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THE MAINSTAY FUNDS
MAP EQUITY FUND
CLASS I SHARES
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STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
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This Statement of Additional Information ("SAI") supplements the
information contained in the Fund's Prospectus dated May 1, 2000, as amended or
supplemented from time to time (the "Prospectus"), and should be read in
conjunction with the Prospectus. The Prospectus is available 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). This
Statement of Additional Information, although not a prospectus, is incorporated
by reference in and is made a part of the Prospectus.
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 offer contained herein, and, if given or made, such other information
or representations must not be relied upon as having been authorized by The
MainStay Funds or the Distributor. This Statement of Additional Information and
the related Prospectus do not constitute an offer by The MainStay Funds 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, LLC, P.O. Box 8401, Boston, Massachusetts 02266-8401, or
by calling 1-800-MAINSTAY. In addition, you can make inquiries through your
registered representative.
The financial statements of the Fund, including the Statement of Assets and
Liabilities and the Portfolio of Investments as of December 31, 1999, the
Statement of Operations for the year ended December 31, 1999 and Statement of
Changes in Net Assets for the years ended December 31, 1999 and 1998, the notes
to Financial Statements, and the Report of Independent Accountants, all of which
are included in the Fund's 1999 Annual Report to Shareholders, are hereby
incorporated by reference into this Statement of Additional Information.
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TABLE OF CONTENTS
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The MainStay Funds 4
Additional Information About the Fund 4
Investment Practices and Instruments 4
Temporary Defensive Measures 5
Repurchase Agreements 5
Lending of Portfolio Securities 6
Cash Equivalents 6
Convertible Securities 6
Foreign Securities 7
Warrants 8
Options on Securities 8
Futures Transactions 9
Fundamental Investment Restrictions 14
Non-Fundamental Investment Restrictions 15
Trustees and Officers 16
The Manager, the Subadvisor and the Distributor 23
Management Agreement 23
Sub-Advisory Agreement 24
Distribution Agreement 24
Other Services 25
Expenses Borne by the Trust 25
Portfolio Transactions and Brokerage 25
Net Asset Value 27
Shareholder Investment Account 29
Shareholder Servicing Agent 29
Purchase, Redemption, Exchanges and Repurchase 29
How to Purchase Shares of the Fund 29
Redemptions and Exchanges 31
Distributions in Kind 31
Suspension of Redemptions 31
Exchange Privileges 32
Tax-Deferred Retirement Plans 32
Cash or Deferred Profit Sharing Plans Under Section 401(k) for
Corporations and Self-Employed Individuals 32
Individual Retirement Account ("IRA") 32
403(b)(7) Tax Sheltered Account 34
General Information 34
Calculation of Performance Quotations 34
Tax Information 36
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Taxation of the Fund 36
Character of Distributions to Shareholders -- General 37
Taxation of Options, Futures and Similar Instruments 38
Passive Foreign Investment Companies 39
Foreign Currency Gains and Losses 39
Commodity Investments 39
Dispositions of Fund Shares 40
Tax Reporting Requirements 40
Foreign Taxes 41
State and Local Taxes - General 41
Explanation of Fund Distributions 41
General Information 41
Organization and Capitalization 41
General 41
Voting Rights 41
Shareholder and Trustee Liability 42
Registration Statement 42
Other Information 42
Independent Accountants 42
Transfer Agent 42
Custodian 43
Legal Counsel 43
Code of Ethics 43
Appendix A -- Description of Securities Ratings 44
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THE MAINSTAY FUNDS
The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of 23 separate investment
portfolio. This Statement of Additional Information pertains only to the MAP
Equity Fund (the "Fund"). MainStay Management, LLC. (the "Manager") serves as
the manager for the Fund and has entered into a Sub-Advisory Agreement with
Markston International, LLC ("Markston" or the "Subadvisor") with respect to the
MAP Equity Fund.
The Trust, formed January 9, 1986, is a Massachusetts business trust. The
Fund is a diversified fund as defined by the Investment Company Act of 1940, as
amended (the "1940 Act").
ADDITIONAL INFORMATION ABOUT THE FUND
The Prospectus discusses the investment objectives of the Fund and the
principal investment strategies to be employed in seeking to achieve those
objectives. This section contains supplemental information concerning certain of
the securities and other instruments in which the Fund may invest, the principal
investment strategies the Fund may utilize, and certain risks involved with
those strategies.
THE FUND ALONE DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM.
Investment decisions for the Fund are made independently from those of the
other accounts and investment companies that may be managed by the Subadvisor.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which the Fund invests at the same
time as another fund or another account managed by the Subadvisor, 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 the Fund or the price paid or received by the
Fund.
The Fund may invest in warrants. A warrant is a right which entitles its
holder, for a specified period of time, to acquire a specified number of shares
of common stock for a specified price per share. If the share price at the time
the warrant is exercised exceeds the total of the exercise price of the warrant
and its purchase price, the Fund experiences a gain to the extent this total is
exceeded by the share price. However, if the share price at the time the warrant
expires is less than the exercise price of the warrant, the Fund will suffer a
loss of the purchase price of the warrant.
The Fund restricts its investment in securities of foreign issuers to no
more than 10% of the value of the Fund's total net assets. Such securities may
be subject to additional federal taxes which would increase the cost of such
investments and may be subject to foreign government taxes which could reduce
the income yield on such securities.
In addition, the Fund may also buy "restricted" securities which cannot be
sold publicly until registered under the Securities Act of 1933. The Fund's
ability to dispose of investments in "restricted" securities at reasonable price
levels might be limited unless and until their registration under the Securities
Act of 1933 has been completed. The Fund will endeavor to have the issuing
company pay all the expenses of any such registration, but there is no assurance
that the Fund will not have to pay all or some of these expenses.
INVESTMENT PRACTICES AND INSTRUMENTS
The Fund may engage in the following investment practices or invest in the
following instruments to the extent permitted in the Prospectus and elsewhere in
this SAI.
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TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions - for temporary defensive
purposes - the Fund may invest without limit in cash and cash equivalents. See
"Cash Equivalents."
REPURCHASE AGREEMENTS
The Fund 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.
A repurchase agreement, which provides a means for the 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 security, usually in the form
of a 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 a custodian appointed by the Fund or another custodian as
agent for the Fund and the Fund's counterparty. The Fund attempts to assure that
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 the Fund as a dividend to shareholders.
For purposes of the 1940 Act, a repurchase agreement has been deemed to be
a loan from the Fund to the seller of the Obligation. It is not clear whether a
court would consider the Obligation purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate 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 Fund, the Subadvisor seeks 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 Trustees have delegated to the Subadvisor the
authority and responsibility to monitor and evaluate the Fund's use of
repurchase agreements and identification of sellers who they believe to be
creditworthy and have authorized the Fund to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, the Fund could experience delays in recovering its investment or
losses.
LENDING OF PORTFOLIO SECURITIES
In accordance with guidelines adopted by the Board of Trustees, the Fund
may seek to increase its income by lending portfolio securities. Under present
regulatory policies, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash or U.S. government
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securities maintained on a current basis at an amount at least equal to 100% of
the current market value of the securities loaned. The Fund would have the right
to call a loan and obtain the securities loaned at any time generally on less
than five days' notice. For the duration of a loan, the Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation from the investment of the
collateral. The Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but the Fund would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment.
As with other extensions of credit, there are risks of delay in recovery
of, or even loss of rights in, the collateral should the borrower of the
securities fail financially or breach its agreement with the Fund. However, the
loans would be made only to firms deemed by the Subadvisor to be creditworthy
and approved by the Board, and when, in the judgment of the Subadvisor, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Subadvisor determines to make securities
loans, it is intended that the value of securities loaned will not exceed 33% of
the value of the total assets of the Fund. Under the guidelines adopted by the
Board of Trustees, the Fund may not enter into a lending agreement with a
counterparty which would cause the Fund to have loans outstanding to that
counterparty for securities having a value greater than 5% of the Fund's total
assets.
CASH EQUIVALENTS
The Fund 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 the U.S. Government or any agency 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 (as described in this
SAI) 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 above if such instruments are deemed by the Subadvisor to
be of comparable high quality and liquidity.
CONVERTIBLE SECURITIES
The 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 Subadvisor believes that a
company's convertible securities are undervalued in the market. Convertible
securities eligible for inclusion in the Fund's portfolio include convertible
bonds, convertible preferred stocks, warrants or notes or other 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
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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 the
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.
FOREIGN SECURITIES
The Fund 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 denominated in foreign
currencies may gain or lose value as a result of fluctuating currency exchange
rates. Securities markets in other countries are not always as efficient as
those in the U.S. and are sometimes less liquid and more volatile. Other risks
involved in investing in the securities of foreign issuers include differences
in accounting, auditing and financial reporting standards; limited publicly
available information; the difficulty of assessing economic trends in foreign
countries; generally higher commission rates on foreign portfolio transactions;
the possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); government
interference, including government ownership of companies in certain sectors,
wage and price controls, or imposition of trade barriers and other protectionist
measures; difficulties in invoking legal process abroad and enforcing
contractual obligations; political, social or economic instability which could
affect U.S. investments in foreign countries; and potential restrictions on the
flow of international capital. Additionally, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including foreign withholding taxes, and other foreign taxes may apply with
respect to securities transactions. Additional costs associated with an
investment in foreign securities may include higher transaction, custody and
foreign currency conversion costs. In the event of litigation relating to a
portfolio investment, the Fund 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
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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ADRs (sponsored or unsponsored) are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying foreign securities.
Most ADRs are traded on a U.S. stock exchange. Issuers of unsponsored ADRs are
not contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. European Depositary Receipts and
International Depositary Receipts are receipts typically issued by a European
bank or trust company evidencing ownership of the underlying foreign securities.
Global Depositary Receipts are receipts issued by either a U.S. or non-U.S.
banking institution evidencing ownership of the underlying foreign securities.
WARRANTS
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. If a warrant is not exercised by the date of its
expiration, the Fund will lose its entire investment in such warrant.
OPTIONS ON SECURITIES
PURCHASING OPTIONS. The 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 Fund will engage in such
transactions only with firms the Subadvisor deems to be of sufficient
creditworthiness so as to minimize these risks.
The Fund 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. The purchase of put options on securities held in
the portfolio or related to such securities will enable the 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 Fund may also purchase call options on securities it intends 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 Fund may
sell put or call options identical to those previously purchased, which could
result in a net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs paid on the
put or call option when it was purchased.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES. Exchange markets in
some 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
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viable markets will develop or continue in the United States or abroad.
The Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. The 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 the 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 the Fund to successfully utilize options may
depend in part upon the ability of the Subadvisor 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.
FUTURES TRANSACTIONS
The Fund may purchase and sell stock index futures to hedge the equity
portion of its securities portfolio 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) or to gain market exposure to
that portion of the market represented by the futures contract. The 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, the 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. The Fund may also purchase and write put and call options on
futures contracts of the type into which the 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 compliance with
applicable CFTC rules, the Fund also may enter into futures contracts traded on
foreign futures exchanges such as Frankfurt, Tokyo, London or Paris as long as
trading on foreign futures exchanges does not subject the Fund to risks that are
materially greater than the risks associated with trading on U.S. 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 the 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. Futures contracts
trade on these markets through an "open outcry" auction on the exchange floor.
Currently, there are futures contracts based on a variety of instruments,
indexes and currencies, including long-term U.S. Treasury bonds, Treasury notes,
GNMA certificates, three-month U.S. Treasury bills, three-month domestic bank
certificates of deposit, a municipal bond index and various stock indexes.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its
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custodian (or broker, if legally permitted) a specified amount of liquid assets
("initial margin") as a partial guarantee of its performance under the contract.
The margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract assuming all contractual obligations have been satisfied. The Fund
expects to earn interest income on its initial margin deposits. A futures
contract held by the Fund is valued daily at the official settlement price of
the exchange on which it is traded. Each day, as the value of the security,
currency or index fluctuates, 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 the 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, the Fund will mark-to-market its
open futures positions. Moreover, the Fund will maintain sufficient liquid
assets to cover its obligations under open futures contracts.
The 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 the 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--the 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 Subadvisor 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. The 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, the 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. The Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to
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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.
Depending upon the types of futures contracts that are available to hedge
the Fund's portfolio of securities or portion of a portfolio, perfect
correlation between the Fund's futures positions and portfolio positions may be
difficult to achieve. Futures contracts do not exist for all types of securities
and markets for futures contracts that do exist may, for a variety of reasons,
be illiquid at particular times when the Fund might wish to buy or sell a
futures contract.
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 the Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Fund may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the Fund
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, the
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, the 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. The 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 or to gain exposure to particular
markets represented by the index.
The Fund does not intend to use U.S. stock index futures to hedge positions
in securities of non-U.S. companies.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. The Fund will only enter into futures contracts or related
options which are standardized and traded on a U.S. or foreign exchange or board
of trade, or similar entity, or quoted on an automatic quotation system. The
Fund will not enter into futures contracts for which the aggregate contract
amounts exceed 100% of the Fund's net assets. In addition, with respect to
positions in futures and related options that do not constitute bona fide
hedging positions, the 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, the 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
11
<PAGE> 12
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, the 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, the 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, the 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 the Fund may enter into futures, futures options
or forward contracts. See "Tax Information."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. There can be no assurance that hedging strategies using futures will
be successful. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract, which in some cases may
be unlimited. 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. An incorrect correlation could result in a loss on both the hedged
securities or currencies and the hedging vehicle so that the portfolio return
might have been better had hedging not been attempted. 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 the 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
12
<PAGE> 13
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.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or a futures option position. If no liquid
market exists, the Fund would remain obligated to meet margin requirements until
the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist. Lack of a liquid market for any reason may prevent the Fund
from liquidating an unfavorable position and the Fund would remain obligated to
meet margin requirements until the position is closed.
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 Fund 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 the 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.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FOREIGN CURRENCY. Options on securities, futures
contracts, options on futures contracts, currencies and options on currencies
may be traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the United States; may not involve a
clearing mechanism and related guarantees; and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities.
The value of such positions also could be adversely affected by (i) other
complex foreign political, legal and economic factors, (ii) delays in
availability, than in the United States, of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lesser trading
volume.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below are fundamental policies
of the Fund; i.e., they may not be changed without a majority vote of the
outstanding shares of the Fund, as defined in the 1940 Act. Except for those
investment policies specifically identified as fundamental in the Prospectus and
this Statement of Additional Information, all other investment policies and
practices described may be changed by the Board of Trustees without the approval
of shareholders.
Unless otherwise indicated, all of the percentage limitations below, and in
the investment restrictions recited in the Prospectus apply only at the time a
transaction is entered into. Accordingly, if a percentage restriction is
13
<PAGE> 14
adhered to at the time of investment, a later increase or decrease in the
percentage which results from a relative change in values or from a change in
the Fund's net assets will not be considered a violation. With respect to
investment in illiquid securities, the Fund will consider taking measures to
reduce the holdings of illiquid securities if they exceed the percentage
limitation as a result of changes in the values of the securities as if liquid
securities have become illiquid.
THE FUND MAY NOT:
1. With respect to 75% of total assets invest more than 5% of the value of
its total assets 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 the
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 the Fund maintains 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.
3. Purchase securities if such purchase would cause 25% or more in the
aggregate of the market value of the total assets of the 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 Fund elects to be so
classified and the foregoing limitation shall no longer apply.
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), commodities and commodity contracts. The Trust reserves the
freedom of action to hold and to sell real estate acquired for the Fund as a
result of the ownership of securities. Purchases and sales of foreign currencies
on a spot basis and forward foreign currency exchange contracts, options on
currency, futures contracts on currencies or securities indices and options on
such futures contracts are not deemed to be an investment in a prohibited
commodity or commodity contract for the purpose of this restriction.
5. Make loans to other persons, except loans of portfolio securities. The
purchase of debt obligations and the entry into repurchase agreements in
accordance with the 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 the 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.
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 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.
14
<PAGE> 15
Unless otherwise indicated, all percentage limitations apply only at the
time a transaction is entered into. Accordingly, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in the
percentage which results from a relative change in values or from a change in
the Fund's net assets will not be considered a violation.
The Fund may not:
(a) As an operating policy, the 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, the 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, the 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. The 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 Subadvisor'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 the Fund has written.
(d) As an operating policy, the Fund may not purchase the securities of
other investment companies except to the permitted by the 1940 Act in connection
with a merger, consolidated, acquisition, or reorganization.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining the 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 Subadvisor,
pursuant to guidelines approved by the Trustees.
The Subadvisor takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by the 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 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 the extent that the market for a Rule 144A security changes, a Rule 144A
security originally determined to be liquid upon purchase may be determined to
be illiquid.
15
<PAGE> 16
To make the determination that an issue of 4(2) commercial paper is liquid,
the Subadvisor 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 Subadvisor 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).
TRUSTEES AND OFFICERS
The Board of Trustees oversees the Fund, the Manager and the Subadvisor.
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.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S) DURING PAST 5 YEARS
NAME, ADDRESS AND AGE WITH TRUST
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard M. Kernan, Jr.* Chairman and Director of MainStay VP Series Fund,
51 Madison Avenue Trustee Inc. From January 1987 to present;
New York, NY 10010 Chairman of the board and Chief
Date of Birth: Executive Officer of MainStay VP
12/13/40 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, MacKay
Shields LLC, 1988 to present; and
Director, Express Scripts,
1992-present.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Stephen C. Roussin* President, Chief President and Chief Operating Officer,
300 Interpace Parkway Executive Officer New York Life Asset Management
Parsippany, NJ 07054 and Trustee Operating Company LLC, 1999 to
Date of Birth: 7/12/63 present; President and Chief Operating
Officer, New York Life Asset
Management LLC, 1999 to present;
President, MainStay Management, June
1997-2000; Director and Chairperson,
MainStay Institutional Funds, Inc.,
1997 to present; Senior Vice
President, New 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
New York, NY 10010 Company; Chairman of the Board and
Date of Birth: 3/1/32 Chief Executive Officer, New York Life
Insurance Company, 1990 to 1997; Vice
Chairman of the Board, New York Life
Insurance Company, 1986 to 1990;
Director, New York Life Insurance
Company, 1985 to present; Chairman of
the Board, American Council of
Insurance, 1994 to 1995; Chairman of
the Board, Life Insurance Council of
New York, 1996 to 1997; Director,
Million Dollar Roundtable Foundation,
1996 to 1997; Director, Insurance
Marketplace Standards Association,
1996 to 1997; Director, CK Witco
Corporation, 1989 to present; Member,
International Advisory Board of Credit
Commercial de France, 1995 to 1999;
and a Life Fellow of the American Bar
Foundation.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Edward J. Hogan Trustee Rear Admiral U.S. Navy (Retired);
Box 2321 Independent Management Consultant,
Sun Valley, ID 83353 1992 to 1997.
Date of Birth: 8/17/32
- ------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Nancy Maginnes Trustee Member, Council of Rockefeller
Kissinger University, New York, NY, 1991 to
Henderson Road present; Trustee, Rockefeller
South Kent, CT 06785 University, 1995 to present; Trustee,
Date of Birth: 4/13/34 Animal Medical Center, 1993 to
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.,
426 C Street, N.E. 1984 to present; Managing Director, The
Washington, D.C. 20002 Life Services Trust, 1998 to present;
Date of Birth: 1/4/48 Vice Chair, Employee Health Programs,
1990 to present; Vice Chair, TheraCom
Inc., 1994 to present; Director,
PeacePac, 1994 to present; Commissioner,
State of Maryland, Higher Education
Commission, 1995 to present; Chair,
National Organization on Fetal Alcohol
Syndrome, 1993 to present; Board Member,
Hollings Cancer Center, Medical
University of South Carolina, 1993 to
present; Member, UNICEF National Board,
1993 to present; Board Member, KIDS
(Kids in Distressed Situations) 1996 to
present; Member, Business Leaders for
Sensible Priorities, 1998 to present;
and Board Member, Discovery Creek
Children's Museum, 1997 to present.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
John B. McGuckian Trustee Chairman of the Board, Ulster
Ardverna Television plc, 1990 to present;
Cloughmills Director, Ulster Television plc, 1970
Northern Ireland to present; Chairman of the Board,
BT4 49NL Tedcastle Holding Ltd. (energy), 1995
Date of Birth: to present; Director, Cooneen Textiles
11/13/39 Ltd. (clothing manufacturer), 1967 to
present; Director Allied Irish Banks
plc, 1977 to present; Chairman, 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 1999.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Donald E. Nickelson 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,
Date of Birth: 12/9/32 1988 to 1990; Chairman of the Board,
Paine Webber Properties, 1985 to
1989; Director, Harbour Group, 1986
to present; Director, Sugen, Inc.,
1992 to 1999; Chairman of the Board,
Omniquip International, Inc., 1996 to
1999; Director, Carey Diversified,
L.L.C., January 1,1998 to present.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Donald K. Ross* Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance
Franklin Lakes, NJ Company; Director, New York Life
07417 Insurance Company, 1978 to 1996;
Date of Birth: 7/1/25 President, New York Life Insurance
Company, 1986 to 1990; Chairman of
the Board, New York Insurance
Company, 1981 to 1990; Director,
MacKay Shields LLC, 1984 to present;
and Trustee, Consolidated Edison
Company of New York, Inc., 1976 to
1998.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Richard S. Trutanic Trustee Senior Managing Director, Groupe
1155 Connecticut Ave. Arnault (private investment firm),
N.W. 1999-present; Chairman, The Somerset
Suite 400 Group (financial advisory firm), 1990
Washington, DC 20036 to present; Chief Executive Officer
Date of Birth: 2/13/52 and President, Americap L.L.C.
(Financial Advisory Firm), 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.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Gary E. Wendlandt* Trustee Executive Vice President, New York
51 Madison Avenue Life Insurance Company, May 1999 to
New York, NY 10010 present; Chief Executive Officer,
Date of Birth: 10/8/50 New York Life Asset Management LLC,
December 1999 to present; Chief
Executive Officer, New York Life
Asset Management Operating Company
LLC, December 1999 to present;
Chairman and Manager, New York Life
Asset Management Operating Company
LLC, March 2000 to present; Chairman
and Manager, New York Life Asset
Management LLC, March 2000 to
present; Manager, New York Life
Benefit Services, Manager, Monitor
Capital Advisors LLC, Manager,
MainStay Management LLC, Manager,
MainStay Shareholder Services LLC,
Manager, Madison Square Advisors
LLC, and Director, NYLIFE
Distributors, Inc., March 2000 to
present; Executive Vice President
and Chief Investment Officer,
MassMutual Life Insurance Company,
June 1993 - 1999.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Jefferson C. Boyce* Senior Vice Chairman, Monitor Capital Advisors,
51 Madison Avenue President LLC., 1977 to present; Senior Vice
New York, NY 10010 President, MainStay Institutional
Date of Birth: 9/17/57 Funds Inc., 1998 to present; Senior
Vice President, New York Life
Insurance Company, 1994 to present;
Director, NYLIFE Distributors Inc.,
1993 to present; and chief
Administrative Officer, Pensin,
Mutual Funds, Structured Finance,
Corporate Quality, Human Resources
and Employees' health Departments,
New York Life Insurance company,
1992 to 1994.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C>
John A. Flanagan* Vice President Vice President and Chief Financial
51 Madison Avenue and Chief Officer, The MainStay Funds, 1999 to
New York, NY 10010 Financial Officer present; Treasurer, MainStay VP Series
Date of Birth: 6/5/46 Fund, 1999 to present; Treasurer and
Chief Financial and Accounting
Officer, MainStay Institutional Funds
Inc., 1999 to present; Senior Vice
President and Chief Financial Officer,
NYLIFE Distributors, Inc., 1999 to
present; Vice President and Chief
Financial Officer, MainStay Management
LLC, 1999 to present; Manager,
MainStay Management LLC, 1999 to
present; Manager, MainStay Shareholder
Services LLC, 1999 to present; Vice
President and Treasurer, New York Life
Asset Management Operating Company
LLC, December 1999 to present; Vice
President and Treasurer, New York Life
Asset Management LLC, December 1999 to
present; Vice President, New York Life
Insurance Company, 1999 to present;
Treasurer of the Strong Funds and
Senior Vice President of Strong
Capital Management, Inc., 1997 to
1998; Partner, Price Waterhouse
Coopers LLP, 1994 to 1997.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Patrick J. Farrell* Vice President Vice President, New York Life
51 Madison Avenue Insurance Company, 1996 to present;
New York, NY 10010 Assistant Treasurer, Member of the
Date of Birth: 9/27/59 Dividend Committee, The MainStay
Funds, 1998 to present.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Richard W. Zuccaro* Tax Vice Vice President, New York Life
51 Madison Avenue President Insurance Company, 1995 to present;
New York, NY 10010 Vice President -- Tax, New York
Date of Birth: Life Insurance Company, 1986 to
12/12/49 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 MainStay Institutional
Funds Inc., 1992 to present; Tax
Vice President, NYLIFE
Distributors, Inc., 1993 to
present; Vice President Assistant
Controller, New York Life.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Joseph J. McBrien* Secretary Vice President and Secretary, New
51 Madison Avenue York Life Asset Management
New York, NY 10010 Operating Company LLC, December
Date of Birth: 1999 to present; Vice President
5/26/48 and Secretary, New York Life Asset
Management LLC, December 1999 to
present; Vice President and
Associate General Counsel, New
York Life Insurance Company, 1999
to present; Secretary, MainStay VP
Series Fund, Inc., 1999 to
present; Secretary, MainStay
Institutional Funds Inc., 1999 to
present; Secretary, MainStay
Management LLC, 1999 to present;
Secretary, MainStay Shareholder
Services LLC, 1999 to present;
Secretary, Monitor Capital
Advisors LLC, 1999 to present;
Secretary, Madison Square Advisors
LLC, 1999 to present; Vice
President and Counsel, State
Street Bank and Trust Company,
1997 to 1999; Principal, McBrien
Consulting, 1996 to 1997; Senior
Vice President and General
Counsel, Liebe and Company, 1986
to 1996; Senior Vice President and
General Counsel, Evergreen Asset
Management Corp., 1986 to 1996.
- ------------------------------------------------------------------------------------------------------------
- ---------------------
</TABLE>
As indicated in the above table, certain Trustees and officers also hold
positions with MacKay Shields, Monitor, New York Life Insurance Company, NYLIFE
Securities Inc. and/or NYLIFE Distributors Inc.
The Independent Trustees of the Trust receive from the Trust an annual
retainer of $45,000, a fee of $2,000 for each Board of Trustees meeting and a
fee of $1,000 for each 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, 1999, the Trustees received the
following compensation from the Trust and from certain other investment
companies (as indicated) that have the same investment advisors as the Trust or
an investment advisor that is an affiliated person of one of the Trust's
investment advisors:
<TABLE>
<CAPTION>
Aggregate Total Compensation From
Name of Compensation Registrant
Trustee from the Trust Paid to Trustees
------- -------------- ----------------
<S> <C> <C>
Edward J. Hogan $55,000 $55,000
Nancy M. Kissinger 55,000 55,000
Terry L. Lierman 55,000 55,000
Donald E. Nickelson 59,000 59,000
Richard S. Trutanic 55,000 55,000
John B. McGuckian 55,000 55,000
</TABLE>
23
<PAGE> 24
THE MANAGER, THE SUBADVISOR AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Fund, MainStay Management, LLC
(the "Manager"), subject to the supervision of the Trustees of the Trust and in
conformity with the stated policies of the Fund, administers the Fund's business
affairs and has investment advisory responsibilities. MainStay Management, LLC
is a direct subsidiary of New York Life Asset Management LLC which is a direct
subsidiary of New York Life Insurance Company.
The Trustees, including the Independent Trustees, approved the Management
Agreement with respect to the Fund on March 15, 1999. The sole initial
shareholder of the MAP Equity Fund approved the Management Agreement on June 8,
1999. 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 the Fund (as defined in the
1940 Act and the rules thereunder) 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 Trustees, including the independent
Trustees, approved amendments to the Management Agreement at an in-person
meeting held on September 13, 1999 to reflect the conversion of MainStay
Management from a corporation to a limited liability company under the laws of
the State of Delaware.
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
the Fund for any error or judgment by the Manager or for any loss sustained by
the 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 the Fund,
and except as indicated in the Prospectus under the heading "Manager, Subadvisor
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 Subadvisor;
(b) the fees to be paid to the Subadvisor pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with administering
the ordinary course of the Fund's business, other than those assumed by the
Trust.
SUBADVISORY AGREEMENT
Pursuant to the Sub-Advisory Agreement between the Manager and Markston
International, LLC ("Markston") the Subadvisor, subject to the supervision of
the Trustees of the Trust and the Manager in conformity with the stated policies
of the Fund and the Trust, manages the Fund's portfolio, including the purchase,
retention, disposition and loan of securities. As compensation for services, the
Manager, not the Fund, pays the Fund's Subadvisor a monthly fee calculated on
the basis of its average daily net assets during the preceding month at the
annual rates of 0.45% up to $250 million; 0.40% from $250 million to $500
million; and 0.35% in excess of $500 million.
24
<PAGE> 25
The Trustees, including the Independent Trustees, approved the Sub-Advisory
Agreement with Markston at an in-person meeting held March 15, 1999. The
Sub-Advisory Agreement was approved by the Fund's sole shareholder on June 8,
1999. The Sub-Advisory Agreement will remain in effect for two years following
its effective date, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Trustees or by
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act and the rules thereunder) and, in either case, by a majority of
the Trustees who are not "interested persons" of the Trust, the Manager, or the
Subadvisor (as the term is defined in the 1940 Act).
The Subadvisor has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or officers of the Trust to serve
in the capacities in which they have been elected or appointed. In connection
with the services they render, the Subadvisor bears the salaries and expenses of
all of its personnel.
The Sub-Advisory Agreement provides that the Subadvisor shall not be liable
to the Fund for any error of judgment by a Subadvisor or for any loss suffered
by the Fund except in the case of the Subadvisor's willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Sub-Advisory
Agreement also provides that it shall terminate automatically if assigned and
that it may be terminated without penalty by the manager immediately upon
material breach by the Subadvisor, after the Subadvisor has received notice and
an opportunity to cure such breach.
For the fiscal year ended December 31, 1999, the management fee paid after
reimbursement was $305,543 (includes $54,647 of advisory fees paid to Markston
Investment Management, the Fund's prior advisor for the period January 1, 1999
through June 8, 1999). The management fee reimbursed was $65,954, and the
Sub-Advisory fee paid by the Manager for the period June 9, 1999 through
December 31, 1999 was $190,110.
With respect to the MAP-Equity Fund, the predecessor to the MAP Equity
Fund, investment advisory and management services were provided by Markston
International LLC, formerly Markston Investment Management. During the fiscal
years ended December 31, 1997 and 1998, Markston International LLC received from
the MAP-Equity Fund advisory fees of $432,252 and $334,330, respectively. For
the period January 1, 1999 through June 8, 1999 Markston Investment Management
received from the MAP-Equity Fund advisory fees of $54,647.
DISTRIBUTION AGREEMENT
NYLIFE Distributors Inc. serves as the Trust's distributor and principal
underwriter (the "Distributor")pursuant to a Distribution Agreement dated
January 1, 1994. NYLIFE Securities Inc. ("NYLIFE Securities") sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to 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 Distributor is not
obligated to sell any specific amount of the Trust's shares. The Distributor
receives sales loads and distribution plan payments.
The Trust anticipates making a continuous offering of its shares, although
it reserves the right to suspend or terminate such offering at any time with
respect to any Fund or class or group of Funds or classes. The Distribution
Agreement for the MAP Equity Fund was approved by the Trustees, including a
majority of the Independent Trustees, at a meeting held on March 15, 1999.
After an initial two-year period, the Distribution Agreement is subject to
annual approval by the Board of Trustees. The Distribution Agreement is
terminable at any time, without payment of a penalty, by vote of a majority of
the Trust's Trustees who are not "interested persons" (as defined in the 1940
Act) of the Trust, upon 60 days' written notice to the Distributor, or by vote
of a majority of the outstanding voting securities of that Fund, upon 60 days'
written notice to the Trust. The Distribution Agreement will terminate in the
event of its assignment.
First Priority Investment Corporation acted as distributor to the
MAP-Equity Fund until April 30, 1999 pursuant to a Distributor's Agreement.
During the fiscal periods ended December 31, 1997 and 1998 and April 30, 1999,
the company received, $37,552, $162,627 and $192,924, respectively, for its
services as distributor.
NYLIFE Distributors, Inc. retained sales charges of $10,715 on sales of
Class A shares for the period June 9, 1999 through December 31, 1999. The
Distributor also received contingent deferred sales charges on redemption of
Class B shares of $912 for the same period.
25
<PAGE> 26
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated October 24,
1997, the Manager performs certain bookkeeping and pricing services for the
Fund. The Fund will bear an allocable portion of the cost of providing these
services to the Trust.
For the period June 9, 1999 through December 31, 1999, the amount of
recordkeeping fees paid to the Manager was $15,964.
In addition, the 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 the Fund, is responsible under its
Management Agreement for the payment of expenses related to the 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 Subadvisor,
(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 the Fund, in connection with its securities
transactions, (vi) the fees of any trade association of which the Fund or the
Trust is a member, (vii) the cost of share certificates representing shares of
the Fund, (viii) reimbursement of a portion of the organization expenses of the
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 the Fund's
business, (xi) any expenses assumed by the Fund pursuant to its plan of
distribution, (xii) all taxes and business fees payable by the Fund to federal,
state or other governmental agencies, and (xiii) costs associated with the
pricing of the Fund's 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 Fund has entered into a committed line of credit with The Bank of New
York as agent, and various other lenders from whom it may borrow up to 5% of its
net assets in order to honor redemptions. The credit facility is expected to be
utilized in periods when the Fund experiences unusually large redemption
requests. A mutual fund is considered to be using leverage whenever it borrows
an amount more than 5% of its assets. The Fund does not intend to borrow for the
purpose of purchasing securities using the credit facility or any other source
of borrowed funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Fund pays 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, other debt
securities and some equity 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 usually 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 Subadvisor attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of
26
<PAGE> 27
the Fund and its 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 Subadvisors may consider sales of shares of the Fund
as a factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the Fund.
In order for the Affiliated Broker to effect any portfolio transactions for the
Fund 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 Fund will not deal with the Affiliated Broker in any portfolio transaction
in which the Affiliated Broker acts as principal.
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), the Subadvisor may cause the
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Subadvisor an amount of commission for
effecting a securities transaction for the Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Subadvisor
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
Subadvisor'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
Subadvisor, 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 Subadvisor's 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 Subadvisor for no
consideration other than brokerage or underwriting commissions. Research
provided by brokers is used for the benefit of all of the Subadvisor's clients
and not solely or necessarily for the benefit of the Trust. The Subadvisor's
investment management personnel attempt to evaluate the quality of Research
provided by brokers. Results of this effort are sometimes used by the Subadvisor
as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Subadvisor. Investment decisions for the Fund and for the
Subadvisor's 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 advisor, 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 the Fund is concerned. The Trust believes that over time
its ability to participate in volume transactions will produce better executions
for the Fund.
27
<PAGE> 28
The Sub-Advisory fee that the Manager pays on behalf of the Fund to the
Subadvisor will not be reduced as a consequence of the Subadvisor's receipt of
brokerage and research services. To the extent the 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
clearly determined. Such services would be useful and of value to the Subadvisor
in serving both the Fund and other clients and, conversely, such services
obtained by the placement of brokerage business of other clients would be useful
to the Subadvisor in carrying out its obligations to the Fund.
For the period June 9, 1999 through December 31, 1999, total brokerage
commissions paid were $33,115 on portfolio transactions amounting to
$37,595,693. The amount of these brokerage commissions which were paid to
brokers that provided research was $9,534. There were no brokerage commissions
paid to affiliated persons.
For the fiscal years ended December 31, 1997 and 1998, and the period
January 1, 1999 through June 8, 1999, the MAP-Equity Fund (predecessor to the
MAP Equity Fund) paid total brokerage commissions of $61,779 in 1997 (on
portfolio transactions amounting to $84,698,287), of which approximately 24.3%
was paid to brokers that provided research; $44,997 in 1998 (on portfolio
transactions amounting to $63,342,288), of which approximately 37.9% was paid to
brokers that provided research; and $12,303 in 1999 (on portfolio transactions
amounting to $17,285,287) of which approximately 18% was paid to brokers that
provided research. As of December 31, 1999, MAP Equity Fund held common stock of
American Express Co. valued at $2,029,414.
The Fund's portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of this calculation, portfolio
securities will exclude purchases and sales of debt securities having a maturity
at the date of purchase of one year or less.
The turnover rate for the Fund will vary from year-to-year and depending on
market conditions, turnover could be greater in periods of unusual market
movement and volatility. A higher turnover rate generally would result in
greater brokerage commissions, particularly in the case of equity oriented
Funds, or other transactional expenses which must be borne, directly or
indirectly, by the Fund and, ultimately, by the Fund's shareholders. High
portfolio turnover may also result in the realization of an increase in net
short-term capital gains by the Fund which, when distributed to non-tax exempt
shareholders, will be treated as dividends (ordinary income).
NET ASSET VALUE
The Trust determines the net asset value per share of the Class I shares of
the Fund on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated as of the close of the first session of the New
York Stock Exchange (currently 4:00 p.m., New York time) for Class I shares of
the Fund by dividing the current market value of the total assets attributable
to the class, by the total number of outstanding shares of the class.
Portfolio securities are valued (a) by appraising common and preferred
stocks which are traded on the New York Stock Exchange at the last sale price of
the first session on that day 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 Fund's Subadvisor if the prices are deemed by the
Subadvisor to be representative of market values at the close of the first
session of the New York Stock Exchange; (e) by appraising debt securities at
prices supplied by a pricing agent selected by the Subadvisor, which prices
reflect broker-dealer-supplied valuations and electronic data processing
techniques and/or matrix pricing if those prices are deemed by the Fund's
Subadvisor to be representative of market values at the close of the first
session 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 foreign exchanges whose
28
<PAGE> 29
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
Fund's Subadvisor 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 calculations may be done by others.
Money market instruments held by the Fund with a remaining maturity of 60 days
or less are valued by the amortized cost method unless such method does not
represent fair value. Forward foreign currency exchange contracts held by the
Fund 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. For financial accounting
purposes, 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 Fund's net asset values are not
calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the
time their prices are determined and the close of the New York Stock Exchange
generally will not be reflected in the Fund's calculation of net asset value.
However, the Subadvisor, in consultation with the Manager, may, in its
judgement, determine that an adjustment to the Fund's net asset value should be
made because intervening events have caused the Fund's net asset value to be
materially inaccurate.
The proceeds received by the 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 the
Fund and constitute the underlying assets of the Fund. The underlying assets of
the Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to the 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
Fund, under which a record of the shares of the 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 the Fund, the shareholder
will be mailed a confirmation showing the transaction. Shareholders will be sent
a quarterly statement showing the status of the Account. In addition,
shareholders will be sent a monthly statement for each month in which a
transaction occurs.
SHAREHOLDER SERVICING AGENT
The Fund may pay shareholder service fees, directly or indirectly to
various entities (shareholders service agents)
29
<PAGE> 30
that provide services to shareholders. These may include broker-dealers,
advisors, administrative service forms, banks and other financial institutions.
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.
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE
HOW TO PURCHASE SHARES OF THE FUND
If you are participating in a company savings plan, such as a 401(k) plan,
profit sharing plan, defined benefit plan or other employee-directed plan, your
company will provide you with the information you need to open an account and
buy and sell shares of the Fund. If you are a participant in a "wrap account" or
similar program, your investment professional will provide you with information.
BY MAIL - INDVIDUAL SHAREHOLDERS
Initial purchases of shares of the Fund should be made by mailing the
completed application form to the investor's Registered Representative. Shares
may be purchased at the NAV per share next determined after receipt in good
order of the purchase order by the Fund.
BY TELEPHONE - INDIVIDUAL SHAREHOLDERS
An investor may make an initial investment by having his or her Registered
Representative telephone MSS between 8:00 AM and 6:00 PM, Eastern time, on any
day the New York Stock Exchange is open. The purchase will be effected at the
NAV per share 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 Fund and MSS for transactions effected by telephone, see "Know How to
Sell and Exchange Shares."
BY WIRE - INDIVDUAL SHAREHOLDERS
An investor may open an account and invest by wire by having his or her
Registered Representative telephone MSS between 8:00 AM and 6:00 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 MAP Equity Fund-Class I
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.
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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 or by ACH payment, the Trust may withhold payment for up to 10 days from
the date the check or ACH purchase is received.
ADDITIONAL INVESTMENTS
Additional investments in the 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 the 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, 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 the 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 Subadvisor, purchase shares of the Fund with liquid securities
that are eligible for purchase by the Fund and that have a value that is readily
ascertainable. These transactions will be effected only if the Subadvisor
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.
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REDEMPTIONS AND EXCHANGES - INDIVIDUAL SHAREHOLDERS
Shares may be redeemed directly from the 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 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. 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 the 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 - INDIVIDUAL SHAREHOLDERS
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.
DISTRIBUTIONS IN KIND
The Trust has agreed to redeem shares of the 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 Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the NAV of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of the 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.
EXCHANGE PRIVILEGES
Exchanges will be based upon the Fund's NAV per share next computed
following receipt of a properly executed exchange request.
Subject to the conditions and limitations described herein, Class I shares
of the Fund may be exchanged for Class A shares 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.
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INVESTORS SHOULD READ THE PROSPECTUS CAREFULLY BEFORE THEY PLACE AN
EXCHANGE REQUEST.
Generally, shareholders may exchange their Class I shares of the 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.
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 6:00 PM Eastern time).
In times when the volume of telephone exchanges is heavy, additional phone
lines will be added by MSS. However, in times of very large 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, except for systematic exchanges, exchanges
processed via MainStay's automated system and as to certain accounts for which
tracking data is not available, after five exchanges per calendar year, a $10
fee will be imposed on each trade date on which a shareholder makes an exchange
and additional exchange requests may be denied.
TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR CORPORATIONS AND
SELF-EMPLOYED INDIVIDUALS
Shares of the 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. The 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 the Fund may also be purchased as an underlying investment for an
IRA made available by NYLIFE Distributors. Three types of IRAs are available --
a traditional IRA, 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 an 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 the
2000 tax year, a contribution is deductible only if the individual (and his or
her spouse, if applicable) has an adjusted gross income below a certain level
($51,000 for married individuals filing a joint return, with a phase-out of the
deduction for adjusted gross income between $51,000 and $61,000; $31,000 for a
single
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individual, with a phase-out for adjusted gross income between $31,000 and
$41,000). These phase-out limits will gradually increase, 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, 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 ($0-$10,000 for non-participant spouses filing a separate
return). 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. However,
there are exceptions for certain withdrawals, including: withdrawals up to a
total of $10,000 for qualified first-time homebuyer expenses or 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 which
feature nondeductible contributions that 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. 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 years old. The maximum contribution is phased
out for taxpayers with adjusted gross income between $95,000 and $110,000
($150,000 - $160,000 if married filing jointly). Earnings are tax-deferred until
a distribution is made. If a distribution does not exceed the beneficiary's
"qualified higher education expenses" for the year, no part of the distribution
is taxable. If part of a distribution is taxable, a penalty tax will generally
apply as well. Any balance remaining in an Education IRA when the beneficiary
becomes 30 years old must be distributed and any earnings will be taxable and
subject to a penalty tax upon distribution.
All income and capital gains deriving from IRA investments in the Fund are
reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA or
Education IRA combined with tax-deferred compounded earnings on IRA investments
can lead to substantial retirement and/or education savings.
403(b)(7) TAX SHELTERED ACCOUNT
Shares of the Fund may also be purchased as the underlying investment for
tax sheltered custodial accounts (403(b)(7) TSA 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)(7) TSA plan.
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<PAGE> 35
GENERAL INFORMATION
Shares of the 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 Fund's Custodian and
Transfer Agent designate New York Life Trust Company as custodian for IRAs and
403(b)(7) TSA 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)(7) TSA
plans are extremely complex and change from time to time. Therefore, an investor
should consult with his or her own professional tax advisor before establishing
any of the tax-deferred retirement plans described above.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time the Fund may publish its yield and/or average annual
total return in advertisements and communications to shareholders. The average
annual total return 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. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Quotations of the Fund's average annual total return will be calculated
according to the following SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
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)
The 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 the Fund's
actual return for a specified period as opposed to its average return over 1, 5,
and 10-year periods.
The average annual total returns of the MAP Equity Fund's Class I Shares
for the 1-year, 5-year and 10-year periods ended December 31, 1999 are 6.85%,
22.89% and 15.41%, respectively. These figures are based on the performance of
the Mutual Benefit Fund prior to June 9, 1999, which was renamed the MAP-Equity
Fund in 1995. The current shareholders of the MAP-Equity Fund approved an
Agreement and Plan of Reorganization at their June 3, 1999 meeting. On June 9,
1999 the MAP-Equity Fund was reorganized as the MainStay MAP Equity Fund and
existing MAP-Equity Fund shareholders became Class I shareholders of MainStay
Map Equity Fund.
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.
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<PAGE> 36
The 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 the Fund's performance including (i) realized and
unrealized capital gains and losses, which are reflected in calculations of the
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 the Fund will
fluctuate over time, and any presentation of the 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 the 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 the 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 the
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 the Fund may
discuss the investment philosophy, personnel and assets under management of the
Fund's Manager and Subadvisor, and other pertinent facts relating to the
management of the Fund by the Subadvisor.
From time to time the Fund 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 the Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Morgan Stanley Capital
International indexes, the Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, the Merrill Lynch 1 to 3 Year Treasury Index, the
Salomon Brothers World Government Benchmark Bond Index, the Salomon Brothers
non-U.S. Dollar World Government Bond Index, the Lehman Brothers Municipal Bond
Index and the Lehman Brothers Government Corporate Index; (ii) other groups of
mutual funds tracked by Morningstar Inc. or Lipper Analytical Services, widely
used independent research firms which rank mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) and other
measures of the performance of the economy to assess the real rate of return
from an investment in the Fund. Advertisements for the Fund may also include
general information about the performance of unmanaged indexes with investment
parameters similar to the Fund's. 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 Fund may include general
information about the services and products offered by the Fund, 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 INFORMATION
TAXATION OF THE FUND
The following summarizes certain federal income tax considerations
generally affecting the Fund and its stockholders. No attempt is made to present
a detailed explanation of the tax treatment of the Fund or its stockholders, and
the discussion here is not intended as a substitute for careful tax planning.
The discussion is based upon 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 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.
The Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
the 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 the Fund as a
regulated investment company may limit the extent to which the 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
the 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. The
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, the Fund currently
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 the 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.
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<PAGE> 38
Provided that the Fund qualifies as a regulated investment company, under
the Code, it generally will not be subject to any excise or income taxes in
Massachusetts. The Fund's investments, if any, 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 the Fund's earnings will be subject to tax in their
hands.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming the 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 the 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 the 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 the 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 the Fund's net capital gain, whether received in cash or
reinvested in Fund shares, will generally be taxable to shareholders as
long-term capital gains, regardless of how long a Shareholder has held the
Fund's shares. Net capital gains from assets held for one year or less will be
taxed as ordinary income.
If any net long-term capital gains in excess of net short-term capital
losses are retained by the Fund for reinvestment, requiring federal income taxes
to be paid thereon by the Fund, the Fund may elect to treat such capital gains
as having been distributed to shareholders. As a result, such capital gains
would be taxable to the shareholders. Shareholders would 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 would be
entitled to increase the adjusted tax basis of the Fund shares by the difference
between their pro-rata share of such gains and their tax credit.
Distributions by the Fund result in a reduction in the net asset value of
the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would generally be
taxable to the shareholder (except to the extent the distribution is an exempt
interest dividend as described below) as ordinary income or capital gain as
described above, even though, from an investment standpoint, it may constitute a
partial return of investment. In particular, investors should be careful to
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those investors purchasing shares just prior to a distribution
will then receive a partial return of their investment upon such distribution,
which may nevertheless be taxable to them.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Any distributions that are not from the 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.
TAXATION OF OPTIONS, FUTURES AND SIMILAR INSTRUMENTS
Many of the options, futures contracts and forward contracts entered into
by the 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
the 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
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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 the Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the 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 the Fund are not entirely clear. The hedging transactions
in which the Fund engages may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the 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 the Fund that did not engage in such hedging transactions.
The diversification requirements applicable to the Fund's status as a
regulated investment company may limit the extent to which the Fund will be able
to engage in transactions in options, futures contracts or forward contracts.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund 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 the 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.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the 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, the Fund may elect to
mark to market its PFIC shares at the end of each taxable year, with the result
that unrealized gains are treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC Shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
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Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to the 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 the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the 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 the 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, the 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.
DISPOSITIONS OF FUND SHARES
Upon redemption, sale or exchange of shares of the 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 the Fund were capital
assets in the hands of the shareholder, and generally will be taxable to
shareholders as long-term capital gains if the shares had been held for more
than one year. A loss realized by a shareholder on the redemption, sale or
exchange of shares of the 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. 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. 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. As discussed above,
certain dividends paid in January will be treated as received by shareholders on
the prior December 31. 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 advisor to determine the tax status of Fund
distributions and/or gains from redemptions in his or her own state and locality
(or foreign country).
Under the federal income tax law, the Fund will be required to report to
the IRS all distributions of income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares 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 the 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
the 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 the 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.
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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 advisors about the
applicability of the backup withholding provisions.
FOREIGN TAXES
Investment income and gains received by the 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 Fund's stockholders. Since the percentage of Fund's
total assets 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 the Fund will be subject depends on the specific
countries in which the Fund's assets will be invested and the extent of the
assets invested in each such country and, therefore, cannot be determined in
advance.
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 the Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions.
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax advisor regarding the U.S.
and non-U.S. tax consequences of ownership of shares of the 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
distributions of net investment income and short-term capital gains to him or
her.
ORGANIZATION AND CAPITALIZATION
GENERAL
The Fund is a 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
Fund was originally formed as the Mutual Benefit Fund, a Delaware corporation.
The Fund was renamed the MAP-Equity Fund in 1995. The Map-Equity Fund was
reorganized as the MainStay MAP Equity Fund on June 9, 1999.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate votes
will be taken by each class on matters affecting the Fund or a particular class
of shares issued by the 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.
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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 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 the 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.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Company's registration statement
filed with the SEC under the Securities Act of 1933 with respect to the
securities offered hereby, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
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
Fund's Annual Report, which is incorporated by reference in this SAI, has been
so incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
TRANSFER AGENT
MainStay Shareholder Services, LLC ("MSS"), an affiliate of the Manager,
serves as the transfer agent and dividend disbursing agent for the Fund. MSS has
its principal office and place of business at 260 Cherry Hill Road, Parsippany,
New Jersey. Pursuant to its Transfer Agency and Service Agreement dated April
28, 1997 with the Trust, MSS provides transfer agency services, such as the
receipt of purchase and redemption orders, the receipt of dividend reinvestment
instructions, the preparation and transmission of dividend payments and the
maintenance of various records of accounts. The Fund pays MSS fees in the form
of per account charges, as well as out-of-pocket expenses and advances incurred
by MSS. MSS has entered into a Sub-Transfer Agency and Service Agreement with
Boston Financial Data Services, Inc. ("BFDS") located at 2 Heritage Drive, North
Quincy, Massachusetts 02171 and pays to BFDS per account, and transaction fees
and out-of-pocket expenses for performing certain transfer agency and
shareholder recordkeeping services.
CUSTODIANS
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The Bank of New York ("BONY") serves as custodian for the Fund. The Trust
has also appointed BONY as its foreign custody manager with respect to certain
securities held outside of the United States. BONY has its principal office at
48 Wall Street, New York, New York 10286.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust and persons who, in connection
with their regular functions, play a role in the recommendation of any purchase
or sale of a security by the Trust or obtain information pertaining to such
purchase or sale or who have the power to influence the management or policies
of the Trust or the Manager or a Subadvisor unless such power is the result of
their position with the Trust or Manager or Subadvisor. 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. Subject to these restrictions, these persons are permitted to invest in
securities, including securities that may be purchased or held by the Fund. The
Trust has developed procedures for administration of the Code.
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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).
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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.
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.
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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
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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.
140081.2
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THE MAINSTAY FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
- --------------------------------------------------------------------------------
This Statement of Additional Information supplements the information
contained in the Funds' Prospectuses dated May 1, 2000, as amended or
supplemented from time to time (the "Prospectuses"), and should be read in
conjunction with the Prospectuses. The Prospectuses are available 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).
This Statement of Additional Information, although not in itself a prospectus,
is incorporated by reference in and is made a part of the Prospectuses.
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 offer contained herein, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by The MainStay Funds or the Distributor. This Statement of Additional
Information and the related Prospectus do not constitute an offer by The
MainStay Funds 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.
The financial statements of each of the Funds, including the Statement
of Assets and Liabilities as of December 31, 1999, the Portfolio of Investments
and the Statement of Operations for the year ended December 31, 1999, the
Statement of Changes in Net Assets for the years ended December 31, 1999 and
1998, and the Notes to the Financial Statements, all of which are included in
the 1999 Annual Reports and the Reports of Independent Accountants, which are
included in the 1999 Annual Reports, are hereby incorporated by reference into
this Statement of Additional Information ("SAI").
An audited financial statement for NYLIFE LLC, as of December 31, 1999
is included in this SAI.
<PAGE> 49
<TABLE>
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TABLE OF CONTENTS
<S> <C>
THE MAINSTAY FUNDS...........................................................................................................4
ADDITIONAL INFORMATION ABOUT CERTAIN FUNDS...................................................................................4
BLUE CHIP GROWTH FUND....................................................................................................4
CONVERTIBLE FUND.........................................................................................................5
EQUITY INDEX FUND........................................................................................................5
GLOBAL HIGH YIELD FUND...................................................................................................5
GOVERNMENT FUND..........................................................................................................6
HIGH YIELD CORPORATE BOND FUND...........................................................................................7
INTERNATIONAL BOND FUND..................................................................................................7
INTERNATIONAL EQUITY FUND................................................................................................8
MAP EQUITY FUND..........................................................................................................8
MONEY MARKET FUND........................................................................................................9
RESEARCH VALUE FUND.....................................................................................................11
SMALL CAP VALUE FUND....................................................................................................11
STRATEGIC INCOME FUND...................................................................................................11
STRATEGIC VALUE FUND....................................................................................................13
TAX FREE BOND FUND......................................................................................................14
TOTAL RETURN FUND.......................................................................................................15
THE EQUITY INDEX FUND GUARANTEE.........................................................................................15
HOW THE INDEXING WORKS..................................................................................................18
RISK FACTORS AFFECTING CALIFORNIA MUNICIPAL SECURITIES..................................................................18
RISK FACTORS AFFECTING NEW YORK MUNICIPAL SECURITIES....................................................................30
SPECIAL CONSIDERATIONS AFFECTING PUERTO RICO............................................................................43
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS...............................................................49
TEMPORARY DEFENSIVE MEASURES............................................................................................49
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS.................................................................49
LENDING OF PORTFOLIO SECURITIES.........................................................................................51
CASH EQUIVALENTS........................................................................................................52
BANK OBLIGATIONS........................................................................................................52
COMMERCIAL PAPER........................................................................................................52
U.S. GOVERNMENT SECURITIES..............................................................................................53
DEBT SECURITIES.........................................................................................................53
CONVERTIBLE SECURITIES..................................................................................................53
ARBITRAGE...............................................................................................................54
FOREIGN SECURITIES......................................................................................................55
FOREIGN CURRENCY TRANSACTIONS...........................................................................................56
FOREIGN INDEX-LINKED INSTRUMENTS........................................................................................58
BRADY BONDS.............................................................................................................59
MUNICIPAL SECURITIES....................................................................................................60
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS......................................................................63
VARIABLE RATE DEMAND NOTES ("VRDNS")....................................................................................63
FLOATING AND VARIABLE RATE SECURITIES...................................................................................64
ZERO COUPON BONDS.......................................................................................................64
STANDBY COMMITMENTS -- OBLIGATIONS WITH PUTS ATTACHED...................................................................65
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
WHEN-ISSUED SECURITIES..................................................................................................65
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES......................................................................66
WARRANTS................................................................................................................73
SHORT SALES AGAINST THE BOX.............................................................................................73
OPTIONS ON SECURITIES...................................................................................................73
OPTIONS ON FOREIGN CURRENCIES...........................................................................................77
SECURITIES INDEX OPTIONS................................................................................................79
FUTURES TRANSACTIONS....................................................................................................80
SWAP AGREEMENTS.........................................................................................................88
LOAN PARTICIPATION INTERESTS............................................................................................90
REAL ESTATE INVESTMENT TRUSTS ("REITs").................................................................................91
RISKS ASSOCIATED WITH DEBT SECURITIES...................................................................................92
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")..............................................................92
FUNDAMENTAL INVESTMENT RESTRICTIONS.........................................................................................93
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS.....................................................................................95
TRUSTEES AND OFFICERS.......................................................................................................99
THE MANAGER, THE SUBADVISORS AND THE DISTRIBUTOR...........................................................................107
MANAGEMENT AGREEMENT...................................................................................................107
SUB-ADVISORY AGREEMENTS................................................................................................108
DISTRIBUTION AGREEMENT.................................................................................................114
DISTRIBUTION PLANS.....................................................................................................115
OTHER SERVICES.........................................................................................................124
EXPENSES BORNE BY THE TRUST............................................................................................125
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................................................................126
NET ASSET VALUE............................................................................................................131
SHAREHOLDER INVESTMENT ACCOUNT.............................................................................................134
SHAREHOLDER TRANSACTIONS...................................................................................................134
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE.............................................................................134
HOW TO PURCHASE SHARES OF THE FUNDS....................................................................................134
ALTERNATIVE SALES ARRANGEMENTS.........................................................................................137
PURCHASES AT NAV.......................................................................................................140
REDUCED SALES CHARGES ON CLASS A SHARES................................................................................141
LETTER OF INTENT ("LOI")...............................................................................................141
CONTINGENT DEFERRED SALES CHARGE, CLASS A..............................................................................141
CONTINGENT DEFERRED SALES CHARGE, CLASS B..............................................................................142
CONTINGENT DEFERRED SALES CHARGE, CLASS C..............................................................................144
REDEMPTIONS AND EXCHANGES..............................................................................................144
DISTRIBUTIONS IN KIND..................................................................................................146
SUSPENSION OF REDEMPTIONS..............................................................................................146
EXCHANGE PRIVILEGES....................................................................................................146
DISTRIBUTIONS AND REDEMPTIONS FOR EQUITY INDEX FUND....................................................................147
TAX-DEFERRED RETIREMENT PLANS..............................................................................................148
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR CORPORATIONS AND SELF-EMPLOYED INDIVIDUALS..............148
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")..................................................................................149
403(b)(7) TAX SHELTERED ACCOUNT........................................................................................150
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
GENERAL INFORMATION....................................................................................................150
CALCULATION OF PERFORMANCE QUOTATIONS......................................................................................151
TAX INFORMATION............................................................................................................161
TAXATION OF THE FUNDS..................................................................................................161
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL..................................................................162
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- THE TAX-FREE FUNDS.......................................................164
DISCOUNT...............................................................................................................165
USERS OF BOND-FINANCED FACILITIES......................................................................................166
TAXATION OF OPTIONS, FUTURES AND SIMILAR INSTRUMENTS...................................................................166
PASSIVE FOREIGN INVESTMENT COMPANIES...................................................................................167
FOREIGN CURRENCY GAINS AND LOSSES......................................................................................168
COMMODITY INVESTMENTS..................................................................................................168
DISPOSITIONS OF FUND SHARES............................................................................................168
TAX REPORTING REQUIREMENTS.............................................................................................169
FOREIGN TAXES..........................................................................................................170
STATE AND LOCAL TAXES - GENERAL........................................................................................170
EXPLANATION OF FUND DISTRIBUTIONS......................................................................................171
ADDITIONAL INFORMATION REGARDING THE EQUITY INDEX FUND.................................................................171
ADDITIONAL INFORMATION REGARDING THE CALIFORNIA TAX FREE FUND AND NEW YORK TAX FREE FUND...............................171
ANNUAL STATEMENTS......................................................................................................172
GENERAL INFORMATION....................................................................................................173
ORGANIZATION AND CAPITALIZATION............................................................................................173
GENERAL................................................................................................................173
VOTING RIGHTS..........................................................................................................174
SHAREHOLDER AND TRUSTEE LIABILITY......................................................................................174
REGISTRATION STATEMENT.................................................................................................174
SHARE OWNERSHIP OF THE FUNDS...........................................................................................174
OTHER INFORMATION..........................................................................................................186
INDEPENDENT ACCOUNTANTS................................................................................................186
TRANSFER AGENT.........................................................................................................186
CUSTODIANS.............................................................................................................187
LEGAL COUNSEL..........................................................................................................187
CODE OF ETHICS.........................................................................................................187
APPENDIX A.................................................................................................................188
NYLIFE LLC AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS..............................................................193
</TABLE>
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<PAGE> 52
THE MAINSTAY FUNDS
The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of 23 separate investment
portfolios: Blue Chip Growth Fund, California Tax Free Fund, Capital
Appreciation Fund, Convertible Fund, Equity Income Fund, Equity Index Fund,
Global High Yield Fund, Government Fund, Growth Opportunities Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, MAP
Equity Fund, Money Market Fund, New York Tax Free Fund, Research Value Fund,
Small Cap Growth Fund, Small Cap Value Fund, Strategic Income Fund, Strategic
Value Fund, Tax Free Bond Fund, Total Return Fund and Value Fund (individually
referred to as a "Fund" or, collectively, the "Funds"). MainStay Management LLC
(the "Manager") serves as the manager for the Funds and has entered into
Sub-Advisory Agreements with Monitor Capital Advisors LLC ("Monitor") with
respect to the Equity Index Fund; 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. ("DGHM") with respect to the Small Cap Value Fund; Madison Square
Advisors LLC ("Madison Square Advisors") with respect to the Growth
Opportunities Fund; Markston International LLC ("Markston") with respect to the
MAP Equity Fund and MacKay Shields LLC ("MacKay Shields") with respect to the
remaining 17 Funds; MacKay Shields, Monitor, GAMCO, John A. Levin & Co., DGHM,
Madison Square Advisors and Markston are sometimes jointly referred to as the
"Subadvisors."
The Trust, formed January 9, 1986, is a Massachusetts business trust.
Each Fund, other than California Tax Free Fund, Equity Index Fund, International
Bond Fund, Global High Yield Fund, and New York Tax Free Fund, is a diversified
fund as defined by the Investment Company Act of 1940, as amended (the "1940
Act").
ADDITIONAL INFORMATION ABOUT CERTAIN FUNDS
The Prospectuses discuss the investment objectives of the Funds and the
principal investment strategies to be employed in seeking to achieve those
objectives. This section contains supplemental information concerning certain of
the securities and other instruments in which the Funds may invest, the
principal investment strategies the Funds may utilize, and certain risks
involved with those strategies.
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 a Subadvisor.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which a Fund invests at the same time
as another fund or another account managed by the same Subadvisor, available
investments or opportunities for sales will be allocated equitably to each. In
some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by a Fund or the price paid or received by a Fund.
BLUE CHIP GROWTH FUND
The Fund will generally invest in Blue Chip companies, with the
Subadvisor selecting those securities which it perceives to be undervalued or to
otherwise have growth potential. Blue
<PAGE> 53
Chip companies are those which occupy (or in the Subadvisor's judgment 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.
CONVERTIBLE FUND
In selecting convertible securities for purchase or sale, the Subadvisor
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. 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.
EQUITY INDEX FUND
When the Fund has cash reserves, the Fund may invest in S&P 500
Index Futures, 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 Fund seeks to provide investment results that correspond to the
total return performance of the S&P 500 Composite Stock Price Index. The Fund
regularly monitors how well its performance corresponds to that Index and seeks
to take corrective action whenever the correlation between the Fund's
performance and the Index is less than 0.95.
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 Subadvisor 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 Subadvisor will also determine,
using good faith and judgement, (1) the percentage of the Fund's assets to be
invested
5
<PAGE> 54
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. The Fund is not obligated to use any
of these instruments, but its Subadvisor may do so, when, in its discretion, it
believes it advisable.
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.,
Government National Mortgage Association ("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 Federal National Mortgage Association ("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: 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 the Federal Home Loan Mortgage Corporation
("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 Subadvisor.
6
<PAGE> 55
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 may be sought by
lengthening the maturities of high yield debt securities held in the Fund's
portfolio during periods when the Subadvisor 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 Subadvisor 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. The Subadvisor analyzes potential high yield
debt investments like stocks, applying a bottom-up process using a quantitative
approach that focuses on the fundamentals of the companies' earnings and
operating momentum, combined with qualitative research.
INTERNATIONAL BOND FUND
The International Bond Fund may be appropriate 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 Subadvisor 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 Subadvisor 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. The Fund is not obligated to use any
of these instruments but may do so when the Subadvisor, in its discretion,
believes it advisable.
7
<PAGE> 56
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 Subadvisor.
INTERNATIONAL EQUITY FUND
In making investments for the Fund, the Subadvisor 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 Subadvisor
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. The Fund is not
obligated to use any of these instruments, but may do so when the Subadvisor, in
its discretion, believes it advisable.
The International Equity Fund may invest in American Depositary Receipts
("ADRs") European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), International Depositary Receipts ("IDRs") or other similar securities
convertible into securities of foreign issuers. An ADR is a receipt typically
issued by a U.S. bank or trust company showing that you own a foreign security.
An EDR is a receipt typically issued by a European bank or trust company showing
that you own a foreign security. GDRs and IDRs are receipts typically issued by
global or international depositories showing that you own a foreign security.
MAP EQUITY FUND
The Fund may invest in warrants. A warrant is a right which entitles its
holder, for a specified period of time, to acquire a specified number of shares
of common stock for a specified price per share. If the share price at the time
the warrant is exercised exceeds the total of the exercise price of the warrant
and its purchase price, the Fund experiences a gain to the extent this total is
exceeded by the share price. However, if the share price at the time the warrant
expires is less than the exercise price of the warrant, the Fund will suffer a
loss of the purchase price of the warrant.
8
<PAGE> 57
The Fund restricts its investment in securities of foreign issuers to no
more than 10% of the value of the Fund's total net assets. Such securities may
be subject to additional federal taxes which would increase the cost of such
investments and may be subject to foreign government taxes which could reduce
the income yield on such securities.
In addition, the Fund may also buy "restricted" securities which cannot
be sold publicly until registered under the Securities Act of 1933, as amended
(the "1933 Act"). The Fund's ability to dispose of investments in "restricted"
securities at reasonable price levels might be limited unless and until their
registration under the 1933 Act has been completed. The Fund will endeavor to
have the issuing company pay all the expenses of any such registration, but
there is no assurance that the Fund will not have to pay all or some of these
expenses.
MONEY MARKET FUND
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).
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 Rule 2a-7 under the 1940 Act ("Rule 2a-7"),
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
Subadvisor 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 respect to a class of debt
obligations that is comparable in priority and security, and that is 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 Subadvisor; (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 an obligation 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 ("Guarantee Obligation"), the Guarantee
Obligation has received a rating from an NRSRO or the Guarantee Obligation 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 Obligation, with certain exceptions, and (ii) the issuer of the Demand
Feature or Guarantee Obligation, or another institution, has undertaken promptly
to notify the holder of the security in the event that the Demand Feature or
Guarantee Obligation is substituted with another Demand Feature or Guarantee
Obligation; (5) if it is a security issued by a money market fund registered
with the Securities and Exchange Commission ("SEC") under the 1940 Act; or (6)
if it is a government security as defined in Rule 2a-7. With respect to 5% of
its total assets, measured at the time of investment, the Fund may also invest
in money market
9
<PAGE> 58
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 in the highest
rating category, 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 Guarantee
Obligations. 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 Obligation, the Fund,
with respect to 75% of its total assets, shall not have invested more than 10%
of its assets in securities issued by or subject to Demand Features or Guarantee
Obligations from the institution that issued the Demand Feature or Guarantee
Obligation, with certain exceptions. In addition, immediately after the
acquisition of any Demand Feature or Guarantee Obligation (or a security after
giving effect to the Demand Feature or Guarantee Obligation) that is a not
within the highest rating category by NRSROs, the Fund shall not have invested
more than 5% of its total assets in securities issued by or subject to Demand
Features or Guarantee Obligations from the institution that issued the Demand
Feature or Guarantee Obligation. 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 Subadvisor, 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 Subadvisor 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 results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and
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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 Rule 2a-7, 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.
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. 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
Subadvisor.
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. The Fund may
also invest in money market instruments, 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.
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 Subadvisor's proprietary
multifactor model or a change in fundamental expectations. Positions are
eliminated when price appreciation renders a sale rating based on the
Subadvisor's valuation model. The Fund may invest up to 15% of net assets in
real estate investment trusts ("REITs").
STRATEGIC INCOME FUND
In managing the Fund, the Subadvisor conducts a continuing review of
yields and other information derived from a data base which it maintains in
managing fixed-income portfolios.
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Fundamental economic cycle analysis, credit quality and interest rate trends are
among the principal factors considered by the Subadvisor 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
Subadvisor takes into account a broad range of fundamental and technical
indicators. The Subadvisor 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 Subadvisor expects interest rates to
decline. If the Subadvisor 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 Subadvisor 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 Subadvisor 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.
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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 Subadvisor.
The Subadvisor seeks to reduce risk through diversification, credit
analysis and attention to current developments and trends in both the economy
and financial markets.
STRATEGIC VALUE FUND
In managing the Fund, the Subadvisor 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 Subadvisor 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 Subadvisor's analysis
indicates that the Fund should be fully invested in only one asset group, the
Subadvisor 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 Subadvisor'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 Subadvisor 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 Subadvisor's opinion,
either unwarranted pessimism or unrecognized value.
In selecting convertible securities for purchase or sale, the Subadvisor
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 Subadvisor expects interest rates to
decline. If the Subadvisor 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.
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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). 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 Subadvisor 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 Subadvisor 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.
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 Subadvisor nor counsel to the
Fund reviews such opinions or otherwise determines independently that the
interest on a security will be classified as tax-exempt interest.
Municipal Bonds are issued to obtain funds for various public purposes.
The interest on these obligations is generally exempt from regular federal
income tax in the hands of most investors. Because the Fund may hold high-grade
Municipal Bonds, the income earned on shares of the Fund may tend to be less
than it might be on a portfolio emphasizing lower quality securities.
Conversely, to the extent that the Fund holds lower quality securities, the risk
of default in the payment of principal or interest by the issuer of a portfolio
security is greater than if the Fund held only higher quality securities.
Although higher quality tax-exempt securities may produce lower yields, they are
generally more marketable. To protect the Fund's capital under adverse market
conditions, the Fund may from time to time purchase higher quality securities or
taxable short-term investments with a resultant decrease in yield or increase in
the proportion of taxable income.
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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.
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 Subadvisor.
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 Subadvisor.
Although the Total Return Fund does not intend to seek short-term
profits, securities in its portfolio will be sold whenever the Subadvisor
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 Internal Revenue Code
of 1986, as amended (the "Code"). A high turnover rate involves greater expenses
to the Fund and may increase the possibility of shareholders realizing taxable
capital gains. The Fund engages in portfolio trading if it believes a
transaction, net of costs (including custodian charges), will help in achieving
its investment objective.
THE EQUITY INDEX FUND GUARANTEE
NYLIFE LLC ("NYLIFE"), a Delaware limited liability company 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 of a Fund Share (the "Guarantee Date"), the then-net asset
value of a unit equal to the net asset value of that Fund
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share, plus the value of all dividends and distributions paid with respect to
that share, including cumulative reinvested dividends and distributions
attributable to such share paid during that 10-year period ("Guaranteed Share"),
is less than the public offering price initially paid for the share ("Guaranteed
Amount"), NYLIFE will pay for disbursement to shareholders an amount equal to
the difference between the Guaranteed Amount for each such share and the net
asset value of each such Guaranteed Share outstanding and held by shareholders
as of the close of business on the Guarantee Date. There is no charge to the
Fund or its shareholders for the Guarantee.
If, on a particular Guarantee Date, payments must be made under the terms
of the Guarantee, the terms of the Guarantee will obligate NYLIFE
unconditionally and irrevocably to pay to the Equity Index Fund's transfer and
dividend disbursing agent for the benefit of shareholders with that Guarantee
Date an amount equal to the difference between the Guaranteed Amount and net
asset value per each Guaranteed Share (as defined in the Prospectus)
outstanding. The Equity Index Fund's transfer and dividend disbursing agent will
forward the difference between the Guaranteed Amount and the net asset value
directly to each individual shareholder.
A Guaranteed Share (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.
When a shareholder redeems shares, shares will be redeemed on a first in, first
out basis, meaning that the oldest shares, including shares no longer subject to
the Guarantee, would be redeemed first.
NYLIFE will pay any amounts owing under the Guarantee to the Fund's
transfer and dividend disbursing agent on the fifth 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. In the case of IRAs and certain other retirement
plans, the amount due under the Guarantee may be transferred to a Money Market
Fund account within the plan, instead of being paid to the shareholder in cash.
The Guarantee is intended to assure each owner of Guaranteed Shares on a
Guarantee Date that he or she will be able to recover, as of the Guarantee Date,
at a minimum, the Guaranteed Amount (with no adjustment for inflation or the
time value of money). The Guarantee will benefit any holder of such Guaranteed
Shares on the relevant Guarantee Date, who need not be the original purchaser,
and who, for example, may own such shares by gift or inheritance.
Although the Equity Index Fund does not intend to pay dividends and
distributions in cash to shareholders (unless a shareholder elects to receive
payments in cash), such dividends and distributions which are reinvested will be
taxable to shareholders. See "Tax Information." 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
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under the Guarantee will be solely the obligations of NYLIFE. Neither the Equity
Index Fund, New York Life, 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.
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 their particular 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 LLC was formed in Delaware on September 30, 1999 as a Delaware
limited liability company. Audited financial statements for NYLIFE for its most
recent fiscal year ended December 31, 1999, appear in this 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, 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.
Persons who do not have an individual account maintained on the
shareholder records of the Fund's transfer agent, MainStay Shareholder Services
LLC, may purchase shares of the Equity Index Fund only with the written
authorization of NYLIFE Distributors.
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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 Subadvisor seeks to provide investment results which
mirror the performance of the Index. The Subadvisor 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.
"Standard & Poor's", "S&P 500", "S&P" and "Standard & Poor's 500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
Monitor Capital Advisors LLC. 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 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.
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
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investments in California municipal issuers. Such information constitutes only a
brief discussion, does not purport to be a complete description and is based on
information from sources believed by the Trust to be reliable, including
official statements relating to securities offerings of California and municipal
issuers, and periodic publications by national ratings organizations. Such
information, however, has not been independently verified by the Trust.
Certain California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives, as discussed
below, could adversely affect the market values and marketability of, or result
in default of, existing obligations of the State. Obligations of the State or
local governments may also be affected by budgetary pressures affecting the
State and economic conditions in the State.
Certain of the California municipal securities in which the Fund may
invest may be obligations of issuers which rely in whole or in part on
California State revenues for payment of these obligations. Property tax
revenues and a portion of the State's General Fund surplus are distributed to
counties, cities and their various taxing entities and the State assumes certain
obligations theretofore paid out of local funds. Whether and to what extent a
portion of the State's General Fund will be distributed in the future to
counties, cities and their various entities, is unclear.
Certain of the California municipal securities may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, Proposition 13 added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Legislation enacted by the California legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as amended) provides that notwithstanding
any other law, local agencies may not levy any ad valorem property tax except to
pay debt service on indebtedness approved by the voters prior to July 1, 1978,
and that each county will levy the maximum tax permitted by Article XIIIA of
$4.00 per $100 assessed valuation. The apportionment of property taxes in fiscal
years after 1978-79 was revised pursuant to Statutes of 1979, Chapter 282, which
provides relief funds from State moneys beginning in fiscal year 1979-80 and is
designed to provide a permanent system for sharing State taxes and budget funds
with local agencies. Under Chapter 282, cities and counties receive more of the
remaining property tax revenues collected under Proposition 13 instead of direct
State aid. School districts receive a correspondingly reduced amount of property
taxes, but receive compensation directly from the State and are given additional
relief.
On November 8, 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
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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.
On November 5, 1996, voters approved Proposition 218, entitled the "Right
to Vote on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.
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
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of statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. As amended by Proposition 111, the
Appropriations Limit is tested over consecutive two-year periods. Any excess of
the aggregate "proceeds of taxes" received over such a two-year period above the
combined Appropriations Limits for those two years is divided equally between
transfers to K-14 districts and refunds to taxpayers.
The legislature enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIIIB and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
On November 8, 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 State tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recession in the early 1990s, 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 the "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. By implementing these actions, per-pupil funding
from Proposition 98 sources stayed almost constant at approximately $4,200 from
Fiscal Year 1991-92 to Fiscal Year 1993-94.
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In 1992, a lawsuit was filed, called California Teachers' Association v.
Gould, which challenged the validity of these off-budget loans. The settlement
of this case, finalized in July, 1996, 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 is repaying
$935 million by forgiveness of the amount owed, while schools will repay $825
million. The State share of the repayment will be reflected as an appropriation
above the current Proposition 98 base calculation. The schools' share of the
repayment will count as appropriations that count toward satisfying the
Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact. The 1998-99 Budget Act appropriated $250 million as
repayment of prior years' loans to schools, as part of the settlement in this
case, and the 1999-00 Budget Act appropriates $310 million for the same purpose.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 through 1999-00 have resulted 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 50% from the level in place from 1991-92,
and is estimated at about $6,313 per ADA in 2000-01. A significant amount of the
"extra" Proposition 98 monies in the last few years has been allocated to
special programs, including an initiative to increase the number of computers in
schools throughout the State. Furthermore, since General Fund revenue growth is
expected to continue in 2000-01, there are also new initiatives to increase
school safety, improve schools' accountability for pupil performance, provide
additional textbooks to schools, fund deferred maintenance projects, provide
better teacher recruitment and training and provide performance incentives to
teachers.
Certain California municipal securities in the Fund may be obligations
that 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
that 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.
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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%
of the original principal amount of the mortgage loan. This limitation could
affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
On 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. Counties have been successful in earning performance incentive
payments and have earned amounts in excess of the available appropriation for
1998-99 and, it is estimated, for 1999-00 as well. The Governor proposes to
repeal or modify the current incentive structure in 2000-01 to permit adequate
funding for other CalWORK program demands in the future.
To date, the implementation of the CalWORKs program has continued the
trend of declining welfare caseloads. The CalWORKs caseload is projected to be
589,000 in 1999-00 and 557,000 in 2000-01, down from a high of 921,000 cases in
1994-95. The longer-term impact of the new federal Law and CalWORKs is being
evaluated by the RAND Corporation, with a series of reports to be furnished and
the final report due October 2001.
The 2000-01 CalWORKs budget reflect California's success in meeting the
federally-mandated work participation requirements for federal fiscal year 1998.
With that goal being met, the federally-imposed maintenance-of-effort (MOE)
level for California is reduced from 80 percent of the federal fiscal year 1994
baseline expenditures for the former AFDC program ($2.9
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billion) to 75 percent ($2.7 billion). It is still uncertain if the state will
meet the work participation requirements for federal fiscal year 1999; however,
due to program changes, it is expected that California will meet the work
participation goal in federal fiscal year 2000 and beyond. In addition,
California will receive a TANF High Performance Bonus award of $45.5 million.
This one-time bonus is awarded to states for their successes in moving welfare
recipients to work and sustaining their participation in the workforce.
The 2000-01 Governor's Budget proposes expenditures which will continue
to meet, but not exceed the federally-required $2.7 billion combined State
and county MOE requirement. Total CalWORKs-related expenditures are estimated to
be $7.2 billion for 1999-00 and $6.9 billion for 2000-01, including child care
transfer amounts for the Department of Education.
Pressures on the State's budget in the late 1980's and early 1990's were
caused by a combination of external economic 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 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 issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes
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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, $1.6 billion in 1996-97, $2.4 billion in 1997-98 and $1.6 billion in
1998-99) than were initially planned when the budgets were enacted. These
additional funds were largely directed to school spending as mandated by
Proposition 98, to make up shortfalls from reduced federal health and welfare
aid and particularly in 1998-99 to fund new program incentives. The accumulated
budget deficit from the recession years was finally eliminated.
The California Constitution, codes and statutes specify the uses of
certain revenue. Such receipts are accounted for in various special funds. In
general, special fund revenues comprise three categories of income:
1. Receipts from tax levies which are allocated to specified
functions, such as motor vehicle taxes and fees and certain
taxes on tobacco products.
2. Charges for special services to specific functions,
including such items as business and professional license
fees.
3. Rental royalties and other receipts designated for
particular purposes (e.g., oil and gas royalties).
Motor vehicle related taxes and fees accounted for about 55 percent of
all special fund revenues and transfers in 1998-99. Principal sources of this
income are motor vehicle fuel taxes, registration and weight fees and vehicle
license fees. During the 1998-99 fiscal year, $8.6 billion was derived from the
ownership or operation of motor vehicles. This was only 1.0 percent above the
1997-98 level, due to tax reductions enacted for vehicle license fees. About
$4.7 billion of this revenue was returned to local governments. The remainder
was available for various state programs related to transportation and services
to vehicle owners. These amounts (as well as those shown below in the table
"Comparative Yield of State Taxes--All Funds") include the additional fees and
taxes derived from the passage of Proposition 111 in June 1990.
Chapter 322, Statutes of 1998 established a vehicle license fee offset
program. Pursuant to this chapter, vehicle license fees were reduced by 25
percent beginning January 1, 1999. In addition, Chapter 74, Statutes of 1999,
provided a one-time expansion of the offset program by an additional 10 percent
for the 2000 calendar year only, and Chapter 76, Statutes of 1999, allowed a
one-year reduction in vehicle license fees for certain commercial motor
vehicles. For 1999-00 and 2000-01, the offset program is expected to reduce
revenues by $1.350 billion and $1.712 billion, respectively. This loss of local
revenue is replaced by the State's General Fund.
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Vehicle license fees, over and above the costs of collection and refunds
authorized by law, are constitutionally defined local revenues. A continuous
appropriation from the General Fund replaces the vehicle license fee revenue
that local governments would otherwise lose due to the fee reductions. If in any
year the Legislature fails to appropriate enough funds to fully offset the
then-applicable vehicle license fee reduction, the percentage offset will be
reduced to assure that local governments are not disadvantaged.
In addition to the initial 25 percent reduction, Chapter 322 also sets
out a series of "trigger" levels, so that the percentage fee reduction could be
increased in annual stages up to a maximum of 67.5 percent in 2003 depending on
whether future General Fund revenues reach the target levels. In order for the
next 10 percent fee reduction, which will result in a cumulative 35 percent cut
from 1998 base levels, to go into effect permanently beginning calendar year
2001, General Fund revenues in FY 2000-01 would need to reach about $65.5
billion. Based on the current revenue forecast, the 35 percent offset will go
into effect in the 2001 calendar year.
On November 8, 1988, voters approved Proposition 99, which imposed, as of
January 1, 1989, an additional 25 cents per pack excise tax on cigarettes, and a
new, equivalent excise tax on other tobacco products. The initiative requires
that funds from this tax be allocated to anti-tobacco education and research and
indigent health services, and environmental and recreation programs. Legislation
enacted in 1993 added an additional 2 cents per pack excise tax for the purpose
of funding breast cancer research.
Proposition 10, approved in 1998, increased the excise tax imposed on
distributors selling cigarettes in California to 87 cents per pack effective
January 1, 1999. At the same time, this proposition imposed a new excise tax on
cigars, chewing tobacco, pipe tobacco, and snuff at a rate equivalent to the tax
increase on cigarettes of 50 cents per pack. In addition, the higher excise tax
on cigarettes automatically triggered an additional increase in the tax on other
tobacco products effective July 1, 1999, with the proceeds going to the
Cigarette and Tobacco Products Surtax Fund. Thus, this proposition increased the
total excise tax on other tobacco products by an amount equivalent to an
increase in the cigarette tax of one dollar per pack.
The state excise tax on cigarettes of 87 cents per pack and other tobacco
product taxes are earmarked as follows:
- - Fifty cents of the per-pack tax on cigarettes, and the equivalent rate
levied on non-cigarette tobacco products, goes to the California
Children and Families First Trust Fund and is allocated primarily for
early childhood development programs.
