging in the business
of underwriting, selling or distributing securities. There is currently no
precedent prohibiting banks from performing shareholder servicing and
recordkeeping functions. Changes in federal or state statutes and regulations
pertaining to the permissible activities of banks and their affiliates or
subsidiaries, as well as further judicial or administrative decisions or
interpretations of those provisions, could prevent a bank from continuing to
perform all or a part of such services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
PURCHASES, REDEMPTION AND REPURCHASE
Letter of Intent ("LOI")
The LOI is a non-binding obligation on the Qualified Purchaser to purchase the
full amount indicated; however, on the initial purchase, if required (or, on
subsequent purchases if necessary), 5% of the dollar amount specified in the LOI
will be held in escrow by the Transfer Agent in shares registered in the
shareholder's name in order to assure payment of the proper sales charge. If
total purchases pursuant to the LOI (less any dispositions and exclusive of any
distribution on such shares automatically reinvested) are less than the amount
specified, the investor will be requested to remit to the Distributor an amount
equal to the difference between the sales charge paid and the sales charge
applicable to the aggregate purchases actually made. If not remitted within 20
days after written request, an appropriate number of escrowed shares will be
redeemed in order to realize the difference.
Distributions in Kind
The Trust has agreed to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio. The
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<PAGE>
securities distributed in such a distribution would be valued at the same value
as that assigned to them in calculating the NAV of the shares being redeemed. If
a shareholder receives a distribution in kind, he or she should expect to incur
transaction costs when he or she converts the securities to cash.
Suspension of Redemptions
The Trust may suspend the right of redemption of shares of any Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings or during which trading
on the New York Stock Exchange is restricted; (ii) when the SEC determines that
a state of emergency exists which may make payment or transfer not reasonably
practicable; (iii) as the SEC may by order permit for the protection of the
security holders of the Trust; or (iv) at any other time when the Trust may,
under applicable laws and regulations, suspend payment on the redemption or
repurchase of its shares.
CDSC Waivers
The Prospectus identifies certain categories of Class B share redemptions on
which the contingent deferred sales charge ("CDSC") will be waived. See "Tell Me
the Details - Alternative Sales Arrangements - Deferred Sales Charge Class B
Shares." In addition to those categories, the CDSC will be waived in connection
with the following redemptions of Class B shares by accounts established before
January 1, 1998: (i) withdrawals from IRS qualified and nonqualified retirement
plans, individual retirement accounts, tax sheltered accounts, and deferred
compensation plans, where such withdrawals are permitted under the terms of the
plan or account (e.g., attainment of age 59 1/2, separation from service, death,
disability, loans, hardships, withdrawals of excess contributions pursuant to
applicable IRS rules, withdrawals based on life expectancy under applicable IRS
rules); (ii) preretirement transfers or rollovers within a retirement plan where
the proceeds of the redemption are invested in proprietary products offered or
distributed by New York Life or its affiliates; (iii) living revocable trusts on
the death of the beneficiary; (iv) redemptions made within one year following
the death or disability or a shareholder; (v) redemptions by directors,
Trustees, officers and employees (and immediate family members) of the Trust and
of New York Life and its affiliates where no commissions have been paid;
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<PAGE>
(vi) redemptions by employees of any dealer which has a soliciting dealer
agreement with the Distributor, and by any trust, pension, profit-sharing or
benefit plan for the benefit of such persons where no commissions have been
paid; (vii) redemptions by tax-exempt employee benefit plans resulting from the
adoption or promulgation of any law or regulation; (viii) redemptions by any
state, country or city, or any instrumentality, department, authority or agency
thereof and by trust companies and bank trust departments; and (ix) transfers to
(a) other funding vehicles sponsored or distributed by New York Life or an
affiliated company, or (b) guaranteed investment contracts, regardless of the
sponsor, within a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(K) FOR CORPORATIONS
AND SELF-EMPLOYED INDIVIDUALS
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased as an investment under a
specimen cash or deferred profit sharing plan intended to qualify under Section
401(k) of the Code (a "401(k) Plan") adopted by a corporation, a self-employed
individual (including sole proprietors and partnerships), or other organization.
All Funds, except the California Tax Free Fund, New York Tax Free Fund and Tax
Free Bond Fund, may be used as funding vehicles for qualified retirement plans
including 401(k) plans, which may be administered by third-party administrator
organizations. NYLIFE Distributors does not sponsor or administer such
qualified plans at this time.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased 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
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contribution to a spousal IRA is the lesser of (i) $2,000 or (ii) the sum of (a)
the compensation includible in the working spouse's gross income plus (b) any
compensation includible in the gross income of the nonworking spouse, reduced by
the amount of the deduction taken by the working spouse. The maximum deduction
for a IRA contribution by a married couple is $4,000.
An individual who has not attained age 70-1/2 may make a contribution to a
traditional IRA which is deductible for federal income tax purposes. For tax
years beginning before 1998, a contribution is deductible only if (i) neither
the individual nor his or her spouse (unless filing separate returns and living
apart at all times during the taxable year) is an active participant in an
employer's retirement plan, or (ii) the individual (and his or her spouse, if
applicable) has an adjusted gross income below a certain level ($40,000 for
married individuals filing a joint return, with a phase-out of the deduction for
adjusted gross income between $40,000 and $50,000; $25,000 for a single
individual, with a phase-out for adjusted gross income between $25,000 and
$35,000). These phase-out limits will gradually increase starting with tax
years beginning in 1998, eventually reaching $50,000 - $60,000 for single filers
in 2005 and thereafter (and reaching $80,000 - $100,000 if married filing
jointly in 2007 and thereafter). In addition, for tax years beginning after
1997, a married individual may make a deductible IRA contribution even though
the individual's spouse is an active participant in a qualified employer's
retirement plan, subject to a phase-out for adjusted gross income between
$150,000 - $160,000. However, an individual not permitted to make a deductible
contribution to an IRA may nonetheless make nondeductible contributions up to
the maximum contribution limit for that year. The deductibility of IRA
contributions under state law varies from state to state.
Distributions from IRAs (to the extent they are not treated as a tax-free
return of nondeductible contributions) are taxable under federal income tax laws
as ordinary income. There are special rules for determining how withdrawals are
to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, all traditional IRAs are aggregated and treated as one IRA, all
withdrawals are treated as one withdrawal, and then a proportionate amount of
the withdrawal will be deemed to be made from nondeductible contributions;
amounts treated as a return of nondeductible contributions will not be taxable.
Certain early withdrawals are subject to an additional penalty tax. For
distributions made after 1997, the penalty tax does not apply to
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withdrawals up to a total of $10,000 for qualified first-time homebuyer expenses
or to withdrawals used to pay "qualified higher education expenses" of the
taxpayer or his or her spouse, child or grandchild. There are also special
rules governing when IRA distributions must begin and the minimum amount of such
distributions; failure to comply with these rules can result in the imposition
of an excise tax.
Roth IRAs. Roth IRAs are a form of individual retirement account
---------
applicable for tax years beginning after 1997. Contributions to a Roth IRA are
not deductible but may be made even after the individual attains the age of 70-
1/2. In certain cases, distributions from a Roth IRA may be tax free. The Roth
IRA, like the traditional IRA, is subject to a $2,000 ($4,000 for a married
couple) contribution limit (taking into account both Roth IRA and traditional
IRA contributions). The maximum contribution that can be made is phased-out for
taxpayers with adjusted gross income between $95,000 and $110,000 ($150,000 -
$160,000 if married filing jointly). If the Roth IRA has been in effect for
five years, and distributions are (1) made on or after the individual attains
the age of 59-1/2; (2) made after the individual's death; (3) attributable to
disability; or (4) used for "qualified first-time home buyer expenses," they are
not taxable. If these requirements are not met, distributions are treated first
as a return of contributions and then as taxable earnings. Taxable
distributions may be subject to the same excise tax described above with respect
to traditional IRAs. All Roth IRAs, like traditional IRAs, are treated as one
IRA for this purpose. Unlike the traditional IRA, Roth IRAs are not subject to
minimum distribution requirements during the account owner's lifetime. However,
the amount in a Roth IRA is subject to required distribution rules after the
death of the account owner.
Education IRAs. After 1997, a taxpayer may make non-deductible
--------------
contributions of up to $500 per year per beneficiary to an Education IRA.
Contributions cannot be made after the beneficiary becomes 18 year old. The
maximum contribution is phased out for taxpayers with adjusted gross income
between $95,000 and $110,000 ($150,000 - $160,000 if married filing jointly).
Earnings are tax-deferred until a distribution is made. If a distribution does
not exceed the beneficiary's "qualified higher education expenses" for the year,
no part of the distribution is taxable. If part of a distribution is taxable, a
penalty tax will generally apply as well. Any balance remaining in an Education
IRA when the beneficiary becomes 30 years old must
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be distributed and any earnings will be taxable and subject to a penalty tax
upon distribution.
All income and capital gains deriving from IRA investments in the Fund are
reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA or
Education IRA combined with tax-deferred compounded earnings on IRA investments
can lead to substantial retirement and/or education savings.
403(B)(7) TAX SHELTERED ACCOUNT
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased as the underlying investment
for tax sheltered custodial accounts (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.
GENERAL INFORMATION
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be a permitted investment under profit
sharing, pension, and other retirement plans, IRAs, and tax-deferred annuities
other than those offered by the Fund depending on the provisions of the relevant
plan. Third-party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.
The custodial agreements and forms provided by the Funds' Custodian and
Transfer Agent designate New York Life Trust Company as custodian for IRAs and
403(b) plans (unless another trustee or custodian is designated by the
individual or group establishing the plan) and contain specific information
about the plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by New York Life Trust Company, tax consequences and
redemption information, see the specific documents for that plan.
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The federal tax laws applicable to retirement plans, IRAs and 403(b) plans
are extremely complex and change from time to time. Therefore, an investor
should consult with his or her own professional tax adviser before establishing
any of the tax-deferred retirement plans described above.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time, quotations of the Money Market Fund's "yield" and
"effective yield" may be included in advertisements or communications to
shareholders. These performance figures are calculated in the following manner:
A. Yield -- the net annualized yield based on a specified seven-
-----
calendar day period calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital changes, in
the value of a hypothetical preexisting account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period
to obtain the base period return. The yield is annualized by multiplying
the base period return by 365/7. The yield figure is stated to the nearest
hundredth of one percent. The yield of the Class A and Class B shares of
the Money Market Fund for the seven-day period ended December 31, 1997 was
5.07% and 5.07%, respectively.
B. Effective Yield -- the net annualized yield for a specified seven-
---------------
calendar day period assuming a reinvestment of dividends (compounding).
Effective yield is calculated by the same method as yield except the yield
figure is compounded by adding one, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result, according to the
following formula: Effective Yield = [(Base Period Return + 1) /365/7/] -
1. The effective yield of the Class A and Class B shares of the Money
Market Fund for the seven-day period ended December 31, 1997 was 5.20% and
5.20%, respectively.
The yield and effective yield of the Money Market Fund reflect the
reduction of certain fees otherwise payable and voluntary expense
limitations. Had there been no reduction of fees or expense limitations,
the yield and effective yield of the Money Market Fund would have been
4.77% and 4.88%, respectively, for Class A shares and 4.77% and 4.88%,
B-154
<PAGE>
respectively, for Class B shares for the seven-day period ended December
31, 1997.
As described above, yield and effective yield are based on historical
earnings and are not intended to indicate future performance. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of the assumed reinvestment of dividends. Yield and effective yield will
vary based on changes in market conditions and the level of expenses.
From time to time a Fund, other than the Money Market Fund, may publish its
yield and/or average annual total return in advertisements and communications to
shareholders. Total return and yield are computed separately for Class A and
Class B shares. The average annual total return of each Fund is determined for a
particular period by calculating the actual dollar amount of the investment
return on a $1,000 investment in the Fund made at the maximum public offering
price at the beginning of the period, and then calculating the annual compounded
rate of return which would produce that amount. Total return for a period of
one year is equal to the actual return of the Fund during that period and
reflects fee waivers and reimbursements in effect for each period. This
calculation assumes a complete redemption of the investment and the deduction of
the maximum contingent deferred sales charge at the end of the period in the
case of Class B shares. In the case of Class A shares, the calculation assumes
the maximum sales charge is deducted from the initial $1,000 purchase order. It
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period. The performance information
shown below for the period ended December 31, 1996 provides performance figures
for both Class A and Class B shares of the Funds, except in the case of the
Equity Index Fund which offers only one class of shares, Class A shares.
In considering any average annual total return quotation, investors should
remember that the maximum initial sales charge reflected in each quotation for
Class A shares is a one-time fee which will have its greatest impact during the
early stages of an investor's investment in the Fund. The actual performance of
your investment will be affected less by this charge the longer you retain your
investment in the Fund.
B-155
<PAGE>
Quotations of each Fund's average annual total return will be calculated
according to the following SEC formula:
P(1+T) to the power of n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10-year periods at the end of the 1,
5, or 10-year periods (or fractional portion thereof)
Each Fund may quote total rates of return in addition to its average annual
total return. Such quotations are computed in the same manner as the average
annual compounded rate, except that such quotations will be based on a Fund's
actual return for a specified period as opposed to its average return over 1, 5,
and 10-year periods. In considering any total rate of return quotation,
investors should remember that the maximum initial sales charge reflected in
each quotation for Class A shares is a one-time fee which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of your investment will be affected less by this charge the
longer you retain your investment in the Fund.
The average annual total returns of the Class A shares of the following
Funds for the one-year and, as applicable, five-year and ten-year periods ended
December 31, 1997 and the period from inception to December 31, 1997 were as
follows:*
B-156
<PAGE>
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/97 12/31/97 12/31/97 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
California Tax Free Fund........ 3.04% 5.64% N/A 6.11% 10/1/91
Capital Appreciation Fund (b)... 17.27% 16.33% 18.28% 14.88% 5/1/86
Convertible Fund (b)............ 5.24% 12.38% 12.65% 9.99% 5/1/86
Equity Index Fund............... 28.30% 18.45% N/A 17.83% 12/20/90
Government Fund (b)............. 4.21% 4.93% 6.69% 6.54% 5/1/86
High Yield Corporate
Bond Fund (b)................. 7.16% 13.11% 11.79% 10.49% 5/1/86
International Bond Fund (b)..... -2.75% N/A N/A 8.69% 9/13/94
International Equity Fund (b)... -1.23% N/A N/A 3.35% 9/13/94
New York Tax Free Fund.......... 3.52% 5.74% N/A 6.36% 10/1/91
Strategic Income Fund........... N/A N/A N/A 1.83% 2/28/97
Strategic Value Fund............ N/A N/A N/A -1.61% 10/22/97
Tax Free Bond Fund (b).......... 4.11% 5.18% 6.58% 6.19% 5/1/86
Total Return Fund (b)........... 11.74% 11.91% 12.48% 12.50% 12/29/87
Value Fund (b).................. 15.18% 15.40% 16.43% 12.68% 5/1/86
</TABLE>
* Assumes the deduction of the maximum applicable initial sales charge.
(a) From inception to 12/31/97.
(b) Performance figures for the Fund's Class A shares, first offered to the
public on January 3, 1995, include the historical performance of the Fund's
Class B shares for the period from inception through December 31, 1994.
Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class B shares of the following
Funds for the one-year and, as applicable, five-year and ten-year periods ended
December 31, 1997, and the period from inception to December 31, 1997 were as
follows*:
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/97* 12/31/97* 12/31/97* Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
California Tax Free Fund (b)... 2.63% 6.14% N/A 6.75% 10/1/91
Capital Appreciation Fund...... 18.45% 17.08% 18.77% 15.29% 5/1/86
Convertible Fund............... 5.67% 13.00% 13.08% 10.35% 5/1/86
Government Fund................ 3.54% 5.19% 6.99% 6.79% 5/1/86
High Yield Corporate
Bond Fund.................... 6.55% 13.53% 12.11% 10.76% 5/1/86
International Bond Fund........ -3.85% N/A N/A 9.08% 9/13/94
International Equity Fund...... -1.22% N/A N/A 3.85% 9/13/94
New York Tax Free Fund (b)..... 3.14% 6.26% N/A 7.03% 10/1/91
Strategic Income Fund.......... N/A N/A N/A 1.02% 2/28/97
Strategic Value Fund........... N/A N/A N/A -0.96% 10/22/97
Tax Free Bond Fund............. 3.80% 5.70% 7.01% 6.56% 5/1/86
Total Return Fund.............. 12.65% 12.60% 12.93% 12.97% 12/29/87
Value Fund..................... 16.29% 16.11% 16.89% 13.07% 5/1/86
</TABLE>
* Assumes a complete redemption at the end of each year and the deduction of
the maximum applicable contingent deferred sales charge.
(a) From inception to 12/31/97.
(b) Performance figures for the Fund's Class B shares, first offered to the
public on January 3, 1995, include the historical performance of the Fund's
Class A shares for the period from inception through
B-157
<PAGE>
December 31, 1994. Performance data for the two classes after this date
vary based on differences in their expense structures.
The average annual total returns of the Class A shares of the following
Funds without deducting the applicable initial sales charge is as follows:
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/97 12/31/97 12/31/97 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
California Tax Free Fund.......... 7.90% 6.62% N/A 6.89% 10/1/91
Capital Appreciation Fund (b)..... 24.10% 17.65% 18.95% 15.44% 5/1/86
Convertible Fund(b)............... 11.36% 13.66% 13.29% 10.52% 5/1/86
Equity Index Fund................. 32.26% 19.17% N/A 18.35% 12/20/90
Government Fund(b)................ 9.12% 5.90% 7.18% 6.96% 5/1/86
High Yield Corporate
Bond Fund (b)................... 12.20% 14.15% 12.30% 10.92% 5/1/86
International Bond Fund (b)....... 1.83% N/A N/A 10.22% 9/13/94
International Equity Fund (b)..... 4.52% N/A N/A 5.14% 9/13/94
New York Tax Free Fund............ 8.39% 6.72% N/A 7.15% 10/1/91
Strategic Income Fund............. N/A N/A N/A 6.62% 2/28/97
Strategic Value Fund.............. N/A N/A N/A 4.11% 10/22/97
Tax Free Bond Fund (b)............ 9.02% 6.15% 7.08% 6.61% 5/1/86
Total Return Fund (b)............. 18.24% 13.18% 13.10% 13.14% 12/29/87
Value Fund (b).................... 21.88% 16.72% 17.09% 13.23% 5/1/86
</TABLE>
- --------------------
(a) From inception to 12/31/97.
(b) Performance figures for the Fund's Class A shares, first offered to the
public on January 3, 1995, include the historical performance of the
Fund's Class B shares for the period from inception through December 31,
1994. Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class B shares of the following
Funds without deducting the applicable contingent deferred sales charge is as
follows:
B-158
<PAGE>
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/97 12/31/97 12/31/97 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
California Tax Free Fund (b).. 7.63% 6.45% N/A 6.75% 10/1/91
Capital Appreciation Fund..... 23.45% 17.29% 18.77% 15.29% 5/1/86
Convertible Fund.............. 10.67% 13.24% 13.08% 10.35% 5/1/86
Government Fund............... 8.54% 5.51% 6.99% 6.79% 5/1/86
High Yield Corporate..........
Bond Fund................... 11.55% 13.77% 12.11% 10.76% 5/1/86
International Bond Fund....... 1.15% N/A N/A 9.57% 9/13/94
International Equity Fund..... 3.78% N/A N/A 4.40% 9/13/94
New York Tax Free Fund (b).... 8.14% 6.57% N/A 7.03% 10/1/91
Strategic Income Fund......... N/A N/A N/A 6.02% 2/28/97
Strategic Value Fund.......... N/A N/A N/A 4.04% 10/22/97
Tax Free Bond Fund............ 8.80% 6.02% 7.01% 6.56% 5/1/86
Total Return Fund............. 17.65% 12.85% 12.93% 12.97% 12/29/87
Value Fund.................... 21.29% 16.33% 16.89% 13.07% 5/1/86
</TABLE>
- --------------------
(a) From inception to 12/31/97.
(b) Performance figures for the Fund's Class B shares, first offered to the
public on January 3, 1995, include the historical performance of the
Fund's Class A shares for the period from inception through December 31,
1994. Performance data for the two classes after this date vary based on
differences in their expense structures.
The performance data quoted represents historical performance and the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The yield of each Fund, except the Money Market Fund, is computed by
dividing its net investment income (determined in accordance with the following
SEC formula) earned during a recent 30-day period by the product of the average
daily number of shares outstanding and entitled to receive dividends during the
period and the maximum offering price per share on the last day of the period.
The results are compounded on a bond equivalent (semiannual) basis and then they
are annualized. Yield will be calculated using the following SEC formula:
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
B-159
<PAGE>
d = the maximum offering price per share on the last day of the period
This yield figure does not reflect the deduction of any contingent deferred
sales charges which are imposed upon certain redemptions at the rates set forth
under "Redemptions and Repurchases" in the Prospectus.
For the 30-day period ended December 31, 1997, the yield of each of the
following Funds was:
30-Day
Period Ended
December 31,
1997
----
Fund Class A Class B
---- -------- --------
California Tax Free Fund........ 4.74% 4.71%
Government Fund................. 4.84% 4.34%
High Yield Corporate Bond Fund.. 6.77% 6.33%
International Bond Fund......... 4.57% 4.02%
New York Tax Free Fund.......... 4.72% 4.69%
Tax Free Bond Fund.............. 4.81% 4.79%
Strategic Income Fund........... 5.93% 5.30%
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may publish its tax equivalent yield in advertisements and communications
to shareholders. The tax equivalent yield is calculated by determining the rate
of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of the Fund's yield, assuming certain tax
brackets for a Fund shareholder.
The table below illustrates the taxable yield equivalent to a tax-free
yield of 5.50%.*+
B-160
<PAGE>
To Equal a 5.50% Tax
If Free Return, a Taxable
Your Federal Investment Would Have to
Marginal Tax Earn Without Fee Reduction
Rate is: or Expense Limit
------------ --------------------------
15.00% 6.47%
28.00% 7.64%
31.00% 7.97%
36.00% 8.59%
39.60% 9.11%
- --------------------
* This table reflects application of the regular Federal income tax only;
other taxes may be applicable with respect to a particular shareholder.
Such taxes could change the information shown. Tax rates are subject to
change. Investors in the California and New York Tax Free Funds should in
particular note that the chart does not reflect any state and local taxes
that may be deductible in computing Federal income tax liability.
+ This table is for illustrative purposes only; investors should consult
their tax advisers with respect to the tax implications of an investment
in a Fund that invests primarily in securities, the interest on which is
exempt from regular Federal income tax.
A Fund may also include its current dividend rate in its prospectus, in
supplemental sales literature, or in communications to shareholders. The current
dividend rate of each Fund for a particular period is calculated by annualizing
total distributions per share from net investment income (including equalization
credits, excluding realized short-term capital gains and premiums from writing
options) during this period and dividing this amount by the maximum offering
price per share on the last day of the period. The current dividend rate does
not reflect all components of a Fund's performance including (i) realized and
unrealized capital gains and losses, which are reflected in calculations of a
Fund's total return, or (ii) the amortized discount and premium on debt
obligations in income using the current market value of the obligations, as is
currently required
B-161
<PAGE>
for yield calculations. In addition, the current dividend rate does not take
into account the imposition of any contingent deferred sales charge on the
redemption of Fund shares. Any performance figure which does not take into
account the contingent deferred sales charge would be reduced to the extent such
charge is imposed upon a redemption.
Investors should note that the investment results of a Fund will
fluctuate over time, and any presentation of a Fund's yield, current dividend
rate, total return or tax-equivalent yield of any prior period should not be
considered as a representation of what an investment may earn or what an
investor's yield, current dividend rate, total return or tax-equivalent yield
may be in any future period.
In addition, advertising for a Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for a Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for a
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for a Fund may
discuss the investment philosophy, personnel and assets under management of the
Fund's Manager and Sub-Adviser, and other pertinent facts relating to the
management of the Fund by the adviser.
From time to time any of the Funds may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
In addition, performance information for a Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard &
B-162
<PAGE>
Poor's 500 Composite Stock Price Index, the Salomon Brothers Broad Investment
Grade Bond Index, the Morgan Stanley Capital International indexes; the Dow
Jones Industrial Average, Donoghue Money Market Institutional Averages, the
Merrill Lynch 1 to 3 Year Treasury Index, the Salomon Brothers World Government
Benchmark Bond Index, the Salomon Brothers non-U.S. Dollar World Government Bond
Index, the Lehman Brothers Municipal Bond Index and the Lehman Brothers
Government Corporate Index; (ii) other groups of mutual funds tracked by
Morningstar Inc. or Lipper Analytical Services, widely used independent research
firms which rank mutual funds by overall performance, investment objectives and
assets, or tracked by other services, companies, publications or persons who
rank mutual funds on overall performance or other criteria; and (iii) the
Consumer Price Index (measure for inflation) and other measures of the
performance of the economy to assess the real rate of return from an investment
in the Funds. Unmanaged indexes may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
From time to time, advertisements for the Funds may include general
information about the services and products offered by the Funds, MainStay
Institutional Funds Inc. and New York Life Insurance Company and its
subsidiaries. For example, such advertisements may include statistical
information about those entities including, but not limited to, the number of
current shareholder accounts, the amount of assets under management, sales
information, the distribution channels through which the entities' products are
available, marketing efforts and statements about this information by the
entities' officers, directors and employees.
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 retroactive. Prospective
B-163
<PAGE>
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase ownership, and disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Each Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
each Fund must, among other things: (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
B-164
<PAGE>
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital 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 Fund, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by a Fund in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Provided that a Fund qualifies as a regulated investment company, under
the Code, it generally will not be subject to any excise or income taxes in
Massachusetts. A Fund's investments, if any, in REMIC residual interests (as
explained previously in this SAI) or in Passive Foreign Investment Companies, as
explained below, may cause the Fund to become liable for certain taxes.
Investors that are tax-exempt organizations should carefully consider whether
distributions of a Fund's earnings will be subject to tax in their hands.
B-165
<PAGE>
Each Fund, other than the Equity Index Fund (which offers only one class
of shares) and the Strategic Income Fund and Strategic Value Fund, has received
a ruling from the IRS to the effect that differing distributions between the
classes of its shares will not result in a Fund's dividends and other
distributions being regarded as "preferential dividends" under the Code.
Generally, a preferential dividend is a dividend which a Fund cannot treat as
having been distributed for purposes of (i) determining whether the Fund
qualifies as a regulated investment company for federal tax purposes, and (ii)
determining the Fund's tax liability.
Character of Distributions to Shareholders -- General
Assuming a Fund qualifies as a RIC, distributions of taxable net
investment income and net short-term capital gains in excess of net long-term
capital losses will be treated as ordinary income in the hands of shareholders.
If a Fund's investment income is derived exclusively from sources (such as
interest) other than dividends, no portion of such distributions will be
eligible for the dividends-received deduction available to corporations.
If a portion of a Fund's net investment income is derived from dividends
from domestic corporations, then a portion of such distributions may be eligible
for the corporate dividends-received deduction. The dividends-received deduction
is reduced to the extent shares of a Fund are treated as debt-financed under the
Code and is generally eliminated unless such shares are deemed to have been held
for more than 45 days. The 45-day holding period must occur during the 90-day
period beginning 45 days before the date on which the shares become ex-dividend.
In the case of dividends on certain preferred stock, the holding period
requirement is 90 days during a 180-day period. In addition, the entire dividend
(including the deducted portion) is includable in the corporate shareholder's
alternative minimum taxable income. Finally, if such dividends are large enough
to constitute "extraordinary dividends" under Section 1059 of the Code and the
applicable holding period requirements are not met, the shareholder's basis in
its shares could be reduced by all or a portion of the amount of the dividends
that qualifies for the dividends-received deduction.
Distributions of net capital gain, whether received in cash or reinvested
in Fund shares, will generally be taxable to shareholders as either "20% Rate
Gain" or "28% Rate Gain," depending upon the Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by a Fund for
B-166
<PAGE>
more than 18 months and are subject to a maximum tax rate of 20%; "28% Rate
Gains" arise from sales of assets held by a Fund for more than one year but no
more than 18 months and are subject to a maximum tax rate of 28%. Net capital
gains from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
Any loss realized upon the redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares during
that six-month period. A loss realized upon a redemption of shares of a Fund
within 30 days before or after a purchase of shares of the same Fund (whether by
reinvestment of distributions or otherwise) may be disallowed in whole or in
part.
If any net long-term capital gains in excess of net short-term capital
losses are retained by a Fund for reinvestment, requiring federal income taxes
to be paid thereon by that Fund, the Fund intends to elect to treat such capital
gains as having been distributed to shareholders. As a result, such capital
gains will be taxable to the shareholders. Shareholders will be able to claim
their proportionate share of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities and will be
entitled to increase the adjusted tax basis of the relevant Fund shares by the
difference between their pro-rata share of such gains and their tax credit.
Except for distributions by the Money Market Fund, distributions by a
Fund result in a reduction in the net asset value of a Fund's shares. Should a
distribution reduce the net asset value below a shareholder's cost basis, such
distribution nevertheless would 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.
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Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Any distributions that are not from a Fund's net investment income or net
capital gain may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of such share on
the reinvestment date.
Character of Distributions to Shareholders -- The Tax-Free Funds
The Code permits the character of tax-exempt interest distributed by a
regulated investment company to "flow through" as tax-exempt interest to its
shareholders, provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt under Section 103(a) of the Code.
Each of the California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund (collectively, the "Tax Free Funds") intend to satisfy the 50% requirement
to permit their distributions of tax-exempt interest to be treated as such for
regular Federal income tax purposes in the hands of their shareholders.
Exempt-interest dividends must be taken into account by individual shareholders
in determining whether their total incomes are large enough to result in
taxation of up to 85% of their social security benefits and certain railroad
retirement benefits. None of the income distributions of the Tax Free Funds will
be eligible for the deduction for dividends received by corporations.
Although a significant portion of the distributions by the Tax Free Funds
generally is expected to be exempt from federal taxes, each of these Funds may
under certain circumstances invest in obligations the interest from which is
fully taxable, or, although exempt from the regular federal income tax, is
subject to the alternative minimum tax. Similarly, gains from the sale or
exchange of obligations the interest on which is exempt from regular Federal
income tax will constitute taxable income to those Funds. In addition, a sale of
shares in such Fund (including a redemption of such shares and an exchange of
shares between two mutual funds) will be a taxable event, and may result in a
taxable gain or loss to a shareholder. Accordingly, it is possible that a
significant portion of the distributions of these Funds will constitute taxable
rather than tax-exempt income in the hands of a shareholder. Furthermore,
investors should be aware that tax
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laws may change, and issuers may fail to follow applicable laws, causing a
tax-exempt item to become taxable.
Exempt-interest dividends from the Tax Free Funds; ordinary dividends
from the Tax Free Funds, if any; capital gains distributions from the Tax Free
Funds and any capital gains or losses realized from the sale or exchange of
shares may be subject to state and local taxes. However, the portion of a
distribution of the Funds' tax-exempt income that is attributable to state and
municipal securities issued within the shareholder's own state may not be
subject, at least in some states, to state or local taxes.
Distributions derived from interest on certain private activity bonds
which is exempt from regular federal income tax are treated as a tax preference
item and may subject individual or corporate shareholders to liability (or
increased liability) for the alternative minimum tax. In addition, because a
portion of the difference between adjusted current earnings, as defined in the
Code, and alternative minimum taxable income is an addition to the alternative
minimum tax base, all distributions derived from interest which is exempt from
regular federal income tax are included in adjusted current earnings and may
subject corporate shareholders to or increase their liability for the
alternative minimum tax.
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
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
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be treated as taxable ordinary income to the extent it does not exceed the
accrued market discount on such bond (unless a Fund elects to include market
discount in income in tax years to which it is attributable). Realized accrued
market discount on obligations that pay tax-exempt interest is nonetheless
taxable. Generally, market discount accrues on a daily basis for each day the
bond is held by a Fund at a constant rate over the time remaining to the bond's
maturity. In the case of any debt security having a fixed maturity date of not
more than one year from date of issue, the gain realized on disposition will be
treated as short-term capital gain.
Users of Bond-Financed Facilities
Section 147(a) of the Code prohibits exemption from taxation of interest
on certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed thereby. No investigation as to
the users of the facilities financed by bonds in the portfolios of the Tax Free
Funds has been made by these Funds. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisers before purchasing shares of a
Fund since the acquisition of shares of the Tax Free Bond Fund, California Tax
Free Fund or New York Tax Free Fund may result in adverse tax consequences to
them.
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
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character of gains (or losses) realized by a Fund. In addition, losses realized
by a Fund on positions that are part of a straddle may be deferred under the
straddle rules rather than being taken into account in the taxable year in which
such losses are realized. Furthermore, certain transactions (including options,
futures contracts, notional principal contracts, short sales and 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.
Regarding the Tax Free Bond Fund, the California Tax Free Fund and New
York Tax Free Fund, gains from certain transactions, including, for example,
transactions in options, futures, and other instruments, and from obligations
the interest on which is
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not exempt from Federal income tax, will be taxable income to those Funds.
The International Bond Fund, International Equity Fund, Strategic Value
Fund and Strategic Income Fund 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 successful, status of a Fund as a regulated investment company
might be affected. The Funds intend to monitor developments in this area.
Passive Foreign Investment Companies
Certain of the Funds may invest in shares of foreign corporations which
may be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at least
one-half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each
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taxable year, with the result that unrealized gains are treated as though they
were realized and reported as ordinary income. Any mark-to-market losses and any
loss from an actual disposition of PFIC Shares would be deductible as ordinary
losses to the extent of any net mark-to-market gains included in income in prior
years.
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
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sources. Qualifying income includes, inter alia, interest, dividends, and gain
from the sale of stock or securities, but it does not include gain from the sale
of commodities such as gold and other precious metals.
Dispositions of Fund Shares
Upon redemption, sale or exchange of shares of a Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares. Such gain or loss
generally will be a capital gain or loss if the shares of a Fund were capital
assets in the hands of the shareholder, and generally will be taxable to
stockholders as "20% Rate Gain" if the shares had been held for more than 18
months or as "28% Rate Gain" if the shares had been held for more than one year
but no more than 18 months. A loss realized by a shareholder on the redemption,
sale or exchange of shares of a Fund with respect to which capital gain
dividends have been paid will, to the extent of such capital gain dividends, be
treated as long-term capital loss if such shares have been held by the
shareholder for six months or less at the time of their disposition.
Furthermore, a loss realized by a shareholder on the redemption, sale or
exchange of shares of a Fund with respect to which exempt-interest dividends
have been paid will, to the extent of such exempt-interest dividends, be
disallowed if such shares have been held by the shareholder for six months or
less at the time of their disposition. A loss realized on a redemption, sale or
exchange also will be disallowed to the extent the shares disposed of are
replaced (whether through reinvestment of distributions, or otherwise) within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Shareholders should be aware that redeeming shares of a Fund after
tax-exempt interest has been accrued by the Fund but before that income has been
declared as a dividend may be disadvan tageous. This is because the gain, if
any, on the redemption will be taxable, even though such gains may be
attributable in part to the accrued tax-exempt interest which, if distributed to
the shareholder as a dividend rather than as redemption proceeds, might have
qualified as an exempt-interest dividend.
Under certain circumstances, the sales charge incurred in acquiring
shares of either Fund may not be taken into account in determining the gain or
loss on the disposition of those shares.
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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 reflected in their basis.
If reverse stock splits are done, a share may have a split holding period
reflecting the fact that part of the share represents a reinvested dividend or
distribution.
Tax Reporting Requirements
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her federal income tax return. Shareholders are
also required to report tax-exempt interest. Dividends declared and payable to
shareholders of record on a specified date in October, November or December, if
any, will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares, including exchanges
for shares of another Fund, may result in tax consequences (gain or loss) to the
shareholder and generally are also subject to these reporting requirements. Each
shareholder should consult his or her own tax adviser to determine the tax
status of a Fund distribution in his or her own state and locality (or foreign
country).
Under the federal income tax law, a Fund will be required to report to
the IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares (other than shares of the Money Market Fund), except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, all such taxable distributions and proceeds from the
redemption or exchange of a Fund's shares may be subject to withholding of
federal income tax at the rate of 31% in the case of nonexempt shareholders who
fail to furnish a Fund with their taxpayer identification number and with
required certifications regarding their status under the federal income tax law
or if the IRS or a broker notifies a Fund that the number furnished by the
shareholder is incorrect. In addition, both the Fund and the shareholder are
potentially
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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 share holders who do not itemize deductions on
their federal income tax returns, although any such shareholder may claim a
credit for foreign taxes and in any event will be treated as having taxable
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income in respect to the shareholder's pro rata share of foreign taxes paid by
the Fund. It should also be noted that a tax-exempt shareholder, like other
shareholders, will be required to treat as part of the amounts distributed its
pro rata portion of the income taxes paid by the Fund to foreign countries.
However, that income will generally be exempt from taxation by virtue of such
shareholder's tax-exempt status, and such a shareholder will not be entitled to
either a tax credit or a deduction with respect to such income. The foreign tax
credit generally may offset only up to 90% of the alternative minimum tax in any
given year. Foreign taxes generally are not deductible in computing alternative
minimum taxable income.
State and Local Taxes - General
The state and local tax treatment of distributions received from a Fund
and any special tax considerations associated with foreign investments of a Fund
should be examined by shareholders with regard to their own tax situations.
Shareholders of the Tax Free Bond Fund, the California Tax Free Fund and
New York Tax Free Fund may be subject to state and local taxes on distributions
from the Fund, including distributions which are exempt from federal income
taxes. Some states exempt from the state personal income tax distributions from
a Fund derived from interest on obligations issued by the U.S. government or by
such state or its municipalities or political subdivisions. Each investor should
consult his or her own tax adviser to determine the tax status of distributions
from the Funds in his or her own state and locality.
Opinions relating to the validity of municipal securities and the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the issuers. The Tax Free Bond Fund, California Tax Free Fund and New
York Tax Free Fund, the Sub- Adviser and its affiliates, and the Funds' counsel
make no review of proceedings relating to the issuance of state or municipal
securities or the bases of such opinions.
Due to the lack of adequate supply of certain types of tax-exempt
obligations, and other reasons, various instruments are being marketed which are
not "pure" state and local obligations, but which are thought to generate
interest excludable from taxable income under Code section 103. While a Fund may
invest in such instruments, it does not guarantee the tax-exempt status of the
income earned thereon or from any other investment. Thus, for
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example, were a Fund to invest in an instrument thought to give rise to
tax-exempt interest but such interest ultimately were determined to be taxable,
the Fund might have invested more than 20% of its assets in taxable instruments.
In addition, it is possible in such circumstances that a Fund will not have met
the 50% investment threshold, described above, necessary for it to pay
exempt-interest dividends.
Explanation of Fund Distributions
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions, including, in the case of the Tax Free Bond Fund, the California
Tax Free Fund and New York Tax Free Fund, a statement of the percentage of the
prior calendar year's distributions which the Fund has designated as tax-exempt,
the percentage of such tax-exempt distributions treated as a tax-preference item
for purposes of the alternative minimum tax, and in, the case of the Tax Free
Bond Fund, the source on a state-by-state basis of all distributions.
Additional Information Regarding the Equity Index Fund
If Shareholders receive distributions of amounts paid pursuant to such
distributions from the Fund may not be eligible for the dividends-received
deduction available to corporations.
In addition, although not considered likely, it is possible that
shareholders could be regarded for tax purposes as receiving a constructive
distribution(s) (which could be taxable) from the Fund to the extent that the
Guarantee is deemed to have value.
It is anticipated that capital gain or loss from the disposition of
shares will be eligible for treatment as long-term or short-term capital gain or
loss depending upon the shareholder's actual holding period for the shares.
Investors should be aware that, under IRS regulations, as a result of the
Guarantee, a shareholder's holding period for Fund shares might be deemed not to
commence until the Guarantee is paid or expires. In that event, the capital gain
or loss on the disposition of Fund shares would be short-term capital gain or
loss until such time as the shares have been held continuously by the
shareholder for the requisite long-term holding period (currently more than one
year for Federal income tax purposes) after the expiration or payment of the
Guarantee. The holding period for shares received from
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reinvestment of dividends and distributions will commence no earlier than the
reinvestment date but could be delayed as described previously in this paragraph
as a result of the Guarantee.
Additional Information Regarding the California Tax Free Fund and
New York Tax Free Fund
Under California law, a mutual fund which qualifies as a regulated
investment company must have at least 50% of its total assets in obligations
exempt from California personal income tax at the end of each quarter of its
taxable year in order to be eligible to pay dividends which will be exempt from
California personal income tax. Generally, shareholders who are California
residents will not incur California personal income tax on the amount of
exempt-interest dividends received by them from the California Tax Free Fund and
derived from California state and local issues, whether taken in cash or
reinvested in additional shares. However, other taxes, such as the franchise tax
may apply. Shareholders will normally be subject to California personal income
tax on dividends paid from interest income derived from taxable securities and
from securities issued by states other than California and its subsidiaries and
on distributions of capital gains.
Deductions for interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund may be disallowed in whole
or in part for California personal income tax purposes.
Exempt-interest dividends paid by the New York Tax Free Fund from
interest on qualifying New York bonds generally are exempt from New York State
and New York City personal income taxes, but not corporate franchise taxes.
Dividends and distributions of the Fund derived from taxable income and capital
gains are not exempt from New York State and New York City taxes. Deductions for
interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund may be disallowed in whole or in part for New York
State or New York City personal income tax purposes.
Dividends from the California Tax Free Fund or New York Tax Free Fund
(including exempt-interest dividends), capital gains distributions from a Fund,
and any capital gains or losses realized from the sale or exchange of shares may
be subject to state and local taxes (as well as Federal taxes). However, the
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portion of a distribution of a Fund's tax-exempt income that is attributable to
state and municipal securities issued within the shareholder's own state
generally will not be subject to state or local taxes. Individuals are often
exempt from state and local personal income taxes on distributions of tax-exempt
interest income derived from obligations of issuers located in the state in
which they reside when these distributions are received directly from these
issuers, but are usually subject to such taxes on income derived from
obligations of issuers located in other jurisdictions. Shareholders are urged to
consult their tax advisers with specific reference to their own federal, state
and local tax situations.
Annual Statements
Each shareholder of the California Tax Free Fund will be sent after the
close of the calendar year an annual statement as to the federal income tax and
California state personal income tax status of his or her dividends and
distributions from the Fund for the prior calendar year. Any dividends
attributable to interest on municipal obligations that are not California
municipal securities will be taxable as ordinary dividends for California state
personal income tax purposes even if such dividends are excluded from gross
income for federal income tax purposes. These statements will also designate the
amount of exempt-interest dividends that is a specific preference item for
purposes of the federal individual and corporate alternative minimum taxes. Each
shareholder also will receive, if appropriate, various written notices after the
close of the Fund's prior taxable year as to the federal income tax status of
his or her dividends and distributions which were received from the Fund during
the Fund's prior taxable year. Shareholders should consult their tax advisers as
to any other state and local taxes that may apply to these dividends and
distributions. The dollar amount of dividends excluded or exempt from federal
income taxation or California state personal income taxation, if any, will vary
for each shareholder depending upon the size and duration of each shareholder's
investment in the Fund.
Each shareholder of the New York Tax Free Fund will be sent after the
close of the calendar year an annual statement as to the federal income tax and
New York State and New York City personal income tax status of his or her
dividends and distributions from the Fund for the prior calendar year. These
statements will also designate the amount of exempt-interest dividends that is a
specified preference item for purposes of the federal individual
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and corporate alternative minimum taxes. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. Shareholders should consult their tax advisers as to any other state and
local taxes that may apply to these dividends and distributions. The dollar
amounts of dividends excluded or exempt from federal income taxation or New York
State and City personal income taxation and the dollar amount subject to federal
income taxation or New York State and City personal income taxation, if any,
will vary for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund.
General Information
The foregoing discussion generally relates to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
amounts constituting ordinary income to him or her.
ORGANIZATION AND CAPITALIZATION
General
The Funds are separate series of an open-end investment company, The
MainStay Funds ("Trust"), established under the laws of The Commonwealth of
Massachusetts by a Declaration of Trust dated January 9, 1986, as amended. The
Tax Free Bond Fund was originally formed as the MacKay-Shields MainStay Tax Free
Bond Fund pursuant to a Declaration of Trust on January 9, 1986 and became a
series of the Trust pursuant to a reorganization which occurred on May 29, 1987.
The Total Return Fund commenced operations on December 29, 1987. The Equity
Index Fund commenced operations on December 20, 1990. The California Tax Free
Fund and New York Tax Free Fund commenced operations on October 1, 1991. The
International Bond Fund and International Equity Fund commenced operations on
September 13, 1994. The Strategic Income Fund and Strategic Value Fund commenced
operations on February 28
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and October 22, 1997, respectively. The organizational expenses of each Fund
will be amortized and deferred over a period not to exceed 60 months. The
Declaration of Trust and By-laws authorize the Trustees to establish additional
series or "Funds" as well as additional classes of shares.
Voting Rights
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Fund or class on matters affecting an individual
Fund or a particular class of shares issued by a Fund. Shares have noncumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees and, in such event, the
holders of the remaining shares voting for the election of Trustees will not be
able to elect any person or persons as Trustees. Shares have no preemptive or
subscription rights and are transferable.
Shareholder and Trustee Liability
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. Notice of such disclaimer will
normally be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant Fund for any loss suffered by a shareholder as a
result of an obligation of the Fund. The Declaration of Trust also provides that
the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder 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
B-182
<PAGE>
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
OTHER INFORMATION
Independent Accountants
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
New York, 10036, has been selected as independent accountants of the Trust. The
Funds' Annual Reports, which are incorporated by reference in this SAI, have
been so incorporated in reliance on the reports of Price Waterhouse, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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.
Share Ownership of the Funds
The following table sets forth information concerning beneficial and
record ownership, as of August 1, 1998, of the Funds' shares by each person who
beneficially or of record owns more than five percent of the voting securities
of any Fund:
[To Be Updated]
B-183
<PAGE>
<TABLE>
<CAPTION>
Shares Percentage
Name and Address Beneficially Outstanding
Name of Fund of Shareholder Owned (1) Shares Owned
- ------------ -------------- --------- ------------
<S> <C> <C> <C>
California NYLIFE Distributors Inc.(2) 14.43% 271,121
Tax Free Fund 300 Interpace Parkway
Class A Parsippany, NJ 07054
California Otto V. & Yvonne Louise-Ericksen 9.22% 173,217
Tax Free Fund Tschudi Revoc. Living Trust
Class A 1805 St. Andrews Dr.
Moraga, CA 94668
California William J. & Elinor Potikian 10.36% 83,366
Tax Free Fund Family Revocable Trust
Class B 4475 N. College
Fresno, CA 93704
Capital New York Life Trust Company 24.26% 1,541,608
Appreciation Client Accounts
Class A 51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Convertible New York Life Trust Company 10.45% 468,409
Fund Client Accounts
Class A 51 Madison Avenue, Rm 117A
New York, NY 10010-1603
New York Tax NYLIFE Distributors Inc.(2) 35.07% 499,488
Free Fund 300 Interpace Parkway
Class A Parsippany, NJ 07054
New York Tax Felice Brand 9.33% 53,769
Free Fund 158 Wright Avenue
Class B Deer Park, NY 11729-2224
New York Tax Henry Sheimann Irrevocable Trust 5.59% 32,224
Free Fund 11-31 Jackson Avenue
Class B Scardsdale, NY 10583
New York Tax Smith Barney Inc. 5.45% 77,602
Free Fund 388 Greenwich St.
Class A New York, NY 10013
International NYLIFE Distributors Inc.(2) 55.90% 770,905
Bond Fund 300 Interpace Parkway
Class A Parsippany, NJ 07054
</TABLE>
B-184
<PAGE>
<TABLE>
<S> <C> <C> <C>
International Defined Benefit Pension Trust of FMCNA 5.45% 74,305
Bond Fund C/O the Free Methodist Foundation
Class A 8050 Spring Arbor Road
Spring Arbor, MI 49283
International Merrill Lynch Pierce 5.73% 76,991
Bond Fund Fenner & Smith
Class A 4800 Deer Lake Dr. East
Jacksonville, FL 32246
International NYLIFE Distributors Inc.(2) 36.68% 625,090
Equity Fund 260 Cherry Hill Road
Class A Parsippany, NJ 07054
International New York Life Trust Company 5.95% 101,533
Equity Fund Clients Accounts
Class A 51 Madison Avenue, Room 117A
New York, NY 10010
Strategic Income NYLIFE Distributors Inc.(2) 10.36% 549,397
Fund 300 Interpace Parkway
Class B Parsippany, NJ 07054
Strategic Income New York Life Insurance 33.92% 653,946
Fund Company General Account
Class A 51 Madison Avenue
New York, NY 10010
Value Fund New York Life Trust Company 22.23% 1,420,946
Class A Client Accounts
51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Government New York Life Trust Company 18.12% 363,748
Fund Client Accounts
Class A 51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Tax Free
Bond Fund Schmitt Family Trust 15.26% 202,393
Class A P.O. Box 1566
Savannah, GA 31402
</TABLE>
B-185
<PAGE>
<TABLE>
<S> <C> <C> <C>
Value Fund Delaware Charter Guarantee 5.37% 343,465
Class A & Trust Co., Trustee
FBO Savings Incentive Plan for
Employees of LSB Industries Inc.
Holding Account 401K Plan
P.O. Box 8708
Wilimgton, DE 19899
Money Market New York Life Trust Company 6.89% 6,623,580
Fund Client Accounts
Class A 51 Madison Avenue, Room 117A
New York, NY 10010
Total Return New York Life Trust Company 49.57% 2,668,627
Fund Client Accounts
Class A 51 Madison Avenue, Room 117A
New York, NY 10010
Strategic Income Rodney A. Vanderaa 5.43% 104,752
Fund Joy Vanderaa
Class A 19140 Ada St.
Lansing, IL 60438
Strategic Income James C. Calano 5.76% 111,076
Fund 200 Boulder View Lane
Class A Boulder, CO 80304
Strategic Income Terry L. Vanderaa 5.07% 97,656
Fund Linda A. Vanderaa
Class A ATC Vancom
P.O. Box 7320
Oakbrook Terrace, IL 60181
Strategic Income Rodney A. Vanderaa 5.19% 100,040
Fund Wendy M. Vanderaa
Class A 18448 Holland Road
Lansing, IL 60436
Strategic Value New York Life Insurance 59.65% 914,161
Fund Company
Class A 51 Madison Avenue
New York, NY 10010
</TABLE>
- --------------------
(1) This information, not being within the knowledge of the Trust, has been
furnished by each of the above persons. Beneficial ownership is as
defined under Section 13(d) of the Securities Exchange Act of 1934.
Fractional Shares have been omitted.
B-186
<PAGE>
(2) Mr. George Daoust, in connection with his position with NYLIFE
Distributors, has the power to vote all of the shares shown in the above
table owned by NYLIFE Distributors. Mr. Daoust disclaims beneficial
ownership of such shares.
NYLIFE Distributors Inc. is a corporation organized under the laws of
Delaware. NYLIFE Distributors Inc. is a wholly owned subsidiary of NYLIFE Inc.,
and an indirect wholly owned subsidiary of New York Life Insurance Company.
Code of Ethics
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust and persons who, in connection
with their regular functions, play a role in the recommendation of any purchase
or sale of a security by the Trust or obtain information pertaining to such
purchase or sale or who have the power to influence the management or policies
of the Trust or an Investment Sub-Adviser unless such power is the result of
their position with the Trust or Investment Sub-Adviser. Such persons are
generally required to preclear all security transactions with the Trust's
Compliance Officer or his designee and to report all transactions on a regular
basis. The Trust has developed procedures for administration of the Code.
FINANCIAL STATEMENTS
The financial statements of the Capital Appreciation Fund, California Tax
Free Fund, New York Tax Free Fund, Value Fund, Convertible Fund, Total Return
Fund, High Yield Corporate Bond Fund, Government Fund (formerly the Government
Plus Fund), Tax Free Bond Fund (formerly the MacKay-Shields MainStay Tax Free
Bond Fund), International Bond Fund, International Equity Fund, Equity Index
Fund, Money Market Fund, Strategic Income Fund and Strategic Value Fund,
including the Portfolio of Investments as of December 31, 1997, the Statement of
Assets and Liabilities as of December 31, 1997, the Statement of Operations for
the year ended December 31, 1997, the Statement of Changes in Net Assets for the
years ended December 31, 1997 and 1996, the Notes to the Financial Statements
and the Reports of Independent Accountants, all of which are included in the
1997 Annual Reports to the Shareholders are hereby incorporated by reference
into this Statement of Additional Information.
An audited financial statement for NYLIFE Inc. as of December 31, 1997,
is included in this Statement of Additional Information.
B-187
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
(affiliates of
New York Life Insurance Company)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE>
April 8, 1998
To the Board of Directors and
Stockholder of NYLIFE Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
We have audited the accompanying statutory basis consolidated statement of
financial position of NYLIFE Inc. and its subsidiaries (affiliates of New York
Life Insurance Company) as of December 31, 1997 and 1996, and the related
statutory basis consolidated statements of operations, of changes in
stockholder's equity and of cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 2, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New York State
Insurance Department for valuing companies owned by an insurer, which is a
comprehensive basis of accounting other than generally accepted accounting
principles. The effects on the financial statements of the variance between such
practices and generally accepted accounting principles are described in Note 2.
In our opinion, except for the effects of the matters described in the preceding
paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of NYLIFE Inc. and its subsidiaries at
December 31, 1997and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
<PAGE>
To the Board of Directors and
Stockholder of NYLIFE Inc.
Page 2
April 8, 1997
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NYLIFE Inc. and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31,1997, on the basis of the accounting described in Note 2.
As described in Note 19, on March 15, 1998, New York Life Insurance Company
reached an agreement to sell 100% of the common stock of NYLCare Health Plans to
Aetna Inc.
/s/ Price Waterhouse LLP
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---- ----
(in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 401,565 $ 310,232
Short-term investments 57,959 54,413
Premiums and accounts receivable less allowance for doubtful
accounts of $6,374 and $4,042, respectively 569,108 477,317
Interest and other receivables 36,805 59,414
Deferred distribution costs (net of accumulated amortization
of $296,341 and $229,711, respectively) 268,470 224,752
Investments:
Common stocks 26,130 7,042
Available for sale - bonds 241,697 200,442
Held to maturity - bonds 4,119 2,311
Insurance operations - bonds 50,253 32,411
Mortgage loans - 6,769
Real estate 11,359 100,374
MainStay funds at fair value 41,665 47,263
Security alarm monitoring contracts held for sale 34,180 38,455
Other investments and advances to affiliates 66,034 100,240
Statutory valuation of subsidiary in excess of GAAP net equity 200,247 99,527
Fixed assets (net of accumulated depreciation of $84,445 and
$76,014, respectively) 80,355 89,064
Income taxes receivable 10,961 12,565
Receivable from New York Life Insurance Company 500,686 -
Other assets 124,748 126,033
Net assets of dissolved subsidiaries (790) 65,763
------------ ------------
Total assets $ 2,725,551 $ 2,054,387
============ ============
LIABILITIES and STOCKHOLDER'S EQUITY
Accrued HMO claims payable $ 341,594 $ 229,802
Policy and claim reserves - accident and health 133,412 127,722
Policy and claim reserves - life 94,825 67,657
Participating policyholder liability 14,866 30,100
Payable to New York Life Insurance Company 48,204 47,737
Accrued expenses and other payables 202,642 152,373
Payable on reinsurance assumed 39,608 26,507
Medical group risk sharing and unearned premiums 71,424 54,270
Notes payable 577,930 183,196
Net deferred tax liability and other liabilities 148,907 147,224
------------ ------------
Total liabilities 1,673,412 1,066,588
------------ ------------
Minority interest 111,901 89,533
Stockholder's equity:
Common stock, par value $.10 per share (20,000 shares authorized,
3,850 shares issued and outstanding) and additional paid-in capital 1,043,108 1,066,921
Accumulated deficit (306,938) (270,817)
Investment valuation account 200,247 99,527
Net unrealized gains (losses) on available for sale investments (net of
taxes of $886 and $(764), respectively) 1,383 (1,215)
Cumulative translation adjustment 2,438 3,850
------------ ------------
Total stockholder's equity 940,238 898,266
------------ ------------
Total liabilities and stockholder's equity $ 2,725,551 $ 2,054,387
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Years ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income:
Premium revenue - net of reinsurance $2,792,678 $2,363,286 $ 2,146,107
Premiums assumed on initial reinsurance settlement - 478,149 -
Fee income 1,392,649 925,671 723,494
Interest and dividend income 57,108 56,846 110,642
Commission income 113,590 95,858 50,378
Net realized and unrealized losses on investments (6,462) (2,869) (8,558)
Realized gain on sale of interest in subsidiaries 19,932 121,741 -
Equity in (loss) earnings of affiliates (2,551) (699) 155
Gain on issuance of additional shares by public subsidiary 2,411 27,835 -
Income (loss) from dissolved subsidiaries 16,066 1,836 (138,036)
Other income 22,275 10,035 12,082
----------- ----------- ------------
Total income 4,407,696 4,077,689 2,896,264
----------- ----------- ------------
Expenses:
HMO claims and capitation costs 1,738,512 1,350,743 1,155,269
Health, disability and death benefit costs 618,663 551,816 556,582
Cost of prescription sales 1,015,982 621,652 439,776
Administrative charge from New York Life Insurance Company 65,385 62,631 40,453
Employee compensation 368,939 339,974 286,811
Initial reserve transfer on reinsurance assumed - 478,149 -
Increase in policy reserves - life 21,829 11,746 14,237
Depreciation and amortization 120,238 112,642 103,621
Impairment of intangible asset 4,381 28,830 -
Interest 14,558 15,594 29,784
Professional fees 35,138 37,938 31,893
Selling expenses 166,632 123,413 118,637
Rent expense 36,575 34,943 32,848
Interest crediting expense - - -
Administrative and other expenses 184,442 152,272 202,129
----------- ----------- ------------
Total expenses 4,391,274 3,922,343 3,012,040
----------- ----------- ------------
Net income (loss) before income taxes,
and minority interest 16,422 155,346 (115,776)
Net income tax expense (benefit) 21,929 76,325 (24,441)
----------- ----------- ------------
Net (loss) income before minority interest (5,507) 79,021 (91,335)
Minority interest 18,288 14,188 4,598
----------- ----------- ------------
Net (loss) income $ (23,795) $ 64,833 $ (95,933)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
For the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
Net
Common Unrealized
Stock & Gains (Losses)
Additional Investment on Available Cumulative Total
Paid-In Accumulated Valuation for Sale Translation Stockholder's
Capital Deficit Account Investments Adjustment Equity
------- ------- ------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 599,073 $ (102,169) $ 289,713 $ (26,213) $ 1,963 $ 762,367
Capital contributions 347,473 - - - - 347,473
Dividends - (41,900) - - - (41,900)
Cumulative translation adjustment - - - - (840) (840)
Statutory valuation of subsidiary in
excess of GAAP net equity - - 117,121 - - 117,121
Other equity adjustments - (621) - - - (621)
Net unrealized gains on available
for sale investments - - - 45,312 - 45,312
Net loss - (95,933) - - (95,933)
------------ ----------- --------- --------- -------- -----------
Balance at December 31, 1995 946,546 (240,623) 406,834 19,099 1,123 1,132,979
Effect of business combination (Note 1) - (88,130) - (17,375) - (105,505)
Capital contributions 168,325 - - - - 168,325
Return of capital (47,950) - - - - (47,950)
Change in prior year's retained earnings - (7,102) - - - (7,102)
Cumulative translation adjustment - - - - 2,727 2,727
Statutory valuation of subsidiary
in excess of GAAP net equity - - (307,307) - - (307,307)
Other equity adjustments - 205 - - - 205
Net unrealized losses on available
for sale investments - - - (2,939) - (2,939)
Net income - 64,833 - - - 64,833
------------ ----------- --------- --------- -------- -----------
Balance at December 31, 1996 1,066,921 (270,817) 99,527 (1,215) 3,850 898,266
Capital contributions 101,087 - - - - 101,087
Return of capital (124,900) - - - - (124,900)
Cumulative translation adjustment - - - - (1,412) (1,412)
Statutory valuation of subsidiary
in excess of GAAP net equity - - 100,720 - - 100,720
Other equity adjustments - (12,326) - - - (12,326)
Net unrealized gains on available
for sale investments - - - 2,598 - 2,598
Net loss - (23,795) - - - (23,795)
------------ ----------- --------- --------- -------- -----------
Balance at December 31, 1997 $ 1,043,108 $ (306,938) $ 200,247 $ 1,383 $ 2,438 $ 940,238
============ =========== ========= ========= ======== ===========
</TABLE>
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years ended December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flow from operating activities:
Net (loss) income $ (23,795) $ 64,833 $ (95,933)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 120,238 112,642 104,521
Impairment of intangible assets 4,381 28,830 --
Insurance reserves 21,829 11,748 24,370
Gain on sale of shares of subsidiaries (19,932) (121,741) --
Net realized and unrealized losses 6,462 2,869 8,558
Equity in loss (earnings) of affiliates 2,551 699 (155)
Provision for deferred income tax expense (benefit) 13,609 87,297 (41,968)
Minority interest 18,288 14,188 4,598
Gain on issuance of additional shares by public subsidiary (2,411) (27,835) --
Other 3,821 11,083 2,502
Change in assets and liabilities:
Bank overdrafts -- -- (53,538)
Premiums and accounts receivable (91,791) (206,586) (95,884)
Interest and other receivables 22,609 (67,897) 3,360
Deferred distribution costs and other assets (107,471) (141,565) (93,479)
Accrued expenses and other payables 171,002 170,509 10,948
Payable to New York Life Insurance Company 467 30,499 (19,266)
Policy and claim reserves 11,029 143,096 (6,194)
Income taxes payable 1,604 (58,597) 340
Other liabilities (13,285) 345 (3,596)
Net assets of dissolved subsidiaries 66,553 (192,223) 137,654
--------- --------- ---------
Cash provided by (used in) operating activities 205,758 (137,806) (113,162)
Cash flow from investing activities:
Capital expenditures (38,826) (51,446) (44,721)
Proceeds from sale of investments 214,642 209,383 857,479
Purchase of investments (165,089) (283,947) (534,531)
Sale of subsidiaries, net of cash sold 2,766 138,497 --
Acquisition of subsidiaries, net of cash acquired -- (14,843) (15,765)
Loan to New York Life (499,781) -- --
Payments received on investments 8,693 45,653 5,478
Other (1,045) 3,552 3,121
--------- --------- ---------
Net cash (used in) provided by investing activities $(478,640) $ 46,849 $ 271,061
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
For the Years ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flow from financing activities:
Capital contributions $ 95,471 $ 97,784 $ 160,752
Dividends paid - (35,250) (32,584)
Borrowings net of repayments under line of credit agreements (97,446) 53,378 20,342
Payments applied against capital leases (527) (779) (1,107)
Proceeds from issuance of debt 500,708 - 24,521
Principal repayment of debt (8,173) (12,536) (310,644)
Return of capital distribution (124,900) - -
Proceeds from issuance of shares by public subsidiary - 52,592 -
Other 2,124 (52,839) 21,309
---------- ---------- ----------
Net cash provided by (used in) financing activities 367,257 102,350 (117,411)
---------- ---------- ----------
Effect of exchange rates on cash (3,042) 3,158 (339)
---------- ---------- ----------
Net increase in cash and cash equivalents 91,333 14,551 40,149
Cash and cash equivalents at beginning of period 310,232 295,681 255,532
---------- ---------- ----------
Cash and cash equivalents at end of period $ 401,565 $ 310,232 $ 295,681
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(affiliates of New York Life Insurance Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1997, 1996 and 1995
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
- -------------------------------------------------
The accompanying financial statements reflect the consolidation of NYLIFE Inc.