- - Twenty-five cents of the per-pack tax on cigarettes, and the equivalent
rates levied on non-cigarette tobacco products are allocated to the
Cigarette and Tobacco Products Surtax Fund. These funds are appropriated
for anti-tobacco education and research, indigent health services, and
environmental and recreation programs. This portion of the excise tax was
imposed on January 1, 1989, as voters approved Proposition 99 of 1988.
- - Ten cents of the per-pack tax is allocated to the State's General Fund.
The remaining two cents of the per-pack tax is deposited into the Breast
Cancer Fund. Legislation enacted in 1993 added the additional per pack excise
tax for the purpose of funding breast cancer research.
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In late 1998, the State signed a settlement agreement with the four major
cigarette manufacturers. The State agreed to drop its lawsuit and not to sue in
the future. Tobacco manufacturers agreed to billions of dollars in payments and
restrictions in marketing activities. Under the settlement, the companies will
pay California governments a total of approximately $25 billion over a period of
25 years. In addition, payments of approximately $1 billion per year will
continue in perpetuity. Under the settlement, half of the moneys will be paid to
the State and half to local governments (all counties and the cities of San
Diego, Los Angeles, San Francisco and San Jose). The State's revised 1999-2000
Budget includes receipt of $517 million of settlement money to the General Fund.
The Governor's Budget for 2000-01 projects receipt of $388 million of settlement
money to the General Fund.
The specific amount to be received by the State and local governments is
subject to adjustment. Details in the settlement allow reduction of the
companies' payments because of federal government actions, or reductions in
cigarette sales. Settlement payments can increase due to inflation or increases
in cigarette sales. The "second initial" payment, received in December 1999, was
14 percent lower than the base settlement amount due to reduced sales. Future
payment estimates have been reduced by a similar percentage. In the event that
any of the companies goes into bankruptcy, the State could seek to terminate the
agreement with respect to those companies filing bankruptcy actions thereby
reinstating all claims against those companies. The State may then pursue those
claims in the bankruptcy litigation, or as otherwise provided by law. Also,
several parties have brought a lawsuit challenging the settlement and seeking
damages.
In January 1999, the Governor released his proposed budget for the
1999-00 Fiscal Year (the "Proposed 1999-00 Budget"). The Governor's Proposed
1999-00 Budget projected total General Fund revenues and transfers of $60.3
billion, a $3.3 billion increase over revised 1998-99 revenues. This included
anticipated initial payments from the tobacco litigation settlement of about
$560 million and receipt of one-time revenue from sale of assets. Overall, the
increase reflected an underlying revenue growth rate of 4.7% based on economic
trends, as well as non-economic factors, such as the tobacco company litigation,
that increases the total revenue growth rate to 7.1%. The Governor's Proposed
1999-00 Budget projected that the budget reserve, the SFEU, would be $415
million at June 30, 2000, $200 million lower than the projected level at June
30, 1998.
The 1999 May Revision showed an additional $4.3 billion of revenues for
combined fiscal years 1998-99 and 1999-00. The completion of the 1999 Budget Act
occurred in a timely fashion. The final Budget Bill was adopted by the
Legislature on June 16, 1999, and was signed by the Governor on June 29, 1999
(the "1999 Budget Act" ), meeting the Constitutional deadline for budget
enactment for only the second time in the 1990's.
The final 1999 Budget Act estimated General Fund revenues and transfers
of $63.0 billion, and contained expenditures totaling $63.7 billion after the
Governor used his line-item veto to reduce the legislative Budget Bill
expenditures by $581 million (both General Fund and Special Fund). The 1999
Budget Act also contained expenditures of $16.1 billion from special funds and
$1.5 billion from bond funds. The Administration estimated that the SFEU would
have a balance at June 30, 2000, of about $881 million. Not included in this
amount was an additional $300 million which (after the Governor's vetoes) was
"set aside" to provide funds for employee salary increases (to be negotiated in
bargaining with employee unions), and for litigation reserves. The 1999 Budget
Act anticipates normal cash flow borrowing during the fiscal year.
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The principal features of the 1999 Budget Act include the following:
1. Proposition 98 funding for K-12 schools was increased by $1.6
billion in General Fund moneys over revised 1998-99 levels, $108.6 million
higher than the minimum Proposition 98 guarantee. Of the 1999-00 funds, major
new programs included money for reading improvement, new textbooks, school
safety, improving teacher quality, funding teacher bonuses, providing greater
accountability for school performance, increasing preschool and after school
care programs and funding deferred maintenance of school facilities. The Budget
also includes $310 million as repayment of prior years' loans to schools, as
part of the settlement of the CTA v. Gould lawsuit.
2. Funding for higher education increased substantially above the
actual 1998-99 level General Fund support was increased by $184 million (7.3%)
for the University of California and $126 million (5.9%) for the California
State University system. In addition, Community Colleges funding increased by
$324.3 million (6.6%). As a result, undergraduate fees at UC and CSU will be
reduced for the second consecutive year, and the per-unit charge at Community
Colleges will be reduced by $1.
3. The Budget included increased funding of nearly $600 million
for health and human services.
4. About $800 million from the general fund will be directed
toward infrastructure costs, including $425 million in additional funding for
the Infrastructure Bank, initial planning costs for a new prison in the Central
Valley, additional equipment for train and ferry service, and payment of
deferred maintenance for state parks.
5. The Legislature enacted a one-year additional reduction of 10%
of the VLF for calendar year 2000, at a General Fund cost of about $250 million
in each of fiscal year 1999-00 and 2000-01 to make up lost funding to local
governments. Conversion of this one-time reduction to a permanent cut will
remain subject to the revenue tests in the legislation adopted last year.
Several other targeted tax cuts, primarily for businesses, were also approved,
at a cost of $54 million in 1990-00.
6. A one-time appropriation of $150 million, to be split between
cities and counties, was made to offset property tax shifts during the early
1990's. Additionally, an ongoing $50 million was appropriated as a subvention to
cities for jail booking or processing fees charged by counties when an
individual arrested by city personnel is taken to a county detention facility.
The revised 1999-2000 budget included in the 2000-01 Governor's Budget
also reflects the latest estimated costs or savings as provided in various
pieces of legislation passed and signed after the 1999 Budget Act. The revised
budget includes $730 million for various departments for enrollment, caseload
and population changes and $562 million for Smog Impact Fee refunds prompted by
the October 1999 ruling in Jordan, et al. v. Dept. of Motor Vehicles that the
State Smog Impact Fee program is unconstitutional.
Revised 1999-2000 revenues are $65.2 billion or $2.2 billion higher than
projections at the 1999 Budget Act. Revised 1999-2000 expenditures are $65.9
billion or $2.1 billion higher than projections at the 1999 Budget Act. The
State's Legislative Analyst (LAO) issued a report in January 2000, following the
receipt of actual revenues for the month of December 1999, which were not
available at the time the Governor's Budget estimates were prepared. The LAO
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report indicates General Fund revenues for the 18-month period (January 2000
through June 2001) could be as much as $3 billion higher than the 2000-01
Governor's Budget estimates. The LAO report assumed the continuation of strong
economic growth in the State during this period. The Department of Finance will
provide new projections of 1999-00 and 2000-01 revenues in May 2000.
In January 2000, the Governor released his proposed budget for the
2000-01 Fiscal Year (the "Proposed 2000-01 Budget"). The Governor's Proposed
2000-01 Budget generally reflects that General Fund revenues for Fiscal Year
1999-2000 will be higher than projections made at the time of the 1999 Budget
Act.
The Governor's Proposed 2000-01 Budget projects General Fund revenues and
transfers in 2000-01 of $68.2 billion. This includes anticipated payments from
the tobacco litigation settlement of $387.9 million and the receipt of one-time
revenue from the sale of assets. More accurate revenue estimates will be
available in May and June before the adoption of the Budget. The Governor has
proposed $167 million in tax reduction initiatives.
The Governor's Proposed 2000-01 Budget proposes General Fund expenditures
of $68.8 billion. Included in the Budget are set-asides of $500 million for
legal contingencies and $100 million for various one-time legislative
initiatives. Based on the proposed revenues and expenditures, the Governor's
Budget project the June 30, 2001 balance in the SFEU to be $1.238 billion.
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.
The Bonds have received ratings of "Aa3" by Moody's Investors Service,
"A+" by Standard & Poor's, a division of The McGraw-Hill Companies and "AA-" by
Fitch ICBA, Inc. An explanation of the significance and status of such credit
ratings may be obtained from the rating agencies furnishing the same. There is
no assurance that such ratings will continue for any given period of time or
that they will not be revised or withdrawn entirely by any such rating agencies,
if in their respective judgments, circumstances so warrant. A revision or
withdrawal of any such credit rating could have an effect on the market price of
the Bonds. After the Bonds are rated, the State Treasurer intends to provide
appropriate periodic credit information to the bond rating agencies to assist in
maintaining the ratings on the Bonds.
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The State's Department of Information Technology reports that the State
experienced no interruption in the delivery of mission critical services as a
result of Year 2000. The State will continue to monitor its information
technology systems to ensure the continued delivery of essential services.
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 itself may incur debt.
The State may issue general obligation 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. With the exception of general obligation housing bonds
(which must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
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 ("TRANs"), 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 ("BANs"). TRANs must mature within one year
from their dates of issuance and may not be refunded or refinanced beyond such
period. However, since 1990 the State's ability to issue TRANs has been limited
due to enactment of the fiscal reform program which created the Local Government
Assistance Corporation ("LGAC"), a public benefit corporation empowered to issue
long-term obligations to fund certain payments to local governments that had
been traditionally funded through the State's annual seasonal borrowing. BANs
may only be issued for the purposes and within the amounts for which bonds may
be issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance. In order to
provide flexibility within these maximum term limits, the State has utilized the
BANs authorization to conduct a commercial paper program to fund disbursements
eligible for general obligation bond financing.
Pursuant to specific constitutional authorization, the State may also
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey.
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The State has never been called upon to make any direct payments pursuant to
such guarantees. State guaranteed bonds of the Thruway Authority and the Port
Authority of New York and New Jersey were fully retired on July 1, 1995 and
December 31, 1996, respectively.
In February 1997, the Job Development Authority ("JDA") issued
approximately $85 million of State guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
finances. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities were suspended in 1995. JDA resumed its
lending activities in 1997 under a revised set of lending programs and
underwriting guidelines. As a result of the structural imbalances in JDA's
capital structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed the 1997 refinancing. JDA anticipates that
it will transact additional refinancings in 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the
1999-2000 fiscal year.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State 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. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a financing
arrangement with LGAC to restructure the way the State makes certain local aid
payments.
The State also participates in the issuance of certificates of
participation ("COPs") in a pool of leases entered into by the State's Office of
General Services on behalf of several State departments and agencies interested
in acquiring operational equipment or in certain cases, real property.
Legislation enacted in 1986 established restrictions upon and centralized State
control, through the Comptroller and the Director of the Budget, over the
issuance of COPs representing the State's contractual obligation, subject to
annual appropriation by the Legislature and availability of money, to make
installment or lease-purchase payments for the State's acquisition of such
equipment or real property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. Public authorities refer to public benefit
corporations, created pursuant to State law, other than local authorities.
Public authorities are not subject to the constitutional restrictions on the
incurrence of debt which apply to the State itself and may issue bonds and notes
within the
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amounts and restrictions set forth in legislative authorization. The
State's access to the public credit markets could be impaired and the market
price of its outstanding debt may be materially and adversely affected if any of
its public authorities were to default on their respective obligations.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC. The legislation authorized LGAC to issue its bonds and
notes in an amount to yield net proceeds not in excess of $4.7 billion
(exclusive of certain refunding bonds). Over a period of years, the issuance of
these 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. The
legislation also 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 the need for additional borrowing and
provided 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. This provision
capping the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds
of $4.7 billion, completing the program. The impact of LGAC's borrowing, as well
as other changes in revenue and spending patterns, is that the State has been
able to meet its cash flow needs throughout the fiscal year without relying on
short-term seasonal borrowings.
The State ended its 1998-99 fiscal year on March 31, 1999 in balance on a
cash basis, with a reported General Fund cash balance of $892 million, excluding
$2.31 billion on deposit in the tax refund reserve. Of the closing General Fund
balance, $473 million was in the Tax Stabilization Reserve Fund (after an
additional deposit of $73 million in 1998-99), $107 million in the Contingency
Reserve Fund (after a deposit of $39 million in 1998-99), and $312 million in
the Community Projects Fund.
The closing General Fund balance does not include $2.31 billion that the
State deposited into the tax refund reserve at the close of 1998-99 to pay for
tax refunds in 1999-2000. The refund reserve transaction has the effect of
decreasing reported personal income tax receipts in 1998-99, while increasing
reported receipts in 1999-2000. The proposed 1999-2000 State Financial Plan
assumes that $1.79 billion of the moneys made available through this transaction
will not be used to support operations in 1999-2000, but instead be reserved for
use in 2000-01 and 2001-02 to offset the incremental loss of tax receipts from
already-enacted tax cuts that will take effect in those years. The remaining
balance of $521 million in the tax refund reserve was made available as a result
of the LGAC financing program and was required to be on deposit as of March 31,
1999.
General Fund receipts and transfers from other funds for the 1998-99
fiscal year totaled $36.74 billion, an increase of 6.34% from 1997-98 levels.
Compared to the February Financial Plan estimate, total receipts and transfers
were lower by $34 million. It should be noted that the receipt results for
1998-99 reflect year-end actions that had the effect of reducing personal income
tax receipts, as discussed above. Adjusted for these actions, personal income
taxes were $608 million higher than projected in the enacted budget, largely due
to higher-than-projected
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withholding and estimated tax collections as a result of stronger-than-projected
economic growth, particularly in the financial markets and the securities
industries.
General Fund disbursements and transfers to other funds totaled $36.49
billion for the 1998-99 fiscal year, an increase of 6.23% from 1997-98 levels.
In comparison to the February estimate, disbursements were down by $127 million,
with lower-than-projected spending for local assistance ($194 million), general
State charges ($27 million), and debt service ($2 million), offset by higher
spending in State operations ($21 million) and transfers to other funds ($75
million). Most of this change is attributable to the timing of payments.
Disbursements in All Governmental Funds for the 1998-99 fiscal year
totaled $70.62 billion, or 6.94% above the 1997-98 fiscal year.
The State's most-recent fiscal year began on April 1, 1999 and ends on
March 31, 2000. On March 31, 1999, the State adopted the debt service portion
of the State budget for the 1999-2000 fiscal year; four months later, on August
4, 1999, it enacted the remainder of the budget. The Governor approved the
budget as passed by the Legislature.
Following enactment of the budget, the State prepared a Financial Plan
for the 1999-2000 fiscal year (the "1999-2000 Financial Plan") that sets forth
projected receipts and disbursements based on the actions taken by the
Legislature. The State expects to update the Financial Plan quarterly.
In 1999-2000, General Fund disbursements, including transfers to support
capital projects, debt service and other funds, are estimated at $37.36 billion,
an increase of $868 million or 2.38 percent over 1998-99. Projected spending
under the 1999-2000 enacted budget is $215 million above the Governor's
Executive Budget recommendations, including 30-day amendments. This change is
the net result of spending actions that occurred during negotiations on the
Budget. The increase in General Fund spending is comprised of $1.1 billion in
legislative additions to the Executive Budget (primarily in education), offset
by various actions, including reestimates of required spending based on
year-to-date results and the identification of certain other resources that
offset spending, such as $250 million from commencing the process of privatizing
the Medical Malpractice Insurance Association (MMIA), $250 million from the
retention of the Debt Reduction Reserve Fund within the General Fund and about
$100 million in excess fund balances. The MMIA was established in 1983 to
provide excess liability insurance to doctors and medical providers. Legislation
enacted with the 1999-2000 budget initiates the process of MMIA privatization
and transfers excess fund balances to the State.
The 1999-2000 enacted budget provides for $831 million in new funding for
public schools, the largest year-to-year increase in State history. The budget
also enacts several new tax cuts valued at $375 million when fully phased in by
2003-04. None of the $1.82 billion cash surplus from 1998-99 is assumed to
support spending in 1999-2000, but instead is reserved to help offset the costs
of previously enacted tax cuts that take effect after 1999-2000.
The 1999-2000 Financial Plan projects a closing balance of $2.85 billion
in the General Fund. The balance is comprised of the $1.82 billion surplus from
1998-99 that has been set aside to finance already-enacted tax cuts, $473
million in the Tax Stabilization Reserve Fund (TSRF), $250 million in the Debt
Reduction Reserve Fund (DRRF), $107 million in the Contingency Reserve Fund
(CRF), and $200 million in the Community Projects Fund (CPF), which finances
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legislative initiatives. The State expects to close 1999-2000 with cash balances
in these funds at their highest level ever.
Many complex political, social and economic forces influence the State's
economy and finances, which may in turn affect the State Financial Plan. These
forces may affect the State unpredictably from fiscal year to fiscal year and
are influenced by governments, institutions, and organizations that are not
subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and State economies. The Division of 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 the
projections and those projections may be changed materially and adversely from
time to time.
Total General Fund receipts and transfers in 1999-2000 are now projected
to be $39.31 billion, an increase of $2.57 billion from the $36.74 billion
recorded in 1998-99. This total includes $35.93 billion in tax receipts, $1.36
billion in miscellaneous receipts, and $2.02 billion in transfers from other
funds. The transfer of the $1.82 billion surplus recorded in 1998-99 to the
1999-2000 fiscal period has the effect of exaggerating the growth in State
receipts from year to year by depressing reported 1998-99 figures and inflating
1999-2000 projections.
The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based, with certain modifications, on federal definitions of
income and deductions. Net General Fund personal income tax collections are
projected to reach $22.95 billion in 1999-2000, well over half of all General
Fund receipts and nearly $2.87 billion above the reported 1998-99 collection
total. Much of this growth is associated with the $1.82 billion net impact of
the transfer of the surplus from 1998-99 to the current year as partially offset
by the diversion of an additional $661 million in income tax receipts to the
School Tax Relief (STAR) fund. The STAR program was created in 1997 as a
State-funded local property tax relief program funded through the use of
personal income tax receipts. Adjusted for these transactions, the growth in net
income tax receipts is roughly $1.8 billion, an increase of almost 9 percent.
This growth is largely a function of two factors: i) the 8 percent growth
in income tax liability projected for 1999; and ii) the impact of the 1998 tax
year settlement recorded early in this fiscal year.
User taxes and fees are comprised of three-quarters of the State's four
percent sales and use tax, cigarette, alcoholic beverage, container, and auto
rental taxes, and a portion of the motor fuel excise levies. This category also
includes receipts from the motor vehicle registration fees and alcoholic
beverage license fees. Dedicated transportation funds outside of the General
Fund receive a portion of motor fuel tax and motor vehicle registration fees and
all of the highway use taxes.
Receipts from user taxes and fees are projected to total $7.35 billion,
an increase of $105 million from reported collections in the prior year. The
sales tax component of this category accounts for virtually all of the 1999-2000
growth. Growth in base sales tax yield, after adjusting for tax law and other
changes, is projected at 5.6 percent. Modest increases in motor fuel and auto
rental tax receipts over 1998-99 levels are also expected. However, receipts
from other user taxes and fees are estimated to decline by $177 million.
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The yield of other excise taxes in this category, particularly the
cigarette and alcoholic beverage taxes, show long-term declining trends. General
Fund declines in 1999-2000 motor vehicle fee receipts, in contrast, reflect
statutory fee reductions and an increased amount of collections earmarked to the
Dedicated Highway and Bridge Trust Fund.
Significant statutory changes made in this category during the 1999-2000
legislative session include: delaying until March 1, 2000 the implementation of
the exemption from State sales tax of clothing and footwear priced under $110;
providing week-long sales tax exemptions in September 1999 and January 2000 for
clothing and footwear priced under $500; enactment of a variety of small sales
tax exemptions including certain equipment used in providing telecommunications
service for sale, property and services used in theatrical productions, computer
hardware used to design Internet web sites, and building materials used in
farming; a reduction in the beer tax rate; and an expanded exemption from the
alcoholic beverage tax for small brewers.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes. Beginning in 1994, a 15 percent surcharge on these levies began to be
phased out and, for most taxpayers, there is no surcharge liability for taxable
periods ending in 1997 and thereafter.
Total business tax collections in 1999-2000 are now projected to be $4.63
billion, $230 million below results for the prior fiscal year. The
year-over-year decline in projected receipts in this category is largely
attributable to statutory changes. These include the first year of a scheduled
corporation franchise tax rate reduction, the alternative minimum tax rate
reduction, the fixed dollar minimum rate reduction, and the expansion of the
investment tax credit to financial service companies. Ongoing tax reductions
include the second year of the "Power for Jobs" utility tax credit program, the
gross receipts tax rate reduction, and scheduled additional diversion of General
Fund petroleum business and utility tax receipts to dedicated transportation
funds.
Legislation enacted this year affecting receipts in this category
includes: a phased reduction in the net income tax rate applicable to bank and
insurance companies from 9 percent to 7.5 percent; reforms to the corporation
franchise subsidiary capital tax; a further reduction in the alternative minimum
tax rate from 3 percent to 2.5 percent; doubling the economic development zone
and zone equivalent area wage tax credits; and providing further reforms to the
apportionment of income for the airline industry.
Other taxes include the estate and gift tax, the real property gains tax
and pari-mutuel taxes. Taxes in this category are now projected to total $1
billion, $137 million below last year's amount. The primary factors accounting
for most of the expected decline include: an adverse tax tribunal decision
resulting in significant refunds of the now repealed real property gains tax;
pari-mutuel tax reductions enacted with the 1999-2000 budget; and the effects of
the already enacted reductions in the estate and gift taxes.
Significant legislation passed with the 1999-2000 enacted budget
affecting these sources include both the extension of and an increase in certain
temporary tax reductions at the State's race tracks and conformity with new
federal estate tax provisions.
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Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Miscellaneous
receipts are expected to total $ 1.36 billion, down $142 million from the prior
year amount. This reflects the loss of non-recurring receipts received in
1998-99 and the growing effects of the phase-out of the medical provider
assessments, now scheduled to be eliminated in January 2000.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, including the one percent sales
tax used to support payments to LGAC.
Transfers from other funds are expected to total $2.02 billion, or $99
million more than total receipts from this category during 1998-99. Total
transfers of sales taxes in excess of LGAC debt service requirements are
expected to increase by approximately $93 million, while transfers from all
other funds are expected to increase by $6 million.
General Fund disbursements, including transfers to support capital
projects, debt service and other funds, are estimated at $37.36 billion in
1999-2000, an increase of $868 million or 2.38 percent over 1998-99.
Following the pattern of the last two fiscal years, education programs
receive the largest share of new funding contained in the 1999-2000 Financial
Plan. School aid is expected to grow by $831 million or 8.58 percent over
1998-99 levels (on a State fiscal year basis). Outside of education, the largest
growth in spending is for State Operations ($207 million, including $100 million
reserved for possible collective bargaining costs); Debt Service ($183 million),
and mental hygiene programs, including funding for a cost of living increase for
care providers ($114 million). These increases were offset, in part, by spending
reductions or actions in health and social welfare ($280 million), and in
general State charges ($222 million).
Grants to Local Governments is the largest category of General Fund
disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
largest areas of spending in this category are for aid to elementary and
secondary schools (41 percent) and for the State's share of Medicaid payments to
providers (22 percent). Grants to Local Governments are projected at $25.60
billion in 1999-2000, an increase of $910 million or 3.68 percent over 1998-99.
Under the 1999-2000 enacted budget, General Fund spending on school aid
is projected at $10.52 billion on a State fiscal year basis, an increase of $831
million from the prior year. The budget provides additional funding for
operating aid, building aid, and several other targeted aid programs. It also
funds the balance of aid payable for the 1998-99 school year that is due
primarily in the first quarter of the 1999-2000 fiscal year. For all other
educational programs, disbursements are projected to grow by $78 million to
$2.99 billion.
Spending for Medicaid in 1999-2000 is projected to total $5.54 billion,
essentially unchanged from 1998-99, due in part to the use of $145 million in
other available funds that lowers disbursements in this area. Disbursements for
all other health and social welfare programs are projected to total $2.70
billion, a decrease of $252 million. Lower welfare spending, driven by State and
federal reforms and a robust economy, accounts for most of the decline.
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The remaining disbursements primarily support community-based mental
hygiene programs, local transportation programs, and revenue sharing payments to
local governments. Revenue sharing and other general purpose aid to local
governments is projected at $825 million.
State operations pays for the costs of operating the Executive,
Legislative, and Judicial branches of government, including the prison system,
mental hygiene institutions, and the State University system (SUNY). Personal
Service costs account for approximately 73 percent of spending in this category.
Spending in State operations is projected to increase by $207 million or
3.1 percent over the prior year. The growth reflects $100 million in projected
spending for new collective bargaining agreements that the State expects to be
ratified in the current year. Funding for this expense will come from the
Collective Bargaining Reserve. The annualized costs of current collective
bargaining agreements, growth in the Legislative and Judiciary budgets, and
staffing costs for the State's Year 2000 compliance programs also contribute to
the year-to-year growth in spending. The State's overall workforce is expected
to remain stable at around 191,300 employees.
General State charges account for the costs of providing fringe benefits
to State employees and retirees of the Executive, Legislature, and Judiciary.
These payments, many of which are mandated by statute and collective bargaining
agreements, include employer contributions for pensions, social security, health
insurance, workers' compensation, and unemployment insurance. General State
charges also cover State payments-in-lieu-of-taxes to local governments for
certain State-owned lands, and the costs of defending lawsuits against the State
and its public officers.
Disbursements in this category are estimated at $2.04 billion, a decrease
of $222 million from the prior year. The change primarily reflects projected
growth of $27 million in a variety of programs offset by the use of proceeds
from the privatization of the Medical Malpractice Insurance Association, which
is expected to offset certain General Fund fringe benefit costs over the next
two fiscal years by approximately $250 million annually.
This category also accounts for debt service on short-term obligations of
the State, i.e., the interest costs of the State's commercial paper program. The
commercial paper program is expected to have an average of approximately $185
million outstanding during 1999-2000.
Transfers to other funds from the General Fund are made primarily to
finance certain portions of State capital projects spending and debt service on
long-term bonds where these costs are not funded from other sources.
Long-term debt service transfers are projected at $2.27 billion in
1999-2000, an increase of $183 million from 1998-99. The increase reflects debt
service costs from prior-year bond sales (net of refunding savings), and certain
sales planned to occur during the 1999-2000 fiscal year.
Transfers for capital projects provide General Fund support for projects
that are not financed with bond proceeds, dedicated taxes, other revenues, or
federal grants. Transfers in this category are projected to total $168 million
in 1999-2000. The decline of $78 million from the prior year is primarily due
the delay of the receipt of payment of certain reimbursements in 1998-99.
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Receipts of $50 million transferred to DRRF in 1998-99 will be used in
the Capital Projects Fund in 1999-2000 to provide pay-as-you-go funding for five
capital programs that were previously funded with bond proceeds. The 1999-2000
enacted budget also reserves $250 million in new resources for DRRF.
All other transfers (excluding DRRF), which reflect the remaining
transfers from the General Fund to other funds, are estimated to total $385
million in 1999-2000, a decline of $84 million from 1998-99, primarily because
of certain non-recurring transfers that occurred last year.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Total disbursements for programs supported by Special Revenue Funds are
projected at $30.94 billion, an increase of $1.29 billion or 4.35 percent over
the prior year. Special Revenue Funds include Federal grants and State special
revenue funds.
Federal grants are projected to comprise 72 percent of all Special
Revenue spending in 1999-2000, comparable to prior years. Disbursements from
federal funds are estimated at $22.17 billion, an increase of $741 million or
3.46 percent. Medicaid is the largest program within federal fiends, accounting
for 56 percent of total spending in this category. In 1999-2000, Medicaid
spending is projected at $14.32 billion, an increase of $711 million over
1998-99. The remaining growth in federal funds is primarily for the Child Health
Plus program, which is estimated at $117 million in 1999-2000. This growth is
offset by decreased spending in certain social services programs resulting from
more recent spending reestimates.
State special revenue spending is projected to be $8.77 billion, an
increase of $550 million or 6.69 percent from last year. The spending growth is
primarily due to $661 million for the next phase of the STAR program and $250
million in additional general State charges funded by proceeds from the MMIA
transaction, offset by a decrease of $185 million in projected educational
spending as a result of lower projected Lottery proceeds and a decline of $112
million in transportation disbursements. The remainder reflects the net impact
of spending reestimates.
Capital Projects Funds account for the financial resources used in the
acquisition, construction, or rehabilitation of major State capital facilities,
and for capital assistance grants to certain local governments or public
authorities. This fund type consists of the Capital Projects Fund, which is
supported by tax receipts transferred from the General Fund, and various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues.
Spending from Capital Projects Funds in 1999-2000 is projected at $4.18
billion, an increase of $114 million or 2.80 percent from last year.
Transportation, environmental, education and mental hygiene programs are the
major sources of year-to-year spending growth in this category.
Spending for capital projects is financed with cash or bond proceeds.
Cash resources include pay-as-you-go State resources and Federal grants. Bond
resources include proceeds from the sale of bonds, including voter-approved
General Obligation bonds or public authority bonds.
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The Governor's debt reduction measures lower the State's dependence on
debt by ensuring that a larger and growing share of the State's essential
capital investments are financed with pay-as-you-go resources. The prudent
financing of capital needs with cash resources ensures that less than one-half
of 46% of capital spending in 1999-00 will be financed with debt while State
pay-as-you-go resources and Federal grants will support the majority of 54% of
capital costs.
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, the condition of the financial sector,
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 Financial Plan are based on
the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year collection
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.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the State's projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
Further risks to the Financial Plan arise out of potential actions at the
federal level. Potential changes to federal tax law currently under discussion
as part of the federal government's efforts to enact a multi-year tax reduction
package could alter the federal
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definitions of income on which certain State taxes rely. Certain proposals, if
enacted, could have a significant impact on State revenues in the future.
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 the projections set fort herein. In the past the
State has taken management actions to address potential Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
Despite recent budgetary surpluses recorded by the State, actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, and actions by the federal government have helped to
create projected structural budget gaps for the State. These gaps result 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. To help guard
against these risks, the State has projected reserves of $2.4 billion in
1999-2000.
The national economy has maintained a robust rate of growth during the
past six quarters as the expansion, which is well into its ninth year,
continues. The national expansion, if it continues through February 2000, will
be the longest on record. Since early 1992, approximately 19 million jobs have
been added nationally. Output growth has averaged 3.2 percent over this period,
essentially the same as the 3.3 percent average annual growth during the
post-World War II period. The State economy has also continued to expand, with
over 600,000 jobs added since late 1992. Employment growth has been slower than
in the nation during this period, although the State's relative performance has
improved in the last two years. Growth in average wages in New York has
generally outperformed the nation, while growth in personal income per capita
has kept pace with the nation.
DOB expects that national economic growth will be quite robust throughout
calendar year 1999. Growth in real Gross Domestic Product for 1999 is projected
to be 4.0 percent, with a decline in net exports overwhelmed by continued strong
consumer spending. The projected overall growth rate of the national economy for
calendar year 1999 is nearly identical to the consensus forecast of a widely
followed survey of national economic forecasters. Inflation, as measured by the
Consumer Price Index, is projected to be about 2.1 percent, a modest increase
despite strong economic growth. Personal income and wages are projected to
increase by 5.1 percent and 6.3 percent respectively.
The forecast of the State's economy shows continued expansion during the
1999 calendar year, with employment growth gradually slowing as the year
progresses. The financial and business service sectors are expected to continue
to do well, while employment in the manufacturing sector is expected to post a
modest decline. On an average annual basis, the employment growth rate in the
State is expected to be somewhat lower than in 1998 and the unemployment rate is
expected to drop further to 5.1 percent. Personal income is expected to
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record moderate gains in 1999. Wage growth in 1999 is expected to be slower than
in the previous year as the recent robust growth in bonus payments moderates.
The forecast for continued growth, and any resultant impact on the
State's 1999-2000 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment and wages or in stock market prices
could lead to unanticipated strong growth in consumer spending. Inventory
investment due to Y2K may be significantly stronger than expected towards the
end of this year possibly followed by significant weakness early next year.
Also, improvements in foreign economies may be weaker than expected and
therefore, may have unanticipated effects on the domestic economy. The inflation
rate may differ significantly from expectations due to the conflicting impacts
of a tight labor market and improved productivity growth as well as to the
future direction and magnitude of fluctuations of oil prices. In addition, the
State economic forecast could over- or underestimate the level of fixture bonus
payments, financial sector profits or inflation growth, resulting in unexpected
economic impacts. Similarly, the State forecast could fail to correctly estimate
the amount of employment change in the banking, financial and other business
service sectors as well as the direction of employment change that is likely to
accompany telecommunications and energy deregulation.
To date, the State has experienced no significant Year 2000 computer
disruptions. Monitoring will continue over the next few months to identify and
correct any problems that may arise. However, there can be no assurance that
outside parties who provide goods and services to the State will not experience
computer problems related to Year 2000 programming in the future, or that such
disruptions, if they occur, will not have an adverse impact on State operations
or finances.
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 1999-00 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. In addition, a number of tax law, real property,
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and civil rights claims are pending. 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 35 36 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 and as well as
compensatory and punitive damages.
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.
Adverse developments in the current legal proceedings for which there are
unanticipated, unfavorable and material judgments, or the initiation of new
proceedings could affect the ability of the State to maintain a balanced
1999-2000 Financial Plan. The State believes that the 1999-2000 Financial Plan
includes sufficient reserves to offset the costs associated with the payment of
judgments that may be required during the 1999-2000 fiscal year. These reserves
include (but are not limited to) amounts appropriated for court of claims
payments and projected fund balances in the General Fund. In addition, any
amounts ultimately required to be paid by the State may be subject to settlement
or may be paid over a multi-year period. There can be no assurance, however,
that adverse decisions in legal proceedings against the State would not exceed
the amount of all potential 1999-2000 Financial Plan resources available for the
payment of judgments, and could therefore affect the ability of the State to
maintain a balanced 1999-2000 Financial Plan.
The fiscal health of the State may also be affected by the fiscal health
of New York City ("City"), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time. The
City prepares a four-year financial plan ("Financial Plan") annually and updates
it periodically, and prepares a comprehensive annual financial report describing
its most recent fiscal year each October.
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 cities of Yonkers and Troy continue to
operate under State-ordered control agencies. The potential impact on the State
of any future requests by localities for additional oversight or financial
assistance is not included in the projections of the State's receipts and
disbursements for the State's 1999-00 fiscal year.
The State has provided extraordinary financial assistance to select
municipalities, primarily cities, since the 1996-97 fiscal year. Funding has
essentially been continued or increased in each subsequent fiscal year. Such
funding in 1999-2000 totals $113.9 million. In
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1997-98, the State increased General Propose State Aid for local governments by
$27 million to $550 million, and has continued funding at this new level since
that date.
While the distribution of General Purpose State Aid for local governments
was originally based on a statutory formula, in recent years both the total
amount appropriated and the shares appropriated to specific localities have been
determined by the Legislature. A State commission established to study the
distribution and amounts of general purpose local government aid failed to agree
on any recommendations for a new formula.
Counties, cities, towns, villages and school districts have engaged in
substantial short-term and long-term borrowings. In 1997, the total indebtedness
of all localities in the State, other than New York City, was approximately
$21.0 billion. A small portion (approximately $80 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling State legislation. 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.
Twenty-two localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1997.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal finding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
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 Government of Puerto Rico has established programs directed at
developing the manufacturing and service sectors (with emphasis on the tourism
industry) of the economy and expanding and modernizing the island's
infrastructure. Domestic and foreign investment has been stimulated by selective
tax exemption, development loans, and other financial and tax incentives.
Infrastructure expansion and modernization have been to a large extent financed
by bonds and notes issued by the Commonwealth, its public corporations and
municipalities. Economic progress has been aided by significant increases in the
levels of education and occupational skills of the island's population.
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The economy of Puerto Rico is fully integrated with that of the United
States mainland. During fiscal 1999, approximately 87% of Puerto Rico's exports
went to the United States mainland, which was also the source of approximately
60% of Puerto Rico's imports. In fiscal 1999, Puerto Rico experienced a $9.6
billion positive adjusted merchandise trade balance.
The dominant sectors of the Puerto Rico economy are manufacturing and
services. The manufacturing sector has experienced a basis change over the years
as a result of increased emphasis on higher wage, high technology industries,
such as pharmaceuticals, electronics, computers, microprocessors, professional
and scientific instruments, and certain high technology machinery and equipment.
The services sector, including finance, insurance, real estate, wholesale and
retail trade, and hotel and related services, also plays a major role in the
economy. It rates second only to manufacturing in contribution to the gross
domestic product and leads all sectors in providing employment.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1995 through fiscal 1999. 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 and low oil prices.
Gross product in fiscal 1995 was $28.5 ($26.0 billion in 1992 prices) and
gross product in fiscal 1999 was $38.2 billion ($29.8 billion in 1992 prices).
This represents an increase in gross product of 34.4% from fiscal 1995 to 1999
(14.8% in 1992 prices).
Since fiscal 1985, personal income, both aggregate and per capita, has
increased consistently each fiscal year. In fiscal 1999, aggregate personal
income was $37.2 billion ($33.0 billion in 1992 prices) and personal income per
capita was $9,674 ($8,571 in 1992 prices). The difference in the statistics of
1992 prices for gross product and personal income is attributable to the
difference in the price deflators used for each.
Personal income includes transfer payments to individuals in Puerto Rico
under various social programs. Total federal payments to Puerto Rico, which
include transfers to local government entities and expenditures of federal
agencies in Puerto Rico, in addition to federal transfer payments to
individuals, are lower on a per capita basis in Puerto Rico than in any state.
Transfer payments to individuals in fiscal 1999 were $8.1 billion, of which $5.3
billion, or 65.4%, represented entitlements to individuals who had previously
performed services or made contributions under programs such as Social Security,
Veteran's Benefits, Medicare and U.S. Civil Service retirement pensions.
According to the Labor Department's Household Employment Survey, during
the first seven months of fiscal 2000, total employment increased 0.4% over the
same period in fiscal 1999. Total monthly employment averaged 1,138,600 during
the first seven months of fiscal 2000, compared to 1,134,400 in the same period
in fiscal 1999.
The Planning Board's gross product forecast for fiscal 2000, made in
October 1999, projected an increase of 2.7% over fiscal 1999.
Puerto Rico has a diversified economy with the manufacturing and services
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 estimates, in fiscal 1999
manufacturing generated $26.3 billion, or 43.8%, of gross domestic product and
accounted for 13.9% of total employment; as compared with fiscal 1998, when it
generated $19.0 billion, or 42.3%, of gross domestic product and accounted for
14.1% of total employment. Manufacturing in Puerto Rico is now more diversified
than during the earlier phases of its industrial development and includes
several industries less prone to business cycles. 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.
Federal legislation enacted in 1996, however, which amended Internal Revenue
Code Section 936, phased out the federal tax incentives during a 10-year period.
For many years, United States companies operating in Puerto Rico enjoyed
a special tax credit that was available under Section 936 of the Code.
Originally, the credit provided an effective 100% federal tax exemption for
operating and qualifying investment income from Puerto Rico sources. Amendments
to Section 936 made in 1993 instituted two alternative methods for calculating
the credit and limited the amount of the credit that a qualifying company could
claim. These limitations are based on a percentage of qualifying income and on
qualifying expenditures on wages, other wage related benefit and qualifying
expenditures. 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 tax credit is now being phased out
over a ten-year period for existing claimants and is no longer available for
corporations that establish operations in Puerto Rico after October 13, 1995
(including existing Section 936 Corporations to the extent substantially new
operations are established 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 Amendments eliminated the
credit previously available for income derived from certain qualified
investments in Puerto Rico.
During 1997, Governor Rossello 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 to effect until Puerto Rico shows, among
other things, substantial economic improvements in terms of certain economic
parameters. The fiscal 1998 budget submitted by President Clinton to Congress in
February 1997 included a proposal to modify Section 30A to (i) extend the
availability of the Section 30A Credit indefinitely, (ii) make it available to
companies establishing operations in Puerto Rico after October 13, 1995, and
(iii) eliminate the income cap. Although said proposal was not included in the
final fiscal 1998 federal budgets approved by Congress, President Clinton's
fiscal 2000 budget submitted to Congress includes a proposal to extend the
Section 30A Credit for three years and make it available to companies
establishing new operations, but would make the credit subject to the existing
income cap.
Two bills were recently introduced in Congress in one case to extend the
Section 30A Credit until 2009 and in the other to extend it until the Puerto
Rico economy reaches a level
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closer to that of the U.S. economy. Both bills would make the Section 30A Credit
applicable to newly established companies and new lines of businesses and would
remove the income cap. While the Government of Puerto Rico plans to continue
lobbying for these proposals, it is not possible at this time to predict whether
the Section 30A Credit will be so modified.
The Government of Puerto Rico believes that the phase out of Sections 936
and 30A will not have a significant adverse effect on the economy of Puerto
Rico. It believes that, notwithstanding the loss of the federal income tax
benefits provided by Section 936 and 30A, the tax and other benefits offered by
the Puerto Rico to U.S. and foreign investors will enable it to continue
attracting and retaining investments in manufacturing and service operations.
Some of the factors which the Government believes will continue to make Puerto
Rico an attractive jurisdiction for U.S. and foreign companies to conduct
manufacturing and service operations include: low Puerto Rico corporate tax
rates ranging from 2 to 7%; "super deductions" for job training and research and
development; availability of industrial facilities at competitive rental rates;
an accelerated permitting process; availability of a highly skilled and educated
labor force and a well developed infrastructure for business operations,
including a sophisticated legal and financial system and modern and reliable
electric, transportation and telecommunications networks. One of the reasons why
the Government believes that many U.S. corporations formerly operating under
Section 936 will remain in Puerto Rico during and after the phase out of
Sections 936 and 30A is the fact that, since the beginning of the phase out
period, many of them have converted from U.S. corporations to foreign
corporations, including Puerto Rico corporations. As a result, these
corporations will be able to defer the payment of federal income taxes on the
profits generated by their manufacturing and service operations in Puerto Rico
until such time as such profits are distributed to their U.S. parent company.