("NYLIFE" or the "Company"), a wholly-owned subsidiary of New York Life
Insurance Company ("New York Life"), and its subsidiaries, each of which is
wholly-owned, except as noted:
Aegis Technologies, Inc. ("Aegis")
Eagle Strategies Corp. ("Eagle")
Greystone Realty Corporation ("Greystone")
MacKay-Shields Financial Corporation ("MacKay-Shields")
Madison Square Advisors, Inc. ("MSA")
MainStay Management, Inc. ("MainStay Management")
MainStay Shareholder Services Inc. ("MSS")
Monitor Capital Advisors, Inc. ("Monitor Capital")
MSC Holding, Inc. ("MSC"), 85% owned
New York Life Benefit Services, Inc. ("Benefit Services")
New York Life Capital Corporation ("Capital Corp.")
New York Life International, Inc. ("International, Inc."), formerly
New York Life Worldwide Holding, Inc.
New York Life International Investment, Inc. ("NYL International")
NYL Management Limited
Monetary Research Limited ("MRL")
New York Life Irrevocable Trust of 1996 ("Trust")
New York Life Settlement Corporation ("NYLSET")
New York Life Trust Company ("NYL Trust")
NYLCO, Inc.
NYLIFE Administration Corp. ("NYLACOR")
NYLIFE Depositary Corporation ("Depositary")
NYLIFE Distributors Inc. ("NYLIFE Distributors")
NYLIFE Equity Inc. ("NYLIFE Equity")
NYLIFE Funding Inc. ("NYLIFE Funding")
NYLIFE HealthCare Management Inc. ("NYLIFE HealthCare"),
NYLCare Health Plans ("NYLCare")
Express Scripts Inc. ("ESI"), 45% owned
NYLIFE Realty Inc. ("NYLIFE Realty")
NYLIFE Refinery Inc. ("NYLIFE Refinery")
NYLIFE Resources Inc. ("NYLIFE Resources")
NYLIFE Securities Inc. ("NYLIFE Securities")
NYLIFE SFD Holding, Inc. ("SFD Holding")
Auto Funding II, LP ("Auto Funding")
NYLIFE Structured Asset Management Company, Ltd. ("SAMCO")
NYLINK Insurance Agency Corporation ("NYLINK")
NYLTemps Inc. ("NYLTemps")
<PAGE>
-2-
NYLIFE Inc., through its subsidiaries, offers health insurance, managed care and
related products and services; life insurance in certain international markets;
investment management, mutual fund, securities brokerage and pension products
and services; and the ability to raise capital. Through its health care related
subsidiaries, primarily NYLCare and ESI, the Company develops and manages health
maintenance organizations ("HMOs"), markets mail order prescriptions and
provides pharmacy claims processing services and offers indemnity health
insurance products and ancillary coverages such as group life and disability
insurance. HMO's are established under the individual practice association model
and provide comprehensive health care to their members for a fixed monthly fee.
Although indemnity products are offered throughout the United States through the
Company's group sales offices, HMO's are centered in Texas, Washington, D.C.,
New York, New Jersey and Illinois. As described in Note 19, the Company entered
into an agreement on March 15, 1998 to sell NYLCare.
International operations are conducted through International, Inc., which
markets life insurance and related products and services through joint ventures
and equity investments in Hong Kong, Korea, Indonesia, Mexico, Argentina,
Bermuda and the United Kingdom.
Asset management operations primarily consist of institutional asset management
and mutual fund related products and services offered through MacKay-Shields and
the MainStay Funds. Securities brokerage, mutual fund distribution and
administration services are conducted through NYLIFE Securities, NYLIFE
Distributors, MainStay Shareholder Services and MainStay Management. Pension and
401(k) products and related administrative and trust services are offered
through Benefit Services and NYL Trust.
Capital raising operations are conducted through Capital Corp. which issues
commercial paper and borrows from other sources for the purpose of making loans
to New York Life and its affiliates.
BUSINESS COMBINATIONS:
NYLCare was established on January 1, 1996 when New York Life combined certain
of its existing group life and health indemnity insurance operations with those
of Sanus Corp. Health Systems, an indirect wholly-owned managed care subsidiary
of New York Life, and renamed the company. Concurrently, New York Life also
transferred its ownership in New York Life and Health Insurance Company
(NYLHIC), a wholly-owned life insurance subsidiary, to NYLCare.
Also on January 1, 1996, NYLHIC entered into a modified coinsurance agreement
through which it has assumed the risk on 90% of New York Life's group life and
health indemnity insurance business. Under the terms of the modified coinsurance
agreement, NYLHIC assumes the risk for group life and health policies issued by
New York Life; however, New York Life retains the reserves and related assets.
For purposes of these financial statements, the combination has been treated as
a transaction between entities under common control and, accordingly, financial
statements presented for periods prior to January 1, 1996 have been restated to
include net income of $14,175,000 in 1995, and an increase in stockholder's
equity of $105,505,000 as of December 31, 1995.
<PAGE>
-3-
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------
BASIS OF ACCOUNTING:
The accompanying statutory basis consolidated financial statements have been
prepared on the basis of accounting practices prescribed or permitted by the New
York State Insurance Department for valuing common stocks of subsidiaries (New
York statutory basis of accounting), which is a comprehensive basis of
accounting other than generally accepted accounting principles ("GAAP").
The New York statutory basis of accounting for insurance subsidiaries varies
from those prepared under GAAP primarily as follows: (1) the costs relating to
acquiring business, principally commissions and certain policy issuance
expenses, are charged to income in the year incurred, whereas under GAAP, they
would be deferred and amortized over the periods benefited; (2) policy reserves
are based on different assumptions than under GAAP and dividends on
participating policies are provided when approved by the Board of Directors,
whereas under GAAP, they are provided when credited to the policies; (3) policy
reserves are recorded net of reinsurance, whereas under GAAP, such amounts are
reported gross; (4) the excess of purchase price over statutory net assets
acquired is charged to stockholder's equity in the year of acquisition, whereas
under GAAP, an intangible asset is established and amortized over its useful
life; (5) investments in bonds are generally carried at amortized cost, whereas
under GAAP, investments in bonds which are considered available for sale or held
for trading are generally carried at market value, with changes in market value
charged against equity or reflected in earnings; (6) certain assets are
considered 'non-admitted' and excluded from the statement of financial position,
whereas they are included under GAAP; (7) joint ventures and minority stock
investments are stated at the value of their underlying statutory net assets,
whereas under GAAP, such investments are stated on the equity basis; and (8)
deferred federal income taxes are not provided for as they are under GAAP.
In addition, goodwill arising from the purchase of non-insurance subsidiaries is
amortized over a period not to exceed ten years. Under GAAP, this goodwill would
be amortized over a period of 15 to 25 years. In 1993, New York Life received
authorization from the New York State Insurance Department to adopt approximate
market value (subject to certain liquidity adjustments) as the carrying value
for its investment in Express Scripts Inc., a publicly traded 45% owned
subsidiary of NYLIFE HealthCare. This practice is not recognized under GAAP.
The approximate effects on the financial statements of the variances between the
practices described in the preceding paragraphs and generally accepted
accounting principles are as follows: a decrease in net income of $4,000,000,
$17,000,000 and $2,000,000 for the years ending December 31, 1997, 1996 and
1995, respectively, a decrease in total assets of $122,000,000 and an increase
in total assets of $4,000,000 at December 31, 1997 and 1996, respectively, and a
decrease in stockholder's equity of $123,000,000 and $4,000,000 as of December
31, 1997 and 1996, respectively.
The consolidated statement of operations reflects the activities of purchased
subsidiaries from the acquisition date through the respective year-end date.
Intercompany accounts and transactions have been eliminated.
<PAGE>
-4-
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities denominated in foreign currency have been translated into
U.S. dollars at the respective year end exchange rates. Operating results are
translated at the average exchange rates for the year. Foreign currency
translation gains and losses are credited or charged directly to the Cumulative
Translation Adjustment ("CTA") account in stockholder's equity. The change in
the CTA account is due to the current year effect of the translation adjustment.
Foreign currency transaction gains and losses are included in net income.
CASH AND CASH EQUIVALENTS:
Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less. The carrying value of cash and cash equivalents approximates
fair value.
ACCOUNTS RECEIVABLE:
The carrying value of accounts receivable at December 31, 1997 and 1996
approximates fair value.
DEFERRED DISTRIBUTION COSTS:
Deferred distribution costs relate to commission expenses and certain other
costs related to the distribution of MainStay Funds which have a contingent
deferred sales charge, and are deferred and amortized over a six year period on
a straight-line basis, adjusted for related contingent deferred sales charge
income earned.
INVESTMENTS:
Short-term investments consist of commercial paper and are carried at cost which
approximates fair value. Common stocks are stated at market value. At December
31, 1997 and 1996, bonds, other than those associated with insurance operations,
are either classified as held to maturity and are reported at amortized cost or
classified as available for sale and are reported at estimated fair value, with
unrealized gains and losses reported as a separate component of stockholder's
equity, net of deferred tax. The investment in the MainStay Funds is recorded at
fair value and is held by MacKay-Shields, an investment advisor and NYLIFE
Securities and NYLIFE Distributors, broker-dealers. In accordance with
specialized accounting practices for broker-dealers, unrealized gains and losses
are included in income.
Real estate acquired through foreclosure is valued at the lower of the mortgage
loan carrying value or the appraised (fair market) value of the property at the
time of foreclosure plus certain direct related expenses. Any excess of the
carrying value of the loan over the appraised value is recorded as a realized
loss. Prior to December 30, 1996, alarm monitoring contracts were recorded at
cost net of accumulated amortization. Effective on this date, such contracts are
recorded at the lower of carrying value or fair value less cost to sell and the
amortization of the contracts has been discontinued (see Note 5). Investments in
limited partnerships are generally accounted for under the equity method of
accounting. Under this method, net earnings or losses are included in income
currently.
<PAGE>
-5-
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair values of various assets and liabilities are included throughout the notes
to financial statements. Specifically, fair value disclosure of bonds, real
estate and the investment in the MainStay Funds is reported in Note 8 and fair
value disclosure of notes payable is reported in Note 11. Fair values of bonds
and the investment in the MainStay Funds are based on published or quoted market
values, respectively. Fair value of mortgage loans is estimated based on
discounted cash flow analyses prepared for each loan using interest rates
approximating the current rates for new mortgages with similar remaining
maturities.
FIXED ASSETS:
Fixed assets are recorded at cost and are depreciated over the estimated useful
lives of the assets, generally 3 to 10 years, using the double-declining balance
and straight-line methods of depreciation.
INTANGIBLE ASSETS:
Intangible assets primarily consist of goodwill arising from acquisitions.
Goodwill, which represents the cost in excess of the value assigned to net
assets acquired in connection with acquisitions, is being amortized over 10
years, unless deemed to be impaired, in which case it is written off to the
extent considered unrecoverable (see Note 4).
PREMIUM REVENUE RECOGNITION:
Premium revenue, net of reinsurance, for indemnity and managed health care and
other ancillary coverage is recorded as income over the premium paying period of
the policies. Revenue on premiums collected in advance is deferred.
FEE INCOME:
Revenues from dispensing prescription and non-prescription medical products from
ESI's mail service pharmacies are recorded upon shipment. Revenue from sales of
prescription drugs by pharmacies in ESI's nationwide network and pharmacy claims
processing revenues are recognized when the claims are processed. When ESI has
an independent contractual obligation to pay its network pharmacy providers for
benefits provided to members of its clients' pharmacy benefit plans, ESI
includes payments from plan sponsors for these benefits as prescription sales.
Fees and payments to these pharmacy providers are included as cost of
prescription sales. If ESI is only administering the plan sponsors' network
pharmacy contracts, ESI records fees derived from ESI's contracts with plan
sponsors as net revenue.
Through its subsidiaries, the Company receives fees for services provided under
agreements with its clients. The Company accrues fee income when earned.
Consulting and management fees are recognized in income as services are
rendered. Additionally, the Company derives monitoring revenues from customer
payments for alarm monitoring services. The Company recognizes revenue as the
monitoring services are provided.
CLAIMS, BENEFITS AND CAPITATION COSTS:
Claims and benefits include estimates of payments to be made on individual
claims for medical and ancillary services and for death benefits. The cost of
claims incurred but not reported is estimated using actuarial techniques based
on current membership statistics, current utilization and historical claims data
and trends. These estimates are continually reviewed and revised as changes in
these
<PAGE>
-6-
factors occur and revisions are reflected in the current year's statement of
income. Capitation costs represent monthly charges paid to participating
physicians as compensation for providing continuing medical care.
COST OF PRESCRIPTION SALES:
Costs of prescription sales include product costs, pharmacy claims payments and
other direct costs associated with dispensing prescription and non-prescription
medical products and claims processing operations, offset by fees received from
pharmaceutical manufacturers in connection with ESI's drug purchasing and
formulary management programs.
PARTICIPATING POLICYHOLDER LIABILITY:
The liability for participating policyholders consists principally of dividends
accrued as of the statement date. The allocation of dividends is determined by
means of formulas which reflect the relative contribution of each group of
policies to the results of operations.
ACCRUED EXPENSES AND OTHER PAYABLES:
The carrying value of accrued expenses and other payables at December 31, 1997
and 1996 approximates fair value.
MEDICAL GROUPS' RISK SHARING:
NYLCare compensates primary care physicians on a capitation basis. NYLCare has
in place an incentive program whereby primary care physicians are eligible to
receive a bonus based on quality and cost utilization criteria. An accrual is
made for the estimate of the amount of bonus which will be paid to medical care
providers based upon quality cost utilization criteria.
NYLCare also has risk contracts with provider groups covering certain medical
services. To the extent medical expenses differ from budget, NYLCare and the
providers share any savings or deficit as defined in the contracts.
NEW ACCOUNTING PRONOUNCEMENT:
During 1997 the FASB issued SFAS 130, "Reporting Comprehensive Income" which
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income is composed of two items, "net income" and
"other comprehensive income". Other comprehensive income includes all changes in
equity from nonowner sources (e.g., unrealized holding gains and losses on
available for sale securities).
This Statement requires that the Company classify items of other comprehensive
income according to their nature and present each item separately in the
financial statement in which other comprehensive income is reported. This
Statement also requires that the accumulated balance of other comprehensive
income be reported as a separate item in the equity section of the balance
sheet. This Statement is effective for the 1998 financial statements of the
Company. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
RECLASSIFICATIONS:
Certain 1996 and 1995 amounts in the consolidated financial statements have been
reclassified to conform with the 1997 presentation. These reclassifications had
no effect on net earnings or stockholders' equity as previously reported.
<PAGE>
-7-
NOTE 3 - BUSINESS RISKS AND UNCERTAINTIES:
- ------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
During 1993, New York Life received authorization from the New York State
Insurance Department to adopt approximate market value (subject to certain
liquidity adjustments) as the carrying value for its investment in ESI.
Accordingly, the Company recorded adjustments of $200,247,000 and $99,527,000
for the statutory valuation of ESI in excess of its GAAP net equity at December
31, 1997 and 1996, respectively. These adjustments are included as a component
of stockholder's equity. Based upon the market value of ESI's common stock at
March 31, 1998, the amount of the statutory valuation of the subsidiary in
excess of GAAP net equity was approximately $321,205,000. A significant decline
in the value of this stock could have an adverse effect on the Company's
stockholder's equity.
As providers of life and health insurance products, the operating results of
certain subsidiaries in any given period depend upon estimates of policy
reserves required to provide for future policyholder benefits. The development
of policy reserves for the products of these companies requires management to
make estimates and assumptions regarding mortality, morbidity, health care
costs, lapses, expense and investment experience. Such estimates, including
provisions for incurred but not reported claims, are primarily based on
historical experience and, at times, the specific requirements of local
insurance regulators. Actual results could differ materially from these
estimates. Management monitors actual experience, and, where circumstances
warrant, revises its assumptions and the related estimates of policy reserves
and claim liabilities.
As substantially all of the net assets of International, Inc.'s subsidiaries are
held in foreign countries, there is a potential for adverse impact on net assets
arising from economic and political changes in these countries.
See Note 16 for description of specific commitments and contingencies.
NOTE 4 - IMPAIRMENT OF LONG LIVED ASSETS
- ----------------------------------------
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-lived Assets to be Disposed Of," which is effective for the
fiscal years beginning after December 15, 1995. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. In
accordance with SFAS 121, the following NYLIFE Inc. subsidiaries established
impairment reserves:
<PAGE>
-8-
NYLIFE REFINERY
NYLIFE Refinery, Inc. determined that adverse market and operating conditions
and independent market value quotes were sufficient indicators of a potential
impairment for its investment in Refinery Holding Corporation. As a result,
NYLIFE Refinery recorded a $17,219,000 writedown on its investment in limited
partnerships in 1997.
NEW YORK LIFE BENEFIT SERVICES
Benefit Services determined that projected operating losses were indicators of
potential impairment. These operating losses indicated that a write-down of the
goodwill related to the purchase of this subsidiary was required. As a result,
the remaining $4,381,000 of goodwill that arose from the purchase of Benefit
Services was written off in 1997.
NYLCARE
In 1996, NYLCare determined that continuing operating losses of certain
subsidiaries which perform administrative services for physician groups, were
indicators of potential impairment. Based upon the estimated undiscounted cash
flows anticipated from these subsidiaries it was determined that a write-down of
the goodwill related to these subsidiaries was required. As a result of the
above, approximately $28,830,000 of goodwill and other intangibles was written
off in 1996.
SFD HOLDING
In 1997, Auto Funding II wrote down its investment in trusts by $4,600,000. In
addition, Funding II wrote-off approximately $2,600,000 of capitalized costs
associated with the investment.
NOTE 5 - CHANGES IN ACCOUNTING PRINCIPLES
- -----------------------------------------
SFD HOLDING AND DEPOSITARY
On December 30, 1996, Westinghouse Electric Corporation ("Westinghouse") (the
servicer of the security alarm contracts) sold its security alarm business to
WestSec Inc. As part of this transaction, NYLIFE Structured Asset Management
Company Ltd. ("SAMCO", a subsidiary of SFD Holding - 83% and Depositary -17%),
Westinghouse, WestSec Inc. and an affiliate of WestSec Inc. entered into a
Consent, Assignment, Assumption, and Modification Agreement ("the Consent
Agreement"). In connection with the Consent Agreement, WestSec has committed to
purchase, and SAMCO has committed to sell, the security alarm contracts ("the
Contracts") securing each series of notes used to finance the acquisition of the
Contracts at fixed dates in the future for a determinable price. (See Note 19
for subsequent events related to this transaction.) In accordance with SFAS 121,
SAMCO has reported such Contracts at the lower of carrying amount or fair value
less cost to sell and has discontinued amortization of the Contracts effective
December 30, 1996.
NOTE 6 - ACCOUNTING FOR STOCK-BASED COMPENSATION
- ------------------------------------------------
NON EMPLOYEE AGREEMENTS:
On December 31, 1995, ESI entered into a ten-year corporate alliance with
Premier Purchasing Partners, L.P. (American Healthcare Systems Purchasing
Partners, L.P., the "Partnership"), an affiliate of Premier, Inc. ("Premier").
Under the terms of the transaction, ESI is Premier's preferred vendor of
pharmacy benefit management services to Premier's shareholder systems and their
managed care affiliates and will issue shares of its Class A Common Stock as an
administrative fee to the Partnership based on the attainment of certain
benchmarks, principally related to the number of members receiving ESI pharmacy
benefit management services under the arrangement, and to the
<PAGE>
-9-
achievement of certain joint purchasing goals. In accordance with the terms of
the agreement, ESI issued 227,273 shares of Class A Stock to Premier in May
1996, and may be required to issue up to an additional 2,250,000 shares to the
Partnership over a period up to the first five years of the agreement if the
Partnership exceeds all benchmarks. The shares issued were valued at $11,250,000
and are being amortized over the then remaining term of the agreement.
Amortization expense amounted to $1,164,000 in 1997 and $776,000 in 1996. Except
for certain exemptions from registration under the Securities Act of 1933, as
amended (the "1933 Act"), any shares issued to the Partnership cannot be traded
until they have been registered under the 1933 Act and any applicable state
securities laws. No stock was issued in 1997.
In October 1995, the Financial Accounting Standards Board issued Statement 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), effective for all stock
issued to non-employees subsequent to December 15, 1995. SFAS 123 requires that
all stock issued to non-employees be accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued
instead of the intrinsic value method utilized for stock issued or to be issued
under alliances entered into prior to December 15, 1995. ESI has adopted SFAS
123 as it relates to stock issued or to be issued under alliances based on fair
value at the date the agreement is consummated.
In November 1997, the Emerging Issues Task Force reached a consensus that the
value of equity instruments issued for consideration other than employee
services should be initially determined on the date on which a "firm commitment"
for performance first exists by the provider of goods or services. Firm
commitment is defined as a commitment pursuant to which performance by a
provider of goods or services is probable because of sufficiently large
disincentives for nonperformance. The consensus must be applied for all new
arrangements and modifications of existing arrangements entered into from
November 20, 1997. The consensus only addresses the date upon which fair value
is determined and does not change the accounting based upon fair value as
prescribed by SFAS 123. No such arrangements have been entered into by ESI
subsequent to November 20, 1997.
EMPLOYEE STOCK-OPTIONS:
ESI accounts for employee stock options in accordance with Accounting Principles
Board No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under APB 25,
ESI applies the intrinsic value method of accounting and, therefore, does not
recognize compensation expense for options granted, because options are only
granted at a price equal to market value at the time of grant. SFAS 123
prescribes the recognition of compensation expense based on the fair value of
options determined on the grant date. However, SFAS 123 grants an exception that
allows companies currently applying APB 25 to continue using that method. ESI
has, therefore, elected to continue applying the intrinsic value method under
APB 25.
NOTE 7 - ACQUISITIONS AND DISPOSITIONS
- --------------------------------------
In 1995, New York Life, NYLIFE Inc., and certain other affiliated and
unaffiliated entities, entered into a Stipulation of Settlement (the "Settlement
Agreement") of a class action lawsuit related to the sale of units in, and the
operation of, the Company's proprietary limited partnership programs. In
connection with the Settlement Agreement, New York Life announced a plan to
dissolve the partnership programs ("the Plan"), contingent upon the consent of
the Limited Partnership Investors (the "Investors"). In 1995, NYLIFE Inc.
recorded a provision of $137,000,000 to reflect the
<PAGE>
-10-
estimated costs of dissolving the partnership operations and certain claims in
connection therewith, including settlement of the class action lawsuit. Both the
Settlement Agreement and the Plan were approved during 1996. Final settlement
costs totaled $121,000,000 and, as a result, a corresponding $16,000,000 pre-tax
gain was recorded in 1997.
Pursuant to the Plan, NYLIFE Equity and NYLIFE Realty, as liquidators, have
finalized the process of winding up the partnership programs. All of the
property interests of the partnership programs were sold prior to September 30,
1997. As of September 30, 1997, pursuant to the Settlement Agreement, NYLIFE
Inc. has advanced $173,000,000 to the Investors and has paid $35,652,000 to
other unaffiliated entities for costs of the liquidation, primarily from the
proceeds from a $200,000,000 line of credit with New York Life. In addition,
NYLIFE Inc. has recovered $87,723,000 from the liquidation of the partnership
programs.
NYLIFE Equity and NYLIFE Realty were dissolved on September 30, 1997, whereby
each entity disbursed its remaining funds and transferred its net assets to
NYLIFE Inc. Closing returns of capital totaled $8,888,000 and $2,579,000 for
NYLIFE Equity and NYLIFE Realty, respectively.
For purposes of these financial statements, the results of the dissolved
subsidiaries have been reported as a one line adjustment and, accordingly,
financial statements presented for periods prior to September 30, 1997 have been
restated to include this one line adjustment on the consolidated statement of
financial position and consolidated statement of operations.
NYLIFE HEALTHCARE
On December 31, 1997, NYLCare sold its 100% stock interest in Avanti Health
Systems of Texas, Inc. ("Avanti"), its physician practice management company
located in Texas. An election was made to treat the sale as an asset sale for
federal tax purposes under Section 338(h) 10 of the internal Revenue Code.
NYLCare received approximately 1,402,000 shares of FPA Medical Management, Inc.
common stock with a market value of $26,115,000. NYLCare has recorded a gain of
$19,454,000 after adjusting for the costs related to the sale.
In 1997, NYLCare sold substantially all of the operating assets and certain
liabilities of Avanti of the District, Inc., its physician management practice
company located principally in Maryland. NYLCare received $2,766,000 in cash,
resulting in a gain on the sale of $478,000.
During 1996 and 1995, NYLIFE Inc. paid $7,076,000 and $10,800,000, respectively,
to the three original Founders of NYLIFE HealthCare to purchase their remaining
NYLIFE HealthCare shares in accordance with their Termination, Severance and
Stock Buyback Agreements. Subsequent to the purchase of these shares, NYLIFE's
ownership of NYLIFE HealthCare increased to 100%.
In April 1996, ESI completed a public offering of 1,150,000 shares of Class A
common stock and received $52,592,000 in net proceeds. NYLIFE HealthCare
recognized a pre-tax gain of $27,835,000, representing the difference between
NYLIFE HealthCare's interest in the net assets of ESI immediately after the
public offering and the historical book value of its investment in ESI. As part
of the same stock offering, NYLIFE HealthCare converted 2,990,000 shares of ESI
Class B Common Stock to Class A Common Stock. Net proceeds from the sale totaled
$138,497,000 and a pre-tax gain of approximately $121,741,000 was recognized. As
a result of these transactions, NYLIFE HealthCare's ownership of ESI decreased
from 70% to 46% and its voting stock from 96% to 90%. Additional issuance of
shares in 1997 reduced NYLIFE HealthCare's ownership to 45% and its voting stock
to 89%. See Note 19 for description of ESI's subsequent purchase of Value Rx.
<PAGE>
-11-
In July 1995, NYLCare acquired the minority shareholder's interest in Lonestar
Holding Company for approximately $4,100,000 in cash. As a result of the
transaction, the Houston HMO became a wholly-owned subsidiary of NYLCare.
Goodwill related to the purchase of approximately $2,700,000 is being amortized
over an estimated useful life of 10 years. As described in Note 19, the Company
entered into an agreement on March 15, 1998 to sell NYLCare.
MADISON SQUARE ADVISORS
On November 13, 1997, MSA was created to act as investment advisors over three
New York Life separate accounts. MSA was funded with a $25,000 subscription
receivable. A $25,000 cash contribution was made in January of 1998.
MAINSTAY MANAGEMENT, INC.
On August 22, 1997, MainStay Management was created to oversee the portfolio
management services provided by MacKay-Shields and Monitor Capital and for
managing the MainStay Funds business affairs. MainStay Management was funded
with a $1,000,000 cash contribution and $1,210,000 of furniture and equipment.
MAINSTAY SHAREHOLDER SERVICES INC.
On March 4, 1997, MSS was created to assume certain shareholder servicing
functions previously handled by NYLIFE Distributors. MSS was funded with a
$2,000,000 cash contribution and $912,000 of furniture and equipment.
MSC HOLDING, INC.
During 1995, the assets of the Health and Investment Divisions of MSC were sold
to Meritech, a subsidiary of Summit Technologies and Melson Technologies, an
indirect subsidiary of Aegon Insurance, respectively. Meritech purchased the
Health Division assets for approximately $750,000 which included contracts,
licenses, equipment and various receivables. Melson Technologies purchased the
Investment Division assets for a contingent purchase price of $3,500,000.
$1,000,000 of the purchase price is guaranteed and is expected to be received by
MSC within three years. As of December 31, 1997, $77,000 has been received. The
remaining $2,500,000 is contingent upon the amount of licensing fees the buyers
receive over the next 10 years relating to the SMS Investment System, which is
currently under development. A total gain of approximately $1,695,000 was
recognized on these transactions.
NEW YORK LIFE CAPITAL CORP.
New York Life Capital Corp. was incorporated in Delaware in June 1995. Capital
Corp.'s activities primarily consist of issuing commercial paper and borrowing
from other sources for the purpose of making loans to New York Life and its
affiliates. Capital Corp. commenced operations in 1997 with the issuance of
commercial paper.
NYLINK INSURANCE AGENCY CORPORATION
NYLINK was incorporated in Delaware in November 1996. NYLINK's activities will
primarily consist of the facilitation of the sale of non-proprietary insurance
products by New York Life registered representatives. NYLINK has not yet
commenced operations.
<PAGE>
-12-
NYL MANAGEMENT LTD.
On June 18, 1996, Quorum Capital Management Ltd. ("Quorum") transferred its
assets and business operations to Westdeutsche LandesBank (West LB) for
approximately $1,125,000. A gain of approximately $969,000 was recognized on
this transaction. Quorum subsequently changed its name to NYL Management Ltd.
and substantially ceased on-going operations.
AUTO FUNDING II, LP
NAFCO Auto Funding L.P. ("Funding") was organized as a limited partnership in
1993. Depositary was the general partner and SFD Holding was the limited
partner. On August 15, 1996, Funding assigned all of its financial assets and
liabilities to Auto Funding II L.P. ("Funding II"), a limited partnership with
an ownership structure identical to Funding. Subsequent to the assignment of
assets to Funding II, Depositary and SFD Holding sold their interests in Funding
to an unaffiliated third party. Consideration for the sale of Funding included
$200,000 in cash and $2,000,000 of 6% cumulative preferred stock and 10% of the
common stock of NAFCO Holding Company, Inc., a subsidiary of the purchaser. The
cumulative preferred stock is redeemable under various circumstances, but in any
event within 10 years.
NEW YORK LIFE IRREVOCABLE TRUST
On February 13, 1996, The New York Life Irrevocable Trust of 1996, (the "Trust")
was created to hold the stock of NYLSET. NYLIFE, as Grantor of the Trust,
transferred its 100% ownership of NYLSET to the Trust, making NYLIFE the
beneficiary.
AEGIS TECHNOLOGIES
In December 1995, the Aegis Technologies' Board of Directors approved a plan to
close the business and dissolve Aegis in the event a suitable buyer could not be
found. On March 5, 1996, the decision to dissolve Aegis and its subsidiary,
Personal Financial Assistant Financial Centers was announced. The assets were
liquidated and a loss of $5,420,000 was recognized. Aegis is expected to be
formally dissolved in 1998.
NYLIFE RESOURCES
In December 1993, NYLIFE Resources became a limited partner in the Ancon
Partnership Limited ("Ancon"). The partnership was formed to acquire, explore,
develop, and operate oil and gas properties. In December 1996, NYLIFE Resources,
along with New York Life and New York Life Insurance and Annuity Corporation (a
wholly owned subsidiary of New York Life) entered into a purchase and sale
agreement with American Exploration Company, the general partner. NYLIFE
Resources sold its remaining 11.23% in Ancon for $1,813,000 in cash. The
investment value was $2,173,000, resulting in a loss of $360,000.
<PAGE>
-13-
NOTE 8 - INVESTMENTS
- --------------------
COMMON STOCK:
At December 31, 1997 and 1996, the distribution of unrealized gains on common
stock was as follows (in thousands):
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- ----------
1997 $26,126 $ 4 $ - $26,130
======== ========= ========== =======
1996 $ 5,975 $ 1,067 $ - $ 7,042
======= ======= ========== =======
BONDS:
At December 31, 1997, the maturity distribution of bonds was as follows (in
thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Life Insurance
------------------ ---------------- --------------
Operations
----------
Amortized Estimated Amortized Estimated Statement Estimated
Cost Fair Value Cost Fair Value Value Fair Value
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 51,404 $ 51,431 $ - $ - $ 2,271 $ 2,284
Due in years two through five 108,983 109,869 - - 11,856 12,749
Due in years six through ten 60,789 62,137 - - 26,422 28,631
Due after ten years 15,905 15,874 4,119 4,614 9,704 10,429
-------- -------- --------- --------- -------- --------
Sub-total 237,081 239,311 4,119 4,614 50,253 54,093
Asset-backed securities 2,351 2,386 - - - -
-------- -------- --------- --------- -------- --------
Total $239,432 $241,697 $ 4,119 $ 4,614 $ 50,253 $ 54,093
======== ======== ========= ========= ======== ========
</TABLE>
At December 31, 1997 and 1996, the distribution of unrealized gains and losses
on bonds was as follows (in thousands):
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $ 85,691 $ 785 $ 81 $ 86,395
Commercial paper and Corporate notes 149,456 1,819 258 151,017
Other 4,057 - - 4,057
Certificates of deposit 228 - - 228
-------- ------- -------- --------
Total $239,432 $ 2,604 $ 339 $241,697
======== ======= ======== ========
</TABLE>
<PAGE>
-14-
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Held to Maturity Cost Gains Losses Fair Value
- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $4,119 $ 495 $ - $ 4,614
====== ======== ============ =======
<CAPTION>
Statement Unrealized Unrealized Estimated
Insurance Operations: Value Gains Losses Fair Value
- --------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Foreign Governments $ 16,520 $ 1,809 $ 12 $18,317
Corporate 19,738 2,000 231 21,507
Other 13,995 289 15 14,269
-------- ---------- -------- -------
Total $ 50,253 $ 4,098 $ 258 $54,093
======== ========== ======== =======
DECEMBER 31, 1996
<CAPTION>
Amortized Unrealized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
- --------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $ 97,430 $ 256 $ 880 $ 96,806
Commercial paper and Corporate notes 99,983 682 1,450 99,215
Other 4,223 - - 4,223
Certificates of deposit 198 - - 198
-------- ---------- -------- --------
Total $201,834 $ 938 $ 2,330 $200,442
======== ========== ======== ========
<CAPTION>
Amortized Unrealized Unrealized
Held to maturity Cost Gains Losses Fair Value
- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $2,311 $ 120 $ - $2,431
====== ======== =========== ======
<CAPTION>
Statement Unrealized Unrealized Estimated
Insurance Operations: Value Gains Losses Fair Value
- --------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Foreign Governments $ 10,782 $ 1,281 $ - $ 12,063
Corporate 15,520 951 190 16,281
Other 6,109 384 37 6,456
-------- ---------- -------- ---------
Total $ 32,411 $ 2,616 $ 227 $ 34,800
======== ========== ======== =========
</TABLE>
Proceeds from investments in bonds sold, matured, or repaid were $82,038,000,
$182,786,000, and $624,801,000, for 1997, 1996 and 1995, respectively. Realized
gains from investments in bonds sold, matured, or repaid were $0, $705,000, and
$10,164,000 for 1997, 1996 and 1995, respectively, and realized losses were
$89,000, $12,000, and $3,844,000 for 1997, 1996 and 1995, respectively.
Investment in bonds include $83,401,000 and $65,610,000 of restricted securities
on deposit to meet solvency requirements of various insurance departments, for
1997 and 1996, respectively.
<PAGE>
-15-
REAL ESTATE:
At December 31, 1997 and 1996, real estate totaled $11,359,000 and $100,374,000
respectively, and represented the following (in thousands):
Carrying Value
--------------
1997 1996
---- ----
Acquired through foreclosure $ - $ 98,100
International Operations 11,359 2,274
------- --------
Total $11,359 $100,374
======= ========
During 1997 NYLIFE Funding sold its remaining three properties and recorded a
realized loss of $9,526,000. During 1996, NYLIFE Funding foreclosed on two
delinquent mortgage loans and transferred them at their appraisal value to real
estate recording a realized gain of $773,000.
MAINSTAY FUNDS:
At December 31, 1997 the total investment in the MainStay Funds includes
investments in individual funds as follows (in thousands):
Fund Cost Fair Value
- ------------------------ ------- ----------
California Tax Free $ 2,834 $ 2,792
Capital Appreciation 61 170
Convertible 97 128
Corporate Bond 263 260
Equity Index 129 309
Institutional Growth 837 946
International Equity 6,450 6,638
International Bond 7,814 7,859
High Yield Corporate Bond 106 125
Short-Term Bond 10,897 10,353
New York Tax Free 5,200 5,141
Strategic Income/Value 5,352 5,301
Total Return 65 106
Value 1,452 1,537
-------- --------
Total 1997 $41,557 $41,665
======= =======
Total 1996 $46,862 $47,263
======= =======
SECURITY ALARM CONTRACTS:
At December 31, 1997, the carrying amount of security alarm monitoring contracts
held for sale includes Contracts collateralizing Series A, B and C Notes (see
Note 11) as follows (in thousands):
1997 1996
---- ----
Series A $ 7,821 $ 9,112
Series B 3,374 3,711
Series C 22,985 25,632
------- -------
Total $34,180 $38,455
======= =======
Prior to the reclassification of the Contracts as held for sale effective
December 30, 1996, the Contracts were being amortized over an estimated life of
12 years, as adjusted for attrited Contracts. Amortization expense for the
period January 1, 1996 to December 30, 1996 for Series A, B and C Contracts was
$9,924,000.
<PAGE>
-16-
TIME DEPOSITS:
Time deposits, included in cash and cash equivalents, at December 31, 1997 and
1996, amounted to $5,625,000 and $11,889,000, respectively.
OTHER INVESTMENTS:
Other investments include interests in limited partnerships which consist
primarily of an oil refinery and oil and gas producing properties valued at
$13,117,000 and $32,403,000 at December 31, 1997 and 1996, respectively. The
1997 value includes a pre-tax impairment loss of $17,219,000 in accordance with
SFAS 121 (see Note 4).
As described in Note 7, in connection with the Settlement Agreement, the
Investors approved a plan to dissolve the partnership programs in which NYLIFE
Equity and NYLIFE Realty have interests in. All of the property interests of
these partnership programs have been sold prior to September 30, 1997.
NOTE 9 - FIXED ASSETS
- ---------------------
At December 31, 1997 and 1996, fixed assets, at cost, are comprised of the
following (in thousands):
1997 1996
-------- --------
Furniture $ 29,571 $ 26,865
Equipment 51,124 44,447
Computer hardware 44,260 38,467
Computer software 18,326 15,590
Leasehold improvements 17,901 24,100
Other 3,618 15,609
-------- --------
164,800 165,078
Less accumulated depreciation and amortization 84,445 76,014
-------- ---------
Total $ 80,355 $ 89,064
======== ========
NOTE 10 - POLICY AND CLAIM RESERVES
- -----------------------------------
On January 1, 1996, in accordance with the terms of the initial settlement of
the modified coinsurance agreement, New York Life transferred $478,149,000 to
NYLHIC representing reserves and an equal amount of premiums on existing
business. NYLHIC immediately retransferred the reserves back to New York Life.
As a result of the above transactions, NYLHIC recorded premiums assumed and an
increase in reserves on the initial settlement of $478,149,000 in the statement
of operations.
The modified coinsurance reserve retained by New York Life related to the
reinsured group life and health indemnity business is $568,105,000 and
$498,255,000 at December 31, 1997 and 1996, respectively. The liability for
unpaid group health indemnity claims incurred in the years ended December 31,
1997 and 1996 related to prior years is immaterial.
<PAGE>
-17-
NOTE 11 - NOTES PAYABLE
- -----------------------
Notes payable, generally carried at the unpaid principal balance, consisted of
the following at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Short-term notes payable $500,708 $ -
International-Loan from Windsor Life 5,075 6,103
Series A and B, Floating Rate Secured Five Year Notes 16,216 17,146
Series C 9% Fixed Rate Secured Five Year Notes 24,548 26,596
Loans payable to New York Life 29,474 113,220
Bank borrowings and revolving line of credit with financial institutions - 14,222
Other (including current portion) 1,909 5,909
--------- --------
Total $ 577,930 $183,196
========= ========
</TABLE>
The carrying value of notes payable approximates fair value.
Short-term notes payable consist of Capital Corp's debt balance at December 31,
1997. The weighted average cost of short-term notes payable was approximately
5.75% at December 31, 1997.
The $16,216,000 of Series A and B Floating Rate Secured Five Year Notes are
collateralized by security alarm monitoring contracts, and pay interest
quarterly at a per annum floating rate based on the minimum denomination
five-year certificate of deposit average rate as reported by Bank Rate Monitor.
Principal is paid down on a quarterly basis. This balance is payable during 1998
(see Note 19).
The $24,548,000 of Series C 9% Fixed Rate Secured Five Year Notes are
collateralized by security alarm monitoring contracts, and pay interest
quarterly at the fixed rate. Principal is paid down on a quarterly basis. In
addition, $2,250,000 of these notes are payable during 1998.
In January 1995, NYLIFE entered into a credit agreement, expiring January 1,
1998, with New York Life whereby NYLIFE can borrow up to an aggregate principal
amount of $200,000,000 at any one time. This agreement and any loans made shall
be automatically extended and renewed for additional one year periods, unless
either NYLIFE or New York Life notifies the other to terminate the agreement. At
December 31, 1997 and 1996 the total principal borrowed under this agreement was
$0 and $91,131,000, respectively. Interest expense amounted to $1,847,000 and
$2,598,000 in 1997 and 1996, respectively.
On November 1, 1993, SFD Holding entered into a loan agreement with New York
Life. The agreement allows SFD Holding to borrow money pursuant to one or more
master notes (individually, a "Master Note," collectively, "Master Notes"), each
of which will not exceed one year in maturity and for amounts, in aggregate, not
to exceed $35,000,000 at any one time. Interest on any Master Note borrowing
accrues at the rate which is the annual simple interest equivalent (computed on
the actual daily principal balance based on a 360 day year or twelve 30-day
months) of 225 basis points above the one month LIBOR published in the Wall
Street Journal on the 15th day of the proceeding calendar month (or if such day
is not a day on which such newspaper is published, the next succeeding day of
such publication). In 1995, the loan agreement between SFD Holding and New York
Life was amended to accommodate the acquisition of prime auto loans. The
amendment provides for the following: (I) an increase in the maximum borrowings
to $70,000,000, (ii) an interest rate of 200 basis points above the one month
LIBOR for borrowings related to prime auto loan acquisitions, and (iii) a change
in the monthly interest payment date to the 20th of each month.
<PAGE>
-18-
During 1997, 1996 and 1995, SFD Holding made interest payments totaling
$2,396,000, $2,805,000 and $2,636,000, respectively, to New York Life pursuant
to the Master Notes. At December 31, 1997 and 1996, the amounts outstanding
under the Master Note are $29,474,000 and $22,089,000, respectively. Accrued
interest at December 31, 1997 and 1996 is $203,000 and $145,000, respectively.
On December 11, 1992, SFD Holding entered into a revolving credit agreement (the
"Credit Agreement") with Barclays Bank PLC ("Barclays"). The Credit Agreement
allows SFD Holding to borrow an aggregate principal amount not be exceed
$15,000,000 at any one time. Interest on any borrowing accrues at a rate equal
to either (i) the rate of interest per annum declared by Barclays as its prime
rate in effect at its branch in New York City or (ii) LIBOR plus 1%. SFD Holding
made interest payments totaling $119,000, $981,000 and $138,000 to Barclays
pursuant to the Credit Agreement during 1997, 1996 and 1995, respectively. On
February 20, 1997, SFD Holding borrowed $12,833,000 under the Master Note
Agreement. Those funds were used to repay all amounts then outstanding under the
Credit Agreement. Concurrent with the repayment, the Credit Agreement was
terminated. At December 31, 1997 and 1996, borrowings under the Credit Agreement
were $0 and $13,700,000, respectively. Accrued interest at December 31, 1997 and
1996 was $0 and $70,000, respectively. All borrowings under the Credit Agreement
were guaranteed by NYLIFE Inc.
Along with New York Life, Capital Corp. is party to a credit agreement with a
consortium of banks. The credit agreement consists of a $150,000,000, 364 day
revolving credit facility ("Facility A"), and a $350,000,000, 5 year revolving
credit facility ("Facility B"). Annual facility fees are .04% and .06%, for
Facility A and B, respectively, and borrowing rates are capped at spreads of
.16% and .14% over LIBOR, respectively. In addition, the credit agreement
contains various covenants pertaining to allowable activities of the Company.
Neither the Company nor New York Life have utilized the credit facility to date.
ESI maintains a $25,000,000 unsecured line of credit with the Mercantile Bank
National Association which was renewed for one year on May 29, 1997. ESI has
allowed a line of credit in the amount of $25,000,000 to lapse as of October 31,
1997. Terms of the agreement are as follows: interest is charged on the
principal amount outstanding at a rate equal to any of the following options
which ESI , at its option shall select: (i) the bank's "prime rate", (ii) a
floating rate equal to the Bank's cost of funds rate plus 50 basis points, or
(iii) a fixed rate for periods of 30, 60, 90 or 180 days equal to the LIBOR rate
plus 50 basis points. Fees under this agreement on any unused portion are
charged at ten hundredths of one percent per year. At December 31, 1997 and
1996, ESI had no outstanding borrowings under this agreement, nor did it borrow
any amounts under these agreements during 1997.
<PAGE>
-19-
NOTE 12 - REINSURANCE
- ---------------------
MODIFIED COINSURANCE:
In 1996, NYLHIC entered into a modified coinsurance agreement with New York
Life, whereby 90% of New York Life's group life and health indemnity insurance
business was reinsured with NYLHIC. For the two years ended December 31, 1997
and 1996, NYLHIC recorded the following activity under the reinsurance agreement
(in thousands):
1997 1996
---- ----
Premiums and fees assumed $739,854 $613,632
Benefits 603,814 507,055
Commission and expense allowance 140,022 142,725
Modco reserve adjustment 35,602 (13,135)
Settlement on the net amount due is made 90 days after the end of each quarter.
Accordingly, at December 31, 1997 and 1996, NYLHIC recorded the following
amounts representing fourth quarter activity under the reinsurance agreement (in
thousands):
1997 1996
---- ----
Deferred and uncollected premiums and fees $183,970 $191,922
Claims payable (143,206) (143,096)
Commission and expense allowances
payable (34,762) (34,191)
Dividends due and unpaid (11,613) (27,777)
Payable on reinsurance assumed (39,608) (26,507)
OTHER REINSURANCE:
Certain subsidiaries enter into reinsurance agreements in the normal course of
their insurance business. Reinsurance on certain individual lives is ceded to
reduce the risk on any one life. These subsidiaries remain liable for the
reinsurance ceded, if the reinsurer fails to meet its obligations. Premiums
ceded by these subsidiaries for the years ended December 31, 1997, 1996 and 1995
in connection with reinsurance agreements totaled $28,616,000, $29,434,000 and
$3,201,000, respectively. Policy reserves are recorded net of reinsurance
receivables of $8,434,000 and $7,709,000 at December 31, 1997 and 1996,
respectively.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
NYLIFE and several of its subsidiaries are party to a service agreement with New
York Life, whereby New York Life provides services to NYLIFE and such
subsidiaries, including office space, legal, accounting, administrative,
personnel and other services for which NYLIFE and its subsidiaries are billed.
NYLIFE and its subsidiaries are charged for these services based upon (a) actual
costs incurred, where they are separately identifiable and (b) allocation of
costs incurred by New York Life developed through analyses of time spent on
matters relating to NYLIFE and its subsidiaries.
<PAGE>
-20-
Investment management fees of $54,017,000, $40,864,000, and $35,089,000, were
received from New York Life and certain of its affiliates during the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain subsidiaries earned premiums and fees related to health care services
provided to New York Life of $15,526,000, $14,447,000, and $14,301,000 in 1997,
1996 and 1995, respectively.
During 1995, one of NYLCare's HMO subsidiaries paid hospital service claims of
approximately $7,000,000 to its minority shareholders.
NYLACOR has eight offices which market the New York Life long-term care product.
Beginning in 1995, all the expenses incurred by New York Life sales agents to
market the New York Life long-term care product are paid by NYLACOR and
reimbursed by New York Life. These expenses and the associated reimbursements
totaled $6,200,000, $5,859,000 and $3,266,000, respectively, for the years ended
December 31, 1997, 1996 and 1995.
As a distributor of mutual funds, NYLIFE Distributors has entered into
agreements with the MainStay Funds, pursuant to Rule 12b-1 under the Investment
Act of 1940, to compensate it for the distribution expenses it incurs. Although
the plans are required to be approved annually by the Trustees of the board of
NYLIFE Distributors, the management of NYLIFE Distributors believes that such
annual approval will continue indefinitely. Distribution fee income for 1997 and
1996, was $49,248,000 and $36,826,000, respectively. At December 31, 1997 and
1996, receivables from the MainStay Funds approximated $10,153,000 and
$8,539,000, respectively for distribution, services and administration fees.
NYLIFE Securities earned commission revenue of approximately $85,690,000,
$61,438,000 and $29,910,000 on transactions with affiliates during 1997, 1996
and 1995, respectively.
At December 31, 1997, Greystone has an intercompany payable to New York Life of
$1,538,000 which requires minimum annual installments of $250,000 until the
balance of the account is liquidated. Greystone paid a total of $1,750,000 and
$750,000 in 1997 and 1996, respectively. Such liability is non-interest bearing.
During 1997, NYLIFE Funding received cash of $6,701,000 for transferring a
mortgage loan (with the same statement value) to New York Life Insurance and
Annuity Corporation, a wholly-owned subsidiary of New York Life. The cash in
this transaction was used to return capital of $6,700,000 to New York Life.
On October 1, 1997, Capital Corp. entered into a credit agreement with New York
Life whereby Capital Corp. has agreed to make loans to New York Life in an
aggregate principal amount at any time outstanding of up to but not exceeding
$500,000,000. This agreement and any loans made shall be automatically extended
and renewed for additional one year periods, unless either Capital Corp. or New
York Life notifies the other to terminate the Agreement. At December 31, 1997,
$499,781,000 was loaned to New York Life. During 1997, New York Life made
interest payments totaling $1,443,000. Interest receivable at December 31, 1997
totaled $2,422,000.
<PAGE>
-21-
As of October 27, 1997, MainStay Management began to serve as Manager to each of
the MainStay Retail Funds and, as of November 22, 1997, as Manager to each of
the Institutional Funds (collectively, the "Funds") pursuant to a Management
Agreement with the Funds. MainStay Management assumed responsibility for
oversight of the portfolio management services provided by the Sub-Advisers
(MacKay-Shields, Monitor Capital. and New York Life) and for managing the Funds'
business affairs, which includes furnishing the Funds with office facilities and
providing ordinary clerical, recordkeeping and bookkeeping services. As Manager
of the Funds, MainStay Management receives a fee which ranges between .50% and
1.00% of the average daily net assets of affiliated funds. As the Accounting
Service Agent, MainStay Management receives a separate fee which generally is
less than .05% per Fund on an annual basis. Such fees for 1997 were $14,109,000
and $249,000, respectively.
MainStay Shareholder Services is the Transfer Agent and Shareholder Servicing
Agent for The MainStay Funds. MSS provides shareholder services and acts as the
transfer agent for the Fund's authorized and issued shares of beneficial
interest, dividend disbursing agent and agent in connection with any
accumulation, letter of intent or similar purchase plans provided to
shareholders of record to the Fund and set out in the Prospectus and Statement
of Additional Information. For performance of transfer agent and servicing
duties, the Fund agrees to pay MSS an annual maintenance fee for each
shareholder account.
NOTE 14 - FOREIGN OPERATIONS
- ----------------------------
NYLIFE subsidiaries conduct insurance and investment management operations in
the United Kingdom, Argentina, Bermuda, Hong Kong, Japan, Korea, Indonesia and
Mexico. The assets, liabilities, and net income of these foreign operations at
December 31, 1997 and 1996 and for the years then ended are as follows (in
thousands):
CONSOLIDATED SUBSIDIARIES:
--------------------------
1997 1996
---- ----
Assets $151,690 $128,526
Liabilities 128,442 98,180
Revenue 39,639 43,760
Net Loss (20,225) (20,735)
NON-CONSOLIDATED SUBSIDIARIES
-----------------------------
1997 1996
---- ----
Assets $4,165,310 $3,961,499
Liabilities 4,000,338 3,807,416
Revenue 371,226 330,529
Net (Loss) Income (2,816) 25,852
The cumulative translation adjustments for 1997 and 1996, respectively, are
$2,438,000 and $3,850,000.
Dividend income earned by New York Life UK Limited ("NYLUK"), a wholly owned
subsidiary of International, Inc. on its investment in Life Assurance Holding
Corporation ("LAHC") was $5,136,000 and $3,673,000 for the years ended December
31, 1997 and 1996, respectively.
<PAGE>
-22-
NOTE 15 - INCOME TAXES
- ----------------------
NYLIFE and its subsidiaries are members of an affiliated group which joins in
the filing of a consolidated federal income tax return with New York Life. The
consolidated income tax provision or benefit is allocated among the members of
the group in accordance with a tax allocation agreement. The tax allocation
agreement provides that each member of the group is allocated its share of the
consolidated tax provision or benefit determined generally on a separate return
basis, but may, where applicable, recognize the tax benefits of net operating
losses or capital losses utilizable in the consolidated group. Estimated
payments for taxes are made between the members of the consolidated group during
the year. State, local, and foreign tax returns are filed separately. The income
tax receivable included $5,983,000 and $14,481,000 due from New York Life as of
December 31, 1997 and 1996, respectively, pursuant to the tax allocation
agreement.
The components of income tax expense (benefit) for each year are as follows (in
thousands):
1997 1996 1995
---- ------ ----
Current
Federal $(4,621) $ (20,135) $ 9,119
State 12,471 8,973 8,771
Foreign 470 190 (363)
---------- ---------- ----------
Total Current 8,320 (10,972) 17,527
--------- -------- ----------
Deferred
Federal 13,230 86,686 (41,370)
State 379 611 (598)
---------- -------- ----------
Total Deferred $13,609 87,297 (41,968)
------- ------- --------
Total $21,929 $76,325 $(24,441)
======= ======= ========
Total income tax expense (benefit) is different from the amount computed using
the statutory federal tax rate of 35% in 1997, 1996 and 1995 for the following
reasons (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $5,748 $54,371 $(40,522)
Tax exempt investment income and capital gains (174) (216) (231)
State and local taxes, net of federal income tax benefit 8,353 6,256 5,288
Amortization of goodwill 4,055 6,155 6,219
Net foreign taxes 470 183 (1,904)
Equity in non-consolidated affiliates 6,081 6,447 4,518
Non-deductible losses with respect to foreign operations 178 349 1,378
Undistributed earnings of subsidiaries 1,596 1,237 896
Issuance of additional shares by public subsidiary - 2,689 -
Subsidiary loan write-off (4,598) - -
Provision to return reconciliation 1,323 217 (1,126)
Other (1,103) (1,363) 1,043
-------- -------- ---------
Total income tax expense (benefit) $21,929 $76,325 $(24,441)
======= ======= ========
</TABLE>
<PAGE>
-23-
The net deferred tax liability at December 31, 1997 and 1996, respectively is
attributable to the following temporary differences (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax asset:
Non-deductible reserves $ 11,879 $ 14,389
Net operating losses 4,445 4,448
Deferred compensation 12,122 13,417
Impairments - 2,133
Investments in affiliates and partnerships 2,087 652
Leasehold improvements 1,182 2,607
Deferred rent 2,190 2,365
Depreciation 819 912
Unrealized investment losses 84 764
Employee benefits 5,418 4,867
Modified coinsurance reserves 1,215 -
Deferred tax on sale of shares of subsidiary stock 2,614 2,614
Other 1,958 2,212
------ ---------
Gross deferred tax asset 46,013 51,380
Deferred tax liability:
Deferred distribution costs (93,965) (78,663)
Unrealized appreciation of subsidiary (12,299) (11,456)
Investments in affiliates and partnerships (98) (5,204)
Depreciation (1,715) (1,729)
Unrealized net appreciation (10,484) (9,102)
Unrealized investment gains (802) -
Forgiveness of subsidiary loan - (4,340)
Other (636) (492)
--------- ----------
Gross deferred tax liability (119,999) (110,986)
Valuation allowance (5,033) (4,445)
--------- ----------
Net deferred tax liability $ (79,019) $ (64,051)
========= ==========
</TABLE>
The December 31, 1997 valuation allowance principally relates to foreign net
operating losses, the utilization of which is subject to limitations in the
United Kingdom, and net operating loss limitations.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Leases:
The subsidiaries lease office space, a telephone system, and certain computer
and office equipment under agreements with various expiration dates. The leases
contain provisions for payment of real estate taxes, building maintenance,
electricity and other escalations.
<PAGE>
-24-
Future minimum lease payments under capital and noncancelable operating leases
with original or remaining lease terms in excess of one year at December 31,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1998 $ 1,069 $ 32,661
1999 1,144 30,701
2000 1,223 28,084
2001 1,309 24,876
2002 1,398 30,816
2003 & thereafter - 95,102
----------- ---------
Total 6,143 242,240
----------- ---------
Less future sublease rental receipts - 12,614
----------- ---------
Present value of future minimum lease payments 6,143 -
----------- ---------
Less amount due in one year 1,069 -
----------- ---------
Total $ 5,074 $ 229,626
=========== =========
</TABLE>
Assets recorded under capital leases and the related accumulated depreciation
are listed below. Amortization of these assets is included in depreciation and
amortization expense (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------ ------
<S> <C> <C>
Assets recorded under leases $ 14,091 $14,854
Accumulated depreciation (2,223) (2,048)
-------- -------
Total $ 11,868 $12,806
========= =======
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $36,575,000 $34,943,000 and $32,848,000, respectively.
Windsor Construction Company Limited, a wholly owned subsidiary of NYLUK,
entered into two contracts with Balfour Beatty Limited on January 11, 1994, for
the construction of phases II and III of NYLUK's head office development in the
United Kingdom amounting to $3,945,000 for Phase II and $4,190,000 for Phase
III. The contract for Phase II began on January 8, 1998, and the contract for
Phase III must begin by December 31, 1999.
New York Life has a guarantee, dated December 19, 1995, on behalf of NYLCare for
the rents due by NYLCare to its landlord, Olympia & York OLP Company. New York
Life will only be responsible upon the occurrences of certain events. The total
remaining amount of rental payments for the five year lease is $15,000,000.
Other:
During 1990, NYLIFE entered into an agreement to provide a guarantee for the
benefit of the shareholders of the MainStay Equity Index Fund. The guarantee
provides that if, after ten years from date of purchase, the net asset value,
with all dividend and capital gains distributions reinvested, is less than the
original offering price, NYLIFE will reimburse the shareholders for their loss
of principal and restore the net asset value to the original offering price,
including the return of any front-end sales charge. If shares are redeemed prior
to or after the one day guarantee date, the investor loses the benefit of the
guarantee with respect to those shares.
<PAGE>
-25-
The Company and its subsidiaries are defendants in various legal actions arising
from its operations. Most of these actions seek substantial or unspecified
compensatory and punitive damages. The Company is also from time to time
involved as a party in various governmental, administrative and investigative
proceedings and inquiries. Given the uncertain nature of litigation and
regulatory inquiries, the outcome of the above and other actions pending against
the Company cannot be predicted. The Company nevertheless believes that the
ultimate outcome of all pending litigation should not have a material adverse
effect on the Company's financial position; however, it is possible that
settlements or adverse determinations in one or more actions or other
proceedings in the future could have a material adverse effect on the Company's
operating results for a given year.
NYLIFE Inc. along with NYLIFE Securities and NYLIFE Distributors have a support
agreement whereby NYLIFE Inc. has agreed to absorb any liability which may be
allocated to NYLIFE Securities and NYLIFE Distributors as a result of a lawsuit
alleging misappropriation of funds by a New York Life agent. At December 31,
1997 plaintiffs were seeking $98,000,000 in compensatory and punitive damages.
Plaintiffs recently moved to add 12 additional plaintiffs to the lawsuit who are
asserting similar claims and seek an additional $24,500,000 in damages. At this
time, neither the probability of loss nor the amount of the plaintiffs recovery,
if any, can be estimated.
Additionally, certain subsidiaries are subject to minimum net worth restrictions
pursuant to regulatory requirements and the terms of limited partnership and
debt agreements. At December 31, 1997 and 1996, the net worth of these
subsidiaries exceeded the related requirements.
For the year ended December 31, 1997, approximately 66% of ESI's pharmaceutical
purchases were through one wholesaler. ESI believes that other alternative
sources are readily available.
On May 22, 1997, SAMCO received a letter of credit ("LC") in the aggregate
amount of $85,000,000 from The Chase Manhattan Bank. The LC was provided to
SAMCO in accordance with the provisions of the Consent Agreement. The LC secures
certain obligations owed to SAMCO under the Consent Agreement and the
Operational Services Agreement. In addition, SAMCO and WestSec entered into a
letter agreement dated May 21, 1997 memorializing certain collateral agreements
and understandings related to the LC. During 1997, the LC was reduced to
$75,994,000 in accordance with its terms.
NOTE 17 - EMPLOYEE BENEFIT PLANS
- --------------------------------
Long Term Performance Plan:
MacKay-Shields adopted Long-Term Performance Plans ("the Plans") in 1988 and
1995. These Plans associated with the grant awards are calculated based upon the
attainment of specific goals as set forth in each Plan.
Payments under the 1988 Plan commenced in 1996 and extend through 2000. In
accordance with the provisions of the 1988 Plan, participants are also entitled
to income on the unpaid amount of their award. For certain individuals, a
portion of this amount may be adjusted based upon the investment performance of
certain registered investment companies managed by MacKay-Shields. In 1997 and
1996, respectively, MacKay-Shields recorded dividend and interest income in the
amount of $1,018,000 and $1,678,000 on the cash and investments segregated to
fund the Plan obligation.
<PAGE>
-26-
Awards under the 1995 Plan are based on cumulative growth during the 1995 to
1997 time period, and are payable commencing in 1999 and extending through 2001.
An accrual of $3,903,000 was recorded as a liability based on results for the
three year period 1995 to 1997.
The Plans are long-term in nature and requires participants to enter into
multi-year employment contracts.
Other:
Certain subsidiaries sponsor defined contribution retirement, 401(k) and profit
sharing plans for employees. Contributions to these plans during 1997, 1996 and
1995, totaled $9,294,000, $9,011,000 and $1,794,000, respectively.
NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
The terms of the modified coinsurance agreement between NYLHIC and New York Life
(see Note 1) effective January 1, 1996, specify that NYLHIC assumes the risk for
group life and health policies issued by New York Life; however, New York Life
retains the claim and policy reserves as well as the related assets. The impact
on the Company's 1996 cash flows was a reduction in reported cash balances of
$50,140,000 reflected as other financing activities.
New York Life made net non-cash capital contributions of $5,613,000 and
$22,598,000, respectively, during 1997 and 1996.
Net cash received (paid) for income tax expense was $11,776,000, ($50,245,000)
and ($16,234,000) during 1997, 1996 and 1995, respectively.
Interest paid during 1997, 1996 and 1995 was $10,998,000, $15,075,000, and
$18,931,000, respectively.
NOTE 19 - SUBSEQUENT EVENTS
- ---------------------------
NYLCare Sale:
On March 15, 1998 New York Life reached an agreement to sell 100% of the
outstanding common stock of NYLCare to Aetna Inc. ("Aetna") and entered into a
coinsurance agreement with Aetna to reinsure 100% of New York Life's group life
and health indemnity insurance business currently reinsured by NYLHIC. The
reinsurance agreement between New York Life and NYLHIC will be terminated prior
to closing. Management expects the transaction to close in 1998.