The Government believes that this deferral, coupled with the local tax exemption
and other benefits offered by Puerto Rico, is sufficient to offset the loss of
the credits provided by Sections 936 and 30A.
Another reason is that many companies have obtained new grants of tax
exemption under the industrial incentives laws of Act No. 135 of December 2,
1997 (the "1998 Tax Incentives Law"), under which companies engaged in
manufacturing and certain other designated activities are eligible to receive
full or partial exemption from income, property and other local taxes and which
permit the repatriation or distribution of profits free of dividend taxes. In
response to these and other tax benefits associated with the 1998 Tax Incentives
Law, many companies have made commitments to increase their employment and make
new capital investments. Since fiscal 1997, 234 new companies have either
established new operations in Puerto Rico or expanded their existing operations
in Puerto Rico. The level of exports of manufactured products and other economic
indicators suggest that so far the level of manufacturing operations has
remained strong during this phase out period. While the Government believes that
these indicators suggest that the economy will not be affected significantly by
the elimination of Sections 936 and 30A, there can be no assurance that such
phase out will not have an adverse effect on the economy.
Section 2 of Article VI of the Constitution of Puerto Rico provides that
direct obligations of the Commonwealth evidenced by full faith and credit bonds
or notes 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 theretofore issued 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, exceeds 15% of the average annual revenues raised under the
provisions of Commonwealth legislations and covered into the Treasury of Puerto
Rico in the two fiscal years
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proceeding the then current fiscal year. Section 2 of Article VI 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, property taxes and excise taxes. Certain revenues, such as federal excise
taxes on offshore shipments of alcoholic beverages and tobacco products and
customs duties, which are collected by the United States Government and returned
to the Treasury of Puerto Rico, and motor vehicle fuel taxes and license fees,
which are allocated to the Highway Authority, are not included as internal
revenues for the purpose of calculating the debt limit, although they may be
available for the payment of debt service.
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 status. Under
the proposed legislation, failure to settle on full self-government after
completion of the referenda process provided therein would result in retention
of the current commonwealth status. On March 19, 1997, similar legislation was
introduced in the U.S. Senate. On March 4, 1998, the U.S. House of
Representatives voted in favor of the Political Status Act. The Senate, however,
failed to act upon the Political Status Act.
Pursuant to legislation approved by the Commonwealth Legislature, a
referendum was held in Puerto Rico on December 13, 1998 in which the voters
expressed their preference among four political status options. Two of the
options represented statehood and independence. The other two options describe
statuses which are based on a political relationship with the United States
providing varying degrees of sovereignty over local, national and international
matters. Voters were also allowed to vote for "none" of these four options. The
Statehood option received 46.5% of the votes case, while "none of the above"
received 50.30% of the votes cast. In connection with this referendum, the U.S.
Senate adopted Senate Resolution 279 in which it expressed the sense of the
Senate supporting and recognizing the right of United States citizens residing
in Puerto Rico to express their views regarding their future political status
through a referendum but any change in the existing Commonwealth status would
require an Act of Congress.
On September 21, 1998, Puerto Rico suffered the direct impact of
Hurricane Georges. The hurricane caused extensive damage throughout the island,
with the most serious damage occurring in the central mountain region. The
island was declared an emergency zone by President Clinton, thus making it
eligible for emergency assistance from the Federal Emergency Management Agency
("FEMA"). Most losses to government and private property are expected to be
covered by private insurance, FEMA emergency aid, and local government
assistance programs.
Governor Rossello's administration has developed and is implementing a
new economic development program which is based on the premise that the private
sector should provide the primary impetus for economic development and growth.
This new program, referred to as the New Economic Model, promotes changing the
role of the government from one of a provider of most basic services, to that of
a facilitator for private sector initiatives, and encourages private sector
investment by reducing government-imposed regulatory constraints.
The New Economic Model contemplates the development of initiatives that
will foster private investment in, and private management of, sectors that are
served more efficiently and effectively by private enterprise. The New Economic
Model also seeks to identify and promote
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those areas in which Puerto Rico can compete more effectively in the global
markets. In this regard, tourism has been targeted as a priority because of its
potential for job creation and increased contribution to the gross product
stemming from Puerto Rico's natural competitive advantage. The New Economic
Model also seeks to reduce the size of government's direct contribution to gross
domestic product. As part of this goal, the Government has transferred certain
governmental operations and sold a number of its assets to private parties. One
of the goals of the Rossello administration is to change Puerto Rico's public
health care system from one in which the government provides: (i) free health
services to low income individuals through public health facilities owned and
administered by the government to one in which all medical services are provided
by the private sector; and (ii) the government provides comprehensive health
insurance coverage for qualifying (generally low-income) Puerto Rico residents.
The Commonwealth is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Under Act No. 104 of the Legislature of Puerto Rico, approved on June 25, 1955,
as amended ("Act No. 104"), persons are authorized to sue the Commonwealth only
for causes of actions specified in said Act. The Commonwealth may be liable
under Act No. 104 for damages up to a maximum amount of $75,000 or $150,000 if
it involves action for damages to more than one person or where a single injured
party is entitled to several causes of action. Under certain circumstances, as
provided in Act No. 9 of the Legislature of Puerto Rico, approved on November
26, 1975, as amended ("Act No. 9"), the Commonwealth may provide its officers
and employees, including directors of public corporations and government
instrumentalities and mayors of the municipalities of the Commonwealth, with
legal representation, as well as assume the payment of any judgment that may be
entered against them. There is no limitation on the amount of the judgment that
may be paid under Act No. 9.
With respect to pending and threatened litigation, as of June 30, 1999
the Commonwealth included in its financial statements reported liabilities of
approximately $352 million for awarded and anticipated unfavorable judgments.
This amount represented the amount estimated at the time as a probable liability
or a liability with a fixed or expected due date which would require future
available financial resources for its payment. This amount includes
approximately $200 million of accrued liabilities related to the fines described
below. The Commonwealth believes that the ultimate liability in excess of
amounts provided in the financial statements, if any, would not be significant.
The Commonwealth is a defendant in approximately three hundred related
lawsuits in which the plaintiffs allege a torts claim and violation of their
civil rights in connection with the preparation by the government of dossiers on
certain individuals. The lawsuits are still in the discovery stage. A petition
to certify these claims as a class action has been denied, and such denial has
become final. The aggregate amount of damages claimed by the plaintiffs exceed
$50 billion. The Commonwealth has accepted liability for the claims without
renouncing the limitations, immunities and defenses available to it under Act
No. 104. The Commonwealth believes that the amount of damages claimed is
exaggerated and that the outcome of this litigation will not materially affect
the revenues and expenditures of the Commonwealth. The Commonwealth's financial
statements for the fiscal year which ended June 30, 1999, did not include any
provision for liability with respect to these lawsuits. On December 14, 1999 the
Governor issued an Executive Order whereby the Government offered to pay $6,000
to the plaintiffs in the lawsuits who would agree to dismiss their lawsuit and
$3,000 to certain potential claimants who had not yet filed a lawsuit. The
Commonwealth expects that many of the
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claimants will accept this settlement offer. As part of the Executive Order, the
Governor authorized the Secretary of the Treasury to set aside $5.7 million of
the moneys on deposit in the Budgetary Fund to cover any settlement payments
made.
Several officers of the Commonwealth are defendants in a class action
lawsuit filed in 1979 in the United States District Court for the District of
Puerto Rico by various inmates who alleged that their constitutional rights were
being violated because of overcrowding and lack of adequate healthcare in the
island's correctional system. In 1980, the United States District Court issued a
preliminary injunction and required the defendants to provide additional
capacity for the cells of the correctional facilities and to improve the health
care services available to inmates. Fines in the amount of $280 million have
been assessed against the defendants in order to assure compliance with the
space and health care requirements imposed by the United States District Court.
Of the fines imposed, S 150 million have already been paid by the Commonwealth.
Moody's and S&P have given the Bonds ratings of Baa1 and A, respectively.
These ratings do not reflect the MBIA Bond Insurance Policy or the Ambac Bond
Insurance Policy. Moody's and Standard and Poor's have given the Insured Bonds
ratings of Aaa and AAA, respectively. Ratings reflect only the respective views
of the rating agencies and an explanation of the significance of each rating may
be obtained only from the respective rating agency. There is no assurance that
such ratings will remain in effect for any given period of time or that they
will not be revised downward or withdrawn entirely by either or both of such
rating agencies, if in the judgment of either or both, circumstances so warrant.
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 Prospectuses and
elsewhere in this SAI.
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions - for temporary
defensive purposes - each Fund, except for the Equity Index Fund, may invest
without limit in cash and cash equivalents. See "Cash Equivalents."
REPURCHASE AGREEMENTS AND REVERSE 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 are determined to be creditworthy by the Manager or
Subadvisers. In addition, the Global High Yield Fund, International Bond and
International Equity Funds may enter into domestic or foreign repurchase
agreements with certain sellers deemed to be creditworthy pursuant to guidelines
adopted by the Trustees.
A repurchase agreement, which provides a means for a Fund to earn income
on uninvested cash for periods as short as overnight, is an arrangement under
which the purchaser (i.e., the Fund) purchases a security, usually in the form
of a 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, New York
Tax Free Fund and Tax Free Bond Fund) and price. Repurchase agreements with
foreign banks may be available with respect to government securities of the
particular foreign jurisdiction. The
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custody of the Obligation will be maintained by a custodian appointed by the
Fund. The Fund attempts to assure that 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 and California and New York
Tax Free Funds will enter into repurchase agreements as a means of earning
income on their cash reserves when, in the judgment of the Subadvisor,
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 has been deemed to
be a loan from the Fund to the seller of the Obligation. It is not clear whether
a court would consider the Obligation purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate 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 Subadvisors 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 Blue Chip Growth Fund, California Tax Free Fund, Equity Income Fund,
Global High Yield Fund, Growth Opportunities Fund, New York Tax Free Fund,
Research Value Fund, Small Cap Growth Fund, Small Cap Value Fund, Strategic
Income Fund and Strategic Value Fund may enter into reverse repurchase
agreements with banks or broker-dealers, which involve the sale of a security by
a Fund and its agreement to repurchase the instrument at a specified time and
price. Each Fund will maintain a segregated account consisting of liquid assets
to cover its obligations under reverse repurchase agreements. Each of the
California Tax Free Fund and New York Tax Free Fund will limit its investments
in reverse repurchase agreements and other borrowing to no more than 10% of its
total assets. The Blue Chip Growth Fund, Equity Income Fund, Global High Yield
Fund, Growth Opportunities Fund, Research Value Fund, Small Cap Value Fund,
Small Cap Growth Fund, Strategic Income Fund and Strategic Value Fund will each
limit its investments in reverse repurchase agreements to no more than 5% 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
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repurchase agreements exceed the cost of the agreements, the Fund's earnings or
net asset value will increase faster than otherwise would be the case;
conversely, if the income and gains fail to exceed the costs, earnings or net
asset value would decline faster than otherwise would be the case.
If the other party to a repurchase agreement were to become bankrupt, a
Fund could experience delays in recovering its investment or losses.
LENDING OF PORTFOLIO SECURITIES
In accordance with guidelines adopted by the Board of Trustees, each Fund
may seek to increase its income by lending portfolio securities. Under present
regulatory policies, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash or U.S. government securities maintained on a current basis at an amount
at least equal to 100% of the current market value of the securities loaned. The
Fund would have the right to call a loan and obtain the securities loaned at any
time generally on less than five days' notice. For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned and would also receive compensation from
the investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. The Trust, on behalf of certain
of the Funds, has entered into an agency agreement with Metropolitan West
Securities, 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' Subadvisors.
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 Subadvisor to be creditworthy
and approved by the Board, and when, in the judgment of the Subadvisor, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If a Subadvisor determines to make securities
loans, it is intended that the value of securities loaned will not exceed 33% of
the value of the total assets of the lending Fund. Under the guidelines adopted
by the Board of Trustees, a Fund may not enter into a lending agreement with a
counterparty which would cause the Fund to have loans outstanding to that
counterparty for securities having a value greater than 5% of the Fund's total
assets.
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 the U.S. Government or any agency 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 (as
described in this SAI); 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 above if such
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instruments are deemed by the Subadvisor to be of comparable high quality
and liquidity. In addition, the Global High Yield, International Equity and
International Bond Funds may hold foreign cash and cash equivalents.
BANK OBLIGATIONS
Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Funds will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation.
Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time.
Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity.
Investments in the obligations of banks are deemed to be "cash
equivalents" if, at the date of investment, the banks have capital surplus and
individual profits (as of the date of their most recently published financials)
in excess of $100,000,000, or if, with respect to the obligations of other banks
and savings and loan associations, such obligations are federally insured. The
Equity Index Fund will not be subject to the above restriction to the extent it
invests in bank obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System or are examined by the Comptroller of
the Currency or whose deposits are insured by the 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.
COMMERCIAL PAPER
Each Fund may invest in commercial paper if it is rated at the time of
investment Prime-1 by Moody's or A-1 by S&P, or, if not rated by Moody's or S&P,
if the Fund's Subadvisor determines that the commercial paper is of comparable
quality. In addition, each Fund may invest up to 5% of its total assets in
commercial paper if rated in the second highest rating category by a nationally
recognized statistical rating organization, such as S&P or Moody's, or, if
unrated, if the Fund's Subadvisor determines that the commercial paper is of
comparable quality. Commercial paper represents short-term unsecured promissory
notes issued by banks or bank holding companies, corporations and finance
companies.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include various 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 10 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, GNMA pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal
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Home Loan Banks, by the right of the issuer to borrow from the Treasury; others,
such as those issued by 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 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 Blue Chip Growth Fund, Capital Appreciation Fund, Convertible Fund,
Equity Income Fund, Global High Yield Fund, Growth Opportunities Fund, High
Yield Corporate Bond Fund, International Bond Fund, International Equity Fund,
MAP Equity Fund, Research Value Fund, Small Cap Growth Fund, Small Cap Value
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 Subadvisor 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 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
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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, MAP 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. 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. Such transactions, which involve
costs to a Fund, may be limited by the requirements imposed on each Fund to
qualify as a "regulated investment company" under the Code.
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 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 denominated in foreign
currencies may gain or lose value as a result of fluctuating currency exchange
rates. Securities markets in other countries are not always as efficient as
those in the
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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
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.
ADRs (sponsored or unsponsored) are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying foreign securities.
Most ADRs are traded on a U.S. stock exchange. Issuers of unsponsored ADRs are
not contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. EDRs and IDRs are receipts typically issued
by a European bank or trust company evidencing ownership of the underlying
foreign securities. GDRs are receipts issued by either a U.S. or non-U.S.
banking institution evidencing ownership of the underlying foreign securities.
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 seek to increase its return by trading in foreign
currencies. In addition, to the extent a Fund invests in foreign securities, it
may enter into foreign currency forward contracts in order to protect against
uncertainty in the level of future foreign currency exchange rates. Each
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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
foreign currency forward contracts, currency exchange transactions on a spot
(i.e., cash) basis, put and call options on foreign currencies and foreign
exchange futures contracts. A foreign currency forward 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. 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 fair value exchange rates will be incorporated
in a longer term investment decision made with regard to overall diversification
strategies. However, each Subadvisor 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. Set
forth below are examples of some circumstances in which a Fund might employ a
foreign currency transaction. 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.
Another example is when the Subadvisor 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
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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).
A Fund may also 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.
A Fund may also purchase or sell currencies to profit from changing
exchange rates based upon the Subadvisor's assessment of likely exchange rate
movements. These transactions will not necessarily hedge existing or anticipated
holdings of foreign securities and may result in a loss if the Subadvisor's
currency assessment is incorrect.
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. When a Fund has sold a foreign currency, a similar
process would be followed at the consummation of the forward contract.
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 Subadvisor. 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" or "settlement"
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.
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It should be realized that the use forward contracts to protect 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 Subadvisors believe 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.
The Funds cannot assure that their use of forward contracts will
always be successful. Successful use of forward contracts depends on the
investment manager's skill in analyzing and predicting relative currency
values. Forward contracts alter a Fund's exposure to currencies and could
result in losses to the Fund if currencies do not perform as the Subadvisor
anticipates. A Fund may also incur significant costs when converting assets
from one currency to another. Contracts to sell a foreign currency would limit
any potential gain which might be realized by a Fund if the value of the hedged
currency increases.
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 Global High Yield Fund, 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 which have the investment characteristics of particular securities,
securities indexes, futures contracts or currencies. Such instruments may take
a variety of forms, such as debt instruments with interest or principal
payments determined by reference to the value of a currency or commodity at a
future point in time. For example, a Fund may, subject to compliance with its
respective 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. The risks of such investments would reflect the risks of investing
in the index or other instrument the performance of which
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determines the return for the instrument. Tax considerations may limit the
Funds' ability to invest in foreign index-linked instruments.
BRADY BONDS
Each of the Convertible Fund, Global High Yield 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 are not considered U.S. government securities.
Brady Bonds may be collateralized or uncollateralized and are issued
in various currencies (primarily the U.S. dollar). U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the Brady Bonds.
Interest payments on these Brady Bonds generally are collateralized on a
one-year or longer rolling-forward basis by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of
interest payments or, in 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. Investments in Brady Bonds are to be viewed
as speculative. 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 subdivisions, 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 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
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litigation or other conditions, the power or ability of any one or more issuers
to pay, when due, the principal of, and interest on, its or their municipal
securities may be materially and adversely affected.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power for the payment of
principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of
other kinds of revenue, such as federal revenues. They, also, are usually
general obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim
financial assistance until long-term financing can be arranged. The long-term
bonds then provide funds for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the FHA under the FNMA or GNMA.
Project Notes are instruments sold by the Department of Housing and
Urban Development ("HUD") but issued by a state or local housing agency to
provide financing for a variety of programs. They are backed by the full faith
and credit of the U.S. government, and generally carry a term of one year or
less.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement
their cash flow.
Municipal bonds, which meet longer-term capital needs and generally
have maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds. Issuers of general
obligation bonds include states, counties, cities, towns and regional
districts. The 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
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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 securities 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 1933 Act prior to offer and sale, unless an exemption from such
registration is available, municipal securities which are not publicly offered
may nevertheless be readily marketable. A secondary market may exist for
municipal securities which were not publicly offered initially.
The Tax Free Bond Fund may invest more than 25% of its total assets in
municipal securities the issuers of which are located in the same state and may
invest more than 25% of its total assets in municipal securities the security
of which is derived from any one of the following categories: hospitals and
health facilities; turnpikes and toll roads; ports and airports; colleges and
universities; public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments which might affect all
municipal securities of a similar type. However, the Fund believes that the
most important consideration affecting risk is the quality of municipal
securities.
The Tax Free Bond Fund and California and New York Tax Free Funds may
engage in short-term trading (selling securities held for brief periods of
time, usually less than three months) if the Subadvisor 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 securities 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 securities. These obligations frequently contain "non-appropriation"
clauses that provide that the governmental issuer of the obligation has no
obligation to make future payments under the lease or contract unless money is
appropriated for such purposes by the legislative body on a yearly or other
periodic basis. In addition to the "nonappropriation" risk, many municipal
lease obligations have not yet developed the depth of marketability associated
with municipal bonds; moreover, although the obligations may be secured by the
leased equipment, the disposition of the equipment in the event of foreclosure
might prove difficult. For the purpose of each Fund's investment restrictions,
the identification of the "issuer" of municipal securities which are not
general obligation bonds is made by the
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Subadvisor on the basis of the characteristics of the municipal securities as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such securities.
In order to limit certain of these risks, the California Tax Free
Fund, New York Tax Free Fund and Tax Free Bond Fund will not invest more than
10% (15% in the case of the Strategic Income Fund) of its total assets in
municipal lease obligations that are illiquid (along with all other illiquid
securities). The liquidity of municipal lease obligations purchased by the
Funds will be determined pursuant to guidelines approved by the Board of
Trustees. Factors considered in making such determinations may include: the
frequency of trades and quotes for the obligation; the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; the willingness of dealers to undertake to make a market in the
security; the nature of marketplace trades; the obligation's rating; and, if
the security is unrated, the factors generally considered by a rating agency.
There may be other types of municipal securities that become available
which are similar to the foregoing described municipal securities in which each
Fund may invest.
INCOME LEVEL AND CREDIT RISK. Municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, principal or
interest on its or their municipal obligations may be materially affected.
Although the Funds' quality standards are designed to minimize the credit risk
of investing in municipal securities, 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 securities and their coupons may also be treated as taxable
income under certain circumstances. Acquisitions of municipal securities at a
market discount may also result in ordinary income and/or capital gains.
The Tax Reform Act of 1986 ("TRA") limited the types and volume of
municipal securities qualifying for the federal income tax exemption for
interest, and the Code treats tax-exempt interest on certain municipal
securities 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
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have been issued may cause the retroactive revocation of the tax-exempt status
of certain municipal securities after their issuance. The Funds intend to
monitor developments in the municipal bond market to determine whether any
defensive action should be taken.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
Industrial Development Bonds which pay tax-exempt interest are, in
most cases, revenue bonds and are issued by, or on behalf of, public
authorities to raise money to finance various privately operated facilities for
business, manufacturing, housing, sports, and pollution control. These bonds
are also used to finance public facilities such as airports, mass transit
systems, ports, and parking. The payment of the principal and interest on such
bonds is solely dependent on the ability of the facility's user to meet its
financial obligations and the pledge, if any, of the real and personal property
so financed as security for such payments. These bonds are generally not
secured by the taxing power of the municipality but are secured by the revenues
of the authority derived from payments by the industrial user.
Industrial Development and Pollution Control Bonds, although nominally
issued by municipal authorities, are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user. Industrial Development Bonds issued after
the effective date of the TRA, as well as certain other bonds, are now
classified as "private activity bonds." Some, but not all, private activity
bonds issued after that date qualify to pay tax-exempt interest.
VARIABLE RATE DEMAND NOTES ("VRDNS")
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may invest in tax-exempt obligations which contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to
receive payment of the unpaid principal balance plus accrued interest upon a
short notice period prior to specified dates, generally at 30, 60, 90, 180 or
365-day intervals. The interest rates are adjustable at various intervals to
the prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDN at approximately the
par value of the VRDN on the adjustment date. The adjustments are typically
based upon the prime rate of a bank or some other appropriate interest rate
adjustment index.
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("Institution").
Participating VRDNs provide a Fund with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the
unpaid principal balance plus accrued interest on the Participating VRDNs from
the Institution upon a specified number of days' notice, not to exceed seven
days. In addition, the Participating VRDN is backed up by an irrevocable letter
of credit or guaranty of the Institution. A Fund has an undivided interest in
the underlying obligation and thus participates on the same basis as the
Institution in such obligation, except that the Institution typically retains
fees out of the interest paid or the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment.
FLOATING AND VARIABLE RATE SECURITIES
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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. To be an eligible investment for the Money Market Fund,
there must be a reasonable expectation that, at any time until the final
maturity for the floater or the period remaining until the principal amount can
be recovered through demand, the market value of a floater will approximate its
amortized cost.
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. The Money Market Fund may
not invest in inverse floaters.
ZERO COUPON BONDS
The Funds, except the Equity Index Fund and MAP Equity Fund, may
purchase zero coupon bonds, which are debt obligations issued without any
requirement for the periodic payment of interest. Zero coupon bonds are issued
at a significant discount from face value. The discount approximates the total
amount of interest the bonds would accrue and compound over the period until
maturity at a rate of interest reflecting market rate at the time of issuance.
Because interest on zero coupon obligations is not paid to the Fund on a
current basis but is, in effect, compounded, the value of the securities of
this type is subject to greater fluctuations in response to changing interest
rates than the value of debt obligations which distribute income regularly.
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 of these Funds 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
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Subadvisor 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 these Funds intends to take the position that it is the owner of
any municipal obligations acquired subject to a standby commitment and that
tax-exempt interest earned with respect to such municipal obligations will be
tax-exempt in its hands; however, no assurance can be given that this position
would prevail if challenged. In addition, there is no assurance that standby
commitments will be available to a Fund, nor has the California Tax Free Fund,
New York Tax Free Fund, Strategic Income 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
Each Fund may from time to time purchase securities on a "when-issued"
basis. Debt securities, including municipal securities, 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.
The transactions are entered into in order to secure what is
considered to be an advantageous price and yield to a Fund and not for purposes
of leveraging the Fund's assets. However, a Fund will not accrue any income on
these securities prior to delivery. The value of when-issued securities may
vary prior to and after delivery depending on market conditions and changes in
interest rate levels. There is a risk that a party with whom a Fund has entered
into such transactions will not perform its commitment, which could result in a
gain or loss to the Fund.
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
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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 Funds do not believe that a Fund's net asset value or
income will be exposed to additional risk by the purchase of securities on a
when-issued basis. Each Fund will establish a segregated account in which it
will maintain liquid assets at least equal in value to commitments for
when-issued securities. Such segregated securities either will mature or, if
necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each Fund may buy mortgage-related securities. Mortgage-related
securities are interests in pools of residential or commercial mortgage loans
or leases, including mortgage loans made by savings and loan institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations (see "Mortgage Pass-Through
Securities"). The Funds, to the extent permitted in the Prospectus, may also
invest in debt securities which are secured with collateral consisting of
mortgage-related securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities. Like other fixed-income securities,
when interest rates rise, the value of a mortgage-related security generally
will decline; however, when interest rates are declining, the value of a
mortgage-related security with prepayment features may not increase as much as
other fixed-income securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities,
which are 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, these 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 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).
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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. 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 Federal Housing Administration ("FHA")-insured or
Veterans Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development
and acts as a government instrumentality under authority granted by Congress.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which
include state and federally chartered savings and loan associations, mutual
savings banks, commercial banks and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. government. FNMA is authorized to borrow from the U.S. Treasury to
meet its obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation and acts as a government instrumentality under
authority granted by Congress. FHLMC was formerly owned by the twelve Federal
Home Loan Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCs") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and collection of principal, but PCs are not backed by the full
faith and credit of the U.S. government.
If either fixed or variable rate pass-through securities issued by the
U.S. government or its agencies or instrumentalities are developed in the
future, the Funds reserve the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related 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 a Fund's 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. A Fund 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
Fund's Subadvisor determines that the securities meet the Fund's quality
standards.
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PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. The mortgage-related
securities in which the Funds may invest may be: (i) privately issued
securities which are collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in
which the proceeds of the issuance are invested in mortgage-backed securities
and payment of the principal and interest is supported by the credit of an
agency or instrumentality of the U.S. government.
The California Tax Free Fund, Equity Index Fund, MAP Equity Fund and
New York Tax Free 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 opinion of the Fund's Subadvisor, are illiquid if,
as a result, more than 10% of the value of the Fund's total assets will be
illiquid (15% in the case of the Blue Chip Growth, Equity Income, Global High
Yield, Growth Opportunities, International Equity, International Bond, MAP
Equity, Research Value, Small Cap Growth, Small Cap Value, Strategic Income and
Strategic Value Funds).
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. As with
bonds, 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 provide for a modified form of
call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal only
after the first class has been retired. An investor is partially guarded
against a sooner than desired return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B or
C Bond currently being paid off. When the Series A, B and C Bonds are paid in
full, interest and principal on the Series Z Bond begins to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
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 such CMO, more than 10% of the Fund's net
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assets would be invested in such CMOs and other investment company securities
in the aggregate, or the Fund would hold more than 3% of any outstanding issue
of such 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.
If collection of principal (including prepayments) on the mortgage
loans during any semi-annual 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.
The Funds' Subadvisors expect that governmental, government-related or
private entities may create mortgage loan pools and other mortgage-related
securities offering mortgage pass-through and mortgage-collateralized
investments in addition to those described above. The mortgages underlying
these securities may include alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may vary or whose
terms to maturity may differ from customary long-term fixed rate mortgages. As
new types of mortgage-related securities are developed and offered to
investors, a Fund's Subadvisor will, consistent with the Fund's investment
objectives, policies and quality standards, consider making investments in such
new types of mortgage-related securities.
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
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loans, including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks and special purpose entities of the
foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on
the CMOs and second to pay the related administrative expenses of the issuer.
The residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the mortgage
assets. In particular, the yield to maturity on CMO residuals is extremely
sensitive to prepayments on the related underlying mortgage assets, in the same
manner as an interest-only ("IO") class of stripped mortgage-backed securities.
See "Stripped Mortgage-Backed Securities." In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to
changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances, a portfolio may fail to recoup fully its initial
investment in a CMO residual.
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 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 1933 Act, as
amended. CMO residuals, whether or not registered under such Act, may be
subject to certain restrictions on transferability, and may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
Under certain circumstances, a Fund's investment in residual interests
in "real estate mortgage investment conduits" ("REMICs") may cause shareholders
of that Fund to be deemed to have taxable income in addition to their Fund
dividends and distributions and such income may not be eligible to be reduced
for tax purposes by certain deductible amounts, including net operating loss
deductions. In addition, in some cases, the Fund may be required to pay taxes
on certain amounts deemed to be earned from a REMIC residual. Prospective
investors may wish to consult their tax advisors regarding REMIC residual
investments by a Fund.
CMOs and REMICs may offer a higher yield than U.S. government
securities, but they may also be subject to greater price fluctuation and
credit risk. In addition, CMOs and REMICs typically will be issued in a variety
of classes or series, which have different maturities and are retired in
sequence. Privately issued CMOs and REMICs are not government securities nor
are they supported in any way by any governmental agency or instrumentality. In
the event of a default by an issuer of a CMO or a REMIC, there is no assurance
that the collateral securing such CMO or REMIC will be sufficient to pay
principal and interest. It is possible that there will be limited opportunities
for trading CMOs and REMICs in the over-the-counter market, the depth and
liquidity of which will vary from time to time. 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
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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 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. As is the case with
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 mortgage-related securities with prepayment
features may not increase as much as other fixed income 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 a Subadvisor to
forecast interest rates and other economic factors correctly. If a Subadvisor
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.
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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. The Funds' Subadvisors expect that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables(SM)
("CARS(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.
If consistent with a Fund's investment objective and policies, and, in
the case of the Money Market Fund, the requirements of Rule 2a-7, a Fund also
may invest in other types of asset-backed securities. Certain asset-backed
securities may present the same types of risks that may be associated with
mortgage-backed securities.
WARRANTS
The holder of a warrant has the right to purchase a given number of
shares of a particular issuer at a specified price until expiration of the
warrant. Such investments can provide a greater potential for profit or loss
than an equivalent investment in the underlying security. Prices of warrants do
not necessarily move in tandem with the prices of the underlying securities,
and are speculative investments. Warrants pay no dividends and confer no rights
other than a purchase option. If a warrant is not exercised by the date of its
expiration, the Fund will lose its entire investment in such warrant.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which a Fund sells through a broker a
security it does not own in anticipation of a possible decline in market price.
A short sale "against the box" is a
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short sale in which, at the time of the short sale, a Fund owns or has the
right to obtain securities equivalent in kind and amount. Each of the Funds
will only enter into short sales against the box. A Fund may enter into a short
sale against the box among other reasons, to hedge against a possible market
decline in the value of the security owned 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 Subadvisors believe are creditworthy. Short sales against
the box will be limited to no more than 25% of a Fund's total assets. The MAP
Equity Fund may not enter into short sales against the box.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS. Each Fund, except the MAP Equity Fund and the
Money Market Fund, may sell ("write") covered call options on its portfolio
securities 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's owning the underlying security throughout the option
period, or by holding, on a share-for-share basis, a call on the same security
as the call written, where the exercise price of the call held is equal to or
less than the price of the call written, or greater than the exercise price of
a call written if the difference is maintained by the Fund in liquid assets in
a segregated account with its custodian.
A Fund will write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Fund will give up the opportunity to profit from an increase in the market
price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Fund will retain
the risk of loss should the price of the security decline, which loss the
premium is intended to offset in whole or in part. A Fund, in writing "American
Style" 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. In contrast, "European Style" options may only be exercised on
the expiration date of the option. 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.
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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 or
otherwise cover the existing call option.
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 a 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 otherwise covers the
existing option portion or the Fund delivers the underlying security upon
exercise. 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. Over-the-counter options differ from exchange-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
exchange-traded options. Therefore, a closing purchase transaction for an
over-the-counter option may in many cases only be made with the other party to
the option.
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 Subadvisor, engage without limitation in the
writing of options on U.S. government securities. Subject to the limitation
that all call and put option writing transactions be covered, and limitations
imposed on regulated investment companies under Federal tax law, the
International Bond Fund, International Equity Fund and Global High Yield Fund
may, to the extent determined appropriate by the Subadvisor, engage without
limitation in the writing of options on their portfolio securities.
WRITING PUT OPTIONS. Each Fund, except the Money Market Fund and the
MAP Equity Fund, may also write covered put options. A put option is a
short-term contract which gives the purchaser of the put option, in return for
a premium, the right to sell the underlying security to the seller of the
option at a specified price during the term of the option. Put options written
by a Fund are agreements by a Fund, for a premium received by the Fund, to
purchase specified
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securities at a specified price if the option is exercised during the option
period. A put option written by a 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.
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 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 Subadvisors, 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 Subadvisors 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. The purchase of put options on securities
held in the portfolio or related to such securities will enable a Fund to
preserve, at least partially, unrealized gains occurring prior to the purchase
of the option on a
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portfolio security without actually selling the security. In addition, the Fund
will continue to receive interest or dividend income on the security. The put
options purchased by the Fund may include, but are not limited to, "protective
puts" in which the security to be sold is identical or substantially identical
to a security already held by the Fund or to a security which the Fund has the
right to purchase. The Fund would ordinarily recognize a gain if the value of
the securities decreased during the option period below the exercise price
sufficiently to cover the premium. The Fund would recognize a loss if the value
of the securities remained above the difference between the exercise price and
the premium.
The Funds may also purchase call options on securities the Funds
intend to purchase to protect against substantial increases in prices of such
securities pending their ability to invest in an orderly manner in such
securities. The purchase of a call option would entitle the Fund, in exchange
for the premium paid, to purchase a security at a specified price upon exercise
of the option during the option period. The Fund would ordinarily realize a
gain if the value of the securities increased during the option period above
the exercise price sufficiently to cover the premium. The Fund would have a
loss if the value of the securities remained below the sum of the premium and
the exercise price during the option period. In order to terminate an option
position, the Funds may sell put or call options identical to those previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid on the put or call option when it was purchased.
MARRIED PUTS. Each Fund, except the Equity Index Fund, MAP Equity
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.
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 some 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.
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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. The ability of a Fund to successfully utilize
options may depend in part upon the ability of the Subadvisor 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 MAP Equity 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. A Fund
may use foreign currency options contracts for various reasons, including: to
manage its exposure to changes in currency exchange rates; as an efficient
means of adjusting its overall exposure to certain currencies; or in an effort
to enhance its return through exposure to a foreign currency.
A Fund may, for example, 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. A Fund may also 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. 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.
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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.
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 diminution 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 forego 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.
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.
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. As with other kinds of options
transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge up to the amount of the premium received and a
Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations, although, in the event of rate movements adverse to a Fund's
position, a Fund may forfeit the entire amount of the premium plus related
transaction costs.
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A Fund also may use foreign currency options to protect against
potential losses in positions denominated in one foreign currency against
another foreign currency.
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, except the MAP Equity Fund, may purchase call and put
options on securities indexes (only call options on the S&P 500 Composite Price
Index in the case of the Equity Index Fund) for the purpose of hedging against
the risk of unfavorable price movements which may adversely affect the value of
a Fund's securities. The Equity Index Fund may purchase call options on the S&P
500 Index to protect against increases in the prices of securities underlying
the Index that the Equity Index Fund intends to purchase pending its ability to
invest in such securities in an orderly manner.
Unlike a securities option, which gives the holder the right to
purchase or sell specified securities at a specified price, an option on a
securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the value of the
underlying securities index on the exercise date and the exercise price of the
option, multiplied by (ii) a fixed "index multiplier." In exchange for
undertaking the obligation to make such a cash payment, the writer of the
securities index option receives a premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 Composite Price Index or
the NYSE Composite Index, or a narrower market index such as the S&P 100 Index.
Indexes may also be based on an industry or market segment such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on stock
indexes are traded on the following exchanges, among others: The Chicago Board
Options Exchange, New York Stock Exchange, and American Stock Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities 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
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market generally (or, for narrow market indexes, in a particular industry or
segment of the market) rather than the price movements of individual securities
held by a Fund. In this respect, purchasing a securities index put (or call)
option is analogous to the purchase of a put (or call) on a securities index
futures contract.
A Fund may sell securities index options prior to expiration in order
to close out its positions in securities index options which it has purchased.
A Fund may also allow options to expire unexercised.
FUTURES TRANSACTIONS
The California Tax Free Fund, Convertible Fund, Equity Income Fund,
Global High Yield 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 and investment 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 Blue Chip Growth Fund, Capital Appreciation Fund, Convertible
Fund, Equity Income Fund, Equity Index Fund, Global High Yield Fund, Growth
Opportunities Fund, International Equity Fund, MAP Equity Fund, Research Value
Fund, Small Cap Growth Fund, Small Cap Value 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) or to gain market exposure to that portion of the market
represented by the futures contract. These Funds, and the International Bond
Fund, may also purchase and sell other futures when deemed appropriate, in
order to hedge the equity or non-equity portions of their portfolios. In
addition, each Fund, except the California Tax Free Fund, Equity Index Fund,
Government Fund, Money Market Fund, New York Tax Free Fund and Tax Free Bond
Fund may, to the extent it invests in foreign securities, enter into contracts
for the future delivery of foreign currencies to hedge against changes in
currency exchange rates. Each of the Funds may also purchase and write put and
call options on futures contracts of the type into which such Fund is
authorized to enter and may engage in related closing transactions. In the
United States, all such futures on debt securities, debt index futures, stock
index futures, foreign currency futures and related options will be traded on
exchanges that are regulated by the Commodity Futures Trading Commission
("CFTC"). Subject to compliance with applicable CFTC rules, the Funds also may
enter into futures contracts traded on foreign futures exchanges such as
Frankfurt, Tokyo, London or Paris as long as trading on 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 Blue Chip
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Growth Fund, Global High Yield Fund, Growth Opportunities Fund, Equity Income
Fund, International Bond Fund, International Equity Fund, Research Value Fund,
Small Cap Growth Fund and Small Cap Value 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.
Futures contracts trade on these markets through an "open outcry" auction on
the exchange floor. Currently, there are futures contracts based on a variety
of instruments, indexes and currencies, including long-term U.S. Treasury
bonds, Treasury notes, GNMA certificates, three-month U.S. Treasury bills,
three-month domestic bank certificates of deposit, a municipal bond index and
various stock indexes.
When a purchase or sale of a futures contract is made by a Fund, the
Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of liquid assets ("initial margin") as a partial
guarantee of its performance under the contract. The margin required for a
futures contract is set by the exchange on which the contract is traded and may
be modified during the term of the contract. The initial margin is in the
nature of a performance bond or good faith deposit on the futures contract
which is returned to the Fund upon termination of the contract assuming all
contractual obligations have been satisfied. Each Fund expects to earn interest
income on its initial margin deposits. A futures contract held by a Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day, as the value of the security, currency or index fluctuates,
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. Moreover, each Fund will maintain sufficient liquid assets to cover
its obligations under open futures contracts.
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.
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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" positionit 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 Subadvisors 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.
Depending upon the types of futures contracts that are available to
hedge a Fund's portfolio of securities or portion of a portfolio, perfect
correlation between that Fund's futures positions and portfolio positions may
be difficult to achieve. Futures contracts do not exist for all types of
securities and markets for futures contracts that do exist may, for a variety
of reasons, be illiquid at particular times when a Fund might wish to buy or
sell a futures contract.
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
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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 or to gain exposure
to particular markets represented by the index.
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 Subadvisor
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 Subadvisor 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.
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Another risk is that the Subadvisor 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. 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 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. A Fund will only enter into futures contracts or related
options which are standardized and traded on a U.S. or foreign exchange or
board of trade, or similar entity, or quoted on an automatic quotation system.
The Funds will not enter futures contracts for which the aggregate contract
amounts exceed 100% of the Fund's net assets. In addition, 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 Information."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several
risks associated with the use of futures contracts and futures options as
hedging techniques. There can be no assurance that hedging strategies using
futures will be successful. A purchase or sale of a futures contract may result
in losses in excess of the amount invested in the futures contract, which in
some cases may be unlimited. 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. An incorrect correlation could result in a loss on
both the hedged securities or currencies and the hedging vehicle so that the
portfolio return might have been better had hedging not been attempted. 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
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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.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures or a futures option position. If no
liquid market exists, the Fund would remain obligated to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist. Lack of a liquid market for any reason may
prevent the Fund from liquidating an unfavorable position and the Fund would
remain obligated to meet margin requirements until the position is closed.
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.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS
ON FUTURES CONTRACTS, AND FOREIGN CURRENCY. Options on securities, futures
contracts, options on futures contracts, currencies and options on currencies
may be traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the United States; may not involve a
clearing mechanism and related guarantees; and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities. The value of such
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positions also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) delays in a availability than in
the United States of data on which to make trading decisions, (iii) delays in a
Fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in
the United States, and (v) lesser trading volume.
SWAP AGREEMENTS
The Blue Chip Growth Fund, Equity Income Fund, Global High Yield Fund,
Growth Opportunities Fund, High Yield Corporate Bond Fund, International Bond
Fund, International Equity Fund, Small Cap Growth Fund, Small Cap Value Fund,
Research Value Fund, Strategic Income Fund and Strategic Value Fund may enter
into interest rate, index and currency exchange rate swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Fund than if the Fund had invested directly in an instrument that yielded
that desired return or for other portfolio management purposes. Swap agreements
are two party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on particular predetermined investments or
instruments. The gross returns to be exchanged or "swapped" between the parties
are calculated with respect to a "notional amount," i.e., the return on or
increase in value of a particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a "basket" of securities
representing a particular index. The "notional amount" of the swap agreement is
only a fictive basis on which to calculate the obligations which the parties to
a swap agreement have agreed to exchange. Most Swap Agreements entered into by
the Fund would calculate the obligations of the parties to the agreements on a
"net" basis. Consequently, 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 total assets.