New York Life will receive approximately $1.05 billion as consideration for the
sale of NYLCare, which will generate a pre-tax gain of approximately $700
million.
<PAGE>
-27-
The following is a condensed NYLCare Statement of Financial Position at December
31, 1997 and Statement of Operations for the year ended December 31, 1997 (in
millions):
STATEMENT OF FINANCIAL POSITION
ASSETS
- ------
Cash and cash equivalents $ 195
Premiums and accounts receivable 301
Investments 264
Fixed assets 47
Other assets 171
-----
Total assets $ 978
=====
LIABILITIES and STOCKHOLDER'S EQUITY
- ------------------------------------
Accrued HMO claims payable $ 211
Policy and claim reserves 154
Accrued expenses & other payables 111
Other liabilities 157
-------
Total liabilities $ 633
-----
Stockholder's equity: 345
-----
Total liabilities and stockholder's equity $ 978
=====
STATEMENT OF OPERATIONS
Total income $2,904
------
Expenses:
HMO Claims and capitation costs 1,820
Health, disability and death benefit costs 631
Employee compensation 258
Selling, administrative and other expenses 232
------
Total expenses 2,941
------
Loss before income taxes (37)
Income tax benefit (9)
------
Net loss $ (28)
=========
ESI Acquisition:
On April 1, 1998, ESI purchased Value Rx, the Pharmacy Benefit Management
("PBM") subsidiary of Columbia/HCA Healthcare Corporation ("Columbia"). Under
the terms of the agreement, ESI paid cash of $445,000,000 for the stock of Value
Health, Inc. and Managed Prescription Network, Inc. ESI used approximately
$100,000,000 of its own cash and financed the remainder of the purchase price
through a five year bank facility. In 1997, the unaudited revenue of Value Rx
was approximately $1,500,000,000. The acquisition will be accounted for as a
purchase.
<PAGE>
-28-
Greystone:
In January 1998, management of NYLIFE, Greystone Realty's parent, formally
decided to transfer the asset and property management functions currently being
performed by Greystone to New York Life and to liquidate Greystone, if possible,
on or before June 1, 1998. It is anticipated that Greystone will incur certain
expenses related to this plan including employee severance and office closure
expenses. Further, it is not anticipated that the liquidation will provide
sufficient proceeds to repay all outstanding amounts due to NYLIFE. These
financial statements do not include any adjustments as a result of these
uncertainties.
SFD Holding:
On February 17, 1998, SAMCO sold to WestSec for $15,107,000, the security alarm
monitoring contracts and related assets which constituted the collateral
securing SAMCO's Series A Notes. The transaction was consummated pursuant to the
Operational Services Agreement dated November 15, 1991 between SAMCO and
Westinghouse Electric Corporation, as amended, and the Indenture dated as of
July 15, 1992, as supplemented, between SAMCO and United States Trust Company of
New York, as trustee. A portion of the proceeds of the sale were used to pay all
outstanding principal and accrued interest on the Series A Notes on February 17,
1998, the maturity date of such Notes. On February 17, 1998 SAMCO distributed
$1,640,000 to the Series C note holders, which included interest, quarterly
principal repayment and additional principal repayment.
Concurrent with the sale, SAMCO and WestSec instructed The Chase Manhattan Bank
to reduce the letter of credit to $54,338,000 in accordance with its terms.
On March 2, 1998, WestSec, Inc. filed a Declaratory Judgment action against
SAMCO. The Declaratory Judgement action brought by WestSec in the Texas state
court seeks a judgment by the court declaring that the "person reassignment"
Contracts are not included within the Contracts constituting the collateral
securing the Series A Notes and, therefore, are not included among the Contracts
WestSec was obligated to purchase. WestSec also requests that the Court
determine the number of Contracts which allegedly constitute "person
reassignment" Contracts. WestSec further requests the court to award it costs
and attorney's fees. SAMCO intends to vigorously defend against the claims made
by WestSec and may assert counterclaims as well.
NYLUK:
On March 12, 1998, the Financial Services Authority and the Personal Investment
Authority issued a consultation paper, for comment by May 18, 1998, on the next
phase of the pension sales practices review and redress program launched in
1994. The extension of this review and redress program will lead to claims
against NYLUK, for the expenses incurred in connection with the extension of
this program. NYLUK's loss in connection with the extension of this program,
which will most likely be material, cannot yet be reasonably estimated.
In March of 1998, NYLUK contributed approximately $10,000,000 to LAHC, to fund
the acquisition of GAN Life Holdings (LAHC is a UK holding company which NYLUK
had a 31.25% equity investment in at December 31, 1997). This transaction
resulted in a reduction of NYLUK's investment in LAHC to 22.8%.
Other:
On February 20, 1998, the Board of Directors of NYLIFE Funding and NYLIFE
Resources Inc. approved plans to voluntarily dissolve the Companies. NYLIFE
Funding and NYLIFE Resources Inc. have no present operations and are expected to
be formally dissolved in 1998.
<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
SEPTEMBER 1, 1998
- --------------------------------------------------------------------------------
The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of twenty-two series, the
following seven of which are discussed herein: Blue Chip Growth Fund, Research
Value Fund, Small Cap Value Fund, Growth Opportunities Fund, Small Cap Growth
Fund, Equity Income Fund and Global High Yield Fund (individually or
collectively referred to as a "Fund" or the "Funds"). MainStay Management, Inc.
(the "Manager") serves as the manager for the Funds and has entered into Sub-
Advisory Agreements with Gabelli Asset Management Company ("GAMCO") with respect
to the Blue Chip Growth Fund; John A. Levin & Co., Inc. ("John A. Levin & Co.")
with respect to the Research Value Fund; Dalton, Greiner, Hartman, Maher & Co.
("Dalton, Greiner") with respect to the Small Cap Value Fund; Madison Square
Advisors, Inc. ("Madison Square Advisors") with respect to the Growth
Opportunities Fund; and MacKay-Shields Financial Corporation ("MacKay-Shields")
with respect to the Small Cap Growth Fund, Equity Income Fund and Global High
Yield Fund. GAMCO, John A. Levin & Co., Dalton, Greiner, Madison Square
Advisors and MacKay-Shields are sometimes jointly referred to as the "Sub-
Advisers."
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectuses of the Funds dated June 1,
1998 and September 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.
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<PAGE>
TABLE OF CONTENTS
PAGE IN
STATEMENT OF
ADDITIONAL
INFORMATION
-----------
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS.. 6
Repurchase Agreements..................................... 6
Lending of Portfolio Securities........................... 7
Bank Obligations.......................................... 8
U.S. Government Securities................................ 9
Debt Securities........................................... 9
Convertible Securities.................................... 10
Arbitrage................................................. 11
Foreign Securities........................................ 11
Foreign Currency Transactions............................. 13
Foreign Index-Linked Instruments.......................... 17
Brady Bonds............................................... 17
Floating and Variable Rate Securities..................... 18
Zero Coupon Bonds......................................... 19
When-Issued Securities.................................... 19
Mortgage-Related and Other Asset-Backed Securities........ 20
Short Sales Against the Box............................... 29
Options on Securities..................................... 30
Options on Foreign Currencies............................. 36
Securities Index Options.................................. 38
Futures Transactions...................................... 39
Swap Agreements........................................... 49
Loan Participation Interests.............................. 51
Risks Associated with Debt Securities..................... 53
Risks of Investing in High Yield Securities
("Junk Bonds")....................................... 54
FUNDAMENTAL INVESTMENT RESTRICTIONS............................ 55
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS........................ 57
TRUSTEES AND OFFICERS.......................................... 59
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR.............. 67
Management Agreement...................................... 67
Sub-Advisory Agreements................................... 68
Distribution Agreement.................................... 69
Other Services............................................ 71
B-3
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<TABLE>
<C>
<S>
Expenses Borne by the Trust............................... 72
PORTFOLIO TRANSACTIONS AND BROKERAGE........................... 73
NET ASSET VALUE................................................ 76
SHAREHOLDER INVESTMENT ACCOUNT................................. 78
SHAREHOLDER SERVICING AGENT.................................... 79
PURCHASES, REDEMPTION AND REPURCHASE........................... 79
Letter of Intent ("LOI").................................. 79
Distributions in Kind..................................... 79
Suspension of Redemptions................................. 80
Purchases at NAV.......................................... 80
TAX-DEFERRED RETIREMENT PLANS.................................. 80
Cash or Deferred Profit Sharing Plans Under
Section 401(k) for Corporations and Self-Employed
Individuals............................................... 80
Individual Retirement Account ("IRA")..................... 80
403(b)(7) Tax Sheltered Account........................... 83
General Information....................................... 83
CALCULATION OF PERFORMANCE QUOTATIONS.......................... 84
TAX STATUS..................................................... 88
Taxation of the Funds..................................... 88
Character of Distributions to Shareholders
-- General............................................... 90
Discount.................................................. 92
Taxation of Options, Futures and Similar
Instruments............................................... 93
Passive Foreign Investment Companies...................... 94
Foreign Currency Gains and Losses......................... 95
Commodity Investments..................................... 96
Dispositions of Fund Shares............................... 96
Tax Reporting Requirements................................ 97
Foreign Taxes............................................. 98
State and Local Taxes - General........................... 99
Explanation of Fund Distributions......................... 99
General Information....................................... 100
ORGANIZATION AND CAPITALIZATION................................ 100
General................................................... 100
Voting Rights............................................. 100
</TABLE>
B-4
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<TABLE>
<S> <C>
Shareholder and Trustee Liability......................... 101
OTHER INFORMATION.............................................. 101
Independent Accountants................................... 101
Legal Counsel............................................. 102
Share Ownership of the Funds.............................. 102
Code of Ethics............................................ 102
FINANCIAL STATEMENTS........................................... 102
</TABLE>
B-5
<PAGE>
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
The Funds may engage in the following investment practices or invest in the
following instruments to the extent permitted in the Prospectus.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with member banks of the
Federal Reserve System or member firms of the National Association of Securities
Dealers, Inc. that meet the repurchase agreement creditworthiness guidelines
established by the Trustees. In addition, the Global High Yield Fund may enter
into domestic or foreign repurchase agreements with certain sellers deemed to be
creditworthy pursuant to guidelines adopted by the Trustees.
A repurchase agreement, which provides a means for a Fund to earn income on
uninvested cash for periods as short as overnight, is an arrangement under which
the purchaser (i.e., the Fund) purchases a U.S. government or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price. Repurchase
agreements with foreign banks may be available with respect to government
securities of the particular foreign jurisdiction. The custody of the
Obligation will be maintained by the Fund's Custodian. The value of the
purchased securities, including any accrued interest, will at all times exceed
the value of the repurchase agreement. The repurchase price may be higher than
the purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price upon repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the Obligation subject
to the repurchase agreement.
The income on repurchase agreements may be subject to federal and state
income taxes when distributed by a Fund as a dividend to shareholders.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan
from the Fund to the seller of the Obligation. It is not clear whether a court
would consider the Obligation purchased by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. In the event of the commencement
B-6
<PAGE>
of bankruptcy or insolvency proceedings with respect to the seller of the
Obligation before repurchase of the Obligation under a repurchase agreement, the
Fund may encounter delays and incur costs before being able to sell the
security. Delays may involve loss of interest or decline in price of the
Obligation. If the court characterizes the transaction as a loan and the Fund
has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be
at risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Funds, the
Sub-Advisers seek to minimize the risk of loss from repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the security. However,
if the market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including accrued interest), the Fund
will direct the seller of the Obligation to deliver additional securities so
that the market value of all securities subject to the repurchase agreement
equals or exceeds the repurchase price.
The Funds may enter into reverse repurchase agreements. A Fund will
maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. Each of the Funds will limit
its investments in reverse repurchase agreements to no more than 5% of its total
assets.
LENDING OF PORTFOLIO SECURITIES
Each Fund may seek to increase its income by lending portfolio securities.
Under guidelines adopted by the Funds' Board, such loans may be made to
institutions, such as broker-dealers, and are required to be secured
continuously by collateral in cash or U.S. government securities maintained on a
current basis at an amount at least equal to the market value of the securities
loaned. The Fund would have the right to call a loan and obtain the securities
loaned at any time generally on less than five days' notice. For the duration
of a loan, the Fund would continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities loaned and would also receive
compensation from the investment of the collateral. The Fund would not,
however, have the right to vote any
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
B-8
<PAGE>
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
B-9
<PAGE>
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
B-10
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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
B-18
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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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<PAGE>
At the time the Trust makes the commitment on behalf of a Fund to purchase
a security on a when-issued basis, it will record the transaction and reflect
the amount due and the value of the security in determining the Fund's net asset
value. The market value of the when-issued security may be more or less than
the purchase price payable at the settlement date. The Trustees do not believe
that a Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued basis. Each Fund will establish a
segregated account in which it will maintain liquid assets at least equal in
value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Funds may buy Mortgage-related securities. Mortgage-related securities
are interests in pools of residential or commercial mortgage loans or leases,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Funds, to
the extent permitted in the Prospectus, may also invest in debt securities which
are secured with collateral consisting of mortgage-related securities (see
"Collateralized Mortgage Obligations"), and in other types of mortgage-related
securities. Like other fixed-income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of a mortgage-related security with
prepayment features may not increase as much as other fixed-income securities.
MORTGAGE PASS-THROUGH SECURITIES Interests in pools of mortgage-related
--------------------------------
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, mortgage pass-through securities
provide a monthly payment which consists of both interest and principal
payments. In effect, these payments are a "pass-through" of the monthly
payments made by the individual borrowers on their residential mortgage loans,
net of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying residential property, refinancing or
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foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment. Some mortgage pass-through certificates may include
securities backed by adjustable-rate mortgages which bear interest at a rate
that will be adjusted periodically.
Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. government to purchase
the agency's obligations).
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly owned U.S. government corporation within the U.S.
Department of Housing and Urban Development ("HUD"). GNMA is authorized to
guarantee, with the full faith and credit of the U.S. government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development
and acts as a government instrumentality under authority granted by Congress.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of
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approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the U.S. government. FNMA is authorized to borrow from
the U.S. Treasury to meet its obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation and acts as a government instrumentality under authority
granted by Congress. FHLMC was formerly owned by the twelve Federal Home Loan
Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCS") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and collection of principal, but PCS are not backed by the full
faith and credit of the U.S. government.
If either fixed or variable rate pass-through securities issued by the U.S.
government or its agencies or instrumentalities are developed in the future, the
Funds reserve the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and guarantees are
issued by governmental entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers thereof
will be considered in determining whether a mortgage-related security meets the
Funds' investment quality standards. There can be no assurance that the private
insurers or guarantors can meet their obligations under the insurance
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policies or guarantee arrangements. The Funds may buy mortgage-related
securities without insurance or guarantees if, through an examination of the
loan experience and practices of the originator/servicers and poolers, the Sub-
Adviser determines that the securities meet the Funds' quality standards.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES The mortgage-related
--------------------------------------------
securities in which the Funds may invest may be: (i) privately issued securities
which are collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
Although the market for privately issued mortgage-related securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. No Fund will purchase mortgage-related
securities or any other assets which in the Sub-Advisers' opinion are illiquid
if, as a result, more than 15% of the value of the Fund's total assets will be
illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) A CMO is a hybrid between a
------------------------------------------
mortgage-backed bond and a mortgage pass-through security. Interest and prepaid
principal is paid, in most cases, semiannually. CMOs may be collateralized by
whole mortgage loans, but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA and their
income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs are structured into multiple classes, each
bearing a different stated maturity - actual maturing and average life will
depend upon the prepayment experience of the collateral. CMOs provide for a
modified form of call protection through a de facto breakdown of the underlying
--------
pool of mortgages according to how quickly the loans are repaid. Monthly
payment of principal received from the pool of underlying mortgages, including
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prepayments, is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a sooner
than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond Offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B or
C Bond currently being paid off. When the Series A, B and C Bonds are paid in
full, interest and principal on the Series Z Bond begins to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
The eligible Funds will not invest in any privately issued CMOs that do not
meet the requirements of Rule 3a-7 under the 1940 Act if, as a result of such
investment, more than 5% of a Fund's net assets would be invested in any one
CMO, more than 10% of the Fund's net assets would be invested in CMOs and other
investment company securities in the aggregate, or the Fund would hold more than
3% of any outstanding issue of CMOs.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt obligations
-----------------------------------------
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCS, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because
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of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCS. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities
---------------------------------
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO RESIDUALS CMO residuals are derivative mortgage securities issued by
-------------
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of
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residual cash flow resulting from a CMO will depend on, among other things, the
characteristics of the mortgage assets, the coupon rate of each class of CMO,
prevailing interest rates, the amount of administrative expenses and the
prepayment experience on the mortgage assets. In particular, the yield to
maturity on CMO residuals is extremely sensitive to prepayments on the related
underlying mortgage assets, in the same manner as an interest-only ("IO") class
of stripped mortgage-backed securities. See "Stripped Mortgage-Backed
Securities." In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances a portfolio may
fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and, accordingly, CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Fund's limitations on investment in illiquid securities.
Under certain circumstances, a Fund's investment in residual interests in
"real estate mortgage investment conduits" ("REMICs") may cause shareholders of
that Fund to be deemed to have taxable income in addition to their Fund
dividends and distributions and such income may not be eligible to be reduced
for tax purposes by certain deductible amounts, including net operating loss
deductions. In addition, in some cases, the Fund may be required to pay taxes
on certain amounts deemed to be earned from a REMIC residual. Prospective
investors may wish to consult their tax advisors regarding REMIC residual
investments by a Fund.
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<PAGE>
CMOs and REMICs may offer a higher yield than U.S. government securities,
but they may also be subject to greater price fluctuation and credit risk. In
addition, CMOs and REMICs typically will be issued in a variety of classes or
series, which have different maturities and are retired in sequence. Privately
issued CMOs and REMICs are not government securities nor are they supported in
any way by any governmental agency or instrumentality. In the event of a
default by an issuer of a CMO or a REMIC, there is no assurance that the
collateral securing such CMO or REMIC will be sufficient to pay principal and
interest. It is possible that there will be limited opportunities for trading
CMOs and REMICs in the over-the-counter market, the depth and liquidity of which
will vary from time to time. Holders of "residual" interests in REMICs
(including the Fund) could be required to recognize potential phantom income, as
could shareholders (including unrelated business taxable income for tax-exempt
shareholders) of funds that hold such interests. The Fund will consider this
rule in determining whether to invest in residual interests.
STRIPPED MORTGAGE-BACKED SECURITIES Stripped mortgage-backed securities
-----------------------------------
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Fund's yield to
maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rating categories.
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<PAGE>
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES The value of some
------------------------------------------------
mortgage-backed securities in which the Funds may invest may be particularly
sensitive to changes in prevailing interest rates, and, like the other
investments of the Funds, the ability of a Fund to successfully utilize these
instruments may depend in part upon the ability of an Sub-Adviser to forecast
interest rates and other economic factors correctly. If a Sub-Adviser
incorrectly forecasts such factors and has taken a position in mortgage-backed
securities that is or becomes contrary to prevailing market trends, the Funds
could be exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be
particularly sensitive to prevailing interest rates, the length of time the
security is expected to be outstanding, and the liquidity of the issue. In a
period of unstable interest rates, there may be decreased demand for certain
types of mortgage-backed securities, and a Fund invested in such securities and
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold.
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<PAGE>
Credit risk reflects the chance that a Fund may not receive all or part of
its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
OTHER ASSET-BACKED SECURITIES Several types of asset-backed securities
-----------------------------
have already been offered to investors, including CARS/SM/ ("Certificates for
Automobile Receivables/SM/"). CARS/SM/ represent undivided fractional interests
in a trust ("trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/SM/ are passed-through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor's return
on CARS/SM/ may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of federal
and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
The Sub-Advisers expect that other asset-backed securities (unrelated to
mortgage loans) will be offered to investors in the future. Consistent with its
investment objectives and policies, a Fund also may invest in other types of
asset-backed securities.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which a Fund sells through a broker a
security it does not own in anticipation of a possible decline in market price.
A short sale "against the box" is a short sale in which, at the time of the
short sale, a Fund owns or has the right to obtain securities equivalent in kind
and amount. Each of the Funds will only enter into short sales against the box.
A Fund may enter into a short sale against the box among other reasons, to hedge
against a possible market decline in the value of the security owned by the
Fund. If the
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<PAGE>
value of a security sold short against the box increases, the Fund would suffer
a loss when it purchases or delivers to the selling broker the security sold
short. The proceeds of the short sale are retained by the broker pursuant to
applicable margin rules. In addition, the Fund may segregate assets, equal in
value to 50% of the value of the short sale, in a special account with the
Fund's custodian. The segregated assets are pledged to the broker pursuant to
applicable margin rules. If a broker with which the Fund has open short sales,
were to become bankrupt, a Fund could experience losses or delays in recovering
gains on short sales. The Funds will only enter into short sales against the
box with brokers the Sub-Advisers believe are creditworthy. Short sales against
the box will be limited to no more than 25% of a Fund's total assets.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS Any Fund may sell ("write") covered call options on
--------------------
the portfolio securities of such Fund in an attempt to enhance investment
performance. A call option sold by a Fund is a short-term contract, having a
duration of nine months or less, which gives the purchaser of the option the
right to buy, and imposes on the writer of the option--in return for a premium
received--the obligation to sell, the underlying security at the exercise price
upon the exercise of the option at any time prior to the expiration date,
regardless of the market price of the security during the option period. A call
option may be covered by, among other things, the writer owning the underlying
security throughout the option period, or by holding, on a share-for-share
basis, a call on the same security as the call written, where the exercise price
of the call held is equal to or less than the price of the call written, or
greater than the exercise price of a call written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian.
A Fund will write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, the Fund will give
up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, the Fund will retain the risk of loss
should the price of the security decline, which loss the premium is intended to
offset in whole or in part. A Fund, in writing call options, must assume that
the call may be exercised at any time prior to the expiration of its obligations
as a writer, and that in such
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<PAGE>
circumstances the net proceeds realized from the sale of the underlying
securities pursuant to the call may be substantially below the prevailing market
price. Covered call options and the securities underlying such options will be
listed on national securities exchanges, except for certain transactions in
options on debt securities and foreign securities.
During the option period, the covered call writer has, in return for the
premium received on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline.
A Fund may protect itself from further losses due to a decline in value of
the underlying security or from the loss of ability to profit from appreciation
by buying an identical option, in which case the purchase cost may offset the
premium. In order to do this, the Fund makes a "closing purchase transaction"--
the purchase of a call option on the same security with the same exercise price
and expiration date as the covered call option which it has previously written
on any particular security. The Fund will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a call option in a closing
transaction is less or more than the amount received from the sale of the
covered call option. Also, because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing out of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by the Fund. When a security is to be sold from the Fund's
portfolio, the Fund will first effect a closing purchase transaction so as to
close out any existing covered call option on that security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") which provides a secondary market for an
option with the same exercise price and expiration date, except as discussed
below. There is no assurance that a liquid secondary market on an Exchange or
otherwise will exist for any particular option, or at any particular time, and
for some options no secondary market on an Exchange or otherwise may exist. If
the Fund is unable to effect a closing purchase transaction involving an
exchange-traded option, the Fund will not sell the underlying security until the
option expires or the Fund delivers the underlying security upon exercise. A
closing purchase transaction for an over-the-counter option may be made only
with the other party to the option. Once an option writer has received an
exercise notice, it cannot
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<PAGE>
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver or purchase the underlying securities at the
exercise price.
Each Fund pays brokerage commissions and dealer spreads in connection with
writing covered call options and effecting closing purchase transactions, as
well as for purchases and sales of underlying securities. The writing of
covered call options could result in significant increases in a Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put option
writing transactions be covered, the Funds may, to the extent determined
appropriate by the Sub-Advisers, engage without limitation in the writing of
options on U.S. government securities. Subject to the limitation that all call
and put option writing transactions be covered, and limitations imposed on
regulated investment companies under federal tax law, the Global High Yield Fund
may, to the extent determined appropriate by the Sub-Adviser, engage without
limitation in the writing of options on their portfolio securities.
WRITING PUT OPTIONS Each Fund may also write covered put options. Put
-------------------
options written by a Fund are agreements by a Fund, for a premium received by
the Fund, to purchase specified securities at a specified price if the option is
exercised during the option period. A put option written by the Fund is
"covered" if the Fund maintains liquid assets with a value equal to the exercise
price in a segregated account with its custodian. A put option is also
"covered" if the Fund holds on a share-for-share basis a put on the same
security as the put written, where the exercise price of the put held is equal
to or greater than the exercise price of the put written, or less than the
exercise price of the put written if the difference is maintained by the Fund in
liquid assets in a segregated account with its custodian.
The premium which the Funds receive from writing a put option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the option period, supply and demand and
interest rates.
A covered put writer assumes the risk that the market price for the
underlying security will fall below the exercise price, in which case the writer
could be required to purchase the security at a higher price than the then-
current market price of the security. In both cases, the writer has no control
over the
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<PAGE>
time when it may be required to fulfill its obligation as a writer of the
option.
The Funds may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. The Funds also may effect a closing purchase transaction, in the
case of a put option, to permit the Funds to maintain their holdings of the
deposited U.S. Treasury obligations, to write another put option to the extent
that the exercise price thereof is secured by the deposited U.S. Treasury
obligations, or to utilize the proceeds from the sale of such obligations to
make other investments.
If a Fund is able to enter into a closing purchase transaction, the Fund
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option respectively. After writing a put option, the Fund may incur a loss
equal to the difference between the exercise price of the option and the sum of
the market value of the underlying security plus the premium received from the
sale of the option.
In addition, the Funds may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the Funds
may write covered put and call options and enter into so-called "straddle"
transactions involving put or call options may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") for qualification as
a regulated investment company and the Trust's intention that each Fund qualify
as such. Subject to the limitation that all call and put option writing
transactions be covered, the Funds may, to the extent determined appropriate by
the Sub-Advisers, engage without limitation in the writing of options on U.S.
government securities.
PURCHASING OPTIONS Each Fund may purchase put or call options which are
------------------
traded on an Exchange or in the over-the-counter market. Options traded in the
over-the-counter market may not be as actively traded as those listed on an
Exchange. Accordingly, it may be more difficult to value such options and to be
assured that they can be closed out at any time. The Funds will engage in such
transactions only with firms the Sub-Advisers deem to be of sufficient
creditworthiness so as to minimize these risks.
The Funds may purchase put options on securities to protect their holdings
in an underlying or related security against a substantial decline in market
value. Securities are considered related if their price movements generally
correlate with one
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<PAGE>
another. A Fund would buy a put option in anticipation of a decline in the
market value of such securities. The purchase of a put option would entitle the
Fund, in exchange for the premium paid, to sell a security at a specified price
upon exercise of the option during the option period. The purchase of put
options on securities held in the portfolio or related to such securities will
enable a Fund to preserve, at least partially, unrealized gains occurring prior
to the purchase of the option on a portfolio security without actually selling
the security. In addition, the Fund will continue to receive interest or
dividend income on the security. The put options purchased by the Fund may
include, but are not limited to, "protective puts" in which the security to be
sold is identical or substantially identical to a security already held by the
Fund or to a security which the Fund has the right to purchase. The Fund would
ordinarily recognize a gain if the value of the securities decreased during the
option period below the exercise price sufficiently to cover the premium. The
Fund would recognize a loss if the value of the securities remained above the
difference between the exercise price and the premium.
The Funds may also purchase call options on securities the Funds intend to
purchase to protect against substantial increases in prices of such securities
pending their ability to invest in an orderly manner in such securities. The
purchase of a call option would entitle the Fund, in exchange for the premium
paid, to purchase a security at a specified price upon exercise of the option
during the option period. The Fund would ordinarily realize a gain if the value
of the securities increased during the option period above the exercise price
sufficiently to cover the premium. The Fund would have a loss if the value of
the securities remained below the sum of the premium and the exercise price
during the option period. In order to terminate an option position, the Funds
may sell put or call options identical to those previously purchased, which
could result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put or call option when it was purchased.
MARRIED PUTS Each Fund may engage in a strategy known as "married puts."
------------
This strategy is most typically used when the Fund owns a particular common
stock or security convertible into common stock and wishes to effect a short
sale against the box (see "Short Sales Against the Box") but for various reasons
---
is unable to do so. The Fund may then enter into a series of stock and related
option transactions to achieve the economic equivalent of a short sale against
the box. To implement this trading strategy, the Fund will simultaneously
execute with the same broker a purchase of shares of the common stock and an "in
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<PAGE>
the money" over-the-counter put option to sell the common stock to the broker
and generally will write an over-the-counter "out of the money" call option in
the same stock with the same exercise price as the put option. The options are
linked and may not be exercised, transferred or terminated independently of the
other.
Holding the put option places the Fund in a position to profit on the
decline in price of the security just as it would by effecting a short sale and
to, thereby, hedge against possible losses in the value of a security or
convertible security held by the Fund. The writer of the put option may require
that the Fund write a call option, which would enable the broker to profit in
the event the price of the stock rises above the exercise price of the call
option (see "Writing Call Options" above). In the event the stock price were to
---
increase above the strike or exercise price of the option, the Fund would suffer
a loss unless it first terminated the call by exercising the put.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES Exchange markets in
---------------------------------------------------
U.S. government securities options are a relatively new and untested concept,
and it is impossible to predict the amount of trading interest that may exist
in such options. The same types of risk apply to over-the-counter trading in
options. There can be no assurance that viable markets will develop or continue
in the United States or abroad.
A Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. A Fund may
forego the benefits of appreciation on securities sold pursuant to call options,
or pay a higher price for securities acquired pursuant to put options written by
the Fund. If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price, or, in the case
of a call, remains less than or equal to the exercise price, the Fund will not
be able to exercise profitably the option and will lose its entire investment in
the option. Also, the price of a put or call option purchased to hedge against
price movements in a related security may move more or less than the price of
the related security.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period. The ability of a Fund to successfully utilize options may depend
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<PAGE>
in part upon the ability of the Sub-Adviser to forecast interest rates and other
economic factors correctly.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
OPTIONS ON FOREIGN CURRENCIES
Each Fund may, to the extent that it invests in foreign securities,
purchase and write options on foreign currencies for hedging purposes in a
manner similar to that of the Fund's transactions in currency futures contracts
or forward contracts. For example, a decline in the dollar value of a foreign
currency in which portfolio securities are denominated will reduce the dollar
value of such securities, even if their value in the foreign currency remains
constant. In order to protect against such declines in the value of portfolio
securities, a Fund may purchase put options on the foreign currency. If the
value of the currency does decline, that Fund will have the right to sell such
currency for a fixed amount of dollars which exceeds the market value of such
currency, resulting in a gain that may offset, in whole or in part, the negative
effect of currency depreciation on the value of the Fund's securities
denominated in that currency.
Conversely, if a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Fund may purchase call options on such currency. If the value of
such currency does increase, the purchase of such call options would enable the
Fund to purchase currency for a fixed amount of dollars which is less than the
market value of such currency, resulting in a gain that may offset, at least
partially, the effect of any currency-related increase in the price of
securities the Fund intends to acquire. As in the case of other types of
options transactions, however, the benefit a Fund derives from purchasing
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, if currency exchange rates do not move
in the direction or to the extent anticipated, a Fund could sustain losses on
transactions in foreign currency options which would deprive it of a portion or
all of the benefits of advantageous changes in such rates.
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<PAGE>
A Fund may also write options on foreign currencies for hedging purposes.
For example, if a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the decrease in value of portfolio securities will be offset by
the amount of the premium received by the Fund.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be required to forgo all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.
A call option written on foreign currency by a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in liquid assets in a segregated account with
its custodian.