Commonly used swap agreements include interest rate caps, under which,
in return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap"; interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Subadvisor'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 Subadvisor will
cause a Fund to enter into swap agreements only
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with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Fund's repurchase agreement guidelines.
Certain restrictions imposed on the Funds by the Code may limit the Funds'
ability to use swap agreements. The swaps market is a relatively new market and
is largely unregulated. It is possible that developments in the swaps market,
including potential government regulation, could adversely affect a Fund's
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved
by the CFTC. To qualify for this exemption, a swap agreement must be entered
into by "eligible participants," which include the following, provided the
participants' total assets exceed established levels: a bank or trust company,
savings association or credit union, insurance company, investment company
subject to regulation under the 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
The Funds may invest in participation interests in loans. A Fund's
investment in loan participation interests may take the form of participation
interests in, assignments of or novations of a corporate loan ("Participation
Interests"). The Participation Interests may be acquired from an agent bank,
co-lenders or other holders of Participation Interests ("Participants"). In a
novation, a Fund would assume all of the rights of the lender in a corporate
loan, including the right to receive payments of principal and interest and
other amounts directly from the borrower and to enforce its rights as a lender
directly against the borrower. As an alternative, a Fund may purchase an
assignment of all or a portion of a lender's interest in a corporate loan, in
which case, a Fund may be required generally to rely on the assigning lender to
demand payment and enforce its rights against the borrower, but would otherwise
be entitled to all of such lender's rights in the corporate loan. A Fund also
may purchase a Participation Interest in a portion of the rights of a lender in
a corporate loan. In such a case, a Fund will be entitled to receive payments
of principal, interest and fees, if any, but generally will not be entitled to
enforce its rights directly against the agent bank or the borrower; rather the
Fund must rely on the lending
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institution for that purpose. A Fund will not act as an agent bank, a guarantor
or sole negotiator of a structure with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation
Interests, the agent bank administers the terms of the corporate loan agreement
and is responsible for the collection of principal and interest and fee
payments to the credit of all lenders which are parties to the corporate loan
agreement. The agent bank in such cases will be qualified under the 1940 Act to
serve as a custodian for a registered investment company such as the Trust. A
Fund generally will rely on the agent bank or an intermediate Participant to
collect its portion of the payments on the corporate loan. The agent bank
monitors the value of the collateral and, if the value of the collateral
declines, may take certain action, including accelerating the corporate loan,
giving the borrower an opportunity to provide additional collateral or seeking
other protection for the benefit of the Participants in the corporate loan,
depending on the terms of the corporate loan agreement. Furthermore, unless
under the terms of a participation agreement a Fund has direct recourse against
the borrower (which is unlikely), a Fund will rely on the agent bank to use
appropriate creditor remedies against the borrower. The agent bank also is
responsible for monitoring compliance with covenants contained in the corporate
loan agreement and for notifying holders of corporate loans of any failures of
compliance. Typically, under corporate loan agreements, the agent bank is given
broad discretion in enforcing the corporate loan agreement, and is obligated to
use only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on structuring and funding the corporate loan and
other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be
terminated in the event that it fails to observe the requisite standard of care
or becomes insolvent, or has a receiver, conservator, or similar official
appointed for it by the appropriate bank regulatory authority or becomes a
debtor in a bankruptcy proceeding. A successor agent bank generally will be
appointed to replace the terminated bank, and assets held by the agent bank
under the corporate loan agreement should remain available to holders of
corporate loans. If, however, assets held by the agent bank for the benefit of
a Fund were determined by an appropriate regulatory authority or court to be
subject to the claims of the agent bank's general or secured creditors, the
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,
the Fund will have direct recourse against the borrower in the event the
borrower fails to pay scheduled principal and interest. In all other cases, the
Fund will look to the agent bank to enforce appropriate credit remedies against
the borrower. In acquiring Participation Interests a Fund's Subadvisor will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the Participation Interest meets the
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
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of certain investment restrictions pertaining to the diversification and
concentration of the Fund's portfolio. The Funds consider Participation
Interests not subject to puts to be illiquid.
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.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
REITs are pooled investment vehicles that invest primarily in either
real estate or real estate-related loans. The Fund will not invest in real
estate directly, but only in securities issued by real estate companies.
However, to the extent the Fund invests in REITs, the Fund is also subject to
the risks associated with the direct ownership of real estate. These risks
include: declines in the value of real estate; risks related to general and
local economic conditions; possible lack of availability of mortgage funds;
overbuilding; extended vacancies of properties; increased competition;
increases in property taxes and operating expenses; changes in zoning laws;
losses due to costs resulting from the clean-up of environmental problems;
liability to third parties for damages resulting from environmental problems;
casualty or condemnation losses; limitations on rents; changes in neighborhood
values and the appeal of properties to tenants; and changes in interest rates.
Thus, the value of the Fund's shares may change at different rates compared to
the value of shares of a mutual fund with investments in a mix of different
industries.
REITs are dependent upon management skills and generally may not be
diversified. REITs are also subject to heavy cash flow dependency, defaults by
borrowers and self-liquidation. In addition, REITs could possibly fail to
qualify for tax free pass-through of income under the Code, or to maintain
their exemptions from registration under the 1940 Act. The above factors may
also adversely affect a borrower's or a lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments. In
addition, even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole.
Accordingly, REIT shares can be more volatile than--and at times will perform
differently from--large-capitalization stocks such as those found in the Dow
Jones Industrial Average. In addition, because smaller-capitalization stocks
are typically less liquid than large-capitalization stocks, REIT shares may
sometimes experience greater share-price fluctuations than the stocks of larger
companies.
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,
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and a decline in interest rates will increase the value of fixed income
securities held by a Fund. Longer term debt securities generally pay higher
interest rates than do shorter term debt securities but also may experience
greater price volatility as interest rates change.
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 lower rated debt securities that a Fund purchases may
fluctuate more than the value of higher rated debt securities. Lower rated debt
securities generally carry greater risk that the issuer will default on the
payment of interest and principal. 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.
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. From time to time, each Fund may purchase securities not
paying interest or dividends at the time acquired if, in the opinion of the
Subadvisor, such securities have the potential for future income (or capital
appreciation, if any).
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 shareholders. The Fund may have to sell
some of its assets to pay distributions relating to such interest income which
would reduce the Fund's assets and may thereby increase its expense ratio and
decrease its rate of return.
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FUNDAMENTAL INVESTMENT RESTRICTIONS
The Funds' investment restrictions set forth below are fundamental
policies of each Fund; i.e., they may not be changed with respect to a Fund
without a majority vote of the outstanding shares of that Fund, as defined in
the 1940 Act. Except for those investment policies of a Fund specifically
identified as fundamental in the Prospectuses and this SAI, and the Funds'
objectives as described in the Prospectus, all other investment policies and
practices described may be changed by the Board of Trustees without the
approval of shareholders.
Unless otherwise indicated, all of the percentage limitations below,
and in the investment restrictions recited in the Prospectuses, apply to each
Fund on an individual basis, and apply only at the time a transaction is
entered into. Accordingly, if a percentage restriction is adhered to at time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in a Fund's net assets will not be
considered a violation. With respect to investment in illiquid securities, a
Fund will consider taking measures to reduce the holdings of illiquid
securities if they exceed the percentage limitation as a result of changes in
the values of the securities as if liquid securities have become illiquid.
EACH FUND MAY NOT:
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, New York
Tax Free Fund and Global High Yield 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 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
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available for four consecutive weeks in the four highest rating categories on
new issue bonds in such industry (issue size of $50 million or more) have
averaged in excess of 105% of yields of new issue long-term industrial bonds
similarly rated (issue size of $50 million or more); (c) 25% or more of the
market value of the total assets of the Money Market Fund will be invested in
the securities of banks and bank holding companies, including certificates of
deposit and bankers' acceptances; and (d) at such time that the 1940 Act is
amended to permit a registered investment company to elect to be "periodically
industry concentrated" (i.e., a fund that does not concentrate its investments
in a particular industry would be permitted, but not required, to invest 25% or
more of its total assets in a particular industry) the Funds elect to be so
classified and the foregoing limitation shall no longer apply with respect to
the Funds. With respect to the California Tax Free Fund and New York Tax Free
Fund, private activity bonds ultimately payable by companies within the same
industry are treated as if they were issued by issuers in the same industry for
purposes of this restriction.
4. Purchase or sell real estate (excluding securities secured by
real estate or interests therein or issued by companies that invest in or deal
in real estate) or, in the case of the California Tax Free Fund and New York
Tax Free Fund, real estate investment trust securities; commodities and
commodity contracts. The Trust reserves the freedom of action to hold and to
sell real estate acquired for any Fund as a result of the ownership of
securities. Purchases and sales of foreign currencies on a spot basis and
forward foreign currency exchange contracts, options on currency, futures
contracts on currencies (or securities, with respect to the MAP Equity Fund,
Blue Chip Growth Fund, Research Value Fund, Small Cap Value Fund, Growth
Opportunities Fund, Small Cap Growth Fund, Equity Income Fund, Global High
Yield Fund and 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.
5. Make loans to other persons, except loans of portfolio
securities. The California Tax Free, New York Tax Free and Equity Index Funds
may lend securities in an amount not to exceed 10%, 10% and 30%, respectively,
of each Fund's total assets in accordance with applicable guidelines approved
by the Board of Trustees. 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 a 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.
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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.
Unless otherwise indicated, all percentage limitations apply to each
Fund on an individual basis, and apply only at the time a transaction is
entered into. Accordingly, if a percentage restriction is adhered to at the
time of investment, a later increase or decrease in the percentage which
results from a relative change in values or from a change in a Fund's net
assets will not be considered a violation.
The following are non-fundamental restrictions of the Capital
Appreciation Fund, Convertible Fund, Government Fund, High Yield Corporate Bond
Fund, Money Market Fund, Tax Free Bond Fund, Total Return Fund and Value Fund.
Each of these Funds 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 Subadvisors 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 1933 Act 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 Subadvisor are
deemed illiquid;
(c) purchase the securities of other investment companies, except to
the extent permitted by the 1940 Act or in connection with merger,
consolidation, acquisition or reorganization;
(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, except that the Trust may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities and in connection with transactions involving forward foreign
currency exchange contracts;
(f) purchase or sell any put or call options or any combination
thereof, except that the Trust may purchase and sell or write (i) options on
any futures contracts into 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
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<PAGE> 144
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;
(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.
(h) as an operating policy, the High Yield Corporate Bond Fund may
not invest more than 20% of its net assets in securities rated lower than B by
Moody's or S&P;
(i) as an operating policy, the Strategic Income Fund may not invest
more than 15% of its net assets in securities rated lower than B by Moody's or
S&P;
(j) as an operating policy, the Convertible Fund may not invest more
than 5% of its total assets in securities that are rated less than B by Moody's
or S&P; or are unrated but judged by the Subadvisor to be of comparable
quality; or
(k) as an operating policy, the Total Return Fund may not invest more
than 5% of its net assets in securities rated below investment grade. Up to 20%
of the Total Return Fund's 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
Subadvisor to be of comparable quality.
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 1933 Act
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 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, 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 are non-fundamental restrictions of the International
Bond Fund, International Equity Fund, Strategic Income Fund and Strategic Value
Fund:
(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
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<PAGE> 145
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 Subadvisor'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 extent permitted by the 1940 Act or
in connection with a merger, consolidation, acquisition or reorganization.
The following are non-fundamental restrictions of the Blue Chip Growth
Fund, Equity Income Fund, Global High Yield Fund, Growth Opportunities Fund,
MAP Equity Fund, Research Value Fund, Small Cap Growth Fund and Small Cap Value
Fund:
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, futures and forward contracts are deemed
not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
in connection with futures contracts and options on futures contracts shall not
constitute the purchase of securities on margin.
(c) As an operating policy, a Fund may not invest in securities which
are not readily marketable, or the disposition of which is restricted under
federal securities laws (collectively, "illiquid securities"), other than Rule
144A securities and Section 4(2) commercial paper determined to be liquid
pursuant to guidelines adopted by the Trust's Board of Trustees if, as a
result, more than 15% of the Fund's net assets would be invested in illiquid
securities. A Fund may not invest more than 15% of its net assets in repurchase
agreements providing for settlement in more than seven days, or in other
instruments which for regulatory purposes or in the Subadvisor'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, consolidated, acquisition, or reorganization.
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<PAGE> 146
(e) As an operating policy, the Blue Chip Growth Fund may not invest
more than 10% of its total assets in securities of non-U.S. issuers.
"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 Subadvisors,
pursuant to guidelines approved by the Trustees.
Each Subadvisor 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 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 the extent that the market for a Rule 144A security changes, a Rule
144A security originally determined to be liquid upon purchase may be
determined to be illiquid.
To make the determination that an issue of 4(2) commercial paper is
liquid, a Subadvisor 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
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<PAGE> 147
(iii) if the security is unrated, the Subadvisor 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).
TRUSTEES AND OFFICERS
The Board of Trustees oversees the Funds, the Manager and the
Subadvisors. 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.
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ------------ -------------------
<S> <C> <C>
Richard M. Kernan,Jr.* Chairman and Director of MainStay VP Series Fund,
51 Madison Avenue Trustee Inc. From January 1987 to present;
New York, NY 10010 Chairman of the board and Chief
Date of Birth: 12/13/40 Executive Officer of 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,
MacKay Shields LLC, 1988 to
present; and Director, Express
Scripts, 1992-present.
</TABLE>
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<PAGE> 148
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Stephen C. Roussin* President, Chief President and Chief Operating
300 Interpace Parkway Executive Officer Officer, New York Life Asset
Parsippany, NJ 07054 and Trustee Management Operating Company LLC,
Date of Birth: 7/12/63 1999 to present; President and Chief
Operating Officer, New York Life
Asset Management LLC, 1999 to
present; President, MainStay
Management, June 1997-2000; Director
and Chairperson, MainStay
Institutional Funds, Inc., 1997 to
present; Senior Vice President, New
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
New York, NY 10010 Company; Chairman of the Board and
Date of Birth: 3/1/32 Chief Executive Officer, New York
Life Insurance Company, 1990 to
1997; Vice Chairman of the Board,
New York Life Insurance Company,
1986 to 1990; Director, New York
Life Insurance Company, 1985 to
present; Chairman of the Board,
American Council of Insurance, 1994
to 1995; Chairman of the Board, Life
Insurance Council of New York, 1996
to 1997; Director, Million Dollar
Roundtable Foundation, 1996 to 1997;
Director, Insurance Marketplace
Standards Association, 1996 to 1997;
Director, CK Witco Corporation, 1989
to present; Member, International
Advisory Board of Credit Commercial
de France, 1995 to 1999; and a Life
Fellow of the American Bar
Foundation.
Edward J. Hogan Trustee Rear Admiral U.S. Navy (Retired);
Box 2321 Independent Management Consultant,
Sun Valley, ID 83353 1992 to 1997.
Date of Birth: 8/17/32
</TABLE>
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<PAGE> 149
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Nancy Maginnes Trustee Member, Council of Rockefeller
Kissinger University, New York, NY, 1991 to
Henderson Road present; Trustee, Rockefeller
South Kent, CT 06785 University, 1995 to present;
Date of Birth: 4/13/34 Trustee, Animal Medical Center,
1993 to 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.,
426 C Street, N.E. 1984 to present; Managing Director,
Washington, D.C. 20002 The Life Services Trust, 1998 to
Date of Birth: 1/4/48 present; Vice Chair, Employee Health
Programs, 1990 to present; Vice
Chair, TheraCom Inc., 1994 to
present; Director, PeacePac, 1994 to
present; Commissioner, State of
Maryland, Higher Education
Commission, 1995 to present; Chair,
National Organization on Fetal
Alcohol Syndrome, 1993 to present;
Board Member, Hollings Cancer Center,
Medical University of South Carolina,
1993 to present; Board member - KIDS
(Kids in Distressed Situations) 1996
- present; member, Business Leaders
for Sensible Priorities, 1998 -
present; and Board member, Discovery
Creek Children's museum, 1997 -
present.
</TABLE>
101
<PAGE> 150
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
John B. McGuckian Trustee Chairman of the Board, Ulster
Ardverna Television plc, 1990 to present;
Cloughmills Director, Ulster Television plc,
Northern Ireland 1970 to present; Chairman of the
BT4 49NL Board, Tedcastle Holding Ltd.
Date of Birth: 11/13/39 (energy), 1995 to present; Director,
Cooneen Textiles Ltd. (clothing
manufacturer), 1967 to present;
Director Allied Irish Banks plc,
1977 to present; Chairman, 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 1999.
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,
Date of Birth: 12/9/32 1988 to 1990; Chairman of the Board,
Paine Webber Properties, 1985 to
1989; Director, Harbour Group, 1986
to present; Director, Sugen, Inc.,
1992 to 1999; Chairman of the Board,
Omniquip International, Inc., 1996
to 1999; Director, Carey
Diversified, L.L.C., January 1,1998
to present.
Donald K. Ross* Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance
Franklin Lakes, NJ 07417 Company; Director, New York Life
Date of Birth: 7/1/25 Insurance Company, 1978 to 1996;
President, New York Life Insurance
Company, 1986 to 1990; Chairman of
the Board, New York Insurance
Company, 1981 to 1990; Director,
MacKay Shields LLC, 1984 to present;
and Trustee, Consolidated Edison
Company of New York, Inc., 1976 to
1998.
</TABLE>
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<PAGE> 151
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Richard S. Trutanic Trustee Senior Managing Director, Groupe
1155 Connecticut Ave. N.W. Arnault (private investment firm),
Suite 400 1999 - present; Chairman, The
Washington, DC 20036 Somerset Group (financial advisory
Date of Birth: 2/13/52 firm), 1990 to present; Chief
Executive Officer and President,
Americap L.L.C. (Financial Advisory
Firm), 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.
Gary E. Wendlandt* Trustee Executive Vice President, New York
51 Madison Avenue Life Insurance Company, May 1999 to
New York, New York 10010 present; Chief Executive Officer,
Date of Birth: 10/08/50 New York Life Asset Management LLC,
December 1999 to present; Chief
Executive Officer, New York Life
Asset Management Operating Company
LLC, December 1999 to present;
Chairman and Manager, New York Life
Asset Management Operating Company
LLC, March 2000 to present; Chairman
and Manager, New York Life Asset
Management LLC, March 2000 to
present; Manager, New York Life
Benefit Services, Manager, Monitor
Capital Advisors LLC, Manager,
MainStay Management LLC, Manager,
MainStay Shareholder Services LLC,
Manager, Madison Square Advisors
LLC, and Director, NYLIFE
Distributors, Inc., March 2000 to
present; Executive Vice President
and Chief Investment Officer,
MassMutual Life Insurance Company,
June 1993 - 1999.
</TABLE>
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<PAGE> 152
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Jefferson C. Boyce* Senior Vice Chairman, Monitor Capital Advisors,
51 Madison Avenue President LLC, 1977 to present; Senior Vice
New York, NY 10010 President, MainStay Institutional
Date of Birth: 9/17/57 Funds Inc., 1998 to present; Senior
Vice President, New York Life
Insurance Company, 1994 to
present; Director, NYLIFE
Distributors Inc., 1993 to present;
and Chief Administrative Officer,
Penson, Mutual Funds, Structured
Finance, Corporate Quality, Human
Resources and Employees' health
Departments, New York Life
Insurance Company, 1992 to 1994.
John A. Flanagan* Vice President and Vice President and Chief Financial
51 Madison Avenue Chief Financial Officer, The MainStay Funds, 1999
New York, NY 10010 Officer to present; Treasurer, MainStay VP
Date of Birth: 6/5/46 Series Fund, 1999 to present;
Treasurer and Chief Financial and
Accounting Officer, MainStay
Institutional Funds Inc., 1999 to
present; Senior Vice President and
Chief Financial Officer, NYLIFE
Distributors, Inc., 1999 to
present; Vice President and Chief
Financial Officer, MainStay
Management LLC, 1999 to present;
Manager, MainStay Management LLC,
1999 to present; Manager, MainStay
Shareholder Services LLC, 1999 to
present; Vice President and
Treasurer, New York Life Asset
Management Operating Company LLC,
December 1999 to present; Vice
President and Treasurer, New York
Life Asset Management LLC, December
1999 to present; Vice President,
New York Life Insurance Company,
1999 to present; Treasurer of the
Strong Funds and Senior Vice
President of Strong Capital
Management, Inc., 1997 to 1998;
Partner, PriceWaterhouseCoopers
LLP, 1994 to 1997.
Patrick J. Farrell* Vice President Mr. Farrell has been Vice President,
51 Madison Avenue Corporate Vice President and Assistant
New York, NY 10010 Treasurer of NYLIFE Distributors, Inc.
Date of Birth: 9/27/59 and MainStay Management LLC from 1996
to the present, Assistant Treasurer of
MainStay Institutional Funds from 1996 to
the present and Assistant Treasurer of
MainStay VP Series Fund from 1996 to the
present and Assistant Treasurer, Eclipse
Funds from 1996 to the present. He was
Vice President of Alliance Capital
Management Corporation from 1988
to 1996. From 1986 to 1988, he was Vice
President and Associate Manager of Drexel
Burnham Lambert Incorporated. From 1983
to 1986, he was Assistant Treasurer of
Lexington Management Corporation. From
1981 to 1983 he was a Senior Accountant
for Peat Marwick Mitchell & Company.
</TABLE>
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<PAGE> 153
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Richard W. Zuccaro* Tax Vice President Vice President, New York Life
51 Madison Avenue Insurance Company, 1995 to present;
New York, NY 10010 Vice President -- Tax, New York
Date of Birth: 12/12/49 Life Insurance Company, 1986 to
1995; Tax Vice President, NYLIFE
Securities Inc., 1987 to present;
Tax Vice President, NAFCO, Inc.,
1990 to present; Tax Vice
President, NYLIFE Depositary Inc.,
1990 to present; Tax Vice
President, NYLIFE Inc., 1990 to
present; Tax Vice President, NYLIFE
Insurance Company of Arizona, 1990
to present; Tax Vice President,
NYLIFE Realty Inc., 1991 to
present; Tax Vice President, NYLICO
Inc., 1991 to present; Tax Vice
President, New York Life Fund Inc.,
1991 to present; Tax Vice
President, New York Life
International Investment, Inc.,
1991 to present; Tax Vice
President, NYLIFE Equity Inc., 1991
to present; Tax Vice President,
NYLIFE Funding Inc., 1991 to
present; Tax Vice President, NYLCO
Inc., 1991 to present; Tax Vice
President, MainStay VP Series Fund,
Inc., 1991 to present; Tax Vice
President, CNP Realty, 1991 to
present; Tax Vice President, New
York Life MainStay Institutional
Funds Inc., 1992 to present; Tax
Vice President, NYLIFE
Distributors, Inc., 1993 to
present; Vice President Assistant
Controller, New York Life.
</TABLE>
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<PAGE> 154
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Joseph J. McBrien* Secretary Vice President and Secretary, New
51 Madison Avenue York Life Asset Management Operating
New York, New York 10010 Company LLC, December 1999 to
Date of Birth: 5/26/48 present; Vice President and
Secretary, New York Life Asset
Management LLC, December 1999 to
present; Vice President and
Associate General Counsel, New York
Life Insurance Company, 1999 to
present; Secretary, MainStay VP
Series Fund, Inc., 1999 to present;
Secretary, MainStay Institutional
Funds Inc., 1999 to present;
Secretary, MainStay Management LLC,
1999 to present; Secretary, MainStay
Shareholder Services LLC, 1999 to
present; Secretary, Monitor Capital
Advisors LLC, 1999 to present;
Secretary, Madison Square Advisors
LLC, 1999 to present; Vice President
and Counsel, State Street Bank and
Trust Company, 1997 to 1999;
Principal, McBrien Consulting, 1996
to 1997; Senior Vice President and
General Counsel, Liebe and Company,
1986 to 1996; Senior Vice President
and General Counsel, Evergreen Asset
Management Corp., 1986 to 1996.
</TABLE>
- ---------------
As indicated in the above table, certain Trustees and officers also hold
positions with MacKay Shields, Monitor, New York Life Insurance Company, NYLIFE
Securities Inc. and/or NYLIFE Distributors Inc.
The Independent Trustees of the Trust receive from the Trust an annual
retainer of $45,000, a fee of $2,000 for each Board of Trustees meeting and a
fee of $1,000 for each 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, 1999, the Trustees received the
following compensation from the Trust and from certain other investment
companies (as indicated) that have the same investment advisers as the Trust or
an investment adviser that is an affiliated person of one of the Trust's
investment advisers:
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
NAME OF COMPENSATION FROM REGISTRANT
TRUSTEE FROM THE TRUST PAID TO TRUSTEES
------- -------------- ----------------
<S> <C> <C>
Edward J. Hogan $55,000 $55,000
Nancy M. Kissinger 55,000 55,000
Terry L. Lierman 55,000 55,000
</TABLE>
106
<PAGE> 155
<TABLE>
<S> <C> <C>
Donald E. Nickelson 59,000 59,000
Richard S. Trutanic 55,000 55,000
John B. McGuckian 55,000 55,000
</TABLE>
As of August 31, 1999, 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 SUBADVISORS AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Funds, MainStay
Management LLC (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.
MainStay Management LLC is a direct subsidiary of NYLIFE LLC which is a direct
subsidiary of New York Life Insurance Company.
The Management Agreement 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 the rules thereunder) 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 Trustees, including the
Independent Trustees, approved amendments to the Management Agreement at an
in-person meeting held on September 13, 1999 to reflect the conversion of
MainStay Management from a corporation to a limited liability company under the
laws of the State of Delaware.
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 Prospectuses under the heading
"Manager, Subadvisors 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 a Subadvisor;
(b) the fees to be paid to the Subadvisors 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.
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<PAGE> 156
SUBADVISORY AGREEMENTS
Pursuant to the Subadvisory Agreements between the Manager and Monitor
Capital Advisors LLC ("Monitor") with respect to the Equity Index Fund; between
the Manager and Gabelli Asset Management ("GAMCO") with respect to the Blue
Chip Growth Fund; between the Manager and John A. Levin & Co., Inc. ("John A.
Levin & Co.") with respect to the Research Value Fund; between the Manager and
Dalton Greiner, Hartman, Maher & C. ("DGHM") with respect to the Small Cap
Value Fund; between the Manager and Madison Square Advisors LLC ("Madison
Square Advisors") with respect to the Growth Opportunities Fund; between the
Manager and Markston International LLC ("Markston") with respect to the MAP
Equity Fund; and between the Manager and MacKay Shields LLC ("MacKay Shields")
with respect to the remaining 17 Funds (each a "Subadvisor" and collectively
the "Subadvisors"); each of the Subadvisors, subject to the supervision of the
Trustees of the Trust the Manager 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. As compensation for
services, the Manager, not the Funds, pays the Fund's Subadvisors a monthly fee
calculated on the basis of each Fund's average daily net assets during the
preceding month at the following annual rates:
<TABLE>
<CAPTION>
ANNUAL RATE
<S> <C>
Blue Chip Growth Fund 0.50%(1)
California Tax Free Fund 0.25%(2)
Capital Appreciation Fund 0.36%(2)
Convertible Fund 0.36%
Equity Income Fund 0.35%
Equity Index Fund 0.10%
Global High Yield Fund 0.35%(2)
Government Fund 0.30%(2)
Growth Opportunities Fund 0.35%
High Yield Corporate Bond Fund 0.30%(2)
International Bond Fund 0.45%(3)
International Equity Fund 0.60%
MAP Equity Fund 0.45%(4)
Money Market Fund 0.25%(2)(5)
New York Tax Free Fund 0.25%(2)
Research Value Fund 0.425%(6)
Small Cap Growth Fund 0.50%
Small Cap Value Fund 0.50%(7)
Strategic Income Fund 0.30%
Strategic Value Fund 0.375%
Tax Free Bond Fund 0.30%
Total Return Fund 0.32%(2)
Value Fund 0.36%(8)
</TABLE>
- -----------------
(1) Up to $500 million. For the period June 1, 1998 to May 31, 2001, only
0.40% on assets over $500 million.
108
<PAGE> 157
(2) 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 Subadvisor has voluntarily agreed to do so
proportionately.
(3) The Subadvisor has voluntarily agreed to waive a portion of its fee
until such time as the International Bond Fund reaches $50 million in
net assets.
(4) Up to $250 million; 0.40% from $250 million to $500 million; and 0.35%
in excess of $500 million.
(5) Up to $300 million; 0.225% from $300 million to $700 million; 0.20% from
$700 million to $1 billion; and 0.175% in excess of $1 billion.
(6) Up to $250 million; 0.3825% from $250 million to $500 million; and 0.34%
in excess of $500 million.
(7) Up to $250 million; 0.45% from $250 million to $500 million; and 0.40%
in excess of $500 million.
(8) Up to $200 million; 0.325% from $200 million to $500 million; and 0.25%
in excess of $500 million.
The Subadvisory Agreements will remain in effect for two years following
their effective dates, 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 the rules thereunder) and, in either case, by a
majority of the Trustees who are not "interested persons" of the Trust, the
Manager, or any Subadvisor (as the term is defined in the 1940 Act).
The Subadvisors 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 Subadvisors bear the salaries
and expenses of all of their personnel.
The Subadvisory Agreements provide that the Subadvisors shall not be
liable to a Fund for any error of judgment by a Subadvisor or for any loss
suffered by a Fund except in the case of the Subadvisor's willful misfeasance,
bad faith, gross negligence or reckless disregard of duty. The Sub-Advisory
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 fiscal years ended December 31, 1999 and December 31, 1998 and 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 Subadvisory fee paid by the Manager from the Management fee; and the amount
of the Subadvisory fee waived and/or reimbursed were as follows (the 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 had
not commenced operations as of December 31, 1997):
109
<PAGE> 158
YEAR ENDED 12/31/99
<TABLE>
<CAPTION>
SUB-ADVISORY
MANAGEMENT FEE WAIVED
MANAGEMENT FEE WAIVED SUB-ADVISORY AND/OR
FUND FEE PAID * AND/OR REIMBURSED FEE PAID* REIMBURSED
- ---- -------- ----------------- -------- ----------
<S> <C> <C> <C> <C>
Blue Chip Growth Fund $1,522,623 $ -- $761,312 $ --
California Tax Free Fund 119,917 18,223 59,959 9,112
Capital Appreciation Fund 18,229,526 6,739,391 9,114,763 3,369,696
Convertible Fund 4,706,942 -- 2,353,471 --
Equity Income Fund 144,868 45,799 72,434 --
Equity Index Fund 5,255,558 -- 1,051,111 --
Global High Yield Fund+ -- 75,244 26,873 10,749
Government Fund 3,430,152 -- 1,715,076 --
Growth Opportunities Fund 369,633 -- 184,817 --
High Yield Corporate Bond Fund 20,700,621 1,609,147 10,350,311 804,574
International Bond Fund 119,750 89,812 74,844 59,875
International Equity Fund 1,057,597 -- 634,558 --
MAP Equity Fund 305,543++ 65,954 190,110 --
Money Market Fund 1,976,254 878,339 988,127 439,170
New York Tax Free Fund 60,901 51,029 30,451 25,515
Research Value Fund 102,900 67,846 85,373 --
Small Cap Growth Fund 707,275 -- 353,638 --
Small Cap Value Fund 191,916 87,709 139,813 --
Strategic Income Fund 508,416 -- 254,208 --
Strategic Value Fund 420,671 -- 210,336 --
Tax Free Bond Fund 2,660,755 -- 1,330,378 --
Total Return Fund 10,559,023 490,602 5,279,512 245,301
Value Fund 7,075,261 -- 3,537,631 --
</TABLE>
* After expense reimbursement or waiver.
+ For the year ended December 31, 1999, the Manager earned $75,244, which
was waived, and reimbursed Fund expenses of $41,007. The fees waived and
reimbursed by the Manager total $116,251.
++ Includes $54,647 of advisory fees paid to Markston Investment
Management, the Fund's prior advisor, for the period January 1, 1999
through June 8, 1999.
110
<PAGE> 159
YEAR ENDED 12/31/98
<TABLE>
<CAPTION>
SUB-ADVISORY
MANAGEMENT FEE WAIVED
MANAGEMENT FEE WAIVED SUB-ADVISORY AND/OR
FUND FEE PAID * AND/OR REIMBURSED FEE PAID* REIMBURSED
- ---- -------- ----------------- -------- ----------
<S> <C> <C> <C> <C>
Blue Chip Growth Fund $189,170 $ -- $94,585 $ --
California Tax Free Fund 92,717 45,570 46,359 22,785
Capital Appreciation Fund 13,345,757 4,592,655 6,672,879 3,296,327
Convertible Fund 6,025,907 -- 3,012,954 --
Equity Income Fund 49,143 -- 24,572 --
Equity Index Fund+ 2,866,599 172,008 607,721 --
Global High Yield Fund 28,467 11,387 14,234 5,693
Government Fund 3,741,658 -- 1,870,829 --
Growth Opportunities Fund 70,044 -- 35,022 --
High Yield Corporate Bond Fund 20,579,090 1,598,099 10,289,545 799,049
International Bond Fund 134,025 100,518 83,766 67,012
International Equity Fund 906,887 -- 544,132 --
Money Market Fund 1,189,726 1,107,346 594,863 553,673
New York Tax Free Fund 35,333 70,678 17,667 35,339
Research Value Fund 61,472 -- 30,736 --
Small Cap Growth Fund 136,799 -- 68,400 --
Small Cap Value Fund 95,249 -- 47,625 --
Strategic Income Fund++ 424,136 30,927 212,068 15,463
Strategic Value Fund 382,133 -- 191,067 --
Tax Free Bond Fund 2,904,883 -- 1,452,442 --
Total Return Fund 8,761,932 371,167 4,380,966 185,583
Value Fund 8,378,478 -- 4,189,239 --
</TABLE>
* After expense reimbursement or waiver.
+ Effective April 1, 1998, the Equity Index Fund's expense cap was
terminated.
++ Effective February 28, 1998, the Strategic Income Fund's expense cap was
terminated.
111
<PAGE> 160
10/27/97 - 12/31/97
<TABLE>
<CAPTION>
SUB-ADVISORY
MANAGEMENT FEE WAIVED
MANAGEMENT FEE WAIVED SUB-ADVISORY AND/OR
FUND FEE PAID * AND/OR REIMBURSED FEE PAID* 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, each
applicable or existing Fund paid an advisory fee directly to MacKay Shields or
Monitor. For the period from January 1,1997 through October 26, 1997, 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>
PERIOD ENDED 10/26/97
---------------------
ADVISORY FEE
WAIVED
ADVISORY FEE AND/OR
PAID* REIMBURSED
---- ----------
<S> <C> <C>
California Tax Free Fund $44,678 $2,589
Capital Appreciation Fund 3,934,494 --
Convertible Fund 2,710,393 --
Equity Index Fund 256,066 --
Government Fund 1,760,807 --
High Yield Corporate Bond Fund 6,921,965 --
International Bond Fund 65,696 52,556
International Equity Fund 384,003 --
Money Market Fund 407,638 396,862
New York Tax Free Fund 25,025 13,579
Strategic Income Fund+ 61,282 40,291
Strategic Value Fund+ N/A N/A
</TABLE>
112
<PAGE> 161
<TABLE>
<CAPTION>
PERIOD ENDED 10/26/97
---------------------
ADVISORY FEE
WAIVED
ADVISORY FEE AND/OR
PAID* REIMBURSED
---- ----------
<S> <C> <C>
Tax Free Bond Fund 1,217,473 --
Total Return Fund 3,025,045 --
Value Fund 2,976,469 --
</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, each
applicable or existing Fund paid an administrative fee directly to NYLIFE
Distributors Inc. as administrator. For the period from January 1, 1997 through
October 26, 1997, the amount of the administration fees paid and waived and/or
reimbursed by each Fund was as follows:
<TABLE>
<CAPTION>
PERIOD ENDED 10/26/97
---------------------
ADMINISTRA-
TION FEE
WAIVED
ADMINISTRATION AND/OR
FEE PAID* REIMBURSED
-------- -----------
<S> <C> <C>
California Tax Free Fund $44,678 $2,589
Capital Appreciation Fund 3,934,494 --
Convertible Fund 2,710,393 --
Equity Index Fund 605,767 418,496
Government Fund 1,760,807 --
High Yield Corporate Bond Fund 6,921,965 --
International Bond Fund 39,417 26,278
International Equity Fund 256,002 --
Money Market Fund 407,638 396,862
New York Tax Free Fund 25,025 13,579
Strategic Income Fund+ 61,282 40,291
Strategic Value Fund+ N/A N/A
Tax Free Bond Fund 1,217,473 --
Total Return Fund 3,025,045 --
Value Fund 2,976,469 --
</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.
With respect to the MAP-Equity Fund, the predecessor to the MAP Equity
Fund, investment advisory and management services were provided by Markston
Investment Management, which is now Markston International LLC. During the
fiscal years ended December 31, 1997 and 1998, Markston received from the
MAP-Equity Fund advisory fees of $432,252 and $334,330, respectively. For the
period January 1, 1999 through June 8, 1999 Markston received from the MAP
Equity Fund advisory fees of $54,647.
113
<PAGE> 162
DISTRIBUTION AGREEMENT
NYLIFE Distributors Inc. serves as the Trust's distributor and principal
underwriter (the "Distributor") pursuant to Distribution Agreements dated
January 1, 1994. NYLIFE Securities Inc. ("NYLIFE Securities") sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to 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 Distributor is not
obligated to sell any specific amount of the Trust's shares. The Distributor
receives sales loads and distribution plan payments.
The Trust anticipates making a continuous offering of its shares, although
it reserves the right to suspend or terminate such offering at any time with
respect to any Fund or class or group of Funds or classes. The Distribution
Agreement was approved by the Board of Trustees, including a majority of the
Trustees who are not "interested persons" (as the term is defined in the 1940
Act) of the Trust or the Distributor 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 Agreement for the 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 was approved by the
Trustees, including a majority of the Independent Trustees, on April 27, 1998.
The Distribution Agreement for the MAP Equity Fund was approved by the Trustees,
including a majority of the Independent Trustees, at a meeting held on March 15,
1999. On March 13, 2000, Distribution Agreements were reapproved by the
Trustees, including a majority of the Independent Trustees.
After an initial two-year period, the Distribution Agreements are subject
to annual approval by the Board of Trustees. The Distribution Agreements are
terminable with respect to a Fund at any time, without payment of a penalty, by
vote of a majority of the Trust's Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, upon 60 days' written notice to the
Distributor, or by vote of a majority of the outstanding voting securities of
that Fund, upon 60 days' written notice to the Trust. The Distribution
Agreements will terminate in the event of their assignment.
First Priority Investment Corporation acted as distributor to the
MAP-Equity Fund until April 30, 1999 pursuant to a Distributor's Agreement.
During the fiscal years ended December 31, 1996, 1997 and 1998, the company
received $22,754, $37,552 and $162,627, respectively, for its services as
distributor.
DISTRIBUTION PLANS
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
114
<PAGE> 163
"Class B Plans," the "Class C Plans" and, collectively, the "Plans"). Under the
Plans, 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. Because these fees are paid out of
a Fund's assets on an on-going basis, over time these fees will increase the
cost of an investment and may cost a shareholder more than paying other types of
sales charges. 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. Dealers meeting certain criteria
established by the Distributor, which may be changed from time to time, may
receive additional compensation. 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.
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.
In addition, the Distributor may make payments quarterly to dealers in an amount
up to 1.00% (0.50% for the California Tax Free, New York Tax Free and Tax Free
Bond Funds) on an annualized basis of 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 later years, its expenditures may be less than the distribution fee,
thus enabling the Distributor to realize a profit.
If the Plans for the Funds are terminated, the Funds will owe no payments
to the Distributor other than fees accrued but unpaid on the termination date.
Plans may be terminated only by specific action of the Board of Trustees or
shareholders.
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. The
Distributor, at its expense, also may from time to time provide additional
promotional incentives to dealers who sell Fund shares.
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.
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.
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
115
<PAGE> 164
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.
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.
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.
Each Plan shall continue in effect from year to year, 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).