As with other kinds of options transactions, the writing of an option on
foreign currency will constitute only a partial hedge up to the amount of the
premium received and a Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in
B-37
<PAGE>
the event of rate movements adverse to a Fund's position, a Fund may forfeit the
entire amount of the premium plus related transaction costs. Options on foreign
currencies to be written or purchased by a Fund will be traded on U.S. and
foreign exchanges or over-the-counter.
A Fund also may use foreign currency options to protect against potential
losses in positions denominated in one foreign currency against another foreign
currency in which the Fund's assets are or may be denominated. There can be no
assurance that a liquid market will exist when a Fund seeks to close out an
option position. Furthermore, if trading restrictions or suspensions are
imposed on the options markets, a Fund may be unable to close out a position.
Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchanged-traded options. Foreign currency exchange-traded options generally
settle in cash, whereas options traded over-the-counter may settle in cash or
result in delivery of the underlying currency upon exercise of the option.
SECURITIES INDEX OPTIONS
The Funds may purchase call and put options on securities indexes for the
purpose of hedging against the risk of unfavorable price movements which may
adversely affect the value of a Fund's securities.
Unlike a securities option, which gives the holder the right to purchase or
sell specified securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the difference between the value of the underlying securities index on
the exercise date and the exercise price of the option, multiplied by (ii) a
fixed "index multiplier." In exchange for undertaking the obligation to make
such a cash payment, the writer of the securities index option receives a
premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 Composite Price Index or
the N.Y.S.E. Composite Index, or a narrower market index such as the S&P 100
Index. Indexes may also be based on an industry or market
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<PAGE>
segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indexes are traded on the following
exchanges, among others: The Chicago Board Options Exchange, New York Stock
Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by a Fund will not exactly match the
securities represented in the securities indexes on which options are based. In
addition, the purchase of securities index options involves essentially the same
risks as the purchase of options on futures contracts. The principal risk is
that the premium and transaction costs paid by a Fund in purchasing an option
will be lost as a result of unanticipated movements in prices of the securities
comprising the securities index on which the option is based. Gains or losses
on a Fund's transactions in securities index options depend on price movements
in the securities market generally (or, for narrow market indexes, in a
particular industry or segment of the market) rather than the price movements of
individual securities held by a Fund. In this respect, purchasing a securities
index put (or call) option is analogous to the purchase of a put (or call) on a
securities index futures contract.
A Fund may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Fund may also allow options to expire unexercised.
FUTURES TRANSACTIONS
The Equity Income Fund and Global High Yield Fund may purchase and sell
futures contracts on debt securities and on indexes of debt securities in order
to attempt to protect against the effects of adverse changes in interest rates,
to lengthen or shorten the average maturity or duration of a Fund's portfolio
and for other appropriate risk management purposes. For example, a Fund may
purchase futures contracts as a substitute for the purchase of longer-term debt
securities to lengthen the average duration of a Fund's portfolio of fixed-
income securities. Such futures contracts would obligate the Fund to make or
take delivery of certain debt securities or an amount of cash upon expiration of
the futures contract, although most futures positions typically are closed out
through an offsetting transaction prior to expiration. Each Fund may purchase
and sell stock index futures to hedge the equity portion of those Funds'
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securities portfolios with regard to market (systematic) risk (involving the
market's assessment of overall economic prospects), as distinguished from stock-
specific risk (involving the market's evaluation of the merits of the issuer of
a particular security). The Funds may also purchase and sell other futures when
deemed appropriate, in order to hedge the equity or non-equity portions of their
portfolios. In addition, each Fund may, to the extent it invests in foreign
securities, enter into contracts for the future delivery of foreign currencies
to hedge against changes in currency exchange rates. Each of the Funds may also
purchase and write put and call options on futures contracts of the type into
which such Fund is authorized to enter and may engage in related closing
transactions. In the United States, all such futures on debt securities, debt
index futures, stock index futures, foreign currency futures and related options
will be traded on exchanges that are regulated by the Commodity Futures Trading
Commission ("CFTC"). Subject to applicable CFTC rules, the Funds also may enter
into futures contracts traded on foreign futures exchanges.
A futures contract is an agreement to buy or sell a security or currency
(or to deliver a final cash settlement price in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contracts), for a set price at a future date. When interest rates are
changing and portfolio values are falling, futures contracts can offset a
decline in the value of a Fund's current portfolio securities. When interest
rates are changing and portfolio values are rising, the purchase of futures
contracts can secure better effective rates or purchase prices for the Fund than
might later be available in the market when the Fund makes anticipated
purchases. In the United States, futures contracts are traded on boards of
trade which have been designated "contract markets" by the CFTC. Currently,
there are futures contracts based on a variety of instruments, indexes and
currencies, including long-term U.S. Treasury bonds, Treasury notes, GNMA
certificates, three-month U.S. Treasury bills, three-month domestic bank
certificates of deposit, a municipal bond index and various stock indexes.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of liquid assets ("initial margin"). The margin required for a
futures contract is set by the exchange on which the contract is traded and may
be modified during the term of the contract. The initial margin is in the
nature of a performance bond or good faith deposit on the futures contract which
is returned to the Fund upon termination of the contract assuming all
contractual obligations have been
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satisfied. Each Fund expects to earn interest income on its initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking-to-market."
Variation margin does not represent a borrowing or loan by a Fund but is instead
a settlement between the Fund and the broker of the amount one would owe the
other if the futures contract expired. In computing daily net asset value,
each Fund will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Positions taken in the futures markets are not normally held until delivery
or final cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Fund will usually be liquidated in this manner, the Fund
may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing-out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
FUTURES ON DEBT SECURITIES A futures contract on a debt security is a
--------------------------
binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities--assuming a "long" position--a Fund will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed-upon price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed-upon price. Open futures positions
on debt securities will be valued at the most recent settlement price, unless
such price does not appear to the Sub-Advisers to reflect the fair value of the
contract, in which case the positions will be valued by or under the direction
of the Trustees.
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Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
on debt securities. This would be done, for example, when the Fund intends to
purchase particular securities and it has the necessary cash, but expects the
rate of return available in the securities markets at that time to be less
favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Fund of purchasing
the securities will be offset, at least to some extent, by the rise in the value
of the futures position taken in anticipation of the subsequent securities
purchase. A Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to lengthen the average duration of the
Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
SECURITIES INDEX FUTURES A securities index futures contract does not
------------------------
require the physical delivery of securities, but merely provides for profits and
losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A
stock index
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is designed to reflect overall price trends in the market for equity securities.
Stock index futures may be used to hedge the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the
Funds may enter into futures on debt securities indexes (including the municipal
bond index) to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, a Fund
may seek to protect the value of its portfolio against an overall decline in the
market for securities. Alternatively, in anticipation of a generally rising
market, a Fund can seek to avoid losing the benefit of apparently low current
prices by establishing a "long" position in securities index futures and later
liquidating that position as particular securities are in fact acquired. To the
extent that these hedging strategies are successful, the Fund will be affected
to a lesser degree by adverse overall market price movements, unrelated to the
merits of specific portfolio securities, than would otherwise be the case. A
Fund may also purchase futures on debt securities or indexes as a substitute for
the purchase of longer-term debt securities to lengthen the average duration of
the Fund's debt portfolio.
The Funds do not intend to use U.S. stock index futures to hedge positions
in securities of non-U.S. companies.
CURRENCY FUTURES A sale of a currency futures contract creates an
----------------
obligation by a Fund, as seller, to deliver the amount of currency called for in
the contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. A Fund may sell a currency futures contract, if the Sub-Adviser
anticipates that exchange rates for a particular currency will fall, as a hedge
against a decline in the value of the Fund's securities denominated in such
currency. If the Sub-Adviser anticipates that exchange rates will rise, the
Fund may purchase a currency futures contract to protect against an increase in
the price of securities denominated in a particular currency the Fund intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by a Fund, the Fund
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purchases a currency futures contract for the same aggregate amount of currency
and delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference. Similarly, to close out
a currency futures contract purchased by the Fund, the Fund sells a currency
futures contract. If the offsetting sale price exceeds the purchase price, the
Fund realizes a gain, and if the offsetting sale price is less than the purchase
price, the Fund realizes a loss.
A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of a Fund's securities.
The degree of correlation may be distorted by the fact that the currency
futures market may be dominated by short-term traders seeking to profit from
changes in exchange rates. This would reduce the value of such contracts for
hedging purposes over a short-term period. Such distortions are generally minor
and would diminish as the contract approached maturity. Another risk is that
the Sub-Adviser could be incorrect in its expectation as to the direction or
extent of various exchange rate movements or the time span within which the
movements take place.
OPTIONS ON FUTURES For bona fide hedging and other appropriate risk
------------------
management purposes, the Funds also may purchase and write call and put options
on futures contracts which are traded on exchanges that are licensed and
regulated by the CFTC for the purpose of options trading, or, subject to
applicable CFTC rules, on foreign exchanges. It is the current policy of the
Trust that the Funds will purchase or write only options on futures contracts
that are traded on a U.S. or foreign exchange or board of trade. The Funds also
may engage in related closing transactions with respect to options on futures.
A "call" option on a futures contract gives the purchaser the right, in return
for the premium paid, to purchase a futures contract (assume a "long" position)
at a specified exercise price at any time before the option expires. A "put"
option gives the purchaser the right, in return for the premium paid, to sell a
futures contract (assume a "short" position), for a specified exercise price at
any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
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the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a "long" futures
position, in the case of a "call," or a "short" futures position, in the case of
a "put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However,
as with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the Fund is
not fully invested or of lengthening the average maturity or duration of a
Fund's portfolio. Depending on the pricing of the option compared to either the
futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
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If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are denominated. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of securities or the currencies in which such
securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost to a Fund of the debt securities acquired by it will be reduced by the
amount of the option premium received. Of course, if market prices have
declined, the Fund's purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
--------------------------------------------------------------------
FUTURES CONTRACTS In general, the Funds will engage in transactions in futures
- -----------------
contracts and related options only for bona fide hedging and other appropriate
risk management purposes, and not for speculation. With respect to positions in
futures
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and related options that do not constitute bona fide hedging positions, a Fund
will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price.
A put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
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When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Tax Status."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS There are several risks
-------------------------------------------------
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund's securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends. It is also possible that, when a Fund has sold stock index futures
to hedge its portfolio against a decline in the market, the market may advance
while the value of the particular securities held in the Fund's portfolio may
decline. If this occurred, the Fund would incur a loss on the futures contracts
and also experience a decline in the value of its portfolio securities.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a
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futures contract subject to the limit, no more trades may be made on that day at
a price beyond that limit. The daily limit governs only price movements during
a particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid market in the options. It is not
certain that such a market will develop. Although the Funds generally will
purchase only those options and futures contracts for which there appears to be
an active market, there is no assurance that a liquid market on an exchange will
exist for any particular option or futures contract at any particular time. In
the event no such market exists for particular options, it might not be possible
to effect closing transactions in such options with the result that a Fund would
have to exercise options it has purchased in order to realize any profit and
would be less able to limit its exposure to losses on options it has written.
Many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist. If the price
of a futures contract changes more than the price of the securities or
currencies, the Fund will experience either a loss or a gain on the futures
contracts which will not be completely offset by changes in the price of the
securities or currencies which are the subject of the hedge. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations affecting
the value of securities denominated in foreign currencies because the value of
such securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations.
SWAP AGREEMENTS
The Funds may enter into interest rate, index and currency exchange rate
swap agreements for purposes of attempting to obtain a particular desired return
at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return or for other portfolio management
purposes. Swap agreements are two party contracts entered into
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primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
----
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing a particular index. The
"notional amount" of the swap agreement is only a fictive basis on which to
calculate the obligations which the parties to a swap agreement have agreed to
exchange. Commonly used swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
level, or "floor"; and interest rate collars, under which a party sells a cap
and purchases a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels. A Fund's
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the "net amount").
A Fund's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Fund) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the maintenance of a segregated
account consisting of liquid assets to avoid any potential leveraging of the
Fund's portfolio. A Fund will not enter into a swap agreement with any single
party if the net amount owed or to be received under existing contracts with
that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Sub-Adviser's ability correctly to
predict whether certain types of investments are likely to produce greater
returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Sub-Adviser will
cause a Fund to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the
Funds by the Code may limit the
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Funds' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
a Fund's ability to terminate existing swap agreements or to realize amounts to
be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC.
To qualify for this exemption, a swap agreement must be entered into by
"eligible participants," which include the following, provided the participants'
total assets exceed established levels: a bank or trust company, savings
association or credit union, insurance company, investment company subject to
regulation under the 1940 Act, commodity pool, corporation, partnership,
proprietorship, organization, trust or other entity, employee benefit plan,
governmental entity, broker-dealer, futures commission merchant, natural person,
or regulated foreign person. To be eligible, natural persons and most other
entities must have total assets exceeding $10 million; commodity pools and
employee benefit plans must have assets exceeding $5 million. In addition, an
eligible swap transaction must meet three conditions. First, the swap agreement
may not be part of a fungible class of agreements that are standardized as to
their material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap agreement,
including pricing, cost or credit enhancement terms. Third, swap agreements may
not be entered into and traded on or through a multilateral transaction
execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
LOAN PARTICIPATION INTERESTS
A Fund's investment in loan participation interests may take the form of
participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The
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Participation Interests may be acquired from an agent bank, co-lenders or other
holders of Participation Interests ("Participants"). In a novation, a Fund
would assume all of the rights of the lender in a corporate loan, including the
right to receive payments of principal and interest and other amounts directly
from the borrower and to enforce its rights as a lender directly against the
borrower. As an alternative, a Fund may purchase an assignment of all or a
portion of a lender's interest in a corporate loan, in which case, a Fund may be
required generally to rely on the assigning lender to demand payment and enforce
its rights against the borrower, but would otherwise be entitled to all of such
lender's rights in the corporate loan. A Fund also may purchase a Participation
Interest in a portion of the rights of a lender in a corporate loan. In such a
case, a Fund will be entitled to receive payments of principal, interest and
fees, if any, but generally will not be entitled to enforce its rights directly
against the agent bank or the borrower; rather a Fund must rely on the lending
institution for that purpose. A Fund will not act as an agent bank, a guarantor
or sole negotiator of a structure with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation Interests,
the agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Trust. A Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse against the borrower (which
is unlikely), a Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for
monitoring compliance with covenants contained in the corporate loan agreement
and for notifying holders of corporate loans of any failures of compliance.
Typically, under corporate loan agreements, the agent bank is given broad
discretion in enforcing the corporate loan agreement, and is obligated to use
only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on
B-52
<PAGE>
structuring and funding the corporate loan and other fees paid on a continuing
basis.
A financial institution's employment as an agent bank may be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, a Fund might incur certain costs and
delays in realizing payment on a corporate loan, or suffer a loss of principal
and/or interest. In situations involving intermediate Participants similar
risks may arise.
When a Fund acts as co-lender in connection with a participation interest
or when a Fund acquires a participation interest the terms of which provide
that a Fund will be in privity of contract with the corporate borrower, a Fund
will have direct recourse against the borrower in the event the borrower fails
to pay scheduled principal and interest. In all other cases, a Fund will look
to the agent bank to enforce appropriate credit remedies against the borrower.
In acquiring participation interests a Fund will conduct analysis and evaluation
of the financial condition of each such co-lender and participant to ensure that
the participation interest meets a Fund's qualitative standards. There is a
risk that there may not be a readily available market for loan participation
interests and, in some cases, this could result in a Fund disposing of such
securities at a substantial discount from face value or holding such security
until maturity. When a Fund is required to rely upon a lending institution to
pay the Fund principal, interest, and other amounts received by the lending
institution for the loan participation, the Fund will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification
and concentration of the Fund's portfolio. The Funds consider loan
participation interests not subject to puts to be illiquid.
RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that a Fund invests in debt securities, it will be subject to
certain risks. The value of the debt
B-53
<PAGE>
securities held by a Fund, and thus the net asset value of the shares of
beneficial interest of the Fund, generally will fluctuate depending on a number
of factors, including, among others, changes in the perceived creditworthiness
of the issuers of those securities, movements in interest rates, the average
maturity of the Fund's investments, changes in the relative values of the
currencies in which the Fund's investments are denominated relative to the U.S.
dollar, and the extent to which the Fund hedges its interest rate, credit and
currency exchange rate risks. Generally, a rise in interest rates will reduce
the value of fixed income securities held by a Fund, and a decline in interest
rates will increase the value of fixed income securities held by a Fund.
When and if available, debt securities may be purchased at a discount from
face value. However, the Funds do not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time, the Funds may
purchase securities not paying interest or dividends at the time acquired if, in
the opinion of the Sub-Adviser, such securities have the potential for future
income (or capital appreciation, if any).
Since shares of the Funds represent an investment in securities with
fluctuating market prices, the value of shares of each Fund will vary as the
aggregate value of the Funds' portfolio securities increases or decreases.
Moreover, the value of the debt securities that each Fund purchases may
fluctuate more than the value of higher rated debt securities. These lower
rated fixed income securities generally tend to reflect short-term corporate and
market developments to a greater extent than higher rated securities which react
primarily to fluctuations in the general level of interest rates. Changes in
the value of securities subsequent to their acquisition will not affect cash
income or yields to maturity to the Funds but will be reflected in the net asset
value of the Funds' shares.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest-rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the
B-54
<PAGE>
ability of a highly leveraged company to make principal and interest payments on
its debt securities.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Fund's net asset value and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. A Fund records the interest on these securities
annually as income even though it receives no cash interest until the security's
maturity or payment date. Also, distributions on account of such interest
generally will be taxable to shareholders even if the Fund does not distribute
cash to them. Therefore, in order to pay taxes on this interest, shareholders
may have to redeem some of their shares to pay the tax or the Fund may have to
sell some of its assets to reduce the Fund's assets and may thereby increase its
expense ratio and decrease its rate of return.
Corporate debt securities may bear fixed, contingent, or variable rates of
interest and may involve equity features, such as conversion or exchange rights
or warrants for the acquisition of stock of the same or a different issuer,
participations based on revenues, sales or profits, or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following restrictions may not be changed with respect to any Fund
without the approval of the majority of the outstanding voting securities of
that Fund (as defined under the 1940 Act). Investment restrictions that appear
below or elsewhere in this Statement of Additional Information that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Fund.
The Trust may not, on behalf of any Fund:
(1) Act as an underwriter of securities issued by others, except to the
extent that a Fund may be considered an underwriter
B-55
<PAGE>
within the meaning of the 1933 Act, as amended, in the disposition of portfolio
securities;
(2) Issue senior securities, except to the extent permitted under the
Investment Company Act of 1940;
(3) With respect to 75% of each Fund's (except Global High Yield Fund)
total assets invest more than 5% of the value of the total assets of a Fund in
the securities of any one issuer, except U.S. government securities, or purchase
the securities of any issuer if such purchase would cause more than 10% of the
voting securities of such issuer to be held by a Fund;
(4) Borrow money except from banks on a temporary basis for extraordinary
or emergency purposes, including the meeting of redemption requests, or by
engaging in reverse repurchase agreements or comparable portfolio transactions
provided that these Funds maintain asset coverage of at least 300% for all such
borrowings, and no purchases of securities will be made while such borrowings
exceed 5% of the value of the Fund's total assets.
(5) Purchase securities if such purchase would cause 25% or more in the
aggregate of the market value of the total assets of a Fund to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limitation in respect to
investments in U.S. government securities or investments in repurchase
agreements with respect thereto (for the purposes of this restriction, telephone
companies are considered to be a separate industry from gas or electric
utilities, and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of the parents) except that at such time that the 1940 Act is
amended to permit a registered investment company to elect to be "periodically
industry concentrated" (i.e., a fund that does not concentrate its investments
in a particular industry would be permitted, but not required, to invest 25% or
more of its total assets in a particular industry) the Funds elect to be so
classified and the foregoing limitation shall no longer apply with respect to
the Funds;
(6) Purchase or sell real estate (excluding securities secured by real
estate or interests therein or issued by companies that invest in or deal in
real estate) or, commodities and commodity contracts. The Trust reserves the
freedom of action to hold and to sell real estate acquired for any Fund as a
result of the ownership of securities. Purchases and sales of foreign
currencies on a spot basis and forward foreign currency
B-56
<PAGE>
exchange contracts, options on currency, futures contracts on currencies or
securities indices and options on such futures contracts are not deemed to be an
investment in a prohibited commodity or commodity contract for the purpose of
this restriction; or
(7) Make loans to other persons, except loans of portfolio securities. The
purchase of debt obligations and the entry into repurchase agreements in
accordance with a Fund's investment objectives and policies are not deemed to be
loans for this purpose.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the
Trustees of the Trust have voluntarily adopted certain policies and restrictions
which are observed in the conduct of the affairs of the Funds. These represent
intentions of the Trustees based upon current circumstances. They differ from
fundamental investment policies in that the following additional investment
restrictions may be changed or amended by action of the Trustees without
requiring prior notice to or approval of shareholders.
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, futures and forward contracts are
deemed not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute the purchase of securities on margin.
(c) As an operating policy, a Fund may not invest in securities which
are not readily marketable, or the disposition of which is restricted under
federal securities laws (collectively, "illiquid securities"), other than
Rule 144A securities and Section 4(2) commercial paper determined to be
liquid pursuant to guidelines adopted by the Trust's Board of Trustees if,
as a result, more than 15% of the Fund's net assets would be invested in
illiquid securities. A Fund may not invest more than 15% of its net assets
in
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<PAGE>
repurchase agreements providing for settlement in more than seven days, or
in other instruments which for regulatory purposes or in the Sub-Adviser's
opinion may be deemed to be illiquid, such as a certain portion of options
traded in the over-the-counter market, and securities being used to cover
options a Fund has written.
(d) As an operating policy, a Fund may not purchase the securities of
other investment companies except to the permitted by the 1940 Act in
connection with a merger, consolidation, acquisition, or reorganization.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
The Trustees have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Trustees have delegated the
function of making day-to-day determinations of liquidity to the Sub-Advisers,
pursuant to guidelines approved by the Trustees.
Each Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by a Fund is liquid,
including at least the following:
(i) the frequency and size of trades and quotes for the Rule 144A
security relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the Rule 144A
security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the Rule 144A security;
and
(iv) the nature of the Rule 144A security and the nature of the market
for the Rule 144A security (i.e., the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is liquid,
a Sub-Adviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in default
as to principal or interest;
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<PAGE>
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"); or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper
is rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Sub-Adviser has determined that
the security is of equivalent quality based on factors commonly used by rating
agencies; and
(c) there is a viable trading market for the specific security,
taking into account all relevant factors (e.g., whether the security is the
subject of a commercial paper program that is administered by an issuing and
paying agent bank and for which there exists a dealer willing to make a market
in the security, the size of trades relative to the size of the Fund's holding
or whether the 4(2) commercial paper is administered by a direct issuer pursuant
to a direct placement program).
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees deemed to be "interested persons" of the Trust for
purposes of the 1940 Act are indicated by an asterisk.
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<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Donald K. Ross* Chairman and Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance Company;
Franklin Lakes, NJ 07417 Director, New York Life Insurance
Age: 72 Company, 1978 to 1996; President, New
York Life Insurance Company, 1986 to
1990; Chairman of the Board, New York
Life Insurance Company, 1981 to 1990;
Chief Executive Officer, New York Life
Insurance Company, 1981 to 1990; Director,
MacKay-Shields Financial Corporation,
1984 to present; and Trustee, Consolidated
Edison Company of New York, Inc., 1976 to
present.
Stephen C. Roussin* President, Chief Director and Chairperson, MainStay
51 Madison Avenue Executive Officer and Institutional Funds, Inc., 1997 to present;
New York, NY 10010 Trustee Senior Vice President, New York Life
Age: 34 Insurance Company, 1997 to present; Senior
Vice President, Smith Barney, 1994 to 1997;
and Division Sales Manager, Prudential
Securities, 1989 to 1994.
Harry G. Hohn* Trustee Retired Chairman and Chief Executive
51 Madison Avenue Officer, New York Life Insurance Company;
New York, NY 10010 Chairman of the Board and Chief Executive
Age: 65 Officer, New York Life Insurance Company,
1990 to 1997; Vice Chairman of the Board,
New York Life Insurance Company, 1986 to
1990; Director, New York Life Insurance
Company, 1985 to 1986; Director, Million
Dollar Roundtable Foundation, 1996 to
1997; Director, Insurance Marketplace
Standards Association, 1996 to 1997;
Director, Witco Corporation, 1989 to
present; Member, International Advisory
Board of Credit Commercial de France,
1995 to present; and a Life Fellow of the
American Bar Foundation.
Edward J. Hogan Trustee Rear Admiral U.S. Navy (Retired);
Box 2321 Independent management consultant, 1992
Sun Valley, ID 83353 to 1997.
Age: 65
</TABLE>
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<PAGE>
<TABLE>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Richard M. Kernan, Jr. * Trustee Director of MainStay VP Series Fund, Inc.
51 Madison Avenue from January 1987 to present; Chairman of
New York, NY 10010 the Board and Chief Executive Officer of
Age: 57 MainStay VP Series Fund, Inc. from August
1989 to present; Executive Vice President
and Chief Investment Officer of New York
Life Insurance Company from March 1995
to present; Executive Vice President prior
thereto; Member of the Board of Directors
of New York Life Insurance Company from
November 1996 to present and Chairman of
the Investment Committee from January
1997 to present; and Director, Greystone
Realty Corp. January 1997 to present.
Nancy Maginnes Trustee Member, Council of Rockefeller University,
Kissinger New York, NY, 1991 to present; Trustee,
Henderson Road Rockefeller University, 1995 to present;
South Kent, CT 06785 Trustee, Animal Medical Center, 1993 to
Age: 64 present; and Trustee, The Masters School,
1994 to present; Member, Board of
Overseers, Rockefeller Institute of
Government, Albany, NY, 1983-1992
(Board dissolved).
Terry L. Lierman Trustee President, Capitol Associates, Inc., 1984
426 C Street, N.E. to present; President, Employee Health
Washington, D.C. 20002 Programs, 1990 to present; Vice Chairman,
Age: 49 TheraCom Inc., 1994 to present; Member,
UNICEF National Board, 1993 to present;
Director, Harvard University, Pollin
Institute, 1995 to present; Director,
PeacePac, 1994 to present; Commissioner,
State of Maryland, Higher Education
Commission, 1995 to present; Vice
Chairman, National Organization on
Fetal Alcohol Syndrome, 1993 to present;
Chief Executive Officer, Medical Crisis
Systems, 1997 to present; and Board
Member, Hollings Cancer Center, Medical
University of South Carolina, 1993 to
present.
</TABLE>
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<PAGE>
<TABLE>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
John B. McGuckian Trustee Chairman of the Board, Ulster Television
Ardverna plc, 1 990 to present; Director, Ulster
Cloughmills Television plc, 1970 to present; Chairman
Northern Ireland of the Board, Tedcastle Holding Ltd.(energy),
BT4 49NL 1995 to present; Director, Cooneen Textiles
Age: 58 Ltd. (clothing manufacturer), 1967 to
present; Director, Allied Irish Banks plc,
1977 to present; Director, First Trust Bank,
1991 to present; Director, Unidare plc
(engineering), 1986 to present; Director,
Irish Continental Group plc (ferry operations),
1988 to present; Director, Harbour Group Ltd.
(management company), 1980 to present; Chairman,
Industrial Development Board, 1990 to 1997; and
Chairman of Senate and Senior Pro-Chancellor,
Queen's University, 1986 to present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group Industries,
1701 Highway A-1-A Inc., 1991 to present; Director, PaineWebber
Suite 218 Group, 1980 to 1993; President,
Vero Beach, FL 32963 PaineWebber Group, 1988 to 1990;
Age: 65 Chairman of the Board, PaineWebber
Properties, 1985 to 1989; Director, Harbour
Group, 1986 to present; Chairman of the
Board and Director, Rapid Rock Industries,
Inc., 1986 to present; Director and Chairman
of the Board, Del Industries, 1990 to
present; Trustee, Jones Foundation (Los
Angeles), 1978 to present; Director, Sugen,
Inc., 1992 to present; Chairman of the
Board, Omniquip International, Inc., 1996 to
present; Director, Carey Diversified, L.L.C.,
Jan. 1, 1998 to present.
</TABLE>
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<PAGE>
<TABLE>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Richard S. Trutanic Trustee Managing Director, The Somerset Group
1155 Connecticut Ave., N.W. (financial advisory firm), 1990 to present;
Suite 400 Chief Executive Officer and President,
Washington, DC 20036 Americap L.L.C. (financial advisory firm),
Age: 45 1997 to present; Senior Vice President,
Washington National Investment
Corporation (financial advisory firm), 1985
to 1990; Director, Allin Communications
Corporation, 1996 to 1997; and Director and
Member of Executive Committee, Southern
Net, Inc., 1986 to 1990.
Walter W. Ubl* Trustee Senior Vice President, New York Life
85 East End Avenue Insurance Company, 1995 to 1997; Vice
Apt. 2N President, 1984 to 1995; Vice President in
New York, NY 10028 charge of Mutual Funds Department, 1989
Age: 56 to 1997 ; Director and Vice President,
NYLIFE Distributors Inc., 1993 to 1997;
and Director and Senior Vice President
NYLIFE Securities Inc., 1996 to 1997.
- ----------------------------------------------------------------------------------------------------------
OFFICERS (OTHER THAN TRUSTEES)
- ----------------------------------------------------------------------------------------------------------
Jefferson C. Boyce Senior Vice President Chairman, Monitor Capital Advisors, Inc.,
51 Madison Avenue 1997 to present; Senior Vice President,
New York, NY 10010 MainStay Institutional Funds Inc., 1995 to
Age: 40 present; Senior Vice President, New York
Life Insurance Company, 1994 to present;
Director, NYLIFE Distributors Inc., 1993 to
present; and Chief Administrative Officer,
Pension, Mutual Funds, Structured Finance,
Corporate Quality, Human Resources and
Employees' Health Departments, New York
Life Insurance Company, 1992 to 1994.
Frank A. Mistero Senior Vice President Senior Vice President, New York Life
51 Madison Avenue Insurance Company, 1997 to present; Vice
New York, NY 10010 President, New York Life Insurance
Age: 52 Company, 1990 to 1996; and Director and
Senior Vice President and Chief Operating
Officer, MainStay Management, Inc., 1997
to present.
</TABLE>
B-63
<PAGE>
<TABLE>
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>
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<PAGE>
<TABLE>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Richard Zuccaro Tax Vice President Vice President, New York Life Insurance
51 Madison Avenue Company, 1995 to present; Vice President --
New York, NY 10010 Tax, New York Life Insurance Company,
Age: 48 1986 to 1995; Tax Vice President, NYLIFE
Securities Inc., 1987 to present; Tax Vice
President, NAFCO, Inc., 1990 to present;
Tax Vice President, NYLIFE Depositary
Inc., 1990 to present; Tax Vice President,
NYLIFE Inc., 1990 to present; Tax Vice
President, NYLIFE Insurance Company of
Arizona, 1990 to present; Tax Vice
President, NYLIFE Realty Inc., 1991 to
present; Tax Vice President, NYLICO Inc.,
1991 to present; Tax Vice President, New
York Life Fund Inc., 1991 to present; Tax
Vice President, New York Life International
Investment, Inc., 1991 to present; Tax Vice
President, NYLIFE Equity Inc., 1991 to
present; Tax Vice President, NYLIFE
Funding Inc., 1991 to present; Tax Vice
President, NYLCO Inc., 1991 to present;
Tax Vice President, MainStay VP Series
Fund, Inc., 1991 to present; Tax Vice
President, CNP Realty, 1991 to present; Tax
Vice President, New York Life Worldwide
Holding Inc., 1992 to present; Tax Vice
President, NYLIFE Structured Asset
Management Co. Ltd., 1992 to present; Tax
Vice President, MainStay Institutional Funds
Inc., 1992 to present; Tax Vice President,
NYLIFE Distributors Inc., 1993 to present;
Vice President & Assistant Controller, New
York Life Insurance and Annuity Corp.,
1995 to present, and Assistant Controller,
1991 to present; Vice President, NYLCARE
Health Plans, Inc., 1995 to present; Vice
President - Tax, New York Life and Health
Insurance Co., 1996 to present; and Tax
Vice President, NYL Trust Company, 1996
to present.