For the fiscal year ended December 31, 1999, the Funds paid distribution
and service fees pursuant to the Class A, Class B and Class C Plans as follows
(Class C shares were not offered prior to September 1, 1998):
116
<PAGE> 165
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------
AMOUNT OF FEE AMOUNT OF FEE AMOUNT OF FEE
PURSUANT TO PURSUANT TO PURSUANT TO
CLASS A PLAN CLASS B PLAN CLASS C PLAN
------------- ------------- -------------
<S> <C> <C> <C>
Blue Chip Growth Fund+++ $ 89,206 $ 1,144,496 $ 21,303
California Tax Free Fund 39,369 57,336 2,066
Capital Appreciation Fund 1,152,676 29,944,657 123,691
Convertible Fund 99,395 6,137,135 2,720
Equity Income Fund+++ 35,241 128,524 2,892
Equity Index Fund 2,627,779 N/A N/A
Global High Yield Fund+++ 19,001 31,103 388
Government Fund 70,277 5,432,877 2,927
Growth Opportunities Fund+++ 46,221 340,897 2,265
High Yield Corporate Bond Fund 795,741 33,641,614 358,364
International Bond Fund 34,024 162,824 453
International Equity Fund 65,658 791,552 3,415
MAP Equity Fund++++ 8,249 28,437 5,069
Money Market Fund N/A N/A N/A
New York Tax Free Fund 35,982 39,918 48
Research Value Fund+++ 30,312 73,200 6,431
Small Cap Growth Fund+++ 66,855 436,319 3,536
Small Cap Value Fund+++ 34,410 137,539 4,445
Strategic Income Fund++ 53,376 626,557 7,300
Strategic Value Fund++ 46,124 375,177 1,220
Tax Free Bond Fund 48,705 2,119,102 784
Total Return Fund 441,308 15,472,700 27,110
Value Fund 285,365 11,225,055 4,006
</TABLE>
For the fiscal years ended December 31, 1999, 1998 and 1997, NYLIFE
Distributors retained the following amounts of sales charges including CDSC for
Class A shares of the Funds:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Blue Chip Growth Fund+++ $ 37,028 $18,599 --
California Tax Free Fund 5,727 5,765 $ 6,958
Capital Appreciation Fund 265,282 249,244 201,562
Convertible Fund 10,819 10,796 39,646
Equity Income Fund+++ 6,265 2,531 --
Equity Index Fund 643,812 547,315 329,059
Global High Yield Fund+++ 182 766 --
Government Fund 18,246 16,947 5,803
Growth Opportunities Fund+++ 10,544 3,564 --
High Yield Corporate Bond Fund 200,384 335,190 308,282
International Bond Fund 1,708 2,626 5,235
International Equity Fund 12,862 11,418 121,009
MAP Equity Fund++++ 10,715 N/A N/A
Money Market Fund+ 189,204 N/A N/A
</TABLE>
117
<PAGE> 166
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
New York Tax Free Fund 1,392 3,909 2,297
Research Value Fund+++ 3,915 2,903 --
Small Cap Growth Fund+++ 15,733 9,699 --
Small Cap Value Fund+++ 5,914 7,842 --
Strategic Income Fund++ 11,748 16,088 14,008
Strategic Value Fund++ 5,936 20,954 344
Tax Free Bond Fund 7,520 5,062 5,710
Total Return Fund 80,412 67,358 50,232
Value Fund 40,932 90,483 112,844
</TABLE>
For the fiscal years ended December 31, 1999, 1998 and 1997, contingent
deferred sales charges were paid by investors on the redemption of Class B
shares of each Fund, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Blue Chip Growth Fund+++ $ 110,701 $9,233 --
California Tax Free Fund 15,817 14,309 $3,586
Capital Appreciation Fund 3,035,227 2,052,866 1,485,899
Convertible Fund 1,336,476 1,760,525 1,466,588
Equity Income Fund+++ 18,309 169 --
Equity Index Fund N/A N/A N/A
Global High Yield Fund+++ 2,637 1,244 --
Government Fund 470,807 535,272 788,647
Growth Opportunities Fund+++ 24,943 1,935 --
High Yield Corporate Bond Fund 5,180,406 4,333,277 2,684,352
International Bond Fund 26,524 36,901 31,152
International Equity Fund 103,219 102,712 88,010
MAP Equity Fund++++ 912 N/A N/A
Money Market Fund+ 1,395,811 892,546 779,844
New York Tax Free Fund 25,347 13,598 2,531
Research Value Fund+++ 15,496 1,171 --
Small Cap Growth Fund+++ 47,467 4,526 --
Small Cap Value Fund+++ 21,039 3,797 --
Strategic Income Fund++ 90,634 76,399 11,479
Strategic Value Fund++ 142,252 86,652 --
Tax Free Bond Fund 314,438 350,238 492,542
Total Return Fund 1,092,347 908,734 871,336
Value Fund 1,574,675 1,412,491 996,052
</TABLE>
- ---------------
+ 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.
+++ Commenced operations on June 1, 1998.
118
<PAGE> 167
++++ For the period June 9, 1999 through December 31, 1999.
For the fiscal year ended December 31, 1999 and the period from
September 1, 1998 (commencement of Class C operations) through December 31,
1998, contingent deferred sales charges were paid by investors on the redemption
of Class C shares of each Fund, as follows:
119
<PAGE> 168
<TABLE>
<CAPTION>
YEAR ENDED PERIOD OF SEPTEMBER 1, 1998
DECEMBER 31, 1999 TO DECEMBER 31, 1998+
<S> <C> <C>
Blue Chip Growth Fund $ 1,115 --
California Tax Free Fund 624 --
Capital Appreciation Fund 16,997 --
Convertible Fund 317 $ 82
Equity Income Fund 514 --
Equity Index Fund N/A N/A
Global High Yield Fund 119 20
Government Fund 9 --
Growth Opportunities Fund 378 --
High Yield Corporate Bond Fund 35,789 --
International Bond Fund 1,392 1,170
International Equity Fund 31 --
MAP Equity Fund++ -- --
Money Market Fund 4,000 --
New York Tax Free Fund -- --
Research Value Fund 100 --
Small Cap Growth Fund 401 --
Small Cap Value Fund 576 --
Strategic Income Fund 5,339 --
Strategic Value Fund 813 150
Tax Free Bond Fund 529 --
Total Return Fund 1,082 --
Value Fund 585 --
</TABLE>
---------------------------
+ Class C shares were not offered prior to September 1, 1998.
++For the period June 9, 1999 through December 31, 1999.
For the fiscal year ended December 31, 1999, the following amounts were spent on
compensation to dealers with respect to the Class A shares of each Fund: Blue
Chip Growth Fund spent $635,385; California Tax Free Fund spent $96,761; Capital
Appreciation Fund spent $4,173,092; Convertible Fund spent $225,616; Equity
Income Fund spent $167,074; Equity Index Fund spent $10,795,046; Global High
Yield Fund spent $18,348; Government Fund spent $437,493; Growth Opportunities
Fund spent $183,435; High Yield Corporate Bond Fund spent $2,968,790;
International Bond Fund spent $48,447; International Equity Fund spent $214,391;
MAP Equity Fund spent $125,697; New York Tax Free Fund spent $54,699; Research
Value Fund spent $52,935; Small Cap Growth Fund spent $397,656; Small Cap Value
Fund spent $82,369; Strategic Income Fund spent $198,023; Strategic Value Fund
spent $102,878; Tax Free Bond Fund spent $118,114; Total Return Fund spent
$1,340,813; and Value Fund spent $841,045.
For the fiscal year ended December 31, 1999, it is estimated that the
following amounts were spent for distribution-related activities with respect to
the Class A shares of each Fund:
120
<PAGE> 169
<TABLE>
<CAPTION>
Approximate
Printing and Total
Mailing Amount Spent
Sales Prospectuses Compensation Compensation By NYLife
Material To Other than To To Sales Distributors
and Current Distribution Sales Distribution With Respect
Advertising Shareholders Personnel Personnel Other Costs to Fund
----------- ------------ --------- --------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund $ 20,031 $ 71,540 $ 701,164 $ 358,082 $ 727,492 $ 4,173,092 $ 6,051,401
Value Fund 3,609 16,781 128,900 69,246 127,900 841,045 1,187,481
Convertible Fund 978 5,994 26,909 15,866 28,519 225,616 303,882
High Yield Corp. Bond Fund 14,532 49,007 504,326 297,591 533,498 2,968,790 4,367,744
Government Fund 2,284 4,379 83,648 44,985 88,837 437,493 661,626
Tax Free Bond Fund 429 2,849 18,988 6,931 19,326 118,114 166,637
Total Return Fund 6,330 26,930 217,146 117,835 224,437 1,340,813 1,933,491
California Tax Free Fund 247 2,242 10,626 6,507 12,674 96,761 129,057
New York Tax Free Fund 150 2,102 4,337 2,384 4,154 54,699 67,826
International Bond Fund 114 1,979 3,552 1,720 3,397 48,447 59,209
International Equity Fund 956 4,119 34,659 17,621 37,443 214,391 309,189
Strategic Income Fund 975 3,156 31,647 16,779 29,300 198,023 279,880
Strategic Value Fund 417 2,744 14,221 7,477 13,682 102,878 141,419
Equity Index Fund 50,949 163,493 1,877,895 964,924 1,896,803 10,795,046 15,749,110
Blue Chip Growth Fund 3,942 6,097 127,324 73,579 137,989 635,385 984,316
Research Value Fund 286 1,862 8,148 5,194 8,481 52,935 76,906
Small Cap Value Fund 407 2,091 14,834 7,755 14,510 82,369 121,966
Growth Opportunity Fund 956 2,968 35,110 20,026 35,493 183,435 277,988
Small Cap Growth Fund 2,915 4,775 83,212 50,687 85,152 397,656 624,397
Equity Income Fund 1,073 2,239 32,573 20,926 37,401 167,074 261,286
Global High Yield Fund 84 1,153 2,147 1,296 1,952 18,348 24,980
MAP Equity Fund 888 662 26,008 16,505 26,805 125,697 196,565
===================================================================================================================================
Total $ 112,552 $ 379,162 $ 3,987,374 $ 2,123,916 $ 4,095,245 $23,278,107 $33,976,356
===================================================================================================================================
</TABLE>
121
<PAGE> 170
For the fiscal year ended December 31, 1999, 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
Total Amount
Printing and Spent By
Mailing NYLife
Sales Prospectuses Compensation Distributors
Material To Other than To Compensation Sales With
and Current Distribution To Sales Distribution Respect to
Advertising Shareholders Personnel Personnel Other Costs Each Fund
----------- ------------ --------- --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund $ 93,366 $ 281,671 $ 2,902,405 $ 1,048,667 $ 3,255,502 $21,796,981 $29,378,592
Value Fund 19,590 100,902 616,321 220,665 678,079 5,640,117 7,275,674
Convertible Fund 5,306 56,143 156,334 60,795 175,074 2,270,353 2,724,005
High Yield Corp. Bond Fund 93,885 308,257 2,990,403 1,082,575 3,289,041 23,220,863 30,985,024
Government Fund 6,420 48,739 210,084 76,516 239,059 2,470,316 3,051,134
Tax Free Bond Fund 3,850 37,670 136,575 48,458 150,430 1,811,397 2,188,380
Total Return Fund 33,584 143,761 1,051,018 379,301 1,180,477 8,982,040 11,770,181
California Tax Free Fund 680 1,043 19,311 6,649 21,054 138,894 187,631
New York Tax Free Fund 335 718 9,427 3,462 10,353 66,567 90,862
International Bond Fund 334 1,443 11,200 4,018 12,692 98,090 127,777
International Equity Fund 2,538 7,456 80,868 30,274 90,322 602,617 814,075
Strategic Income Fund 1,891 5,692 61,662 22,179 68,270 461,097 620,791
Strategic Value Fund 1,112 3,390 35,018 12,520 38,430 246,469 336,939
Blue Chip Growth Fund 18,400 12,505 540,146 202,669 618,061 2,928,241 4,320,022
Research Value Fund 763 731 21,436 7,945 23,052 123,704 177,631
Small Cap Value Fund 1,262 1,317 40,420 14,971 44,769 232,155 334,894
Growth Opportunities Fund 5,035 3,613 153,452 56,168 166,367 830,633 1,215,268
Small Cap Growth Fund 8,456 5,168 240,275 99,634 277,731 1,219,591 1,850,855
Equity Income Fund 3,044 1,416 86,535 32,652 92,601 439,726 655,974
Global High Yield Fund 286 302 8,082 2,935 8,736 45,711 66,052
MAP Equity Fund 2,156 403 55,899 21,611 59,848 268,853 408,770
===================================================================================================================================
Total $ 302,293 $ 1,022,340 $ 9,426,871 $ 3,434,664 $10,499,948 $73,894,415 $98,580,531
===================================================================================================================================
</TABLE>
122
<PAGE> 171
For the fiscal year ended December 31, 1999, it is estimated that the
following amounts were spent for distribution-related activities with respect to
the Class C shares of each Fund:
<TABLE>
<CAPTION>
Approximate
Total Amount
Printing and Spent By
Mailing NYLife
Sales Prospectuses Compensation Distributors
Material To Other than To Compensation Sales With
and Current Distribution To Sales Distribution Respect to
Advertising Shareholders Personnel Personnel Other Costs Each Fund
----------- ------------ --------- --------- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund $ 1,244 $ 4,506 $ 41,233 $ 13,864 $ 40,497 $ 216,291 $ 317,635
Value Fund 55 218 1,881 651 1,772 9,591 14,168
Convertible Fund 123 443 2,646 926 2,359 11,922 18,419
High Yield Corp. Bond Fund 3,768 14,389 119,848 43,521 114,456 639,118 935,100
Government Fund 61 261 1,537 652 1,162 8,479 12,152
Tax Free Bond Fund 23 87 746 327 867 5,198 7,248
Total Return Fund 351 1,409 11,329 4,016 10,989 57,826 85,920
California Tax Free Fund 128 457 3,004 922 2,537 13,331 20,379
New York Tax Free Fund 6 20 118 35 97 485 761
International Bond Fund 4 15 272 91 229 1,300 1,911
International Equity Fund 18 63 622 210 581 3,006 4,500
Strategic Income Fund 65 348 3,251 1,095 3,353 16,313 24,425
Strategic Value Fund 9 41 402 143 329 2,359 3,283
Blue Chip Growth Fund 401 2,055 12,264 5,631 9,842 72,519 102,712
Research Value Fund 45 154 1,629 565 1,811 9,032 13,236
Small Cap Value Fund 25 102 1,055 368 1,088 5,741 8,379
Growth Opportunity Fund 58 271 1,724 703 1,434 9,669 13,859
Small Cap Growth Fund 181 1,025 3,807 2,453 2,261 27,212 36,939
Equity Income Fund 107 447 3,200 1,193 2,515 15,605 23,067
Global High Yield Fund 8 16 210 60 233 1,003 1,530
MAP Equity Fund 170 702 4,449 1,858 4,249 23,582 35,010
===================================================================================================================================
Total $ 6,850 $ 27,029 $ 215,227 $ 79,284 $ 202,661 $1,149,582 $1,680,633
===================================================================================================================================
</TABLE>
123
<PAGE> 172
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated October 24,
1997, the Manager performs certain bookkeeping and pricing services for the
Funds. Each Fund will bear an allocable portion of the cost of providing these
services to the Trust.
For the fiscal years ended December 31, 1999 and 1998, and 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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 10/27/97 - 12/31/97
----------------- ----------------- -------------------
<S> <C> <C> <C>
Blue Chip Growth Fund++ $40,659 $8,769 $N/A
California Tax Free Fund 12,599 8,531 N/A
Capital Appreciation Fund 373,458 275,485 41,466
Convertible Fund 92,042 110,412 21,595
Equity Income Fund++ 13,643 7,133 N/A
Equity Index Fund 131,779 61,548 N/A
Global High Yield Fund++ 12,001 7,000 N/A
Government Fund 83,835 88,839 16,639
Growth Opportunities Fund++ 20,936 7,133 N/A
High Yield Corporate Bond Fund 398,497 395,788 68,994
International Bond Fund 13,312 14,829 2,608
International Equity Fund 37,185 33,255 5,460
MAP Equity Fund+++ 15,964 N/A N/A
Money Market Fund 86,768 74,315 12,407
New York Tax Free Fund 12,000 8,000 N/A
Research Value Fund++ 12,000 7,133 N/A
Small Cap Growth Fund++ 25,029 7,280 N/A
Small Cap Value Fund++ 13,044 7,133 N/A
Strategic Income Fund+ 31,577 28,380 4,701
Strategic Value Fund+ 22,029 20,585 2,323
Tax Free Bond Fund 71,012 75,715 13,665
Total Return Fund 199,319 169,320 28,016
Value Fund 150,373 176,604 31,142
</TABLE>
+ The Strategic Income Fund commenced operations on February 28, 1997. The
Strategic Value Fund commenced operations on October 21, 1997.
++ Commenced operations on June 1, 1998.
+++ The MAP Equity Fund commenced operations on June 9, 1999.
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<PAGE> 173
For the period January 1, 1997 through October 26, 1997 and the fiscal
year ended December 31, 1996, the amount of recordkeeping fees paid to NYLIFE
Distributors, the previous Accounting Agent, by each Fund was as follows:
<TABLE>
<CAPTION>
PERIOD YEAR ENDED
1/1/97 - 10/26/97 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
California Tax Free Fund $N/A $ N/A
Capital Appreciation Fund 164,868 145,721
Convertible Fund 108,332 81,568
Equity Index Fund N/A N/A
Government Fund 80,879 114,622
High Yield Corporate Bond Fund 270,515 233,333
International Bond Fund 11,358 12,511
International Equity Fund 24,683 22,075
Money Market Fund 54,915 62,593
New York Tax Free Fund N/A N/A
Strategic Income Fund + 13,624 N/A
Strategic Value Fund + N/A N/A
Tax Free Bond Fund 60,703 80,430
Total Return Fund 119,962 126,154
Value Fund 125,541 16,985
</TABLE>
- ----------------
+ The Strategic Income Fund commenced operations on February 28, 1997.
The Strategic Value Fund commenced operation on October 21, 1997.
In addition, each Fund may reimburse NYLIFE Securities, NYLIFE
Distributors and MainStay Shareholder Services for the cost of certain
correspondence to shareholders and the establishment of shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectuses, 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 Subadvisors,
(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
125
<PAGE> 174
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 to be utilized in periods when the Funds experience unusually large
redemption requests. A mutual fund is considered to be using leverage whenever
it borrows an amount more than 5% of its assets. None of the Funds intend to
borrow for the purpose of purchasing securities using the credit facility or any
other source of borrowed funds.
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, other debt
securities and some equity 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 usually 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 Subadvisor attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and its
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
Subadvisors 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
Funds. In order for the Affiliated Broker to effect any portfolio transactions
for the Funds 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
126
<PAGE> 175
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 Funds 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 Subadvisor may cause a Fund
to pay a broker-dealer (except the Affiliated Broker) which provides brokerage
and research services to the Subadvisor 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 Subadvisor 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 Subadvisor'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 Subadvisors, 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 Subadvisors' 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 Subadvisors for no
consideration other than brokerage or underwriting commissions. Research
provided by brokers is used for the benefit of all of the Subadvisors' clients
and not solely or necessarily for the benefit of the Trust. The Subadvisors'
investment management personnel attempt to evaluate the quality of Research
provided by brokers. Results of this effort are sometimes used by the
Subadvisors 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 Subadvisors. Investment decisions for a Fund and for the
Subadvisors' 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
127
<PAGE> 176
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
Subadvisors will not be reduced as a consequence of the Subadvisors' 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
clearly determined. Such services would be useful and of value to the
Subadvisors 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 Subadvisors in carrying out their obligations to the Funds.
128
<PAGE> 177
For the fiscal years ended December 31, 1999, 1998 and 1997, each of the
following Funds paid brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Brokerage Commissions
Total Brokerage Commissions Paid Paid to Affiliated Persons
-------------------------------- --------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Blue Chip Growth Fund++ $ 216,627 $ 52,673 $ -- $ -- $ -- $ --
Capital Appreciation Fund 2,511,097 1,418,340 1,349,716 -- -- --
Convertible Fund 1,987,014 2,933,036 1,728,411 -- -- --
Equity Income Fund++ 169,126 40,578 -- -- -- --
Equity Index Fund 271,034 199,806 24,704 -- -- --
Government Fund -- -- 1,719 -- -- --
Growth Opportunities Fund++ 103,378 28,756 -- -- -- --
High Yield Corporate Bond Fund 2,914,061 1,730,356 1,297,005 -- -- --
International Equity Fund 264,093 230,372 239,373 -- -- --
MAP Equity Fund++ 33,115 -- -- -- -- --
Research Value Fund++ 40,590 27,977 -- -- -- --
Small Cap Growth Fund++ 63,804 43,448 -- -- -- --
Small Cap Value Fund++ 53,686 60,955 -- -- -- --
Strategic Income Fund+ 7,160 2,531 11,739 -- -- --
Strategic Value Fund+ 145,721 237,599 21,314 -- -- --
Total Return Fund 846,320 496,313 609,009 -- -- --
Value Fund 2,994,078 2,776,378 2,347,711 -- -- --
</TABLE>
<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, 1999 December 31, 1998 December 31, 1997 December 31, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Blue Chip Growth Fund++ $241,372,777 $59,586,318 $ -- $ --
Capital Appreciation Fund 2,194,930,826 1,150,491,675 987,618,526 2,061,262
Convertible Fund 1,625,240,663 2,129,442,319 1,608,359,897 1,535,556
Equity Income Fund++ 88,501,126 60,556,859 -- 140,183
Equity Index Fund 330,432,793 211,986,359 21,111,250 152,947
Government Fund -- -- 12,111,250 --
Growth Opportunities Fund++ 79,620,046 23,105,426 -- 103,378
High Yield Corporate Bond Fund 308,902,539 644,381,301 1,451,737,826 2,709,006
International Equity Fund 79,794,853 84,406,014 60,462,344 84,773
MAP Equity Fund+++ 37,595,693 -- -- 9,534
Research Value Fund++ 29,597,856 24,199,572 -- 37,380
Small Cap Growth Fund++ 27,607,675 18,719,435 -- 34,261
Small Cap Value Fund++ 20,325,827 26,176,292 -- 19,728
Strategic Income Fund+ 3,934,613 1,122,044 41,537,454 4,830
Strategic Value Fund+ 75,557,128 147,090,662 12,723,841 123,233
Total Return Fund 714,836,564 403,031,223 459,057,404 714,048
Value Fund 1,547,917,417 2,147,864,794 1,523,756,743 2,398,517
</TABLE>
+ The Strategic Income Fund commenced operations on February 28, 1997 and the
Strategic Value Fund commenced operations on October 21, 1997.
++ Commenced operations June 1, 1998.
+++ Commenced operations June 9, 1999.
129
<PAGE> 178
The California Tax Free Fund, Global High Yield 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, 1999, 1998 and
1997.
For the fiscal years ended December 31, 1997, 1998 and the period January
1, 1999 through June 8, 1999, the MAP-Equity Fund (predecessor to the MAP Equity
Fund) paid total brokerage commissions of $61,779 in 1997 (on portfolio
transactions amounting to $84,698,287), of which approximately 24.3% was paid to
brokers that provided research; $44,997 in 1998 (on portfolio transactions
amounting to $63,342,288), of which approximately 37.9% was paid to brokers that
provided research; and $12,303 in 1999 (on portfolio transactions amounting to
$17,285,287), of which approximately 18% was paid to brokers that provided
research.
As of December 31, 1999, Blue Chip Growth Fund held common stock of
Merrill Lynch & Co., Inc. valued at $4,191,700; Capital Appreciation Fund held
common stock of Goldman Sachs Group Inc. valued at $22,605,000; and Merrill
Lynch Premier Institutional Fund valued at $51,145,000; Convertible Fund held
convertible bonds of Morgan Stanley Dean Witter & Co., zero coupon bonds, due
8/17/05 valued at $6,111,630 and zero coupon, due 10/19/06 valued at $7,353,000;
convertible bonds of Merrill Lynch & Co., Inc., 0.25%, due 5/10/06 valued at
$5,376,000 and 1.00%, due 7/20/06 valued at $3,640,000; convertible preferred
stock of Merrill Lynch & Co., Inc., 6.25%, Series IGL valued at $693,550;
commercial paper of Goldman Sachs Group LP valued at $9,672,534; and Merrill
Lynch Premier Institutional Fund valued at $25,211,688; Equity Index Fund held
common stock of American Express Co. valued at $7,481,416, Morgan Stanley Dean
Witter & Co. valued at $7,998,996, T. Rowe Price Associates, Inc. valued at
$472,800, Bear Stearns Cos., Inc. valued at $528,561, Lehman Brothers Holdings
Inc. valued at $1,008,543, Merrill Lynch & Co., Inc. valued at $3,097,349, Paine
Webber Group Inc. valued at $566,663 and Charles Schwab Corp. valued at
$3,162,714; Government Fund held asset-backed securities of Morgan Stanley
Aircraft Finance, Series 1, Class A1, 6.6725%, due 3/15/23 valued at $8,187,543;
mortgage-backed securities of CS First Boston Mortgage Securities Corp., Series
1999-C1, Class A2, 7.29%, due 9/15/41 valued at $3,733,500, Lehman Large Loan,
Series 1997-LLI, Class A1, 6.79%, due 10/12/34 valued at $8,010,829; and Merrill
Lynch Mortgage Investors, Inc., Series 1998-C2, Class A1, 6.22%, due 2/15/30
valued at $5,523,286, Series 1995-C2, Class A1, 7.0793%, due 6/15/21 valued at
$3,584,850 and Series 1999-C2, Class A1, 7.56%, due 11/15/31 valued at
$3,060,053; Growth Opportunities Fund held common stock of American Express Co.
valued at $831,250; High Yield Corporate Bond Fund held corporate bonds of
LaBranche & Co., Inc., 9.50%, due 8/15/04 valued at $242,500; commercial paper
of Goldman Sachs Group L.P. valued at $22,930,619, Merrill Lynch & Co., Inc.
valued at $23,448,239, Morgan Stanley Dean Witter & Co. valued at $59,449,440
and Salomon Smith Barney Holdings, Inc. valued at $29,884,500; and Merrill Lynch
Premier Institutional Fund valued at $41,964,906; MAP Equity Fund held common
stock of American Express Co. valued at $2,029,414; Money Market Fund held
commercial paper of American Express Credit Corp. valued at $12,846,190, Goldman
Sachs Group L.P. valued at $23,653,033, Merrill Lynch & Co. Inc. valued at
$11,939,497, Morgan Stanley Dean Witter & Co. valued at $17,972,850, Prudential
Funding Corp. valued at $17,932,306 and Salomon Smith Barney Holdings Inc.
valued at $11,962,060; medium-term notes of Morgan Stanley Dean Witter & Co.
valued at $6,000,047, Prudential Funding Corp., Series B valued at $5,002,177
and Salomon Smith Barney Holdings Inc. valued at $4,852,997; and Merrill Lynch
Premier Institutional Fund valued at $26,905,026; Small Cap Growth Fund held
commercial paper of Merrill Lynch & Co. Inc. valued at $2,991,296; Strategic
Income Fund held corporate bonds of Morgan Stanley Dean
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<PAGE> 179
Witter & Co., 7.125%, due 1/15/03 valued at $299,781, Donaldson, Lufkin &
Jenrette, Inc., 6.50%, due 6/1/08 valued at $160,925, Goldman Sachs Group, Inc.,
Series MTNA, 6.6038%, due 1/8/01 valued at $125,475 and Lehman Brothers
Holdings, Inc., 6.625%, due 2/5/06 valued at $66,224; mortgage-backed securities
of CS First Boston Mortgage Securities Corp., Series 1999-C1, Class A2, 7.29%,
due 9/15/41 valued at $201,413, Lehman Large Loan, Series 1997-LLI, Class A1,
6.79%, due 6/12/04 valued at $150,350, Merrill Lynch Mortgage Investors, Inc.,
Series 1998-C2, Class A1, 6.22%, due 2/15/30 valued at $117,696, Series 1995-C2,
Class A1, 7.0793%, due 6/15/21 valued at $551,810, Series 1999-C1, Class A2,
7.56%, due 11/15/31 valued at $139,546 and Salomon Brothers Mortgage Securities
VII, Series 1997-TZH, Class A1, 7.15%, due 3/25/25 valued at $208,089; and
commercial paper of Merrill Lynch & Co., Inc. valued at $1,438,451; Strategic
Value Fund held convertible bonds of Merrill Lynch & Co., Inc., 0.25%, due
5/10/06 valued at $432,000; and commercial paper of American Express Credit
Corp. valued at $499,594 and Prudential Funding Corp. valued at $1,099,106;
Total Return Fund held asset-backed securities of Morgan Stanley Aircraft
Finance, Series 1, Class A1, 6.6725%, due 3/15/23 valued at $4,538,638;
corporate bonds of Morgan Stanley Dean Witter & Co., 7.125%, due 1/15/03 valued
at $6,670,127, Donaldson, Lufkin & Jenrette Inc., 6.50%, due 6/1/08 valued at
$3,779,433, Goldman Sachs Group Inc., Series A, 6.6038%, due 1/8/01 valued at
$2,810,640, LaBranche & Co., Inc., 9.50%, due 8/15/04 valued at $538,350, and
Lehman Brothers Holding Inc., 6.625%, due 2/5/06 valued at $1,296,102;
mortgage-backed securities of CS First Boston Mortgage Securities Corp., Series
1999-C1, Class A2, 7.29%, due 9/15/41 valued at $4,377,038, Lehman Large Loan,
Series 1997-LLI, Class A1, 6.79%, due 6/12/04 valued at $2,931,822, Merrill
Lynch Mortgage Investors, Inc., Series 1998-C2, Class A1, 6.22%, due 2/15/30
valued at $2,332,895, Series 1995-C2, Class A1, 7.0793%, due 6/15/21 valued at
$3,442,844, Series 1999-C1, Class A2, 7.56%, due 11/15/31 valued at $3,060,053
and Salomon Brothers Mortgage Securities VII, Series 1997-TZH, Class A1, 7.15%,
due 3/25/25 valued at $4,104,666; and Merrill Lynch Premier Institutional Fund
valued at $22,470,468; and Value Fund held commercial paper of American Express
Credit Corp. valued at $8,953,566 and Goldman Sachs Group Inc. valued at
$10,164,863; and Merrill Lynch Premier Institutional Fund valued at $12,745,282.
A Fund's portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of this calculation, portfolio
securities will exclude purchases and sales of debt securities having a maturity
at the date of purchase of one year or less.
The turnover rate for a Fund will vary from year-to-year and depending on
market conditions, turnover could be greater in periods of unusual market
movement and volatility. A higher turnover rate generally would result in
greater brokerage commissions, particularly in the case of equity oriented
Funds, or other transactional expenses which must be borne, directly or
indirectly, by the Fund and, ultimately, by the Fund's shareholders. High
portfolio turnover may also result in the realization of an increase in net
short-term capital gains by the Fund which, when distributed to non-tax exempt
shareholders, will be treated as dividends (ordinary income).
NET ASSET VALUE
The Trust determines the net asset value per share of each class of each
Fund on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated as of the close of the first session of the New
York Stock Exchange (currently 4:00 p.m., New York time) for each class of
shares of each Fund (except the Money Market Fund, which is determined at noon),
by dividing the current market value (amortized cost, in the case of the Money
Market
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<PAGE> 180
Fund) of the total assets attributable to that class, by the total number of
outstanding shares of that class.
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 on instrument at its cost and
thereafter assuming a constant amortization to maturity of any premium paid or
discount received. While this method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Money Market Fund would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the Money Market Fund may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Money Market Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Fund would be able to obtain a somewhat higher
yield if he or she purchased shares of the Money Market Fund on that day, than
would result from investment in a fund utilizing solely market values, and
existing investors in the Money Market Fund would receive less investment
income. The converse would apply in a period of rising interest rates.
Portfolio securities of each of the other Funds are valued (a) by
appraising common and preferred stocks which are traded on the New York Stock
Exchange at the last sale price of the first session on that day 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 a Fund's Subadvisor if the prices
are deemed by the Subadvisor to be representative of market values at the close
of the first session of the New York Stock Exchange; (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Subadvisor,
which prices reflect broker-dealer-supplied valuations and electronic data
processing techniques and/or matrix pricing if those prices are deemed by a
Fund's Subadvisor to be representative of market values at the close of the
first session 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 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 a Fund's Subadvisor 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
calculations may be done by others. Money market instruments held by the Funds
with a remaining maturity of 60 days or less are valued by the amortized cost
method unless such method does not represent fair value. Forward foreign
currency exchange contracts
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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. For financial accounting
purposes, the Trust recognizes dividend income and other distributions on the
ex-dividend date, except that certain dividends from foreign securities are
recognized as soon as the Trust is informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open for trading). In addition, European or Far Eastern securities
trading generally in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Funds' net asset values are not
calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the
time their prices are determined and the close of the New York Stock Exchange
generally will not be reflected in the Funds' calculation of net asset values.
However, a Subadvisor, in consultation with the Manager, may, in its judgement,
determine that an adjustment to a Fund's net asset value should be made because
intervening events have caused the Fund's net asset value to be materially
inaccurate.
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 of New York Life Inc. 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.
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<PAGE> 182
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
MainStay Shareholder Services LLC ("MSS"). If a share certificate is desired, it
must be requested in writing for each transaction. There is no charge to the
investor for issuance of a certificate. Whenever a transaction takes place in a
Fund (other than the Money Market Fund), the shareholder will be mailed a
confirmation showing the transaction. Shareholders will be sent a quarterly
statement showing the status of the Account. In addition, shareholders will be
sent a monthly statement for each month in which a transaction occurs.
SHAREHOLDER TRANSACTIONS
MSS may accept written requests from at least one of the owners of a
Shareholder Investment Account for the following account transactions and/or
maintenance's:
- dividend and capital gain changes (including moving dividends
between account registrations);
- address changes;
- certain Systematic Investment Plan and Systematic Withdrawal Plan
changes (including increasing or decreasing amounts and plan
termination);
- exchange requests between identical registrations; and
- redemptions less than $100,000 to the record address only.
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE
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 its sales arrangements. 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 lower 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."
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<PAGE> 183
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
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 at 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 8:00 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 next
determined following receipt of the telephone order as described above plus any
applicable sales charge. 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 "Know
How to Sell and Exchange Shares."
BY WIRE
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 MSS 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 or by ACH payment, the Trust may withhold payment for up to 10 days from
the date the check is received.
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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.
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 through certain qualified retirement plans; purchases by
the Trustees; New York Life and its subsidiaries and their employees, officers,
directors or agents; through financial services firms that have entered into an
agreement with the Funds or New York Life Distributors; New York Life employee
and agent investment plans; investments resulting from distributions by other
New York Life products and NYLIFE Distributors, Inc. products; and purchases by
certain individual participants.
SYSTEMATIC INVESTMENT PLANS
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. 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 Subadvisor 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 Subadvisor 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.
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
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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. There is no sales charge on purchases of shares
in the Money Market Fund.
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<PAGE> 186
The sales charge applicable to an investment in Class A shares of the Blue
Chip Growth Fund, Capital Appreciation Fund, Convertible Fund, Equity Income
Fund, Growth Opportunities Fund, International Equity Fund, MAP Equity Fund,
Research Value Fund, Small Cap Growth Fund, Small Cap Value 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, Global High Yield 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%
</TABLE>
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<PAGE> 187
<TABLE>
<S> <C> <C> <C> <C>
$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% may be 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 may pay, from its own resources, a
commission to dealers on such investments. In such cases, 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. In addition, for commission purposes, the Trust
will treat Class A share purchases of Funds, other than the Money Market Fund,
in an amount less than $1,000,000 by defined contribution plans, other than
non-ERISA 403(b) plans and IRA plans, that are sponsored by employers with 50 or
more participants as if such purchases were equal to an amount more than
$1,000,000 but less than $2,999,999. Commissions will be calculated on a
calendar year basis. Such commissions will be paid only on those purchases that
were not previously subject to a front-end sales charge and dealer concession.
The Distributor may allow the full sales charge to be retained by dealers.
The amount retained may be changed from time to time. 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.
Set forth below is an example of the method of computing the offering
price of Class A shares of the Equity Index Fund. The example assumes a purchase
of Class A shares of the Fund aggregating less than $100,000 subject to the
schedule of sales charges set forth above at a price based upon the net asset
value of Class A shares of the Fund on December 31, 1999.
<TABLE>
<CAPTION>
<S> <C>
Net Asset Value per Class A Share
at December 31, 1999 $47.36
Per Share Sales Charge - 3.00% of
offering price (3.09% of net asset value per share) $1.46
Class A Per Share Offering Price to the Public $48.82
</TABLE>
The sales charge applicable to an investment in Class A shares of the
California Tax Free Fund, Global High Yield 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 4.50% of the offering price per share
(4.71% of the net asset value per share). Set forth below is an example of the
method of commuting the offering price of the Class A shares of these Funds. The
example assumes a purchase of Class A shares of the California Tax Free Fund
aggregating less than $100,000 at a price based upon the net asset value of
Class A shares of the California Tax Free Fund on December 31, 1999. The
offering price of shares of each of the other listed Funds can be calculated
using the same method.
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<PAGE> 188
<TABLE>
<CAPTION>
<S> <C>
Net Asset Value per Class A Share at December 31, 1999 $8.89
Per Share Sales Charge - 4.50% of offering price (4.71% of net
asset value per share) $0.42
Class A Per Share Offering Price to the Public $9.31
</TABLE>
The sales charge applicable to an investment in Class A shares of the Blue
Chip Growth Fund, Capital Appreciation Fund, Convertible Fund, Equity Income
Fund, Growth Opportunities Fund, International Equity Fund, MAP Equity Fund,
Research Value Fund, Small Cap Value Fund, Strategic Value Fund, Total Return
Fund and Value Fund will be 5.50% of the offering price per share (5.82% of net
asset value per share). Set forth below is an example of the method of computing
the offering price of the Class A shares of the Funds. The example assumes a
purchase of Class A shares of the Blue Chip Growth Fund aggregating less than
$50,000 at a price based upon the net asset value of Class A shares of the Blue
Chip Growth Fund on December 31, 1999. The offering price of the Class A shares
of each of the other listed Funds can be calculated using the same method.
<TABLE>
<CAPTION>
<S> <C>
Net Asset Value per Class A Share at December 31, 1999 $16.50
Per Share Sales Charge - 5.50% of offering price
(5.82% of net asset value per share) $0.96
Class A Per Share Offering Price to the Public $17.46
</TABLE>
PURCHASES AT NAV
Purchases of Class A shares in an amount equal to $1 million or more and
purchases by certain group retirement plans will not be subject to an initial
sales charge, but 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."
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.
("Levin") and Dalton, Greiner, Hartman, Maher & Co. ("DGHM"); employees (and
immediate family members) of Gabelli Asset Management Company and Markston
Investment Management LLC; and investors who are recommended by Levin or DGHM to
invest in the MainStay Funds managed by Levin or DGHM, respectively. Also, any
employee or Registered Representative of an authorized broker-dealer or other
financial services firm (and immediate family members) that has entered into an
agreement with the Funds or the Distributor and any employee of Boston Financial
Data Services that is assigned to the Fund may purchase a Fund's shares at NAV
without payment of any sales charge.
Class A shares of the Funds also may be purchased at net asset value,
without payment of any sales charge, through financial services firms such as
broker-dealers, investment advisors and other financial institutions which have
entered into an agreement with the Funds or the
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Distributor which provides for the sale and/or servicing of Fund shares in
respect of beneficial owners that are clients of the financial services firms or
intermediaries contracting with such firms. The Funds, the Distributor, MSS or
affiliates may pay fees to such firms and/or intermediaries in connection with
these arrangements.
GROUP RETIREMENT PLANS ESTABLISHED BEFORE MAY 1, 2000. In addition to otherwise
applicable provisions described in the prospectus and SAI, purchases through
group retirement plans (other than non-ERISA plans and IRA plans) in a Fund
account established before May 1, 2000 may purchase Class A shares at net asset
value either when the plan sponsor has 50 employees or the plan has an aggregate
investment in shares of any class of the Funds of $1,000,000 or more.
REDUCED SALES CHARGES ON CLASS A SHARES
Purchases of a Fund made at one time by any "Qualified Purchaser" will be
aggregated for purposes of computing the sales charge. "Qualified Purchaser"
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), 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.
LETTER OF INTENT ("LOI")
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
to be 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, call your
Registered Representative or MainStay at 1-800-MAINSTAY.
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 MSS 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.
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.
Purchases of Class A shares at NAV through financial services firms or by
certain persons that are affiliated with or have a relationship with New York
Life or its affiliates (as described above) will not be subject to a contingent
deferred sales charge.
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;
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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 an initial 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 if such shares are
redeemed within one year of the date of the initial purchase.
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) an
initial 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.
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 aggregate 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.
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.
The amount of the contingent deferred sales charge, if any, paid by a
redeeming shareholder 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) 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 first day of the month.
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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.
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; and (x) 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.
ADDITIONAL CDSC WAIVERS APPLICABLE TO ACCOUNTS ESTABLISHED BEFORE JANUARY
1, 1998. In addition to the categories outlined above, 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
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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; (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.
Shareholders should notify MSS, the Funds' transfer agent, at the time of
requesting such redemptions that they are eligible for a waiver of the
contingent deferred sales charge. Class B shares upon which the contingent
deferred sales charge may be waived may not be resold, except to the Trust.
Shareholders who are making withdrawals from retirement plans and accounts or
other tax-sheltered or tax-deferred accounts should consult their tax advisers
regarding the tax consequences of such withdrawals.
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.
Proceeds from the contingent deferred sales charge are paid to, and are
used in whole or in part by, the Distributor to defray its expenses related to
providing distribution related services to the Funds in connection with the sale
of the Class 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.
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
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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
requirement for a signed letter 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.
In times when the volume of telephone redemptions and exchanges is heavy,
additional phone lines will be added by MSS. However, in times of very large
economic or market changes, redemptions and exchanges may be difficult to
implement by the telephone. When calling MSS to make a telephone redemption or
exchange, shareholders should have available their account number and Social
Security or Taxpayer I.D. numbers.
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
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. See the Prospectus for more
information.
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DISTRIBUTIONS IN KIND
The Trust has agreed to redeem shares of each Fund solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the applicable Fund's portfolio. The securities
distributed in such a distribution would be valued at the same value as that
assigned to them in calculating the NAV of the shares being redeemed. If a
shareholder receives a distribution in kind, he or she should expect to incur
transaction costs when he or she converts the securities to cash.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of any Fund and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Trust; or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption or repurchase of its shares.
EXCHANGE PRIVILEGES
Exchanges will be based upon each Fund's NAV per share next determined
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 qualified for sale in the state of residence of the investor
or where an exemption from qualification is available and only with respect to
Funds that are available for sale to new investors. All exchanges are subject
to a minimum investment requirement. 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).
Any exchanges between a Fund and MainStay Equity Index Fund will be
subject to the conditions applicable to Class A share exchanges described
herein. 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
determined 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-
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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 determined 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. 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 original purchase of
the shares, regardless of exchanges into other Funds. 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. In addition, if Class B or Class C shares of a Fund are
exchanged into Class B or Class C shares of the Money Market Fund, the holding
period for purposes of determining the contingent deferred sales charge (and
conversion into Class A shares with respect to Class B shares) stops until the
shares are exchanged back into Class B or Class C shares, as applicable, of
another MainStay Fund.
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, except for systematic exchanges, exchanges
processed via MainStay's automated system and as to certain accounts for which
tracking data is not available, after five exchanges per calendar year a $10 fee
will be imposed on each trade date on which a shareholder makes an exchange and
additional exchange requests may be denied.
For federal income tax purposes, an exchange is treated as a sale on which
an investor may realize a gain or loss. See "Understand the Tax Consequences"
for information concerning the federal income tax treatment of a disposition of
shares.
The exchange privilege may be modified or withdrawn at any time upon prior
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
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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 Guaranteed Date. However, any such
redeemed shares will lose the benefit of the Guarantee. Redemptions will be made
of shares held by the shareholder for the longest period of time. For more
information regarding the redemption procedures for the Equity Index Fund, see
"Additional Information About Certain Funds -- The Equity Index Fund Guarantee."
Within seven days after acceptance of a redemption request, the Equity
Index Fund is required to make payment of the NAV of the shares on the date the
order was received in proper form, except that where a request is made at least
30 days prior to a dividend or distribution record date to redeem the dividend
shares immediately upon issuance (to effectively receive the dividend in cash),
redemption and payment will occur at that time.
TAX-DEFERRED RETIREMENT PLANS
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
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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. Three types of IRAs are
available -- a traditional IRA, 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 an 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 the
1999 tax year, a contribution is deductible only if the individual (and his or
her spouse, if applicable) has an adjusted gross income below a certain level
($51,000 for married individuals filing a joint return, with a phase-out of the
deduction for adjusted gross income between $51,000 and $61,000; $31,000 for a
single individual, with a phase-out for adjusted gross income between $31,000
and $41,000). These phase-out limits will gradually increase, 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, 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 ($0-$10,000 for non-participant spouses filing a
separate return). 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. However,
there are exceptions for certain withdrawals, including: withdrawals up to a
total of $10,000 for qualified first-time homebuyer expenses or 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.
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Roth IRAs. Roth IRAs are a form of individual retirement account which
feature nondeductible contributions that 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. 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 years old. The maximum contribution is phased
out for taxpayers with adjusted gross income between $95,000 and $110,000
($150,000 - $160,000 if married filing jointly). Earnings are tax-deferred until
a distribution is made. If a distribution does not exceed the beneficiary's
"qualified higher education expenses" for the year, no part of the distribution
is taxable. If part of a distribution is taxable, a penalty tax will generally
apply as well. Any balance remaining in an Education IRA when the beneficiary
becomes 30 years old must be distributed and any earnings will be taxable and
subject to a penalty tax upon distribution.
All income and capital gains deriving from IRA investments in the Fund are
reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA or
Education IRA combined with tax-deferred compounded earnings on IRA investments
can lead to substantial retirement and/or education savings.
403(b)(7) TAX SHELTERED ACCOUNT
Shares of a Fund, 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)(7) TSA 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)(7) TSA 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.
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<PAGE> 199
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)(7) TSA 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)(7)
TSA 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, Class
B and Class C shares of the Money Market Fund for the seven-day period ended
December 31, 1999 was 5.24%, 5.24% and 5.24%, 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, Class B and Class C shares of the Money Market Fund for
the seven-day period ended December 31, 1999 was 5.38%, 5.38% and 5.38%,
respectively.
The yield and effective yield of the Money Market Fund reflect the
reduction of certain fees otherwise payable and voluntary expense limitations.
Had there been no reduction of fees or expense limitations, the yield and
effective yield of the Money Market Fund would have been 5.08% and 5.21%,
respectively, for Class A shares, 5.08% and 5.21%, respectively, for Class B
shares and 5.08% and 5.21%, respectively, for Class C shares for the seven-day
period ended December 31, 1999.
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.
151
<PAGE> 200
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, Class B and Class C 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, 1999 provides performance figures for both Class A, Class B and
Class C shares of the Funds, except in the case of the Equity Index Fund which
offers only one class of shares, Class A shares.
In considering any average annual total return quotation, investors should
remember that the maximum initial sales charge reflected in each quotation for
Class A shares is a one-time fee which will have its greatest impact during the
early stages of an investor's investment in the Fund. The actual performance of
your investment will be affected less by this charge the longer you retain your
investment in the Fund.
Quotations of each Fund's average annual total return will be calculated
according to the following SEC formula:
P(1+T)(n) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
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 1-year and, as applicable, 5-year and 10-year periods ended
December 31, 1999 and the period from inception to December 31, 1999 were as
follows:*
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<PAGE> 201
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 33.96% -- -- 32.32% 6/1/98
California Tax Free Fund (10.98)% 3.80% -- 4.36% 10/1/91
Capital Appreciation Fund (b) 18.03% 26.97% 21.84% 17.22% 5/1/86
Convertible Fund (b) 26.54% 14.63% 14.31% 10.91% 5/1/86
Equity Income Fund 18.23% -- -- 13.92% 6/1/98
Equity Index Fund 16.39% 26.66% -- 19.13% 12/20/90
Global High Yield Fund 12.84% -- -- (3.60)% 6/1/98
Government Fund (b) (7.18)% 5.42% 5.36% 5.96% 5/1/86
Growth Opportunities Fund 22.54% -- -- 26.57% 6/1/98
High Yield Corporate
Bond Fund (b) 5.36% 11.04% 11.95% 9.84% 5/1/86
International Bond Fund (b) (12.35)% 6.13% -- 5.81% 9/13/94
International Equity Fund (b) 20.53% 11.83% -- 10.63% 9/13/94
MAP Equity Fund (c) -- -- -- -- 6/9/99
New York Tax Free Fund (9.48)% 4.32% -- 4.77% 10/1/91
Research Value Fund 11.84% -- -- 9.33% 6/1/98
Small Cap Growth Fund 96.19% -- -- 57.81% 6/1/98
Small Cap Value Fund 0.27% -- -- (6.07)% 6/1/98
Strategic Income Fund (2.30)% -- -- 3.27% 2/28/97
Strategic Value Fund 7.35% -- -- 5.45% 10/22/97
Tax Free Bond Fund (b) (10.94)% 3.97% 4.72% 5.10% 5/1/86
Total Return Fund (b) 10.05 19.20% 14.48% 13.96% 12/29/87
Value Fund (b) 2.37% 12.63% 12.53% 10.76% 5/1/86
</TABLE>
- -------------
* Assumes the deduction of the maximum applicable initial sales charge.
(a) From inception to 12/31/99.
(b) Performance figures for the Funds' 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.
(c) Class A shares of the Fund have been offered since June 9, 1999. Total
return information for the Fund's Class I shares is as follows: 1 year: 6.85%, 5
years: 22.89%, 10 years, 15.41%. Class I shares have lower ongoing expenses than
Class A shares. This information also reflects a 4.75% initial sales load,
instead of the 5.5% sales load applicable to Class A shares. Performance
figures for the Class I shares reflect the performance of the Fund's predecessor
entities as described in the Prospectus. Performance data for the two classes
after June 9, 1999 will vary based on differences in their expense structures.
The average annual total returns of the Class B shares of the following
Funds for the 1-year and, as applicable, 5-year and 10-year periods ended
December 31, 1999, and the period from inception to December 31, 1999 were as
follows:*
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 35.78% -- -- 34.11% 6/1/98
</TABLE>
153
<PAGE> 202
<TABLE>
<S> <C> <C> <C> <C> <C>
California Tax Free Fund (b) (11.59)% 4.17% -- 4.79% 10/1/91
Capital Appreciation Fund 18.90% 27.47% 22.15% 17.44% 5/1/86
Convertible Fund 27.90% 14.94% 14.57% 11.10% 5/1/86
Equity Income Fund 19.16% -- -- 14.86% 6/1/98
Global High Yield Fund 12.01% -- -- (4.19)% 6/1/98
Government Fund (8.42)% 5.35% 5.49% 6.05% 5/1/86
Growth Opportunities Fund 23.80% -- -- 28.03% 6/1/98
High Yield Corporate
Bond Fund 4.51% 11.10% 12.10% 9.95% 5/1/86
International Bond Fund (13.49)% 6.06% -- 5.89% 9/13/94
International Equity Fund 21.60% 12.01% -- 10.91% 9/13/94
MAP Equity Fund (c) -- -- -- -- 6/9/99
New York Tax Free Fund (b) (10.23)% 4.67% -- 5.18% 10/1/91
Research Value Fund 12.56% -- -- 10.11% 6/1/98
Small Cap Growth Fund 101.02% -- -- 60.35% 6/1/98
Small Cap Value Fund 0.35% -- -- (5.76)% 6/1/98
Strategic Income Fund (3.46)% -- -- 3.19% 2/28/97
Strategic Value Fund 7.64% -- -- 6.11% 10/22/97
Tax Free Bond Fund (11.61)% 4.39% 5.10% 5.38% 5/1/86
Total Return Fund 10.60% 19.64% 14.78% 14.22% 12/29/87
Value Fund 2.51% 12.94% 12.81% 10.96% 5/1/86
</TABLE>
- ------------
* Assumes a complete redemption at the end of the period and the deduction
of the maximum applicable contingent deferred sales charge.
(a) From inception to 12/31/99.
(b) Performance figures for the Funds' 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.
(c) Class B shares of the Fund have been offered since June 9, 1999. Total
return information for the Fund's Class I shares is as follows: 1 year: 6.85%, 5
years: 22.89%, 10 years, 15.41%. Class I shares have lower ongoing expenses than
Class A shares. This information also reflects a 4.75% initial sales load,
instead of the contingent sales load applicable to Class B shares. Performance
figures for the Class I shares reflect the performance of the Fund's predecessor
entities as described in the Prospectus. Performance data for the two classes
after June 9, 1999 will vary based on differences in their expense structures.
154
<PAGE> 203
The average annual total returns of the Class C shares of the following
Funds for the 1-year and, as applicable, 5-year and 10-year periods ended
December 31, 1999, and the period from inception to December 31, 1999 were as
follows:*
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 39.78% -- -- 36.23% 6/1/98
California Tax Free Fund (7.87)% 4.51% -- 4.79% 10/1/99
Capital Appreciation Fund 22.90% 27.62% 22.15% 17.44% 5/1/86
Convertible Fund 31.90% 15.17% 14.57% 11.10% 5/1/86
Equity Income Fund 23.16% -- -- 17.17% 6/1/98
Global High Yield Fund 16.01% -- -- (1.69)% 6/1/98
Government Fund (4.56)% 5.68% 5.49% 6.05% 5/1/86
Growth Opportunities Fund 27.80% -- -- 30.20% 6/1/98
High Yield Corporate
Bond Fund 8.51% 11.36% 12.10% 9.95% 5/1/86
International Bond Fund (9.85)% 6.37% -- 6.03% 9/13/94
International Equity Fund 25.60% 12.26% -- 11.03% 9/13/94
MAP Equity Fund (b) -- -- -- -- 6/9/99
New York Tax Free Fund (6.45)% 5.01% -- 5.18% 10/1/91
Research Value Fund 16.56% -- -- 12.47% 6/1/98
Small Cap Growth Fund 105.02% -- -- 62.26% 6/1/98
Small Cap Value Fund 4.35% -- -- (3.30)% 6/1/98
Strategic Income Fund 0.54% -- -- 4.18% 2/28/97
Strategic Value Fund 11.64% -- -- 7.37% 10/22/97
Tax Free Bond Fund (7.89)% 4.72% 5.10% 5.38% 5/1/86
Total Return Fund 14.60% 19.83% 14.78% 14.22% 12/29/87
Value Fund 6.51% 13.19% 12.81% 10.96% 5/1/86
</TABLE>
- ----------------
* Assumes a complete redemption at the end of the period and the deduction
of the maximum applicable contingent deferred sales charge. Performance figures
for the Funds' Class C shares (for all Funds except MAP Equity Fund), first
offered to the public on September 1, 1998, include the historical performance
of the Funds' Class B shares for the period from inception through August 31,
1998 Performance data for the two classes after this date vary based on
differences in their expense structures.
(a) From inception to 12/31/99.
(b) Class C shares of the Fund have been offered since June 9, 1999. Total
return information for the Fund's Class I shares is as follows: 1 year: 6.85%, 5
years: 22.89%, 10 years, 15.41%. Class I shares have lower ongoing expenses than
Class A shares. This information reflects a 4.75% initial sales load, instead of
the contingent deferred sales load applicable to Class C shares. Performance
figures for the Class I shares reflect the performance of the Fund's predecessor
entities as described in the Prospectus. Performance data for the two classes
after June 9, 1999 will vary based on differences in their expense structures.
The average annual total returns of the Class A shares of the following
Funds for the 1-year and as applicable, 5-year and 10-year periods ended
December 31, 1999, and the period from
155
<PAGE> 204
inception to December 31, 1999, without deducting the applicable initial sales
charge were as follows:
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 41.75% -- -- 37.12% 6/1/98
California Tax Free Fund (6.79)% 4.77% -- 4.95% 10/1/91
Capital Appreciation Fund (b) 24.90% 28.42% 22.53% 17.71% 5/1/86
Convertible Fund (b) 33.91% 15.93% 14.95% 11.37% 5/1/86
Equity Income Fund 25.11% -- -- 18.05% 6/1/98
Equity Index Fund 19.99% 27.44% -- 19.53% 12/20/90
Global High Yield Fund 18.15% -- -- (0.76)% 6/1/98
Government Fund (b) (2.81)% 6.39% 5.85% 6.31% 5/1/86
Growth Opportunities Fund 29.67% -- -- 31.17% 6/1/98
High Yield Corporate
Bond Fund (b) 10.33% 12.07% 12.46% 10.21% 5/1/86
International Bond Fund (b) (8.22)% 7.11% -- 6.73% 9/13/94
International Equity Fund (b) 27.54% 13.11% -- 11.82% 9/13/94
MAP Equity Fund (c) -- -- -- -- 6/9/99
New York Tax Free Fund (5.22)% 5.29% -- 5.35% 10/1/91
Research Value Fund 18.35% -- -- 13.30% 6/1/98
Small Cap Growth Fund 107.61% -- -- 63.54% 6/1/98
Small Cap Value Fund 6.11% -- -- (2.66)% 6/1/98
Strategic Income Fund 2.30% -- -- 4.96% 2/28/97
Strategic Value Fund 13.59% -- -- 8.21% 10/22/97
Tax Free Bond Fund (b) (6.75)% 4.93% 5.20% 5.45% 5/1/86
Total Return Fund (b) 16.46% 20.55% 15.13% 14.50% 12/29/87
Value Fund (b) 8.33% 13.91% 13.17% 11.22% 5/1/86
</TABLE>
- ----------------
(a) From inception to 12/31/99.
(b) Performance figures for the Funds' 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.
(c) Class A shares of the Fund have been offered since June 9, 1999. Total
return information for the Fund's Class I shares is as follows: 1 year: 12.18%,
5 years: 24.09%, 10 years, 15.98%. Class I shares have lower ongoing expenses
than Class A shares. Performance figures for the Class I shares reflect the
performance of the Fund's predecessor entities as described in the Prospectus.
Performance data for the two classes after June 9, 1999 will vary based on
differences in their expense structures.
The average annual total returns of the Class B shares of the following
Funds for the 1-year and as applicable, 5-year and 10-year periods ended
December 31, 1999, and the period from inception to December 31, 1999, without
deducting the applicable contingent deferred sales charge were as follows:
156
<PAGE> 205
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
- ---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 40.78% -- -- 36.23% 6/1/98
California Tax Free Fund (b) (6.94)% 4.51% -- 4.79% 10/1/91
Capital Appreciation Fund 23.90% 27.62% 22.15% 17.44% 5/1/86
Convertible Fund 32.90% 15.17% 14.57% 11.10% 5/1/86
Equity Income Fund 24.16% -- -- 17.17% 6/1/98
Global High Yield Fund 17.01% -- -- (1.69)% 6/1/98
Government Fund (3.60)% 5.68% 5.49% 6.05% 5/1/86
Growth Opportunities Fund 28.80% -- -- 30.20% 6/1/98
High Yield Corporate Bond Fund 9.51% 11.36% 12.10% 9.95% 5/1/86
International Bond Fund (8.94)% 6.37% -- 6.03% 9/13/94
International Equity Fund 26.60% 12.26% -- 11.03% 9/13/94
MAP Equity Fund (c) -- -- -- -- 6/9/99
New York Tax Free Fund (b) (5.51)% 5.01% -- 5.18% 10/1/91
Research Value Fund 17.56% -- -- 12.47% 6/1/98
Small Cap Growth Fund 106.02% -- -- 62.26% 6/1/98
Small Cap Value Fund 5.35% -- -- (3.30)% 6/1/98
Strategic Income Fund 1.54% -- -- 4.18% 2/28/97
Strategic Value Fund 12.64% -- -- 7.37% 10/22/97
Tax Free Bond Fund (6.96)% 4.72% 5.10% 5.38% 5/1/86
Total Return Fund 15.60% 19.83% 14.78% 14.22% 12/29/87
Value Fund 7.51% 13.19% 12.81% 10.96% 5/1/86
</TABLE>
- ----------------
(a) From inception to 12/31/99.
(b) Performance figures for the Funds' 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.
(c) Class B shares of the Fund have been offered since June 9, 1999. Total
return information for the Fund's Class I shares is as follows: 1 year: 12.18%,
5 years: 24.09%, 10 years, 15.98%. Class I shares have lower ongoing expenses
than Class A shares. Performance figures for the Class I shares reflect the
performance of the Fund's predecessor entities as described in the Prospectus.
Performance data for the two classes after June 9, 1999 will vary based on
differences in their expense structures.
The average annual total returns of the Class C shares of the following
Funds for the 1-year and as applicable, 5-year and 10-year periods ended
December 31, 1999, and the period from inception to December 31, 1999, without
deducting the applicable contingent deferred sales charge were as follows:
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Blue Chip Growth Fund 40.78% -- -- 36.23% 6/1/98
California Tax Free Fund (6.94)% 4.51% -- 4.79% 10/1/91
Capital Appreciation Fund 23.90% 27.62% 22.15% 17.44% 5/1/86
</TABLE>
157
<PAGE> 206
<TABLE>
<CAPTION>
Average
Year Five Years Ten Years Annual
Ended Ended Ended Total Inception
Fund 12/31/99 12/31/99 12/31/99 Return(a) Date
---- -------- -------- -------- --------- ----
<S> <C> <C> <C> <C> <C>
Convertible Fund 32.90% 15.17% 14.57% 11.10% 5/1/86
Equity Income Fund 24.16% -- -- 17.17% 6/1/98
Global High Yield Fund 17.01% -- -- (1.69)% 6/1/98
Government Fund (3.60)% 5.68% 5.49% 6.05% 5/1/86
Growth Opportunities Fund 28.80% -- -- 30.20% 6/1/98
High Yield Corporate Bond Fund 9.51% 11.36% 12.10% 9.95% 5/1/86
International Bond Fund (8.94)% 6.37% -- 6.03% 9/13/94
International Equity Fund 26.60% 12.26% -- 11.03% 9/13/94
MAP Equity Fund (b) -- -- -- -- 6/9/99
New York Tax Free Fund (5.51)% 5.01% -- 5.18% 10/1/91
Research Value Fund 17.56% -- -- 12.47% 6/1/98
Small Cap Growth Fund 106.02% -- -- 62.26% 6/1/98
Small Cap Value Fund 5.35% -- -- (3.30)% 6/1/98
Strategic Income Fund 1.54% -- -- 4.18% 2/28/97
Strategic Value Fund 12.64% -- -- 7.37% 10/22/97
Tax Free Bond Fund (6.96)% 4.72% 5.10% 5.38% 5/1/86
Total Return Fund 15.60% 19.83% 14.78% 14.22% 12/29/87
Value Fund 7.51% 13.19% 12.81% 10.96% 5/1/86
</TABLE>
- ----------------
* Performance figures for the Funds' Class C shares (for all Funds except
MAP Equity Fund), first offered to the public on September 1, 1998, include the
historical performance of the Funds' Class B shares for the period from
inception through August 31, 1998. Performance data for the two classes after
this date vary based on differences in their expense structures.
(a) From inception to 12/31/99.
(b) Class B shares of the Fund have been offered since June 9, 1999. Total
return information for the Fund's Class I shares is as follows: 1 year: 12.18%,
5 years: 24.09%, 10 years, 15.98%. Class I shares have lower ongoing expenses
than Class A shares. Performance figures for the Class I shares reflect the
performance of the Fund's predecessor entities as described in the Prospectus.
Performance data for the two classes after June 9, 1999 will 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)(6) -1]
------
cd
158
<PAGE> 207
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
This yield figure does not reflect the deduction of any contingent
deferred sales charges which are imposed upon certain redemptions at the rates
set forth under "Redemptions and Repurchases" in the Prospectus.
For the 30-day period ended December 31, 1999, the yield of each of the
following Funds was:
<TABLE>
<CAPTION>
30-Day Period Ended
December 31, 1999
Fund Class A Class B Class C
---- ------- ------- -------
<S> <C> <C> <C>
California Tax Free Fund 4.66 4.63 4.63
Global High Yield Fund 9.23 8.82 8.82
Government Fund 5.41 4.93 4.93
High Yield Corporate Bond Fund 7.67 7.26 7.26
International Bond Fund 3.14 2.54 2.54
New York Tax Free Fund 5.02 5.01 5.01
Tax Free Bond Fund 5.20 5.15 5.15
Strategic Income Fund 6.11 5.64 5.64
</TABLE>
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%.*+
<TABLE>
<CAPTION>
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
-------- ----------------
<S> <C>
15.00% 6.47%
28.00% 7.64%
31.00% 7.97%
36.00% 8.59%
39.60% 9.11%
</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
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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 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 Subadvisor, and other pertinent facts relating to the
management of the Fund by the Subadvisor.
From time to time any of the Funds may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
In addition, performance information for a Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Morgan Stanley Capital
International indexes, the Dow Jones Industrial Average,
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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. Advertisements
for a Fund may also include general information about the performance of
unmanaged indexes with investment parameters similar to the Fund's. 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 INFORMATION
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 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 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
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regulated investment companies), or of two or more issuers which the Fund
controls (as that term is defined in the relevant provisions of the Code) and
which are determined to be engaged in the same or similar trades or businesses
or related trades or businesses; and (iii) distribute at least 90% of the sum of
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of any net
long-term capital losses) and its net tax-exempt interest each taxable year. The
Treasury Department is authorized to promulgate regulations under which foreign
currency gains would constitute qualifying income for purposes of the Qualifying
Income Test only if such gains are directly related to investing in securities
(or options and futures with respect to securities). To date, no such
regulations have been issued.
Certain requirements relating to the qualification of a Fund as regulated
investment company may limit the extent to which a Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if a Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital 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 currently
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.
Certain of the Funds have 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
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<PAGE> 211
(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,
whether received in cash or reinvested in Fund shares.
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 a fund's net capital gain, whether received in cash or
reinvested in Fund shares, will generally be taxable to shareholders as
long-term capital gains, regardless of how long a Shareholder has held the
Fund's Shares. Net capital gains from assets held for one year or less will be
taxed as ordinary income.
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 may elect to treat such capital gains
as having been distributed to shareholders. As a result, such capital gains
would be taxable to the shareholders. Shareholders would 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 would 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
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described below) as ordinary income or capital gain as described above, even
though, from an investment standpoint, it may constitute a partial return of
investment. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those investors purchasing shares just prior to a distribution will then receive
a partial return of their investment upon such distribution, which may
nevertheless be taxable to them.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Any distributions that are not from a Fund's net investment income or net
capital gain may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of such share on
the reinvestment date.
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. Taxable income or gain
may also arise from securities lending transactions, repurchase agreements and
options and futures tansactions. Accordingly, it is possible that a significant
portion of the distributions of these Funds will constitute taxable rather than
tax-exempt income in the hands of a shareholder. Furthermore, investors should
be aware that tax laws may change, and issuers may fail to follow applicable
laws, causing a tax-exempt item to become taxable.
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.
Shareholders should be aware that redeeming shares of the Fund after tax-exempt
interest has been accrued by the Fund but before that income has been declared
as a dividend may be disadvantageous. This is because the gain, if any, on the
redemption will be taxable, even though such gains may be attributable in part
to the accrued tax-exempt interest which, if distributed to the shareholder as a
dividend rather than as redemption proceeds, might have qualified as an
exempt-interest dividend.
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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.
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 Subadvisor and its affiliates, and the Funds' counsel
make no review of proceedings relating to the issuance of state or municipal
securities or the bases of such opinions.
Due to the lack of adequate supply of certain types of tax-exempt
obligations, and other reasons, various instruments are being marketed which are
not "pure" state and local obligations, but which are thought to generate
interest excludable from taxable income under Code section 103. While a Fund may
invest in such instruments, it does not guarantee the tax-exempt status of the
income earned thereon or from any other investment. Thus, for example, were a
Fund to invest in an instrument thought to give rise to tax-exempt interest but
such interest ultimately were determined to be taxable, the Fund might have
invested more than 20% of its assets in taxable instruments. In addition, it is
possible in such circumstances that a Fund will not have met the 50% investment
threshold, described above, necessary for it to pay exempt-interest dividends.
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
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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
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
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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 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 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
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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 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
shareholders as long-term capital gains if the shares had been held for more
than one year. 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
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<PAGE> 217
of their disposition. A loss realized on a redemption, sale or exchange also
will be disallowed to the extent the shares disposed of are replaced (whether
through reinvestment of distributions, or otherwise) within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Shareholders should be aware that redeeming shares of a Fund after
tax-exempt interest has been accrued by the Fund but before that income has been
declared as a dividend may be disadvantageous. This is because the gain, if any,
on the redemption will be taxable, even though such gains may be attributable in
part to the accrued tax-exempt interest which, if distributed to the shareholder
as a dividend rather than as redemption proceeds, might have qualified as an
exempt-interest dividend.
Under certain circumstances, the sales charge incurred in acquiring
shares of either Fund may not be taken into account in determining the gain or
loss on the disposition of those shares. This rule applies where shares of a
Fund are exchanged within 90 days after the date they were purchased and new
shares are acquired without a sales charge or at a reduced sales charge 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 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.
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<PAGE> 218
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 either of these Funds may claim a foreign tax credit or
deduction by reason of the Fund's election under Section 853 of the Code,
provided that more than 50% of the value of the total assets of the Fund at the
close of the taxable year consists of securities of foreign corporations. The
foreign tax credit and deduction available to shareholders is subject to certain
limitations imposed by the Code. Also, under Section 63 of the Code, no
deduction for foreign taxes may be claimed by shareholders who do not itemize
deductions on their federal income tax returns, although any such shareholder
may claim a credit for foreign taxes and in any event will be treated as having
taxable income in respect to the shareholder's pro rata share of foreign taxes
paid by the Fund. It should also be noted that a tax-exempt shareholder, like
other shareholders, will be required to treat as part of the amounts distributed
its pro rata portion of the income taxes paid by the Fund to foreign countries.
However, that income will generally be exempt from taxation by virtue of such
shareholder's tax-exempt status, and such a shareholder will not be entitled to
either a tax credit or a deduction with respect to such income. The foreign tax
credit generally may offset only up to 90% of the alternative minimum tax in any
given year. Foreign taxes generally are not deductible in computing alternative
minimum taxable income.
STATE AND LOCAL TAXES - GENERAL
The state and local tax treatment of distributions received from a Fund
and any special tax considerations associated with foreign investments of a Fund
should be examined by shareholders with regard to their own tax situations.
Shareholders of the Tax Free Bond Fund, the California Tax Free Fund and
New York Tax Free Fund may be subject to state and local taxes on distributions
from the Fund, including distributions which are exempt from federal income
taxes. Some states exempt from the state personal income tax distributions from
a Fund derived from interest on obligations issued by the
170
<PAGE> 219
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.
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
The Fund believes the following is a reasonable construction of the
federal tax rules applicable to treatment of the Guarantee for federal income
tax purposes. However, since these rules are subject to differing
interpretations, investors should consult their tax advisors regarding their
investment in the Equity Index Fund.
Receipt of amounts pursuant to the Guarantee should be treated as a
payment by NYLIFE in the nature of insurance rather than a distribution from the
Fund. As such, the payments will not be eligible for the dividends received
deduction available to corporations. The Fund believes that recipients may treat
receipt of the proceeds as reimbursement for the loss of the value of their
Fund's shares and reduce the basis of their Fund shares in the amount of the
guarantee payment rather than treating the payment as gross income.
Shareholders may have to allocate the amount paid for their Fund shares
between the guarantee and the shares in determining the tax basis of their Fund
shares for purposes of determining gain or loss on sale, redemption, or other
disposition of those shares.
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 reinvestment of dividends
and distributing 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
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<PAGE> 220
tax at the end of each quarter of its taxable year in order to be eligible to
pay dividends which will be exempt from California personal income tax.
Generally, shareholders who are California residents will not incur California
personal income tax on the amount of exempt-interest dividends received by them
from the California Tax Free Fund and derived from California state and local
issues, whether taken in cash or reinvested in additional shares. However, other
taxes, such as the franchise tax may apply. Shareholders will normally be
subject to California personal income tax on dividends paid from interest income
derived from taxable securities and from securities issued by states other than
California and its subsidiaries and on distributions of capital gains.
Deductions for interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund may be disallowed in whole
or in part for California personal income tax purposes.
Exempt-interest dividends paid by the New York Tax Free Fund from
interest on qualifying New York bonds generally are exempt from New York State
and New York City personal income taxes, but not corporate franchise taxes.
Dividends and distributions of the Fund derived from taxable income and capital
gains are not exempt from New York State and New York City taxes. Deductions for
interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Fund may be disallowed in whole or in part for New York
State or New York City personal income tax purposes.
Dividends from the California Tax Free Fund or New York Tax Free Fund
(including exempt-interest dividends), capital gains distributions from a Fund,
and any capital gains or losses realized from the sale or exchange of shares may
be subject to state and local taxes (as well as Federal taxes). However, the
portion of a distribution of a Fund's tax-exempt income that is 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
172
<PAGE> 221
each shareholder depending upon the size and duration of each shareholder's
investment in the Fund.
Each shareholder of the New York Tax Free Fund will be sent after the
close of the calendar year an annual statement as to the federal income tax and
New York State and New York City personal income tax status of his or her
dividends and distributions from the Fund for the prior calendar year. These
statements will also designate the amount of exempt-interest dividends that is a
specified preference item for purposes of the federal individual and corporate
alternative minimum taxes. Each shareholder also will receive, if appropriate,
various written notices after the close of the Fund's prior taxable year as to
the federal income tax status of his or her dividends and distributions which
were received from the Fund during the Fund's prior taxable year. Shareholders
should consult their tax advisers as to any other state and local taxes that may
apply to these dividends and distributions. The dollar amounts of dividends
excluded or exempt from federal income taxation or New York State and City
personal income taxation and the dollar amount subject to federal income
taxation or New York State and City personal income taxation, if any, will vary
for each shareholder depending upon the size and duration of each shareholder's
investment in the Fund.
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
distributions of net investment income and short-term capital gains 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 and October 22, 1997, respectively. The 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
commenced operations on June 1, 1998. The MAP Equity Fund was originally formed
as the Mutual Benefit Fund, a Delaware corporation. The Fund was renamed the
MAP-Equity Fund in 1995. The shareholders of the MAP-Equity Fund approved an
Agreement and Plan of Reorganization at their June 3, 1999 meeting and the
Map-Equity Fund was reorganized as the MainStay MAP Equity Fund-Class I shares
on June 9, 1999. The organizational expenses of each Fund (except the MAP Equity
Fund) will be amortized and
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<PAGE> 222
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
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
REGISTRATION STATEMENT
This SAI and the Prospectuses do not contain all the information included
in the Company's registration statement filed with the SEC under the 1933 Act
with respect to the securities offered hereby, certain portions of which have
been omitted pursuant to the rules and regulations of the SEC. The registration
statement, including the exhibits filed therewith, may be examined at the
offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
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<PAGE> 223
SHARE OWNERSHIP OF THE FUNDS
The following table sets forth information concerning beneficial and
record ownership, as of April 6, 2000 of the Funds' shares by each person who
beneficially or of record owned more than 5% of the voting securities of any
Fund:
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund New York Life Trust Company 22.01% 2,201,661.7870
Class A Client Accounts
51 Madison Avenue RM 117A
New York, NY 10010-1603
Capital Appreciation Fund Merrill Lynch Pierce Fenner & Smith Inc. - for 23.91% 117,788.0040
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Value Fund New York Life Trust Company 12.56% 678,292.3740
Class A Client Accounts
51 Madison Avenue Rm 117A
New York, NY 10010-1603
Value Fund Merrill Lynch Pierce Fenner & Smith Inc. for the 11.46% 4,169.1330
Class C sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Value Fund Salomon Smith Barney Inc. 6.39% 2,323.9770
Class C 00150304780
333 West 34th St - 3rd Fl
New York, NY 10001
Value Fund Salomon Smith Barney Inc. 7.06% 2,569.5400
Class C 00178165030
333 West 34th St - 3rd Fl
New York, NY 10001-2483
Value Fund New York Life Trust Company 7.31% 2,661.0670
Class C Cust for the IRA of
Paul E Janetos Sr
250 Rollins Rd
Rollins Ford, NH 03869-5015
</TABLE>
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<PAGE> 224
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Fund Merrill Lynch Pierce Fenner & Smith Inc - for 5.50% 9,985.0350
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Convertible Fund Bear Stearns Securities Corp. 8.81% 15,984.3020
Class C FBO 028-62170-13
1 Metrotech Center North
Brooklyn, NY 11201-3870
Convertible Fund Salomon Smith Barney Inc. 22.82% 41,425.7130
Class C 00106236339
333 West 34th St - 3rd Fl
New York, NY 10001
High Yield Corporate Bond Fund Merrill Lynch Pierce Fenner & Smith Inc - for 13.61% 8,046,870.1100
Class A the sole benefit of its customers
Attn: Fund Administration 97T81
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
High Yield Corporate Bond Fund Merrill Lynch Pierce Fenner & Smith Inc - for 25.71% 2,965,247.3910
Class C the sole benefit of its customers
Attn: Fund Administration 97YK8
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Government Fund New York Life Trust Company 22.32% 727,749.6850
Class A Client Accounts
51 Madison Avenue Rm 117A
New York, NY 10010-1603
Government Fund Merrill Lynch Pierce Fenner & Smith Inc - for 19.80% 13,317.2240
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Government Fund New York Life Trust Company 9.07% 6,104.1390
Class C Cust for the IRA of
Paul E Janetos Sr
250 Rollins Rd
Rollins Ford, NH 03869-5015
</TABLE>
176
<PAGE> 225
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government Fund Olga L. Standish 14.59% 9,818.0830
Class C 287 Winding Brook
Walled Lake, MI 48390-3963
Government Fund Karen L. Allmon 15.35% 10,324.4630
Class C 2363 FM 16W
Tyler, TX 75706
Money Market Fund Sweep Shares BHC Securities Inc 100.00% 204,793,965.7200
Attn: Cash Sweeps Department
One Commerce Square
2005 Market Street
Philadelphia, PA 19103-7042
Money Market Fund Galovich Financial Planning 5.73% 330,227.6100
Class C Services Profit Sharing Plan
Fred S. Galovich TTEE
736 W Ingomar Rd
Ingomar, PA 15127
Money Market Fund Painewebber for the benefit of Larry K. Randa 5.79% 333,635.3600
Class C Trustee for the Larry K. Randa Revocable Trust
Dated 1-29-90
8537 Clynderven
Burr Ridge, IL 60521-8363
Money Market Fund Painewebber for the benefit of Donna Kubik 6.35% 366,014.4100
Class C Larson Trustee for The Donna Kubik Larson
Revocable Trust UAD 9-22-97
8709 Royal Swan Lane
Darien, IL 60561-8433
Tax Free Bond Fund Painewebber for the benefit of Trident Arbitrage 10.55% 171,322.6860
Class A Partners L P
45 Grove Street
New Canaan, CT 06840-5330
Tax Free Bond Fund Schmitt Family Trust 11.16% 181,283.8650
Class A DTD 9-13-91
James S. Schmitt & Don L. Waters & Kim Schmitt
Fogarty TTEES
P.O. Box 1566
Savannah, GA 31402-1566
Tax Free Bond Fund Michael N. Marks 11.42% 185,455.4420
Class A P.O. Box 320765
Cocoa Beach, FL 32932-0765
</TABLE>
177
<PAGE> 226
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax Free Bond Fund David Katzin 5.61% 91,074.8790
Class A 6301 N 44th Street
Paradise Valley, AZ 85253-3919
Tax Free Bond Fund Merrill Lynch Pierce Fenner & Smith Inc - for 36.42% 19,663.7790
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Tax Free Bond Fund Salomon Smith Barney Inc. 19.43% 10,491.2300
Class C 00150822950
333 West 34th St - 3rd Fl
New York, NY 10001
Tax Free Bond Fund George Detillot 6.06% 3,274.5970
Class C TOD Designation on File
9811 33rd Dr SE
Everett, WA 98208-4375
Tax Free Bond Fund Rene R. Torino 15.47% 8,350.7690
Class C Marie C. Torino
4747 Elizabeth Lane
Brooklyn, OH 44144-3247
Tax Free Bond Fund Olga L. Standish 9.84% 5,315.4850
Class C 287 Winding Brook
Walled Lake, MI 48390-3963
Tax Free Bond Fund Karla Sepulvado 5.09% 2,748.2070
Class C P.O. Box 1360
Zwolle, LA 71486-1360
Total Return Fund New York Life Trust Company 39.90% 2,744,864.9780
Class A Client Accounts
51 Madison Avenue Rm 117A
New York, NY 10010-1603
Equity Index Fund New York Life Trust Company 6.27% 1,665,876.8420
Client Accounts
51 Madison Avenue Rm 117A
New York, NY 10010-1603
California Tax Free Fund PKSK Wong Family Partnership L P 7.60% 106,349.5950
Class A Chi Keung Wong TTEE
Shuk Kwan Lam Wong TTEE
3838 Divisadero Street
San Francisco, CA 94123-1013
</TABLE>
178
<PAGE> 227
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California Tax Free Fund NYLIFE Distributors Inc 19.38% 271,121.2630
Class A c/o Al Leier
P.O. Box 421
Parsippany, NJ 07054-0421
California Tax Free Fund Fiserv Securities, Inc. 5.99% 67,907.4450
Class B FAO 40278915
Attn: Mutual Funds Dept
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7084
California Tax Free Fund William J & Elinor G. Potikian 7.38% 83,649.9360
Class B Family Revocable Trust
DTD 8-17-93
Jacinda Potikian TTEE
4475 N College
Fresno, CA 93704-3806
California Tax Free Fund Wedbush Morgan Securities 5.62% 5,559.1050
Class C A/C 3235-5426
1000 Wilshire Blvd.
Los Angeles, CA 90017-2457
California Tax Free Fund Janette A. Gil 11.42% 11,287.0010
Class C 888 E Serena Avenue
Fresno, CA 93720-1732
California Tax Free Fund Bon Ho Koo 76.62% 75,751.4840
Class C 13013 E 166th Street
Cerritos, CA 90703-2201
New York Tax Free Fund NYLIFE Distributors Inc. 39.55% 499,488.3950
Class A c/o Al Leier
PO Box 421
Parsippany, NJ 07054-0421
New York Tax Free Fund Fiserv Securities, Inc. 51.50% 2,200.4280
Class C FAO 40349791
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7084
New York Tax Free Fund Michael P. Porter 46.61% 1,991.4190
Class C 75 S Howells Point Road
Bellport, NY 11713-2621
</TABLE>
179
<PAGE> 228
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Bond Fund Dean Witter for the benefit of Michael Jordan 6.22% 90,155.3620
Class A PO Box 250 Church Street Station
New York, NY 10008-0250
International Bond Fund NYLIFE Distributors 54.21% 785,338.6140
Class A Attn: Al Leier
260 Cherry Hill Rd
Parsippany, NJ 07054-1108
International Bond Fund Donaldson Lufkin Jenrette 29.08% 2,987.0050
Class C Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
International Bond Fund Legg Mason Wood Walker Inc. 11.10% 1,139.8910
Class C 281-75098-19
PO Box 1476
Baltimore, MD 21203-1476
International Bond Fund Fiserv Securities, Inc. 5.27% 541.1470
Class C FAO 40332700
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7084
International Bond Fund Legg Mason Wood Walker Inc. 50.46% 5,184.0600
Class C 281-75237-11
PO Box 1476
Baltimore, MD 21203-1476
International Equity Fund New York Life Trust Company 6.42% 143,200.5430
Class A Client Accounts
51 Madison Avenue Rm 117A
New York, NY 10010-1603
International Equity Fund NYLIFE Distributors 28.58% 637,713.7640
Class A Attn: Al Leier
260 Cherry Hill Rd
Parsippany, NJ 07054-1108
International Equity Fund Salomon Smith Barney Inc. 11.27% 3,804.6670
Class C 00150308028
333 West 34th Street- 3rd Fl
New York, NY 10001-2483
</TABLE>
180
<PAGE> 229
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Equity Fund Salomon Smith Barney Inc. 18.81% 6,349.0060
Class C 00150351046
333 West 34th Street - 3rd Fl
New York, NY 10001-2483
International Equity Fund Attn: Mutual Funds Dept. 14.71% 4,963.6000
Class C Fiserv Securities Inc.
FAO 40969823
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7084
International Equity Fund New York Life Trust Company 11.16% 3,767.8140
Class C Cust. for the IRA of
Paul E. Janetos Sr.