</TABLE>
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<PAGE>
<TABLE>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
A. Thomas Smith III Secretary Vice President and Associate General
51 Madison Avenue Counsel, New York Life Insurance
New York, NY 10010 Company, 1997 to present; Associate
Age: 41 General Counsel, New York Life Insurance
Company, 1996 to 1997; Assistant General
Counsel, New York Life Insurance
Company, 1994 to 1996; Secretary, Eclipse
Financial Asset Trust, 1994 to present;
Secretary, MainStay Institutional Funds Inc.,
MainStay VP Series Fund, Inc., New York
Life Fund Inc., 1994 to 1997; Assistant
Secretary, Eagle Strategies Corp. (registered
investment adviser), 1997 to present;
Secretary, Eagle Strategies Corp. (registered
investment adviser), 1996 to present; and
Assistant General Counsel, Dreyfus
Corporation, 1991 to 1993.
</TABLE>
*Messrs. Ross, Roussin, Hohn, Kernan and Ubl are deemed to be "interested
persons" of the Trust under the 1940 Act.
As indicated in the above table, certain Trustees and officers also hold
positions with MacKay-Shields, New York Life, NYLIFE Securities Inc. and/or
NYLIFE Distributors Inc.
The Independent Trustees of the Trust receive from the Trust an annual
retainer of $40,000 and a fee of $1,000 for each Board of Trustees meeting and
for each Board committee meeting attended and are reimbursed for all out-of-
pocket expenses related to attendance at such meetings. Trustees who are
affiliated with New York Life Insurance Company do not receive compensation from
the Trust.
For the fiscal year ended December 31, 1997, the Trustees received the
following compensation from the Trust and from certain other investment
companies (as indicated) that have the same investment advisers as the Trust or
an investment adviser that is an affiliated person of one of the Trust's
investment advisers:
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<PAGE>
Total Compensation
Aggregate From Registrant
Name of Compensation and Fund Complex
Trustee from the Trust Paid to Trustees
- --------------------- -------------- ------------------
Edward J. Hogan $48,000 $48,000
Nancy M. Kissinger $46,000 $46,000
Terry L. Lierman $48,000 $48,000
Donald E. Nickelson $52,000 $52,000
Richard S. Trutanic $46,000 $46,000
John B. McGuckian* $12,000 $12,000
* Mr. McGuckian was elected to his position as Trustee of the Trust on July
28, 1997.
As of August 1, 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 May
29, 1998, the sole initial shareholder of each of the Funds approved the
Management Agreement. The Management Agreement will remain in effect for two
years following its effective date, and will continue in effect thereafter only
if such continuance is specifically approved at least annually by the Trustees
or by vote of a majority of the outstanding voting securities of each of the
Funds (as defined in the 1940 Act and in a rule under the 1940 Act) and, in
either case, by a majority of the Trustees who are not "interested persons" of
the Trust or the Manager (as the term is defined in the 1940 Act).
B-67
<PAGE>
The Manager has authorized any of its directors, officers and employees who
have been elected or appointed as Trustees or officers of the Trust to serve in
the capacities in which they have been elected or appointed.
The Management Agreement provides that the Manager shall not be liable to a
Fund for any error or judgment by the Manager or for any loss sustained by a
Fund except in the case of the Manager's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
In connection with its administration of the business affairs of each of
the Funds, and except as indicated in the Prospectus under the heading "Manager,
Sub-Advisers and Distributor," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees not affiliated with the
Manager or the Sub-Adviser;
(b) the fees to be paid to the Sub-Advisers pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with administering
the ordinary course of the Funds' business, other than those assumed by the
Trust.
SUB-ADVISORY AGREEMENTS
Pursuant to Sub-Advisory Agreements between the Manager and each of the
Sub-Advisers, subject to the supervision of the Trustees of the Trust and the
Manager and in conformity with the stated policies of each of the Funds and the
Trust, GAMCO; John A. Levin & Co.; Dalton, Greiner; Madison Square Advisors and
MacKay-Shields manage the Funds' portfolios, including the purchase, retention,
disposition and loan of securities.
The Trustees, including the Independent Trustees, approved the Sub-Advisory
Agreements at an in-person meeting held April 27, 1998. On May 29, 1998, the
sole shareholder of each of the
Funds approved the Sub-Advisory Agreements with GAMCO; John A. Levin & Co.;
Dalton, Greiner; Madison Square Advisors and MacKay-Shields. The Sub-Advisory
Agreements will remain in effect for
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two years following their effective date, and will continue in effect thereafter
only if such continuance is specifically approved at least annually by the
Trustees or by vote of a majority of the outstanding voting securities of each
of the Funds (as defined in the 1940 Act and in a rule under the 1940 Act) and,
in either case, by a majority of the Trustees who are not "interested persons"
of the Trust, the Manager, or the Sub-Advisers (as the term is defined in the
1940 Act).
The Sub-Advisers have authorized any of their directors, officers and
employees who have been elected or appointed as Trustees or officers of the
Trust to serve in the capacities in which they have been elected or appointed.
In connection with the services they render, the Sub-Advisers bear the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreements provide that the Sub-Advisers shall not be
liable for any error of judgment by the Sub-Advisers or for any loss suffered by
any of the Funds except in the case of the Sub-Advisers' willful misfeasance,
bad faith, gross negligence or reckless disregard of duty. The Agreements also
provide that they shall terminate automatically if assigned and that they may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
DISTRIBUTION AGREEMENT
NYLIFE Distributors acts as the Principal Underwriter and Distributor of
the Funds' shares pursuant to the Distribution Agreement with the Trust dated
January 1, 1994. NYLIFE Securities Inc., an affiliated company, sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to salesmen as well as the cost of
printing and mailing prospectuses to potential investors and of any advertising
incurred by them in connection with their distribution of Trust shares. In
addition, the Distributor will pay for a variety of account maintenance and
personal services to shareholders after the sale.
The Distribution Agreement with respect to the Funds was approved by the
Trustees, including a majority of the Trustees who are not "interested persons"
(as the term is defined in the 1940 Act) of the Trust nor have any direct or
indirect financial interest in the operation of the distribution plan or in any
related agreement (the "Independent Trustees") at a meeting held on April 27,
1998.
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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", the "Class C Plans" and, collectively, the
"Plans"). Under the Class A Plans, Class A shares of each Fund pay the
Distributor a monthly fee at the annual rate of 0.25% of the average daily net
assets of each Fund's Class A shares for distribution or service activities, as
designated by the Distributor. The Class A Plans for each of the Funds were
approved by the sole initial shareholder of the Class A of shares of each Fund
on May 29, 1998. The Trustees, including a majority of the Independent
Trustees, by vote cast in person at a meeting called for the purpose of voting
on such plans, initially approved the Class A Plans for each of the Funds on
April 27, 1998.
As noted above, the Class B shares of each Fund also have adopted Rule 12b-
1 distribution plans. Rule 12b-1 distribution plans were approved on May 29,
1998 by the sole initial shareholder of each of the Funds. The Trustees of the
Trust, including a majority of the Independent Trustees, by vote cast in person
at a meeting called for the purpose of voting on such Plans, initially approved
the Class B Plans of the Funds on April 27, 1998.
Under the current Class B plans, each Fund's Class B shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% of the average
daily net assets attributable to the Fund's Class B shares. Pursuant to the
Class B Plan, the Class B shares also pay a service fee to the Distributor at
the annual rate of 0.25% of the average daily net assets of the Funds' Class B
shares.
The Class C shares of each Fund also adopted Rule 12b-1 distribution plans.
Rule 12b-1 distribution plans were approved on August __, 1998 by the sole
initial Class C 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 C Plans of the Funds on July 27, 1998.
Under the Class C plans, each Fund's Class C 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 C shares.
Pursuant to the Class C Plans, the Class C shares also pay a service fee to the
Distributor at the annual
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rate of 0.25% of the average daily net assets of the Funds' Class C shares.
Once approved by a vote of a majority of the outstanding voting securities
of a class of shares of a Fund, each Plan shall continue in effect thereafter,
provided such continuance is approved annually by a vote of the Trustees in the
manner described above. No Plan may be amended to increase materially the
amount to be spent for the services described therein without approval of the
shareholders of the affected class of shares of a Fund, and all material
amendments of each Plan must also be approved by the Trustees in the manner
described above. Each Plan may be terminated at any time, without payment of
any penalty, by vote of a majority of the Independent Trustees, or by a vote of
a majority of the outstanding voting securities of the affected Fund (as defined
in the 1940 Act) on not more than 30 days' written notice to any other party to
the Plan. So long as any Plan is in effect, the selection and nomination of
Trustees who are not such interested persons has been committed to those
Trustees who are not such interested persons. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that each Plan will
benefit the respective Fund and its shareholders. Pursuant to the Class A,
Class B and Class C 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.
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In addition, each Fund may reimburse NYLIFE Securities, NYLIFE Distributors
and MainStay Shareholder Services for the cost of certain correspondence to
shareholders and the establishment of shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of each Fund, is responsible under its
Management Agreement for the payment of expenses related to each Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trust ees who are not affiliated with the Manager or Sub-Advisers,
(iii) certain fees and expenses of the Trust's Custodians and Transfer Agent,
(iv) the charges and expenses of the Trust's legal counsel and independent
accountants, (v) brokers' commissions and any issue or transfer taxes chargeable
to the Trust, on behalf of a Fund, in connection with its securities
transactions, (vi) the fees of any trade association of which a Fund or the
Trust is a member, (vii) the cost of share certificates representing shares of a
Fund, (viii) reimbursement of a portion of the organization expenses of a Fund
and the fees and expenses involved in registering and maintaining registration
of the Trust and of its shares with the SEC and registering the Trust as a
broker or dealer and qualifying its shares under state securities laws,
including the preparation and printing of the Trust's registration statements
and prospectuses for such purposes, (ix) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Trustees'
meetings and preparing, printing and mailing prospectuses and reports to
shareholders, (x) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of a Fund's business,
(xi) any expenses assumed by the Fund pursuant to its plan of distribution,
(xii) all taxes and business fees payable by a Fund to federal, state or other
governmental agencies, and (xiii) costs associated with the pricing of the
Funds' shares. Fees and expenses of legal counsel, registering shares, holding
meetings and communicating with shareholders include an allocable portion of the
cost of maintaining an internal legal and compliance department.
The Funds have entered into a committed line of credit with The Bank of New
York as agent, and various other lenders from whom a Fund may borrow up to 5% of
its net assets in order to honor redemptions. The credit facility is expected to
be
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utilized in periods when the Funds experience unusually large redemption
requests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in
certain over-the-counter securities also may be effected on an agency basis,
when the total price paid (including commission) is equal to or better than the
best total prices available from other sources. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Sub-Advisers attempt to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of each Fund and their other
clients on the basis of the broker-dealers' professional capability, the value
and quality of their brokerage services and the level of their brokerage
commissions. Consistent with the foregoing primary considerations, the Conduct
Rules of the NASD and such other policies as the Trustees may determine, the
Sub-Advisers may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Trust. In order for the Affiliated Broker to effect any portfolio transactions
for the Trust on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
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commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
Affiliated Broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The Trust will not deal with the Affiliated Broker in any portfolio
transaction in which the Affiliated Broker acts as principal.
Under each Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), a Sub-Adviser may cause a Fund
to pay a broker-dealer (except the Affiliated Broker) which provides brokerage
and research services to the Sub-Adviser an amount of commission for effecting a
securities transaction for a Fund in excess of the amount other broker-dealers
would have charged for the 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")
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to the Sub-Advisers for no consideration other than brokerage or underwriting
commissions. Securities may be bought or sold through such broker-dealers, but
at present, unless otherwise directed by the Trust, a commission higher than one
charged elsewhere will not be paid to such a firm solely because it provided
Research to an Sub-Adviser. Research provided by brokers is used for the benefit
of all of the Sub-Advisers' clients and not solely or necessarily for the
benefit of the Trust. The Sub-Advisers' investment management personnel attempt
to evaluate the quality of Research provided by brokers. Results of this effort
are sometimes used by the Sub-Advisers as a consideration in the selection of
brokers to execute portfolio transactions.
In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Sub-Advisers. Investment decisions for a Fund and for the Sub-
Advisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be 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
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placement of brokerage business of other clients would be useful to the Sub-
Advisers in carrying out their obligations to the Funds.
Investors may, subject to the approval of the Trust, the Manager and the
Sub-Adviser, purchase shares of a Fund with liquid securities that are eligible
for purchase by that Fund and that have a value that is readily ascertainable.
These transactions will be effected only if the Sub-Adviser intends to retain
the security in the Fund as an investment. The Trust reserves the right to
amend or terminate this practice at any time.
NET ASSET VALUE
The net asset value per share of each Fund is determined by the Trust daily
as of the close of regular trading on the New 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
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option or futures contract is principally traded and (g) by appraising all other
securities and other assets, including over-the-counter common and preferred
stocks not quoted on the NASDAQ system, securities listed or traded on certain
foreign exchanges whose operations are similar to the U.S. over-the-counter
market and debt securities for which prices are supplied by a pricing agent but
are not deemed by the Sub-Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of 60 days or less
and including restricted securities and securities for which no market quotation
is available, at fair value in accordance with procedures approved by and
determined in good faith by the Trustees, although the actual calculation may be
done by others. Money market instruments held by the Funds with a remaining
maturity of 60 days or less will be valued by the amortized cost method unless
such method does not represent fair value. Forward foreign cur rency exchange
contracts held by the Funds are valued at their respective fair market values
determined on the basis of the mean between the last current bid and asked
prices based on dealer or exchange quotations.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at 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
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New York. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days in
New York and on which the Funds' net asset values are not calculated. Such
calculation of net asset value does not take place contemporaneously with the
determination of the prices of the majority of the portfolio securities used in
such calculation.
Events affecting the values of portfolio securities that oc cur between
the time their prices are determined and the close of the New York Stock
Exchange will not be reflected in the Funds' calculation of net asset values
unless the Sub-Adviser deems that the particular event would materially affect
net asset value, in which case an adjustment 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.
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SHAREHOLDER SERVICING AGENT
The Glass-Steagall Act prohibits national banks from engaging in the
business of underwriting, selling or distributing securities. There is
currently no precedent prohibiting banks from performing shareholder servicing
and recordkeeping functions. Changes in federal or state statutes and
regulations pertaining to the permissible activities of banks and their
affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations of those provisions, could prevent a bank from
continuing to perform all or a part of such services. If a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services.
It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
PURCHASES, REDEMPTION AND REPURCHASE
LETTER OF INTENT ("LOI")
The LOI is a non-binding obligation on the Qualified Purchaser to purchase
the full amount indicated; however, on the initial purchase, if required (or, on
subsequent purchases if necessary), 5% of the dollar amount specified in the LOI
will be held in escrow by the Transfer Agent in shares registered in the
shareholder's name in order to assure payment of the proper sales charge. If
total purchases pursuant to the LOI (less any dispositions and exclusive of any
distribution on such shares automatically reinvested) are less than the amount
specified, the investor will be requested to remit to the Distributor an amount
equal to the difference between the sales charge paid and the sales charge
applicable to the aggregate purchases actually made. If not remitted within 20
days after written request, an appropriate number of escrowed shares will be
redeemed in order to realize the difference.
DISTRIBUTIONS IN KIND
The Trust has agreed to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio. The securities
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distributed in such a distribution would be valued at the same value as that
assigned to them in calculating the NAV of the shares being redeemed. If a
shareholder receives a distribution in kind, he or she should expect to incur
transaction costs when he or she converts the securities to cash.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange
is closed other than customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Trust; or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption or repurchase of its shares.
PURCHASES AT NAV
A Fund's Class A shares may be purchased at NAV, without payment of any
sales charge, by employees (and immediate family members) of GAMCO.
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
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tax years beginning in 1997, only a traditional IRA is available. For tax years
beginning after 1997, two additional types of IRAs will be available -- the
"Roth" IRA and the "Education" IRA.
An individual may contribute as much as $2,000 of his or her earned income
to a traditional IRA. A married individual filing a joint return may also
contribute to a traditional IRA for a nonworking spouse. The maximum deduction
allowed for a contribution to a spousal IRA is the lesser of (i) $2,000 or (ii)
the sum of (a) the compensation includible in the working spouse's gross income
plus (b) any compensation includible in the gross income of the nonworking
spouse, reduced by the amount of the deduction taken by the working spouse. The
maximum deduction for a IRA contribution by a married couple is $4,000.
An individual who has not attained age 70-1/2 may make a contribution to a
traditional IRA which is deductible for federal income tax purposes. For tax
years beginning before 1998, a contribution is deductible only if (i) neither
the individual nor his or her spouse (unless filing separate returns and living
apart at all times during the taxable year) is an active participant in an
employer's retirement plan, or (ii) the individual (and his or her spouse, if
applicable) has an adjusted gross income below a certain level ($40,000 for
married individuals filing a joint return, with a phase-out of the deduction for
adjusted gross income between $40,000 and $50,000; $25,000 for a single
individual, with a phase-out for adjusted gross income between $25,000 and
$35,000). These phase-out limits will gradually increase starting with tax
years beginning in 1998, eventually reaching $50,000 - $60,000 for single filers
in 2005 and thereafter (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
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proportionate amount of the withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Certain early withdrawals are subject to an
additional penalty tax. For distributions made after 1997, the penalty tax does
not apply to withdrawals up to a total of $10,000 for qualified first-time
homebuyer expenses or to withdrawals used to pay "qualified higher education
expenses" of the taxpayer or his or her spouse, child or grandchild. There are
also special rules governing when IRA distributions must begin and the minimum
amount of such distributions; failure to comply with these rules can result in
the imposition of an excise tax.
Roth IRAs. Roth IRAs are a form of individual retirement account
---------
applicable for tax years beginning after 1997. Contributions to a Roth IRA are
not deductible but may be made even after the individual attains the age of 70-
1/2. In certain cases, distributions from a Roth IRA may be tax free. The Roth
IRA, like the traditional IRA, is subject to a $2,000 ($4,000 for a married
couple) contribution limit (taking into account both Roth IRA and traditional
IRA contributions). The maximum contribution that can be made is phased-out for
taxpayers with adjusted gross income between $95,000 and $110,000 ($150,000 -
$160,000 if married filing jointly). If the Roth IRA has been in effect for
five years, and distributions are (1) made on or after the individual attains
the age of 59-1/2; (2) made after the individual's death; (3) attributable to
disability; or (4) used for "qualified first-time home buyer expenses," they are
not taxable. If these requirements are not met, distributions are treated first
as a return of contributions and then as taxable earnings. Taxable
distributions may be subject to the same excise tax described above with respect
to traditional IRAs. All Roth IRAs, like traditional IRAs, are treated as one
IRA for this purpose. Unlike the traditional IRA, Roth IRAs are not subject to
minimum distribution requirements during the account owner's lifetime. However,
the amount in a Roth IRA is subject to required distribution rules after the
death of the account owner.
Education IRAs. After 1997, a taxpayer may make non-deductible
--------------
contributions of up to $500 per year per beneficiary to an Education IRA.
Contributions cannot be made after the beneficiary becomes 18 year old. The
maximum contribution is phased out for taxpayers with adjusted gross income
between $95,000 and $110,000 ($150,000 - $160,000 if married filing jointly).
Earnings are tax-deferred until a distribution is made. If a distribution does
not exceed the beneficiary's "qualified higher education expenses" for the year,
no part of the distribution is taxable. If part of a distribution is taxable, a
penalty tax will generally apply as well. Any balance
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remaining in an Education IRA when the beneficiary becomes 30 years old must be
distributed and any earnings will be taxable and subject to a penalty tax upon
distribution.
All income and capital gains deriving from IRA investments in the Fund are
reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA
or Education IRA combined with tax-deferred compounded earnings on IRA
investments can lead to substantial retirement and/or education savings.
403(b)(7) TAX SHELTERED ACCOUNT
Shares of a Fund may also be purchased as the underlying investment for tax
sheltered custodial accounts (403(b) plans) made available by NYLIFE
Distributors. In general, employees of tax-exempt organizations described in
Section 501(c)(3) of the Code (such as hospitals, churches, religious,
scientific, or literary organizations and educational institutions) or a public
school system are eligible to participate in a 403(b) plan.
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.
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CALCULATION OF PERFORMANCE QUOTATIONS
From time to time a Fund may publish its yield and/or average annual total
return in advertisements and communications to shareholders. Total return and
yield are computed separately for Class A and Class B shares. The average
annual total return of each Fund is determined for a particular period by
calculating the actual dollar amount of the investment return on a $1,000
investment in the Fund made at the maximum public offering price at the
beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount. Total return for a period of one year
is equal to the actual return of the Fund during that period and reflects fee
waivers and reimbursements in effect for each period. This calculation assumes
a complete redemption of the investment and the deduction of the maximum
contingent deferred sales charge at the end of the period in the case of Class B
shares. In the case of Class A shares, the calculation assumes the maximum
sales charge is deducted from the initial $1,000 purchase order. It also
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period.
In considering any average annual total return quotation, investors should
remember that the maximum initial sales charge reflected in each quotation for
Class A shares is a one-time fee which will have its greatest impact during the
early stages of an investor's investment in the Fund. The actual performance of
your investment will be affected less by this charge the longer you retain your
investment in the Fund.
Quotations of each Fund's average annual total return will be calculated
according to the following SEC formula:
P(1+T) to the power of n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10-year periods at the end of the 1, 5, or
10-year periods (or fractional portion thereof)
Each Fund may quote total rates of return in addition to its average annual
total return. Such quotations are computed in the same manner as the average
annual compounded rate, except that
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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 are annualized.
Yield will be calculated using the following SEC formula:
Yield = 2[(a-b +1) to the power of 6 -1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
This yield figure does not reflect the deduction of any contingent deferred
sales charges which are imposed upon certain redemptions at the rates set forth
under "Redemptions and Repurchases" in the Prospectus.
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
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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 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
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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 firms which rank mutual funds by overall
performance, investment objectives and assets, or tracked by other services,
companies, publications or persons who rank mutual funds on overall performance
or other criteria; and (iii) the Consumer Price Index (measure for inflation)
and other measures of the performance of the economy to assess the real rate of
return from an investment in the Funds. Unmanaged indexes may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
From time to time, advertisements for the Funds may include general
information about the services and products offered by the Funds, MainStay
Institutional Funds Inc. and New York Life Insurance Company and its
subsidiaries. For example, such advertisements may include statistical
information about those entities including, but not limited to, the number of
current shareholder accounts, the amount of assets under management, sales
information, the distribution channels through which the entities' products are
available, marketing efforts and statements about this information by the
entities' officers, directors and employees.
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TAX STATUS
TAXATION OF THE FUNDS
The following summarizes certain federal income tax considerations
generally affecting the Funds and their stockholders. No attempt is made to
present a detailed explanation of the tax treatment of the Funds or their
stockholders, and the discussion here is not intended as a substitute for
careful tax planning. The discussion is based upon present provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be the retroactive.
Prospective investors should consult their own tax advisors with regard to the
federal tax consequences of the purchase ownership, and disposition of Fund
shares, as well as the tax consequences arising under the laws of any state,
foreign country, or other taxing jurisdiction.
Each Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
each Fund must, among other things: (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
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items, dividends, interest and net short-term capital gains in excess of any net
long-term capital losses) and its net tax-exempt interest each taxable year.
The Treasury Department is authorized to promulgate regulations under which
foreign currency gains would constitute qualifying income for purposes of the
Qualifying Income Test only if such gains are directly related to investing in
securities (or options and futures with respect to securities). To date, no
such regulations have been issued.
Certain requirements relating to the qualification of a Fund as regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if a Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net short-
term capital 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
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year. Such distributions are taxable to shareholders in the calendar year in
which the distributions are declared, rather than the calendar year in which the
distributions are received.
Provided that a Fund qualifies as a regulated investment company under the
Code, it generally will not be subject to any excise or income taxes in
Massachusetts. A Fund's investments, if any, in REMIC residual interests (as
explained previously in this SAI) or in Passive Foreign Investment Companies, as
explained below, may cause the Fund to become liable for certain taxes.
Investors that are tax-exempt organizations should carefully consider whether
distributions of a Fund's earnings will be subject to tax in their hands.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming a Fund qualifies as a RIC, distributions of taxable net investment
income and net short-term capital gains in excess of net long-term capital
losses will be treated as ordinary income in the hands of shareholders. If a
Fund's investment income is derived exclusively from sources (such as interest)
other than dividends, no portion of such distributions will be eligible for the
dividends-received deduction available to corporations.
If a portion of a Fund's net investment income is derived from dividends
from domestic corporations, then a portion of such distributions may be eligible
for the corporate dividends-received deduction. The dividends-received
deduction is reduced to the extent shares of a Fund are treated as debt-financed
under the Code and is generally eliminated unless such shares are deemed to have
been held for more than 45 days. The 45-day holding period must occur during
the 90-day period beginning 45 days before the date on which the shares become
ex-dividend. In the case of dividends on certain preferred stock, the holding
period requirement is 90 days during a 180-day period. In addition, the entire
dividend (including the deducted portion) is includable in the corporate
shareholder's alternative minimum taxable income. Finally, if such dividends
are large enough to constitute "extraordinary dividends" under Section 1059 of
the Code and the applicable holding period requirements are not met, the
shareholder's basis in its shares could be reduced by all or a portion of the
amount of the dividends that qualifies for the dividends-received deduction.
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Distributions of net capital gain, whether received in cash or reinvested
in Fund shares, will generally be taxable to shareholders as either "20% Rate
Gain" or "28% Rate Gain," depending upon the Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by a Fund for
more than 18 months and are subject to a maximum tax rate of 20%; "28% Rate
Gains" arise from sales of assets held by a Fund for more than one year but no
more than 18 months and are subject to a maximum tax rate of 28%. Net capital
gains from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares.
Any loss realized upon the redemption of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the extent
of any capital gain dividends received with respect to such shares during that
six-month period. A loss realized upon a redemption of shares of a Fund within
30 days before or after a purchase of shares of the same Fund (whether by
reinvestment of distributions or otherwise) may be disallowed in whole or in
part.
If any net long-term capital gains in excess of net short-term capital
losses are retained by a Fund for reinvestment, requiring federal income taxes
to be paid thereon by that Fund, the Fund intends to elect to treat such capital
gains as having been distributed to shareholders. As a result, such capital
gains will be taxable to the shareholders. Shareholders will be able to claim
their proportionate share of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities and will be
entitled to increase the adjusted tax basis of the relevant Fund shares by the
difference between their pro-rata share of such gains and their tax credit.
Distributions by a Fund result in a reduction in the net asset value of a
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would generally be
taxable to the shareholder (except to the extent the distribution is an exempt
interest dividend as described below) as ordinary income or capital gain as
described above, even though, from an investment standpoint, it may constitute a
partial return of investment. In particular, investors should be careful to
consider the tax implications of buying shares just prior to a distribution.
The price of shares purchased at that time includes the amount of the
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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 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
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security having a fixed maturity date of not more than one year from date of
issue, the gain realized on disposition will be treated as short-term capital
gain.
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, 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
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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
successful, status of a Fund as a regulated investment company might be
affected. The Funds intend to monitor developments in this area.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain of the Funds may invest in shares of foreign corporations which may
be classified under the Code as passive foreign investment companies ("PFICs").
In general, a foreign corporation is classified as a PFIC if at least one-half
of its assets constitute investment-type assets or 75% or more of its gross
income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable
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years. Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each taxable year, with the result that
unrealized gains are treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
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
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gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Fund's net investment income to be
distributed to its shareholders. If Section 988 losses exceed other investment
company taxable income (which includes, among other items, dividends, interest
and the excess, if any, of net short-term capital gains over net long-term
capital losses) during the taxable year, a Fund would not be able to make any
ordinary dividend distributions, and distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders or, in
some cases, as capital gain, rather than as an ordinary dividend.
COMMODITY INVESTMENTS
A regulated investment company is required under the Code to derive at
least 90% of its gross income from certain qualifying sources. Qualifying income
includes, inter alia, interest, dividends, and gain from the sale of stock or
----------
securities, but it does not include gain from the sale of commodities such as
gold and other precious metals.
DISPOSITIONS OF FUND SHARES
Upon redemption, sale or exchange of shares of a Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares. Such gain or loss
generally will be a capital gain or loss if the shares of a Fund were capital
assets in the hands of the shareholder, and generally will be taxable to
stockholders as "20% Rate Gain" if the shares had been held for more than 18
months or as "28% Rate Gain" if the shares had been held for more than one year
but no more than 18 months. A loss realized by a shareholder on the redemption,
sale or exchange of shares of a Fund with respect to which capital gain
dividends have been paid will, to the extent of such capital gain dividends, be
treated as long-term capital loss if such shares have been held by the
shareholder for six months or less at the time of their disposition.
Furthermore, a loss realized by a shareholder on the redemption, sale or
exchange of shares of a Fund with respect to which exempt-interest dividends
have been paid will, to the extent of such exempt-interest dividends, be
disallowed if such shares have been held by the shareholder for six months or
less at the time of their disposition. A loss realized on a redemption, sale or
exchange also will be disallowed to the extent the shares disposed of are
replaced (whether through reinvestment of
B-96
<PAGE>
distributions, or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders should be aware that redeeming shares of a Fund after tax-
exempt interest has been accrued by the Fund but before that income has been
declared as a dividend may be disadvan tageous. This is because the gain, if
any, on the redemption will be taxable, even though such gains may be
attributable in part to the accrued tax-exempt interest which, if distributed to
the shareholder as a dividend rather than as redemption proceeds, might have
qualified as an exempt-interest dividend.
Under certain circumstances, the sales charge incurred in acquiring shares
of either Fund may not be taken into account in determining the gain or loss on
the disposition of those shares. This rule applies where shares of a Fund are
exchanged within 90 days after the date they were purchased and new shares are
acquired without a sales charge or at a reduced sales charge pursuant to a right
acquired upon the initial purchase of shares. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. The portion of the sales charge affected by this rule will be
treated as a sales charge paid for the new shares and will be reflected in their
basis.
If reverse stock splits are done, a share may have a split holding period
reflecting the fact that part of the share represents a reinvested dividend or
distribution.
TAX REPORTING REQUIREMENTS
All distributions, whether received in shares or cash, must be reported by
each shareholder on his or her federal income tax return. Shareholders are also
required to report tax-exempt interest. Dividends declared and payable to
shareholders of record on a specified date in October, November or December, if
any, will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares, including
exchanges for shares of another Fund, may result in tax consequences (gain or
loss) to the shareholder and generally are also subject to these reporting
requirements. Each shareholder should consult his or her own tax
B-97
<PAGE>
adviser to determine the tax status of a Fund distribution in his or her own
state and locality (or foreign country).
Under the federal income tax law, a Fund will be required to report to the
IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares (other than shares of the Money Market Fund), except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, all such taxable distributions and proceeds from the
redemption or exchange of a Fund's shares may be subject to withholding of
federal income tax at the rate of 31% in the case of nonexempt shareholders who
fail to furnish a Fund with their taxpayer identification number and with
required certifications regarding their status under the federal income tax law
or if the IRS or a broker notifies a Fund that the number furnished by the
shareholder is incorrect. In addition, both the Fund and the shareholder are
potentially subject to a $50 penalty imposed by the IRS if a correct, certified
taxpayer identification number is not furnished and used on required information
returns. If the withholding provisions are applicable, any such distributions
and proceeds, 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.
B-98
<PAGE>
The International Bond Fund and the International Equity Fund may qualify
for and make the election permitted under Section 853 of the Code so that
shareholders will be able to claim a credit or deduction on their federal income
tax returns for, and will be required to treat as part of the amounts
distributed to them, their pro rata portion of qualified taxes paid by the Fund
to foreign countries (which taxes relate primarily to investment income). The
U.S. shareholders of a Fund may claim a foreign tax credit or deduction by
reason of the Fund's election under Section 853 of the Code, provided that more
than 50% of the value of the total assets of the Fund at the close of the
taxable year consists of securities of foreign corporations. The foreign tax
credit and deduction available to shareholders is subject to certain limitations
imposed by the Code. Also, under Section 63 of the Code, no deduction for
foreign taxes may be claimed by shareholders who do not itemize deductions on
their federal income tax returns, although any such shareholder may claim a
credit for foreign taxes and in any event will be treated as having taxable
income in respect to the shareholder's pro rata share of foreign taxes paid by
the Fund. It should also be noted that a tax-exempt shareholder, like other
shareholders, will be required to treat as part of the amounts 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.
B-99
<PAGE>
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
amounts constituting ordinary income to him or her.
ORGANIZATION AND CAPITALIZATION
GENERAL
The Funds are separate series of an open-end investment company, The
MainStay Funds ("Trust"), established under the laws of The Commonwealth of
Massachusetts by a Declaration of Trust dated January 9, 1986, as amended. The
Funds included herein 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
B-100
<PAGE>
election of Trustees can elect all Trustees and, in such event, the holders of
the remaining shares voting for the election of Trustees will not be able to
elect any person or persons as Trustees. Shares have no preemptive or
subscription rights and are transferable.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. Notice of such disclaimer will
normally be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant Fund for any loss suffered by a shareholder as a
result of an obligation of the Fund. The Declaration of Trust also provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which a Fund would be
unable to meet its obligations. The Trustees believe that, in view of the
above, the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York, 10036, has been selected as independent accountants of the Trust.
B-101
<PAGE>
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.
SHARE OWNERSHIP OF THE FUNDS
The following table sets forth information concerning beneficial and record
ownership, as of August 1, 1998, of the Funds' shares by each person who
beneficially or of record owns more than five percent of the voting securities
of any Fund:
[To Be Provided]
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust and persons who, in connection
with their regular functions, play a role in the recommendation of any purchase
or sale of a security by the Trust or obtain information pertaining to such
purchase or sale. Such persons are generally required to preclear all security
transactions with the Trust's Compliance Officer or his designee and to report
all transactions on a regular basis. The Trust has developed procedures for
administration of the Code. The Sub-Advisers that are unaffiliated with New
York Life Insurance Company have adopted their own codes of ethics to govern the
personal trading activities of their personnel.
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-102
<PAGE>
THE MAINSTAY FUNDS
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements:
Included in Part A of this Registration Statement:
(1) Capital Appreciation Fund, Convertible Fund, Government Fund, High
Yield Corporate Bond Fund, Money Market Fund, Tax Free Fund, Total
Return Fund, Value Fund:
Financial Highlights for the years ended August 31, 1988, August 31,
1989, August 31, 1990, August 31, 1991, August 31, 1992, August 31,
1993 and August 31, 1994; the period September 1, 1994 through
December 31, 1994; the years ended December 31, 1995, December 31,
1996 and December 31, 1997.
(2) Equity Index Fund:
Financial Highlights for the period December 2, 1990 (commencement of
operations) to August 31, 1991; the fiscal years ended August 31,
1992, August 31, 1993 and August 31, 1994; the period September 1,
1994 through December 31, 1994; the years ended December 31, 1995,
December 31, 1996 and December 31, 1997.
(3) California Tax Free Fund and New York Tax Free Fund:
Financial Highlights for the period October 1, 1991 (commencement of
operations) through August 31, 1992; the years ended August 31, 1993
and August 31, 1994; the period September 1, 1994 through December 31,
1994; the years ended December 31, 1995, December 31, 1996 and
December 31, 1997.
(4) International Equity Fund and International Bond Fund:
Financial Highlights for the period September 13, 1994 (commencement
of operations) through December 31, 1994;
<PAGE>
the years ended December 31, 1995, December 31, 1996 and December 31,
1997.
(5) Strategic Income Fund:
Financial Highlights for the period February 28, 1997 (commencement of
operations) through December 31, 1997.
(6) Strategic Value Fund:
Financial Highlights for the period October 21, 1997 (commencement of
operations) through December 31, 1997.
Included in Part B of this Registration Statement:
Financial Statements for NYLIFE Inc. as of December 31, 1997.
Incorporated by reference in Part B of this Registration Statement:
California Tax Free Fund, Capital Appreciation Fund, Convertible Fund,
Equity Index Fund, Government Fund, High Yield Corporate Bond Fund,
International Bond Fund, International Equity Fund, Money Market Fund,
New York Tax Free Fund, Tax Free Fund, Total Return Fund, Value Fund:
Statement of Assets and Liabilities as of December 31, 1997;
Statement of Operations for the year ended December 31, 1997;
Statement of Changes in Net Assets for the years ended December 31,
1996 and December 31, 1997;
Notes to Financial Statements;
Portfolio of Investments at December 31, 1997.
Strategic Income Fund:
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997;
Statement of Operations for the period February 28, 1997 (commencement
of operations) through December 31, 1997;
Statement of Changes in Net Assets for the period ended December 31,
1997.
Notes to Financial Statements;
Portfolio of Investments at December 31, 1997; and
Strategic Value Fund:
Statement of Assets and Liabilities as of December 31, 1997;
Statement of Operations for the period October 22, 1997 (commencement
of operations) through December 31, 1997;
Statement of Changes in Net Assets for the period ended December 31,
1997.
Notes to Financial Statements;
Portfolio of Investments at December 31, 1997; and
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable or
are not required.
b. Exhibits:
1. (a) Amended and Restated Declaration of Trust dated
August 30, 1991 -- Previously filed as Exhibit 1(a)
to Post-Effective Amendment No. 13*
(b) Fifth Amended and Restated Establishment and
Designation of Series of Shares of Beneficial
Interest, Par Value $.01 Per Share dated October 26,
1992 -- Previously filed as Exhibit 1(b) to Post-
Effective Amendment No. 16*
(c) Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per
Share -- Previously filed as Exhibit 1(b) to Post-
Effective Amendment No. 11*
(d) Form of Establishment and Designation of Additional
Series of Shares of Beneficial Interest, Par Value
$.01 Per Share -- Previously filed as Exhibit 1(b) to
Post-Effective Amendment No. 23*
(e) Form of Declaration of Trust as Amended and Restated
December 31, 1994 -- Previously filed as Exhibit 1(e)
to Post-Effective Amendment No. 27*
(f) Form of Establishment and Designation of Additional
Series of Shares of Beneficial Interest, Par Value
$.01 Per Share -- Previously filed as Exhibit 1(e) to
Post-Effective Amendment No. 28*
(g) Form of Establishment and Designation of an
Additional Series of Shares of Beneficial Interest,
<PAGE>
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 --Previously filed as Exhibit 1(i) to
Post--Effective Amendment No. 47*
2. (a) Amended and Restated By-laws dated August 30, 1991
-- Previously filed as Exhibit 2 to Post-Effective
Amendment No. 13*
(b) Amended and Restated By-Laws dated December 31,
1994 --Previously filed as Exhibit 2(b) to Post-
Effective Amendment No. 32*
3. Inapplicable
4. Specimen Share Certificate -- Previously filed as
Exhibit 4 to Pre-Effective Amendment No. 2*
5. (a)(1) Revised Form of Investment Advisory Agreement --
Capital Appreciation Fund -- Previously filed as
Exhibit 5(a)(1) to Pre-Effective Amendment No. 2*
(2) Revised Form of Investment Advisory Agreement --Value
Fund -- Previously filed as Exhibit 5(a)(2) to Pre-
Effective Amendment No. 2*
(3) Revised Form of Investment Advisory Agreement --
Convertible Fund -- Previously filed as Exhibit
5(a)(3) to Pre-Effective Amendment No. 2*
(4) Revised Form of Investment Advisory Agreement -- High
Yield Corporate Bond Fund --Previously filed as
Exhibit 5(a)(4) to Pre-Effective Amendment No. 2*
(5) Revised Form of Investment Advisory Agreement --
Government Fund -- Previously filed as Exhibit
5(a)(5) to Pre-Effective Amendment No. 2*
(6) Revised Form of Investment Advisory Agreement --Money
Market Fund -- Previously filed as Exhibit 5(a)(6) to
Pre-Effective Amendment No. 2*
<PAGE>
(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*
(14)(a)Management Agreement - Strategic Value Fund**
(14)(b)Management Agreement - All Funds except Strategic
Value Fund**
(b)(1) Form of Sub-Advisory Agreement -- Strategic Value
Fund -- Previously filed as Exhibit 5(b)(1) to Post-
Effective Amendment No. 38*
(b)(2) Form of Composite Sub-Advisory Agreement --
Previously filed as Exhibit 5(b)(2) to Post-
Effective Amendment No. 42*
(b)(3) Sub-Advisory Agreement - Blue Chip Growth Fund**
(b)(4) Sub-Advisory Agreement - Growth Opportunities Fund**
(b)(5) Sub-Advisory Agreement - Research Value Fund**
(b)(6) Sub-Advisory Agreement - Small Cap Value Fund**
(b)(7) Sub-Advisory Agreement - Equity Index Fund**
(b)(8) Sub-Advisory Agreement - with MacKay-Shields
Financial Service Corporation**
<PAGE>
6. (a)(1) Form of Distribution Agreement -- Previously filed as
Exhibit 6(a) to Post-Effective Amendment No. 22*
(a)(2) Distribution Agreement**
(b)(1) Form of Soliciting Dealer Agreement -- Previously
filed as Exhibit 6(b) to Pre-Effective Amendment No.
1*
(b)(2) Soliciting Dealer Agreement**
7. Inapplicable
8. (a) Custodian Contract with State Street Bank and Trust
Company --Previously filed as Exhibit 8(a) to Pre-
Effective Amendment No. 1*
(b) Fee schedule for Exhibit 8(a) -- Previously filed as
Exhibit 8(b) to Pre-Effective Amendment No. 2*
(c) Custodian Contract with The Bank of New York --
Previously filed as Exhibit 8(a) to Post-Effective
Amendment No. 7*
(d) Amendment to Custodian Contract with State Street
Bank and Trust Company**
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*
(3) Transfer Agency Agreement**
(4) Sub-Transfer Agency
Agreement**
(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*
<PAGE>
(c) Form of Fund Accounting Service Agreement --
Previously filed as Exhibit 9(11) to Post-Effective
Amendment No. 6*
(d) Form of Guaranty Agreement -- Equity Index Fund --
Previously filed as Exhibit 9(c) to Post-Effective
Amendment No. 7*
(e) Form of Services Agreement between The MainStay Funds
and NYLIFE Distributors Inc. -- Previously filed as
Exhibit 9(b) to Post-Effective Amendment No. 25*
(f) Form of Service Agreement -- Previously filed as
Exhibit 9(g) to Post-Effective Amendment No. 33*
(g) Form of Service Agreement with New York Life Benefit
Services, Inc. -- Previously filed as Exhibit 9(g)
to Post-Effective Amendment No. 37*
(h) Fund Accounting Agreement**
(i) Guaranty Agreement - Equity Index Fund**
10. Opinion and consent of counsel - Previously filed as
Exhibit 10 to Post-Effective Amendment No. 45
(accession number 0000950130-98-002195)*
11. (a) Consent of independent accountants
12. Not applicable.
13. Investment representation letter relating to initial
capital -- Previously filed as Exhibit 13 to Pre-
Effective Amendment No. 1*
14. (a)(1) Revised Form of 403(b) Account Application --
Previously filed as Exhibit 14(a)(1) to Post-
Effective Amendment No. 3* (2) Revised Form of 403(b)
Custodial Agreement --Previously filed as Exhibit
14(a)(2) to Post-Effective Amendment No. 3*
(b)(1) Form of 401(k) Adoption Agreement -- Previously
filed as Exhibit 14(b)(1) to Pre-Effective Amendment
No. 2*
(2) Form of 401(k) Plan and Trust -- Previously filed as
Exhibit 14(b)(2) to Pre-Effective Amendment No. 2*
(c)(1) Form of IRS Form 5305-A -- Previously filed as
Exhibit 14(c)(1) to Pre-Effective Amendment No. 2*
(2) Revised Form of IRS Adoption Agreement and Custodian
Disclosure Statement*
(3) Form of MainStay Funds Individual Retirement Account
Application and Transfer Request*
<PAGE>
15. (a)(1) Form of Composite Plan of Distribution pursuant to
Rule 12b-1 (Class A shares) as approved October 30,
1995 -- Capital Appreciation Fund, Value Fund,
Convertible Fund, Total Return Fund, High Yield
Corporate Bond Fund, Government Fund and Tax Free
Bond Fund -- Previously filed as Exhibit 15(a)(1) to
Post-Effective Amendment No. 32*
(2) Form of Composite Plan of Distribution pursuant to
Rule 12b-1 (Class B Shares) as approved October 30,
1995 -- Capital Appreciation Fund, Value Fund,
Convertible Fund, Global Fund, Total Return Fund,
Natural Resources/Gold Fund, High Yield Corporate
Bond Fund, Government Fund and Tax Free Bond Fund - -
Previously filed as Exhibit 15(a)(2) to Post-
Effective Amendment No. 32*
(3) Form of Plan of Distribution pursuant to Rule 12b-1
(Class A Shares) as approved October 30, 1995 --
International Equity Fund and International Bond
Fund --Previously filed as Exhibit 15(a)(3) to Post-
Effective Amendment No. 33*
(4) Form of Plan of Distribution pursuant to Rule
12b-1 (Class B Shares) as approved October 30, 1995
-- International Equity Fund and International Bond
Fund --Previously filed as Exhibit 15(a)(4) to Post-
Effective Amendment No. 33*
(5) Form of Plan of Distribution pursuant to Rule 12b-1
(Class A Shares) as approved October 30, 1995 --
California Tax Free Fund, New York Tax Free Fund and
Equity Index Fund -- Previously 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*
<PAGE>
(10) Form of Plan of Distribution pursuant to Rule 12b-1
(Class B shares) -- MainStay Strategic Value Fund --
Previously filed as Exhibit 15(a)(10) to Post-
Effective Amendment No. 38*
(11) Form of Composite Plan of Distribution pursuant to
Rule 12b-1 as approved October 24, 1997 -Previously
filed as Exhibit 15(a)(ii) to Post-Effective
Amendment No. 42*
(12) Form of Plan of Distribution pursuant to Rule 12b-1
(Class C shares)
16. Not applicable
17. Not applicable
18. Form of Multiple Class Plan Pursuant to Rule 18f-3
--Previously filed as Exhibit 18 to Post-Effective Amendment
No. 30*
* Incorporated herein by reference
** To be filed by amendment.
Item 25. Persons Controlled by or under Common Control with
Registrant
The following chart indicates the persons controlled by New York Life:
<TABLE>
<CAPTION>
Percent of Voting Securities
Name Jurisdiction of Organization Owned
- ---- ---------------------------- -----
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation Delaware 100%
which owns 100% of the shares of
Greystone Realty Management, Inc. Delaware
NYLIFE Administration Corp. Texas 100%
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
Madison Square Advisors, Inc. Delaware 100%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Voting Securities
Name Jurisdiction of Organization Owned
- ---- ---------------------------- -----
<S> <C> <C>
MainStay Institutional Funds Inc. Maryland ***
MainStay Management, Inc. Delaware 100%
MainStay Shareholder Services, Inc. Delaware 100%
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity Corporation Delaware 100%
New York Life International Investment Inc. Delaware 100%
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited United Kingdom
MainStay VP Series Fund, Inc. Maryland *
New York Life International, Inc. (formerly New York Delaware 100%
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., England
which owns 100% of the shares of:
Windsor Construction Company Limited England
and 33.3% of
Japan Gamma Asset Management Limited Japan
and 31.5% of the shares of:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Voting Securities
Name Jurisdiction of Organization Owned
- ---- ---------------------------- -----
<S> <C> <C>
Life Assurance Holding Corporation Limited, Japan
which owns 100% of the shares of:
Windsor Life Assurance Company Limited
and which owns 51% of the shares of:
KOHAP New York Life Insurance Ltd. South Korea
and which owns 50.2% of the shares of:
P.T. Asuransi Jiwa Sewur - New York Indonesia
and which owns 49% of the shares of:
GEO New York Life, S.A.
NYLIFE Depositary Corporation which owns 16,.67% of Delaware 100%
NYLIFE Structured Asset Management Company Ltd. Texas
New York Life Benefit Services, Inc. which owns 100% Massachusetts 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 Canada
Practice Pattern Science, Inc.
ESI Canada Holdings, Inc., Canada
which owns 100% of the shares of:
ESI Canada, Inc. Canada
IVTx of Houston, Inc. Texas
IVTx of Dallas, Inc. Texas
PhyNet, Inc. Delaware
Express Scripts Vision Corporation Delaware
NYLCare Health Plans, Inc. Delaware
(formerly Sanus Corp. Health Systems), which owns
100% of the shares of:
New York Life and Health Insurance Company Delaware
Avanti Corporate Health Systems Inc. Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Voting Securities
Name Jurisdiction of Organization Owned
- ---- ---------------------------- -----
<S> <C> <C>
Avanti Health Systems, Inc., Texas
which owns 100% of the shares of:
Avanti of the District, Inc. Maryland
Avanti of Illinois, Inc. Illinois
Avanti of New York, Inc. New York
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of:
NYLCare Health Plans of the Mid-Atlantic, Inc., Maryland
which owns 100% of the shares of:
Physicians Health Services Foundation, Inc. Maryland
Lonestar Holding Co., which owns 90% of the Delaware
shares of:
Lone Star Health Plan, Inc.
which owns 100% of the shares of: New York
NYLCare Health Plans of the Gulf
Coast, Inc. Texas
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., Texas
which owns 100% of the shares of:
NYLCare Passport PPO of the Southwest, Inc. Texas
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Voting Securities
Name Jurisdiction of Organization Owned
- ---- ---------------------------- -----
<S> <C> <C>
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. Delaware
which owns 50% of the shares of :
WellPath Community Health Plan Holdings, L.L.C. North Carolina
which owns 100% of:
WPCHP Holdings, Inc. Delaware
and 99% of:
WellPath Preferred Services, L.L.C. and North Carolina
WellPath Select Holdings, L.L.C. North Carolina
which 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, Delaware
which owns 100% of the shares of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc. Pennsylvania
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc Missouri
ETHIX Northwest Public Services, Inc. Washington
ETHIX Northwest, Inc. Washington
which owns 100% of:
NYLCare Health Plans Northwest, Inc. Washington
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Voting Securities
Name Jurisdiction of Organization Owned
- ---- ---------------------------- -----
<S> <C> <C>
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc. Oregon
ETHIX Southeast, Inc. North Carolina
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 100% of the shares of California
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%
which owns 100% of the shares of:
NYLINK Insurance Agency of Alabama, Alabama
Incorporated
NYLINK Insurance Agency of New Mexico, New Mexico
Incorporated
NYLINK Insurance Agency of Hawaii, Incorporated Hawaii
NYLINK Insurance Agency of Massachusetts, 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.
<PAGE>
* 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.
Item 26. Number of Holders of Securities (as of May 31,1998)
<TABLE>
<CAPTION>
(2)
Number of
Title of Class Record Holders
Shares of beneficial interest: Class A Class B
- ----------------------------- ------- -------
<S> <C> <C>
Capital Appreciation Fund 19,633 145,633
Value Fund 9,238 100,444
Convertible Fund 3,270 42,030
High Yield Corporate Bond Fund 7,440 107,192
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
Shares of beneficial interest: Class A Class B
- ----------------------------- ------- -------
<S> <C> <C>
Government Fund 818 36,673
Tax Free Bond Fund 397 14,822
Money Market Fund 5,120 34,067
Total Return Fund 5,476 88,903
Equity Index Fund 25,361 N/A
California Tax Free Fund 400 251
New York Tax Free Fund 389 174
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
Shares of beneficial interest: Class A Class B
- ----------------------------- ------- -------
<S> <C> <C>
International Equity Fund 1,658 9,478
International Bond Fund 326 2,249
Strategic Income Fund 466 2,551
Strategic Value Fund 725 3,546
Small Cap Growth Fund 1 1
Small Cap Value Fund 1 1
Blue Chip Growth Fund 1 1
Equity Income Fund 1 1
Growth Opportunities Fund 1 1
Research Value Fund 1 1
Global High Yield Fund 1 1
</TABLE>
Item 27. Indemnification
New York Life Insurance Company maintains Directors & Officers
Liability insurance coverage totaling $100 million. The coverage limit applies
each year and has been extended to cover Directors, Trustees and Officers of the
Trust, and subsidiaries and certain affiliates of New York Life. Subject to the
policies' terms, conditions, deductible and retentions, Directors, Officers and
Trustees are covered for claims, 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.
<PAGE>
Article IV of Registrant's Declaration of Trust states as follows:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is, or has been, a Trustee or officer of the
Trust shall be indemnified by the Trust, or by one or more Series
thereof if the claim arises from his or her conduct with respect to
only such Series to the fullest extent permitted by law against all
liability and against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal, or
other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or a Series thereof or the
Shareholders by reason of a final adjudication by a court or other body
before which a proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust or a
Series thereof;
(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
<PAGE>
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification to
which personnel of the Trust other than Trustees and officers may be entitled by
contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceedings of the character described in paragraph (a) of this
Section 4.3 shall be advanced by the Trust or a Series thereof to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient, to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by surety bond or some other
appropriate security provided by the recipient, or the Trust or a
Series thereof shall be insured against losses arising out of any such
advances; or
(ii) a majority of the Non-interested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees acts on
the matter) or an independent legal counsel in a written opinion shall
determine, based upon a review of readily available facts (as
opposed to a full trial-type inquiry), that 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.
<PAGE>
The business or other connections of each director and officer of
MacKay- Shields Financial Corporation is currently listed in the investment
adviser registration on Form ADV for MacKay-Shields Financial Corporation (File
No. 801- 5594) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of
Monitor Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors, Inc. (File No. 801-34412)
and is hereby incorporated herein by reference.
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 here in by reference.
Item 29. Principal Underwriters
(a) None.
(b)
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ---------------- ----------------------- ----------
<S> <C> <C>
Davidson, Sheila(2) Chief Compliance Officer None
Boyce, Jefferson C.(2) Director Senior Vice President
Brady, Robert E.(1) Director and Vice President None
Boccio, Frank M.(2) Director None
Rock, Robert D.(2) Director None
Gallo, Michael G.(2) Director None
Hildebrand, Phillip J.(2) Director None
Roussin, Stephen(3) Director President and Chief
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Polis, Anthony W.(3) Vice President and Chief Chief Financial Officer
Calhoun, Jay S.(2) Vice President and Treasurer None
Warga, Thomas J.(2) Senior Vice President and General Auditor None
Livornese, Linda M.(2) Vice President None
Murray, Thomas J.(2) Corporate Vice President None
Zuccaro, Richard W.(2) Tax Vice President Tax Vice
Krystel, David J.(2) Vice President None
O'Byrne, John H.(2 Vice President and Chief None
Adasse, Louis H.(2) Corporate Vice President None
Daoust, George R.(3) Assistant Vice President None
Arizmendi, Arphiela(3) Corporate Vice President Assistant Treasurer
Cirillo, Antoinette B.(3) Assistant Vice President Assistant Treasurer
Lorito, Geraldine(3) Assistant Vice President Assistant Treasurer
Gomez, Mark A.(2) Assistant Secretary None
</TABLE>
(1) 260 Cherry Hill Road, Parsippany, NJ 07054
(2) 51 Madison Avenue, New York, NY 10010
(3) Morris Corporate Center I, Building A, 300 Interpace Parkway,
Parsippany, NJ 07054
(c) Inapplicable.
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, the Manager and
NYLIFE Distributors Inc., Morris Corporate Center I, Building A, 300 Interpace
Parkway, Parsippany, NJ 07054, at MacKay-Shields Financial Corporation, 9 West
57th Street, New York, NY 10019; Monitor Capital Advisors, Inc., 504 Carnegie
Center, Princeton, New Jersey 08540; 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.
<PAGE>
Inapplicable.
Item 32. Undertakings.
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 Jersey, on the ___ day of , 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 , 1998.
Signatures Title
---------- -----
* Chairman and Trustee
- ---------------------
DONALD K. ROSS
/s/ Stephen C. Roussin President, Chief Executive
- ---------------------
STEPHEN C. ROUSSIN Officer and Trustee
/s/ Anthony W. Polis Chief Financial Officer
- ---------------------
ANTHONY W. POLIS (Principal Financial and
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 Post-Effective Amendment No. 44 on March 17, 1998.
** Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 40 on August 28, 1997
<PAGE>
EXHIBIT INDEX
Exhibit Item
Consent of Independent Accountants 11(a)
Form Plan of Distribution pursuant 15(12)
to Rule 12b-1(Class C shares)
<PAGE>
EXHIBIT 99.11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 47 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated April
15, 1998, relating to the financial statements of NYLIFE Inc. and subsidiaries,
which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement. We also consent to the incorporation by
reference in the Prospectus and Statement of Additional Information of our
reports dated February 19, 1998, February 24, 1998 and February 25, 1998,
relating to the December 31, 1997 financial statements and financial highlights
of The MainStay Funds, which financial statements are also incorporated by
reference into the Registration Statement. We also consent to the references
to us under the heading "Financial Highlights" in the Prospectus and under the
heading "Other Information - Independent Accountants" in the Statement of
Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 27, 1998
<PAGE>
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
FOR CLASS C SHARES
OF THE MAINSTAY FUNDS
WHEREAS, The MainStay Funds (the "Trust") engages in business as an open-
end management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into a number of separate series (individually, a "Fund,"and collectively, the
"Funds") as set forth in Schedule A, as amended from time to time;
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan of Distribution (the "Plan")
will benefit the Trust, each Fund and its respective shareholders;
WHEREAS, the Trust employs NYLIFE Distributors Inc. ("NYLIFE Distributors")
as distributor of the securities of which it is the issuer, including Class C
shares of each Fund; and
WHEREAS, the Trust and NYLIFE Distributors have entered into a Distribution
Agreement, pursuant to which the Trust employs NYLIFE Distributors in such
capacity during the continuous offering of Class C shares of the Trust.
NOW, THEREFORE, the Trust hereby adopts on behalf of each Fund, and NYLIFE
Distributors hereby agrees to the terms of, the Plan in accordance with Rule
12b-1 under the Act on the following terms and conditions:
1. Each Fund shall pay to NYLIFE Distributors, as the distributor of
securities of which the Fund is the issuer, a fee for distribution of the Class
C shares of the Fund at an annual rate, as set forth opposite each Fund's name
on Schedule A, of the Fund's average daily net assets attributable to the Fund's
Class C shares. Such fee shall be calculated and accrued daily and paid monthly
or at such other intervals as the Trustees shall determine, subject to any
applicable restriction imposed by rules of the National Association of
Securities Dealers, Inc. If this Plan is terminated, a Fund will owe no
payments to NYLIFE Distributors other than any portion of the distribution fee
accrued through the effective date of termination but then unpaid.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
NYLIFE Distributors' services as distributor of the Class C shares of each Fund
in connection with any activities or expenses primarily intended to result in
the sale of Class C shares of the Fund, including, but not limited to,
compensation to registered representatives or other employees of NYLIFE
Distributors and its affiliates, including NYLIFE Securities Inc., and to other
broker-dealers that have entered into a Soliciting Dealer Agreement with NYLIFE
Distributors, compensation to and expenses of employees of NYLIFE Distributors
who engage in or support distribution of the Fund's Class C
<PAGE>
shares; telephone expenses; interest expense; printing of prospectuses and
reports for other than existing shareholders; preparation, printing and
distribution of sales literature and advertising materials; administrative
services and expenses; and profit on the foregoing.
3. Each Fund will pay to NYLIFE Distributors, in addition to the
distribution fee, a service fee at the rate of 0.25% on an annualized basis of
the average daily net assets of the Class C shares of the Fund (the "Service
Fee") as compensation for "service activities" (as defined below) rendered to
shareholders of the Fund. Such Service Fee shall be calculated daily and paid
monthly or at such other intervals as the Board shall determine.
For purposes of the Plan, "service activities" shall mean activities in
connection with the provision of personal, continuing services to investors in a
Fund, excluding transfer agent and subtransfer agent services for beneficial
owners of Fund Class C shares, aggregating and processing purchase and
redemption orders, providing beneficial owners with share account statements,
processing dividend payments, providing subaccounting services for Class C
shares held beneficially, forwarding shareholder communications to beneficial
owners and receiving, tabulating and transmitting proxies executed by beneficial
owners; provided, however, that if the National Association of Securities
Dealers Inc. ("NASD") adopts a definition of "service activities" for purposes
of Conduct Rule 2830 that differs from the definition of "service activities"
hereunder, or if the NASD adopts a related definition intended to define the
same concept, the definition of "service activities" in this Paragraph shall be
automatically amended, without further action of the parties, to conform to such
NASD definition. Overhead and other expenses of NYLIFE Distributors related to
its "service activities," including telephone and other communications expenses,
may be included in the amounts expended for such activities.
4. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
5. The Plan of Distribution shall continue in full force and effect as to
a Fund for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 4.
6. NYLIFE Distributors shall provide to the Trustees of the Trust and the
Trustees shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.
7. This Plan may be terminated as to a Fund at any time, without payment
of any penalty, by vote of a majority of the Rule 12b-l Trustees, or by a vote
of a majority of the outstanding voting securities of the Fund on not more than
30 days' written notice to any other party to the Plan.
-2-
<PAGE>
8. This Plan may not be amended to increase materially the amount of
compensation provided for herein unless such amendment is approved in the manner
provided for initial approval in paragraph 4 hereof, and no material amendment
to the Plan shall be made unless approved in the manner provided for approval
and annual renewal in paragraph 5 hereof.
9. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the Act) of the Trust shall be
committed to the discretion of the Trustees who are not such interested persons.
10. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof, for a period of
not less than six years from the date of this Plan, any such agreement or any
such report, as the case may be, the first two years in an easily accessible
place.
11. The Trustees of the Trust and the shareholders of each Fund shall not
be liable for any obligations of the Trust or the Fund under this Plan, and
NYLIFE Distributors or any other person, in asserting any rights or claims under
this Plan, shall look only to the assets and property of the Trust or the Fund
in settlement of such right or claim, and not to such Trustees or shareholders.
IN WITNESS WHEREOF, the Trust, on behalf of each Fund, and NYLIFE
Distributors have executed this Plan of Distribution as of the 1st day of
September, 1998, to be effective September 1, 1998.
THE MAINSTAY FUNDS
By:
--------------------------------
Title:
NYLIFE DISTRIBUTORS INC.
By:
--------------------------------
Title:
-3-
<PAGE>
SCHEDULE A
FUND DISTRIBUTION FEE
Capital Appreciation Fund .75%
International Equity Fund .75%
Convertible Fund .75%
Total Return Fund .75%
Value Fund .75%
Government Fund .75%
High Yield Corporate Bond Fund .75%
International Bond Fund .75%
California Tax Free Fund .75%
New York Tax Free Fund .75%
Strategic Income Fund .75%
Strategic Value Fund .75%
Tax Free Bond Fund .75%
Blue Chip Growth Fund .75%
Research Value Fund .75%
Small Cap Value Fund .75%
Growth Opportunities Fund .75%
Small Cap Growth Fund .75%
Equity Income Fund .75%
Global High Yield Fund .75%
-4-