250 Rollins Rd
Rollins Ford, NH 03869-5015
Strategic Income Fund New York Life Ins. General Account 35.60% 759,184.1330
Class A Attn: Richard Schwartz
260 Cherry Hill Rd
Parsippany, NJ 07054-1187
Strategic Income Fund Salomon Smith Barney Inc. 8.50% 9,044.6260
Class C 00150304328
333 West 34th Street - 3rd Fl
New York, NY 10001-2483
Strategic Income Fund Salomon Smith Barney Inc. 7.86% 8,362.8120
Class C 00115029304
333 West 34th Street - 3rd Fl
New York, NY 10001-2483
Strategic Income Fund Donaldson Lufkin Jenrette 5.14% 5,470.4600
Class C Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Strategic Income Fund Donaldson Lufkin Jenrette 16.40% 17,443.4230
Class C Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Strategic Income Fund Mazie A. Noll 10.42% 11,087.4560
Class C Harold P. Kissinger
Monroe A. Noll
c/o Harold P. Kissinger
114 West Main Street
Reinholds, PA 17569-9704
</TABLE>
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<PAGE> 230
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Strategic Income Fund Bradley Wood 5.07% 5,387.8650
Class C 11336 Old Prospect Hill Rd
Glenn Dale, MD 20769-9422
Strategic Income Fund Karen L. Allmon 6.27% 6,666.7000
Class C 2363 FM 16W
Tyler, TX 75706
Strategic Income Fund Christine L. Dangelo 6.22% 6,612.7690
Class C 8652 Afton Road
Afton, MI 49705-9705
Strategic Value Fund New York Life Ins. Co. 59.02% 965,932.3350
Class A Attn: Richard Schwartz
260 Cherry Hill Rd
Parsippany, NJ 07054-1187
Strategic Value Fund Merrill Lynch Pierce Fenner & Smith Inc - for 39.99% 6,343.2640
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Strategic Value Fund Salomon Smith Barney Inc. 16.69% 2,646.6240
Class C 00144363011
333 West 34th St - 3rd Fl
New York, NY 10001-2483
Strategic Value Fund Fiserv Securities, Inc. 6.03% 955.8950
Class C FAO 40245425
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103-7084
Strategic Value Fund Jerry Gold 6.16% 977.3530
Class C 3119 Westchester Court
St. Charles, MO 63303-3866
Strategic Value Fund New York Life Trust Company 5.66% 897.3910
Class C Cust for the IRA of Kirk C. Hansen
Kirk C. Hansen
PO Box 54
Absarokee, MT 59001-0054
</TABLE>
182
<PAGE> 231
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Small Cap Growth Fund Shirley J. Schatz 5.86% 306,564.7440
Class A Larry L. Schatz JT TEN
Tod Registration on File
7518 Lillys Lane
Villa Ridge, MO 63089-2781
Small Cap Growth Fund New York Life Insurance Company 17.22% 900,000.0000
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Small Cap Growth Fund Merrill Lynch Pierce Fenner & Smith Inc. - for 13.84% 74,924.0370
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Small Cap Growth Fund Donaldson Lufkin Jenrette 6.24% 33,750.0000
Class C Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Small Cap Value Fund New York Life Insurance Company 54.91% 902,024.0170
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Small Cap Value Fund New York Life Insurance Company 5.73% 100,227.1220
Class B Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Small Cap Value Fund Merrill Lynch Pierce Fenner & Smith Inc - for 34.85% 34,165.3160
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Small Cap Value Fund Painewebber for the Benefit of 6.99% 6,856.5400
Class C Local 68
Engineers Pension Fund
PO Box 534
W Caldwell, NJ 07007-0534
Small Cap Value Fund Donaldson Lufkin Jenrette 15.68% 15,368.8520
Class C Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
</TABLE>
183
<PAGE> 232
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Blue Chip Growth Fund New York Life Insurance Company 16.42% 900,000.000
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Blue Chip Growth Fund Merrill Lynch Pierce Fenner & Smith Inc - for 12.30% 88,664.0940
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Equity Income Fund New York Life Insurance Company 56.13% 966,472.9920
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Equity Income Fund Painewebber for the Benefit of Painewebber CDN 8.47% 8,866.0050
Class C FBO
James L. Sandonato P/W Cust
PO Box 3321
Weehawken, NJ 07087-8154
Growth Opportunities Fund New York Life Insurance Company 45.71% 900,514.8050
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Growth Opportunities Fund Merrill Lynch Pierce Fenner & Smith Inc - for 5.85% 5,698.5700
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Growth Opportunities Fund New York Life Trust Company 5.77% 5,614.7790
Class C Cust for the IRA of Maureen S. Townsend
1217 San Dieguito Drive
Encinitas, CA 92024-5116
Growth Opportunities Fund Robert C. Olmstead 10.75% 10,463.0640
Class C Katie Olmstead
4230 Hickory Oak Box 2
Spring, TX 77389-4670
</TABLE>
184
<PAGE> 233
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research Value Fund New York Life Insurance Company 74.25% 944,166.5190
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Research Value Fund New York Life Insurance Company 10.18% 104,964.8650
Class B Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Research Value Fund Merrill Lynch Pierce Fenner & Smith Inc - for 9.63% 9,951.4840
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
Research Value Fund Wedbush Morgan Securities 5.34% 5,519.7310
Class C A/C 7232-3665
1000 Wilshire Blvd.
Los Angeles, CA 90017-2457
Research Value Fund Salomon Smith Barney Inc. 7.52% 7,767.6050
Class C 00150308028
333 West 34th Street - 3rd Fl
New York, NY 10001-2483
Research Value Fund Salomon Smith Barney Inc. 11.70% 12,087.2680
Class C 00150351046
333 West 34th Street - 3rd Fl
New York, NY 10001-2483
Global High Yield Fund New York Life Insurance Company 92.95% 900,000.0000
Class A Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Global High Yield Fund New York Life Insurance Company 20.45% 100,000.0000
Class B Attn: Jean Hoysradt
51 Madison Avenue
New York, NY 10010-1603
Global High Yield Fund Merrill Lynch Pierce Fenner & Smith Inc - for 15.69% 2,566.9200
Class C the sole benefit of its customers
Attn: Fund Administration 97T98
4800 Deer Lake Drive East 3rd Fl
Jacksonville, FL 32246-6484
</TABLE>
185
<PAGE> 234
<TABLE>
<CAPTION>
Percentage
Name and Address Outstanding Owned
Name of Fund Shareholder Owned (1) Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global High Yield Fund Ranney Family Rev Living Trust 7.35% 1,203.3690
Class C DTD 10-28-92
Raymond F. Ranney TTEE
1915 N Vista
Spokane, WA 99212-2416
Global High Yield Fund Donaldson Lufkin Jenrette 5.88% 961.6800
Class C Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Global High Yield Fund Painewebber for the benefit of Emily E. Nagler 17.29% 2,829.0000
Class C 50 Glenbrook Rd
Apt. #14H
Stamford, CT 06902-2952
Global High Yield Fund Donaldson Lufkin Jenrette 16.93% 2,769.9290
Class C Securities Corporation Inc.
PO Box 2052
Jersey City, NJ 07303-2052
Global High Yield Fund Mary E. Johns 16.71% 2,733.6830
Class C 3841 Tunnel Hill Rd., SW
Cleveland, TN 37311-8347
Map Equity Salomon Smith Barney Inc. 5.16% 21,613.9650
Class A 00140502905
333 West 34th Street - 3rd Fl
New York, NY 10001-2483
</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 1934 Act. Fractional shares have been
omitted.
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.
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 PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
186
<PAGE> 235
TRANSFER AGENT
MainStay Shareholder Services, LLC ("MSS"), an affiliate of the Manager,
serves as the transfer agent and dividend disbursing agent for each of the
Funds. MSS has its principal office and place of business at 260 Cherry Hill
Road, Parsippany, New Jersey. Pursuant to its Transfer Agency and Service
Agreement dated April 28, 1997 with the Trust, MSS provides transfer agency
services, such as the receipt of purchase and redemption orders, the receipt of
dividend reinvestment instructions, the preparation and transmission of dividend
payments and the maintenance of various records of accounts. The Funds pay MSS
fees in the form of per account charges, as well as out-of-pocket expenses and
advances incurred by MSS. MSS has entered into a Sub-Transfer Agency and Service
Agreement with Boston Financial Data Services, Inc. ("BFDS") located at 2
Heritage Drive, North Quincy, Massachusetts 02171 and pays to BFDS per account,
and transaction fees and out-of-pocket expenses for performing certain transfer
agency and shareholder recordkeeping services.
CUSTODIANS
The Bank of New York ("BONY") serves as custodian for the Equity Index
Fund, California Tax Free Fund, New York Tax Free Fund, International Equity
Fund, International Bond Fund, Strategic Income Fund, Strategic Value Fund, Blue
Chip Growth Fund, Equity Income Fund, Global High Yield Fund, Growth
Opportunities fund, Research Value Fund, Small Cap Growth Fund, Small Cap Value
Fund and the MAP Equity Fund. The Trust has also appointed BONY as its foreign
custody manager with respect to certain securities held outside of the United
States. BONY has its principal office at 48 Wall Street, New York, New York
10286.
State Street Bank and Trust Company ("State Street") serves as custodian
for the other MainStay Funds, including the Capital Appreciation Fund,
Convertible Fund, Total Return Fund, Value Fund, Government Fund, High Yield
Corporate Bond Fund, Tax Free Fund, and Money Market Fund. State Street has its
principal office at 225 Franklin Street, Boston, Massachusetts.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Trust, and also acts as counsel to the Trust.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust and persons who, in connection
with their regular functions, play a role in the recommendation of any purchase
or sale of a security by the Trust or obtain information pertaining to such
purchase or sale or who have the power to influence the management or policies
of the Trust or the Manager or a Subadvisor unless such power is the result of
their position with the Trust or Manager or Subadvisor. Personal trading is
permitted by such persons; however they 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 Subadvisors 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.
187
<PAGE> 236
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
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<PAGE> 237
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.
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.
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<PAGE> 238
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.
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<PAGE> 239
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
191
<PAGE> 240
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.
192
<PAGE> 241
NYLIFE LLC. AND SUBSIDIARIES
(AFFILIATES OF NEW YORK LIFE
INSURANCE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
193
<PAGE> 242
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
11 Madison Avenue
New York NY 10010
Telephone (212) 596 8000
Facsimile (212) 591-4850
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Member of NYLIFE LLC
In our opinion, the accompanying consolidated statement of financial position
and the related consolidated statements of operations and comprehensive income,
of changes in member's equity/stockholder's equity and of cash flows present
fairly, in all material respects, the financial position of NYLIFE LLC and its
subsidiaries (affiliates of New York Life Insurance Company) at December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States, which 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 the opinion expressed above.
As discussed in Note 2, the Company changed its basis of accounting from
accounting practices prescribed or permitted by the New York State Insurance
Department to accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
April 7, 2000
194
<PAGE> 243
NYLIFE LLC AND SUBSIDIARIES
(AFFILIATES OF NEW YORK LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------- ---------------
(in thousands)
<S> <C> <C>
ASSETS
Investments
Equity securities $ 221,590 $ 22,928
Fixed maturities:
Available for sale 129,761 75,046
Held to maturity 4,775 4,119
MainStay funds at fair value 33,507 35,622
Other long-term investments 53,296 16,889
Cash and cash equivalents 391,356 364,692
Restricted investments 5,663 -
Accounts receivable (less allowance for doubtful accounts of $21,194 and
$21,479, respectively) 824,873 473,026
Interest and other receivables 25,300 34,802
Deferred distribution costs (net of accumulated amortization of $204,879 and
$217,930 respectively) 180,027 226,756
Deferred policy acquistion costs 67,213 46,269
Fixed assets (net of accumulated depreciation of $63,737 and $43,976,
respectively) 123,998 103,451
Receivable from New York Life Insurance Company 83,534 1,315,849
Goodwill (net of accumulated amortization of $37,858 and $8,808, respectively) 1,101,657 289,596
Other intangible assets 183,420 65,765
Other assets 142,525 82,572
-------------- ---------------
Total assets $ 3,572,495 $ 3,157,382
============== ===============
LIABILITIES AND MEMBER'S EQUITY/STOCKHOLDER'S EQUITY
Accrued claims payable $ 854,158 $ 339,992
Policy reserves 162,670 103,647
Participating policyholder liability 3,815 3,378
Payable to New York Life Insurance Company 39,222 35,759
Dividend payable to New York Life Insurance Company - 373,924
Accrued expenses and other payables 305,586 218,492
Income taxes payable 29,918 4,503
Notes payable 711,492 1,271,202
Net deferred tax liability 130,728 . 30,417
Other liabilities 119,033 136,955
-------------- ---------------
Total liabilities 2,356,622 2,518,269
-------------- ---------------
Minority interest 533,468 137,885
Member's equity 1,062,791 -
Undistributed losses (373,089) -
Common stock, par value $.10 per share (20,000 shares authorized, 3,850 shares
issued and outstanding) and additional paid-in capital - 912,839
Accumulated deficit - (415,159)
Accumulated other comprehensive (loss) income:
Net unrealized (losses) gains on investments (net of taxes of $(2,254) and
$96, respectively) (10,385) 1,097
Cumulative translation adjustment 3,088 2,451
-------------- ---------------
Total member's equity/stockholder's equity 682,405 501,228
-------------- ---------------
Total liabilities and member's equity/stockholder's equity $ 3,572,495 $ 3,157,382
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
195
<PAGE> 244
NYLIFE LLC AND SUBSIDIARIES
(AFFILIATES OF NEW YORK LIFE INSURANCE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
For the Years ended December 31,
1999 1998 1997
------------------------------------------
(in thousands)
<S> <C> <C> <C>
Income:
Fee income $ 4,660,313 $ 3,177,181 $1,506,092
Premium revenue - net of reinsurance 57,316 47,375 27,571
Commission income 183,020 146,661 113,590
Interest and dividend income 67,644 70,992 32,533
Net realized and unrealized gains (losses) on investments 16,140 (73,953) (6,462)
Realized gain on sale of assets 182,930 - -
Equity in earnings (losses) of affiliates 10,462 869 (3,833)
Gain on issuance of additional shares by public subsidiary 104,932 921 2,411
Other income 8,891 4,801 30,941
-------------- ------------- ------------
Total income 5,291,648 3,374,847 1,702,843
-------------- ------------- ------------
Expenses:
Cost of prescription sales 3,826,905 2,584,997 1,119,167
Employee compensation 188,974 147,588 111,203
Selling expenses 194,178 144,429 131,461
Depreciation and amortization 151,642 181,226 102,138
Administrative charge from New York Life Insurance Company 95,193 71,293 59,926
Interest 100,068 54,670 13,197
Professional fees 61,309 44,797 6,768
Benefit payments 13,119 10,855 7,534
Increase in policy reserves 29,371 24,381 26,712
Rent expense 22,413 13,737 9,815
Administrative and other expenses 178,299 97,599 68,431
-------------- ------------- ------------
Total expenses 4,861,471 3,375,572 1,656,352
-------------- ------------- ------------
Net income (loss) from continuing operations before income taxes and
minority interest 430,177 (725) 46,491
Net income tax expense 189,473 36,020 29,365
-------------- ------------- ------------
Net income (loss) from continuing operations before minority interest 240,704 (36,745) 17,126
Minority interest 91,663 23,343 18,225
-------------- ------------- ------------
Net income (loss) from continuing operations $ 149,041 $ (60,088) $ (1,099)
Discontinued operations:
Net loss from discontinued operations (before measurement date),
(net of income tax benefit of $8,756) - - (27,911)
Gain on disposal of NYLCare, including operating gains of $6,926
during the phase out period (net of income taxes of $265,624) - 380,135 -
-------------- ------------- ------------
Net income (loss) from discontinued operations - 380,135 (27,911)
Net income (loss) before extraordinary item and cumulative effect of
change in accounting principle 149,041 320,047 (29,010)
Extraordinary Item
Loss on early retirement of debt (net of income tax benefit of
$4,492) (7,150) - -
Cumulative effect of change in accounting principle (net of income
tax benefit of $14,210) (26,389) - -
-------------- ------------- ------------
Net Income (loss) $ 115,502 $ 320,047 $ (29,010)
Other Comprehensive income (losses)
Net unrealized holding gains (losses) on investments (net of
income taxes of $(2,350), $(790) and $1,650, respectively) (11,482) (4,772) 7,084
Cumulative translation adjustments 637 13 (1,412)
-------------- ------------- ------------
Comprehensive income (loss) $ 104,657 $ 315,288 $ (23,338)
============== ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
196
<PAGE> 245
NYLIFE LLC AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S EQUITY / STOCKHOLDER'S EQUITY
For the years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Common Accumulated
Stock & Other
Additional Investment Comprehensive
Paid-In Accumulated Valuation Member's Undistributed Income
Capital Deficit Account Equity Losses (Loss) Total
------- ------- ------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 as
previously reported $1,066,921 $ (270,817) $ 99,527 $ - $ - $ 2,635 898,266
Cumulative Effect of
comprehensive change in basis
of accounting (Note 2) 55,143 (61,455) (99,527) - - - (105,839)
Balance at December 31, 1996, as
adjusted 1,122,064 (332,272) - - - 2,635 792,427
Capital contributions 101,087 - - - - - 101,087
Return of capital (124,900) - - - - - (124,900)
Net loss - (29,010) - - - - (29,010)
Other comprehensive income
(losses)
Net unrealized gains on
investments - - - - - 7,084 7,084
Cumulative translation
adjustment - - - - - (1,412) (1,412)
----------- ------------ ----------- ----------- ------------ ------------- -----------
Balance at December 31, 1997 1,098,251 (361,282) - - - 8,307 745,276
Capital contributions 100,145 - - - - - 100,145
Return of capital (285,557) - - - - - (285,557)
Dividend - (373,924) - - - - (373,924)
Net income - 320,047 - - - - 320,047
Other comprehensive income
(losses)
Net unrealized losses on
investments - - - - - (4,772) (4,772)
Cumulative translation
adjustment - - - - - 13 13
----------- ------------ ----------- ----------- ------------ ------------- -----------
Balance at December 31, 1998 912,839 (415,159) - - - 3,548 501,228
Capital contributions 147,590 - - - - - 147,590
Dividend - (73,432) - - - - (73,432)
Net income - 100,322 - - - - 100,322
Other comprehensive income
Net unrealized gains on
investments - - - - - 23 23
Cumulative translation
adjustment - - - - - 226 226
----------- ------------ ----------- ----------- ------------ ------------- -----------
Balance at September 30, 1999 1,060,429 (388,269) - - - 3,797 675,957
Conversion to a Limited
Liability Company (1,060,429) 388,269 - 1,060,429 (388,269) - -
Capital contributions - - - 2,362 - - 2,362
Net income - - - - 15,180 - 15,180
Other comprehensive income
(losses)
Net unrealized losses on
investments - - - - - (11,505) (11,505)
Cumulative translation
adjustment - - - - - 411 411
----------- ------------ ----------- ----------- ------------ ------------- -----------
Balance at December 31, 1999 $ - $ - $ - $1,062,791 $ (373,089) $ (7,297) $ 682,405
=========== ============ =========== =========== ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
197
<PAGE> 246
NYLIFE LLC AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years ended December 31,
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 115,502 $ 320,047 $ (29,010)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 151,642 190,015 122,888
Gain on disposal of business, excluding operating gains - (373,209) -
Capitalization of deferred policy acquisition costs (18,392) (11,889) (7,077)
Insurance reserves 29,371 24,500 26,712
Net realized gain on sale of interest in subsidiaries - - (19,932)
Net realized gain on sale of assets (182,930) - -
Net realized and unrealized (gains) losses on investments (16,140) 65,017 6,462
Equity in (earnings) loss of affiliates (10,462) 117 7,557
Provision for deferred income tax expense 107,730 (1,960) 12,289
Minority interest 91,663 23,413 18,288
Gain on issuance of additional shares by public subsidiary (104,932) (921) (2,411)
Non recurring charges, net of cash paid 22,281 1,467 -
Extraordinary loss on early retirement of debt 11,642 - -
Other 5,423 8,554 8,202
Change in assets and liabilities, net of changes resulting from
acquisitions or sales of subsidiaries:
Premiums and accounts receivable (221,994) 78,185 (91,791)
Interest and other receivables 3,979 (8,302) 22,609
Deferred distribution costs and other assets (74,908) (136,728) (109,121)
Accrued expenses and other payables 318,341 5,061 171,002
Net payable (receivable) to New York Life Insurance Company 1,235,774 (829,149) (498,241)
Claims payable - (132,243) 11,029
Net income taxes payable (receivable) 25,272 16,305 1,604
Short-term notes payable (790,295) 365,198 500,708
Other liabilities (15,899) (7,393) (13,285)
Net assets of dissolved subsidiaries - - 66,553
--------------- -------------- ---------------
Net cash provided by (used in) operating activities 682,668 (403,915) 205,035
Cash flow from investing activities:
Capital expenditures (43,839) (45,363) (38,826)
Proceeds from sale of investments 51,999 289,655 214,642
Purchase of investments (180,476) (164,007) (163,439)
Proceeds from sale of subsidiaries, net of cash sold and
closing costs, net of taxes - 593,168 2,766
Acquisition of subsidiaries, net of cash acquired (721,049) (460,137) -
Payments received on investments 7,558 2,537 8,693
Other 453 4,603 (1,045)
--------------- -------------- ---------------
Net cash (used in) provided by investing activities $ (885,354) $ 220,456 $ 22,791
--------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
198
<PAGE> 247
NYLIFE LLC AND SUBSIDIARIES
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
For the Years ended December 31,
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flow from financing activities:
Capital contributions $ 147,590 $ 97,534 $ 95,471
Dividends paid (447,356) - -
Borrowings net of repayments under line of credit agreements - - (97,446)
Proceeds from long-term debt 1,290,950 360,000 -
Repayment of debt (1,060,312) (31,082) (8,173)
Return of capital distribution - (276,237) (124,900)
Contributions from limited partners 20,900 - -
Deferred financing fees (26,316) (4,062) -
Proceeds from exercise of stock options 6,438 2,021 -
Net proceeds from issuance of common stock 299,378 - -
Other - (215) 1,597
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 231,272 147,959 (133,451)
---------------- --------------- ---------------
Effect of exchange rates on cash (1,922) (1,373) (3,042)
---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 26,664 (36,873) 91,333
Cash and cash equivalents at beginning of period 364,692 401,565 310,232
---------------- --------------- ---------------
Cash and cash equivalents at end of period $ 391,356 $ 364,692 $ 401,565
================ =============== ===============
Supplemental disclosure of cash flow information: Cash paid
(received) during the year for:
Income taxes $ 26,483 $ 298,158 $ (11,776)
---------------- --------------- ---------------
Interest expense $ 104,675 $ 47,492 $ 10,998
---------------- --------------- ---------------
Supplemental disclosure of non-cash financing activities:
Net capital contributions $ 2,362 $ (6,709) $ 5,613
---------------- --------------- ---------------
Contributions from limited partners $ 86,795 $ - $ -
---------------- --------------- ---------------
Dividends declared but not paid $ - $ 373,924 $ -
---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
199
<PAGE> 248
NYLIFE LLC AND SUBSIDIARIES
(AFFILIATES OF NEW YORK LIFE INSURANCE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
The accompanying financial statements reflect the consolidation of NYLIFE LLC
(the "Company"), formerly NYLIFE Inc., 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:
ACTIVE SUBSIDIARIES
Avanti Corporate Health Systems Inc. ("Avanti")
Eagle Strategies Corp. ("Eagle")
MacKay Shields Financial LLC ("MacKay Shields") (Formerly MacKay-Shields
Financial Corporation) **
Madison Square Advisors LLC ("MSA") (Formerly Madison Square Advisors, Inc.)**
NYLAP Manager LLC ("NYLCAP Manager") (Formed in 1999) **
New York Life Capital Partners LLC ("NYLCP LLC"), (Formed in 1999)
53% owned **
New York Life Capital Partners, LP ("NYLCP LP"), (Formed in
1999) 3% owned**
MainStay Management LLC ("MainStay Management") (Formerly MainStay Management,
Inc.) **
MainStay Shareholder Services LLC ("MSSI") (Formerly MainStay Shareholder
Services Inc.) **
Monitor Capital Advisors LLC ("Monitor Capital") (Formerly Monitor Capital
Advisors, Inc.) **
New York Life Benefit Services LLC ("Benefit Services") (Formerly New York Life
Benefit Services Inc.)**
New York Life Capital Corporation ("Capital Corporation")
New York Life International, Inc. ("International Inc.") **
New York Life Insurance, Ltd. ("Korea") (Formerly Kohap New York Life
Insurance Ltd.)**
New York Life International Investment, Inc. ("NYL International")
New York Life Irrevocable Trust of 1996 ("Trust")
New York Life Settlement Corporation ("NYLSET")
New York Life Trust Company ("NYL Trust")
New York Life UK Limited ("NYLUK")
NYLIFE Administration Corp. ("NYLACOR")
NYLIFE Distributors, Inc. ("NYLIFE Distributors") **
NYLIFE HealthCare Management, Inc. ("NYLIFE HealthCare")
Express Scripts, Inc. ("ESI"), 39% owned, 86% voting stock
NYLIFE Refinery, Inc. ("NYLIFE Refinery")
NYLIFE Securities, Inc. ("NYLIFE Securities")
NYLINK Insurance Agency Corporation ("NYLINK")
NYLTemps, Inc. ("NYLTemps")
Prime Provider Corp. ("Prime Provider")
DISCONTINUED/DISSOLVED SUBSIDIARIES
Aegis Technologies, Inc. ("Aegis") (Dissolved in 1999)
Greystone Realty Corporation ("Greystone") (Dissolved in 1999)
MSC Holding, Inc. ("MSC"), (Dissolved in 1999) 85% owned
NYLCare NC Holdings, Inc. ("NC Holdings") (Discontinued in 1998)
NYLIFE Depositary Corporation ("Depositary") (Dissolved in 1999)
NYLIFE Funding, Inc. ("NYLIFE Funding") (Dissolved in 1998)
NYLCare Health Plans ("NYLCare") (Discontinued in 1998)
New York Life and Health Insurance Company ("NYLHIC") (Discontinued in
1998)
NYLIFE Resources, Inc. ("NYLIFE Resources") (Dissolved in 1998)
NYLIFE SFD Holding, Inc. ("SFD Holding") (Dissolved in 1999)
Auto Funding II, LP ("Auto Funding") (Dissolved in 1999)
NYLIFE Structured Asset Management Company, Ltd. ("SAMCO") (Dissolved in
1999)
WellPath of Arizona Reinsurance Company ("WellPath") (Discontinued in 1998)
NYLIFE Equity ("NYLIFE Equity") (Dissolved in 1997)
NYLIFE Realty Inc. ("NYLIFE Realty") (Dissolved in 1997)
** Subsidiaries affected by the re-organization described in Note 18
200
<PAGE> 249
The Company was originally incorporated under the laws of New York in 1984 as
NYLIFE Inc., and was converted to a Delaware limited liability company on
September 30, 1999. Effective October 1, 1999, MacKay Shields, MainStay
Management, Monitor Capital and MSA were also converted to limited liability
companies. Benefit Services and MSSI were converted to limited liability
companies on January 28, 2000.
The Company, through its subsidiaries, offers insurance products in certain
international markets; pharmacy benefit management services; investment
management, mutual fund, and pension products/services; securities brokerage
and capital financing.
International operations are conducted primarily through International Inc.,
which markets life, annuity and health insurance and pension products/services
through joint ventures and equity investments in Argentina, Hong Kong,
Indonesia, Mexico, Philippines and South Korea. In addition, International Inc.
has representative offices in the People's Republic of China and an investment
fund in India.
Pharmacy benefit management services in the United States and Canada are
conducted through ESI, and include network claims processing, mail pharmacy
services, benefit design consultation, drug utilization review, formulary
management, disease management, medical and drug data analysis services and
medical information management services. ESI also conducts business as an
Internet pharmacy through its 19.9% interest in PlanetRx.com Inc.
Asset management operations primarily consist of institutional asset management
and mutual fund related products and services offered through MacKay Shields,
Monitor Capital and MSA. Mutual fund distribution and administration services
are conducted through NYLIFE Distributors, MSSI and MainStay Management.
Pension and 401(k) products and related administrative and trust services are
offered through Benefit Services and NYL Trust.
Securities brokerage is conducted through NYLIFE Securities, whose operations
consist of acting as an introducing broker for clients and the distribution of
mutual fund products (including the MainStay Funds ("Funds") through a
soliciting dealer agreement with NYLIFE Distributors) and registered products
through New York Life's career agency force.
Capital financing operations are conducted through Capital Corporation, which
issues commercial paper and borrows from other sources for the purpose of
making loans to New York Life and its affiliates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"). Prior to
1999, the consolidated financial statements had been prepared on the basis of
accounting practices prescribed or permitted by the New York State Insurance
Department for valuing common stocks of subsidiaries, which is a comprehensive
basis of accounting other than GAAP. Financial statements for the years ended
December 31, 1998 and 1997 have been restated in accordance with GAAP. The
cumulative effect of the comprehensive change in basis of accounting of
$105,839,000 has been recorded as a decrease to the beginning of the year
equity for the year ended December 31, 1997.
201
<PAGE> 250
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements. Actual results could differ from those
estimates.
INVESTMENTS
Equity securities consist of both affiliated and unaffiliated securities.
Unaffiliated securities are stated at market value. Affiliated securities
represent unconsolidated subsidiaries and are accounted for under the equity
method of accounting with net earnings or losses included in net income and
unrealized appreciation and depreciation reflected as unrealized gains and
losses reported as a separate component of member's equity. Fixed maturities
are classified as either held to maturity and reported at amortized cost or
available for sale and reported at estimated fair value, with unrealized gains
and losses reported as a separate component of member's equity, net of deferred
tax. The investments in the Funds are recorded at fair value and are held by
MacKay Shields and MainStay Management, investment advisors; MSSI, a transfer
agent; and NYLIFE Securities and NYLIFE Distributors, broker-dealers. In
accordance with specialized accounting practices for broker-dealers, unrealized
gains and losses are included in net income. Real estate is recorded at cost
less accumulated depreciation. Other long-term investments primarily represent
investments in limited partnerships and are generally accounted for under the
equity method of accounting with net earnings or losses 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.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short term maturities of
these instruments. The carrying value of equities, available for sale fixed
maturities and investments in real estate and the Funds approximates fair value
and is discussed in Note 6. The fair value of interest rate swaps was based on
quoted market prices, which reflect the present values of the difference
between estimated future fixed rate payments and future variable rate receipts.
The carrying value of notes payable approximates fair value and is discussed in
Note 9.
DEFERRED DISTRIBUTION COSTS
Deferred distribution costs primarily relate to commission expenses associated
with the distribution of Class B shares of the Funds, which are deferred and
amortized over a six year period on a straight-line basis.
During 1999, the Company changed its method of accounting for the costs related
to the distribution of Class B shares of the Funds. The Company is now
deferring only commission expenses associated with new sales of the Funds.
Certain other costs related to the distribution of the Funds, which were
previously deferred, are now being expensed as incurred. Management believes
that this method will more accurately reflect the matching of distribution
costs with the related revenue recognition. The cumulative effect of this
change for years prior to January 1, 1999 was $26,389,000, which is recorded in
the accompanying Consolidated Statement of Operations and Comprehensive Income.
Also, the effect of this change in 1999 reduced net income by $5,648,000.
202
<PAGE> 251
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business and certain costs of issuing and
underwriting policies that vary with and are primarily related to the
production of new business are deferred and recorded as an asset in the balance
sheet. These costs consist primarily of commissions, overrides, certain
expenses of issuing and underwriting contracts, and certain agency expenses.
For traditional life and periodic endowment products, such costs are amortized
over the life of the contract in proportion to estimated gross margins. The
assumptions for estimated gross margins are initially based on best estimates
and updating periodically to reflect actual experience. Unlocking is done
automatically as actual experience emerges. The effect of which is reflected in
the current year's amortization. For term life and certain riders, the deferred
policy acquisition costs are amortized over the life of the contract in
proportion to gross premiums. For non-participating limited pay policies the
deferred policy acquisition costs are amortized over the premium paying period
in proportion to gross premiums.
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 straight-line method of
depreciation.
GOODWILL
Goodwill represents the cost in excess of the value assigned to net assets
acquired in connection with acquisitions and is being amortized over 10 to 30
years, unless deemed to be impaired, in which case it is written off to the
extent considered unrecoverable (see Note 4).
OTHER INTANGIBLE ASSETS
Other intangible assets consist of customer contracts, non-compete agreements
and deferred financing fees. These assets are carried at amortized cost and are
amortized on a straight-line basis over periods from 1 to 20 years.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company, through its investment in ESI, has entered into interest rate swap
agreements to manage exposure to interest rate risk (see Note 9). ESI does not
hold or issue derivative financial instruments for trading purposes. The
interest rate swaps are designated to hedge ESI's variable interest rate
payments. Amounts received or paid are accrued as interest receivable or
payable and as interest income or expense. The fair values of the interest rate
swap agreements are based on market prices. The fair value represents the
estimated amount ESI would receive or pay to terminate the agreements, taking
into consideration current interest rates.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"), effective for fiscal years beginning after
June 15, 2000. FAS 133 requires all derivatives be recognized as either assets
or liabilities in the consolidated statement of financial position and measure
those instruments at fair value. In addition, FAS 133 specifies the accounting
for changes in the fair value of a derivative based on the intended use of the
derivative and the resulting designation. ESI's present interest rate swaps
would be considered cash flow hedges. Accordingly, the change in the fair
values of the swaps will be reported on the consolidated statement of financial
position as an asset or liability. The corresponding unrealized gains or losses
representing the effective portion of the hedges will be initially recognized
in member's equity and other comprehensive income, and subsequently any changes
in unrealized gains or losses from the initial measurement date will be
recognized in earnings
203
<PAGE> 252
concurrent with the interest expense on ESI's underlying variable rate debt. If
the Company had adopted FAS 133 as of December 31, 1999, it would have recorded
an unrealized gain of $6,867,000 as an asset and an increase in member's equity
and other comprehensive income during 1999.
POLICY RESERVES
Policy reserves include reserves for traditional life (including attached OPP
riders), periodic endowments, term life, other riders, non-participating
limited pay policies, and remaining short term and insignificant products. For
traditional life and periodic endowments, net level premium reserves are
calculated using dividend fund interest rates and guaranteed cash surrender
value mortality rates. For term life and other riders, net level premium
reserves are calculated using mortality, interest, expense, and persistency.
Mortality, interest, and expense are based on best estimate with a provision
for adverse deviation. Persistency reflects actual experience. For
non-participating limited pay policies, net level premium reserves are
calculated with additional reserves set up to account for the unearned revenue
liability.
PARTICIPATING POLICYHOLDER LIABILITY
The liability for participating policyholders' consists principally of
dividends earned and expected to be paid or credited during the subsequent
year. 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.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are recognized for the expected future tax
consequences/benefits, utilizing current tax rates, of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
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 member'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.
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 dispenses pharmaceuticals to members of health benefit
plans sponsored by their clients or have 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 revenue and ingredient costs or payments to these pharmacy
providers in cost of prescription sales. If ESI is only administering the plan
sponsors' network pharmacy contracts, ESI records fees derived from ESI's
contracts with plan sponsors as revenue.
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<PAGE> 253
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.
PREMIUM REVENUE RECOGNITION
Premiums are recognized as income when due. The associated benefits and
expenses are matched with income so as to result in the recognition of profits
over the life of the contracts. This match is accomplished by providing for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs. For non-participating contracts with
a limited number of premium payments due over a period shorter than the period
over which benefits are provided, premiums are recorded as income when due. Any
excess profit which is defined by excess of gross over net premiums, is
deferred and recognized as income in a constant relationship to insurance in
force.
NET REALIZED AND UNREALIZED INVESTMENT GAINS
Net realized gains are computed using the specific identification method. Costs
of investments are adjusted for impairments considered other than temporary.
Unrealized gains and losses of broker-dealers are included in net income in
accordance with specialized accounting practices.
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. Fees receivable from pharmaceutical
manufacturers are estimated on a quarterly basis, converting total
prescriptions dispensed to estimated rebatable scripts (i.e., those
prescriptions with respect to which ESI is contractually entitled to submit
claims for rebates) multiplied by the contractually agreed manufacturer rebate
amount. Estimated fees receivable from pharmaceutical manufacturers are
recorded when ESI determines that they are realizable, and realization is not
dependent upon future pharmaceutical sales. Estimates are revised once the
actual rebatable scripts are calculated and rebates are billed to the
manufacturer.
NOTE 3 - BUSINESS RISKS AND UNCERTAINTIES
The development of deferred policy acquisition costs and policy reserves for
certain subsidiaries offering life insurance products requires management to
make estimates and assumptions regarding mortality, morbidity, lapses, expense
and investment experience. Such estimates are primarily based on historical
experience and future expectations. Actual results could differ from these
estimates. Management monitors actual experience, and, where circumstances
warrant, revises its assumptions and the related estimates of policy reserves
and claim liabilities.
As substantially all of the net assets of International Inc.'s subsidiaries and
NYLUK 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 15 for description of specific commitments and contingencies.
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<PAGE> 254
NOTE 4 - IMPAIRMENTS
In 1998, NYLIFE Distributors amortized an additional $52,648,000 of deferred
12b-1 distribution costs in order to more appropriately align the deferred
asset with the anticipated recoverable sales charges. This adjustment was
necessitated in part, by the occurrence of significant redemptions that
qualified for waiver of otherwise payable contingent deferred sales charges.
In 1998, NYLUK decided to exit its investment in Life Assurance Holding
Corporation Limited, a UK holding company in which NYLUK has a 22.8% equity
interest. The lack of interest from serious potential buyers indicated that an
other than temporary impairment had occurred. As a result, a realized loss of
$45,698,000 was recorded during 1998.
In 1998, NYLIFE Healthcare owned 1,402,000 shares of common stock of FPA
Medical Management, Inc. ("FPA"). During the third quarter of 1998, FPA entered
into bankruptcy proceedings and NYLIFE Healthcare determined that an other than
temporary impairment had occurred. As a result, a realized loss of $33,300,000
was recorded during 1998.
Auto Funding was a limited partnership formed for the purpose of investing in a
series of trusts ("NAFCO Auto Trusts") consisting of prime and non-prime
automobile loans. During 1998, Auto Funding recorded realized losses of
$6,700,000 and $11,500,000, respectively, representing Auto Funding's remaining
investment in the NAFCO Auto Trust and the anticipated exercise of its option
to prepay the Investor Certificateholders in NAFCO Auto Trusts-2, 3 and B. The
write-offs were necessitated by the continued unpredictability of the
underlying collateral in NAFCO Auto Trusts. In 1997, Auto Funding recorded
realized losses of $4,600,000 and $2,600,000, respectively, on NAFCO Auto
Trusts and related capitalized costs.
NYLIFE Refinery 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 Company, LP. As a result,
NYLIFE Refinery recorded a pre-tax realized loss of $6,010,000 and $17,219,000
on its investment during 1998 and 1997, respectively.
In 1997, the Company determined that Benefit Services projected operating
losses were indicative of a potential impairment. As a result, the Company
expensed $4,381,000 (included in administrative and other) of goodwill related
to the purchase of this subsidiary.
NOTE 5 - ACQUISITIONS AND DISPOSITIONS
ESI
On April 1, 1999, ESI purchased Diversified Pharmaceutical Services, Inc. and
Diversified Pharmaceutical Services (Puerto Rico) Inc. (collectively DPS), from
SmithKline Beecham Corporation and SmithKline Beecham InterCredit BV for
approximately $715,000,000 (which includes purchase price adjustments for
working capital and transaction costs). ESI used approximately $48,000,000 of
its own cash and financed the remainder of the purchase price and related
acquisition costs through a $1.05 billion credit facility and a $150,000,000
senior subordinated bridge credit facility (see Note 9).
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<PAGE> 255
The acquisition has been accounted for using the purchase method and the
results of operations of the acquired entities have been included in the
consolidated financial statements since April 1, 1999. The purchase price has
been preliminary allocated based on the estimated fair values of net assets
acquired at the date of the acquisition. The excess of purchase price over
tangible net assets acquired has been preliminarily allocated to customer
contracts in the amount of $129,500,000 (included in other intangible assets)
which are being amortized using the straight-line method over the estimated
useful lives of 1-20 years and to goodwill in the amount of $734,485,000 which
is being amortized using the straight-line method over the estimated useful
life of 30 years. ESI filed an Internal Revenue Code SS.338 (h)(10) election,
making amortization expense tax deductible. In conjunction with the
acquisition, DPS retained the following liabilities (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired $1,010,159
Cash paid for the capital stock (714,678)
---------------
Liabilities retained $ 295,481
===============
</TABLE>
In June 1999, ESI completed a public offering of 5,175,000 shares of Class A
common stock and received $299,378,000 in net proceeds. In addition, employee
stock options were exercised throughout the year. NYLIFE Healthcare recognized
a pre-tax gain of $104,932,000, representing the difference in 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 a result of
these transactions, NYLIFE Healthcare's ownership of ESI decreased from 45% to
39% and its voting stock from 89% to 86%.
On August 31, 1999, ESI and YourPharmacy.com, Inc. ("YPC"), a wholly owned
subsidiary of ESI entered into an Asset Contribution and Reorganization
Agreement (the "Contribution Agreement") with PlanetRx, PRX Holdings, Inc.
("Holdings"), and PRX Acquisition Corp. ("Acquisition Sub"). Pursuant to the
Contribution Agreement, YPC agreed to contribute certain operating assets
constituting its e-commerce business in prescription and non-prescription drugs
and health and beauty aids to Holdings in exchange for 19.9% of the
post-initial public offering common equity of Holdings (the "IPO"), and
PlanetRx was also to assume certain obligations of YPC. Simultaneously with
this transaction, Acquisition Sub was to merge into PlanetRx and PlanetRx
shareholders would receive stock in Holdings, which would change its name to
"PlanetRx.com Inc.", which would conduct business as an Internet pharmacy.
On October 13, 1999, the transactions described in the Contribution Agreement
were consummated, YPC received 10,369,990 unregistered shares, or 19.9% of the
common equity of PlanetRx, and PlanetRx assumed options granted to YPC
employees, which converted into options to purchase approximately 1.8 million
shares of PlanetRx common stock. In connection with the IPO, ESI executed a 180
day lock-up agreement that prevents ESI from selling its shares until April 10,
2000. The consummation of the transaction occurred immediately preceding the
closing of PlanetRx's IPO of common stock. Based on the IPO price of $16 per
share, YPC received consideration valued at $165,920,000. ESI recorded a
one-time gain of $182,930,000 on the transaction, and a one-time stock
compensation expense (included in administrative and other expenses) of
$19,520,000 relating to the employee stock options. ESI's investment in
PlanetRx is accounted for on the cost method and it is reported under equities
at fair value. Additionally, as part of the Contribution agreement, PlanetRx
will pay ESI an annual fee of $11,650,000 and reimbursement for certain
expenses of $3,000,000 over a 5 year term, which can be extended to 10 years if
ESI meets certain performance measures. Additionally, ESI is eligible to
receive an incremental fee based upon the number of members who placed their
first
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<PAGE> 256
order for prescription drug or non-prescription merchandise with PlanetRx. ESI
recorded $2,912,000 of the annual fee and $88,000 of incremental fee in other
revenue and reduced selling and general administrative expenses by $750,000 for
reimbursement of certain expenses. As of December 31, 1999, ESI had PlanetRx
receivables of $5,732,000.
On April 1, 1998, ESI acquired all of the outstanding capital stock of Value
Health, Inc. and Managed Prescriptions Network, Inc. (collectively, "ValueRx")
from Columbia/HCA HealthCare Corporation ("Columbia") for approximately
$460,000,000 in cash (which includes transaction costs and executive management
severance costs of approximately $6,700,000 and $8,300,000, respectively);
approximately $360,000,000 was obtained through a five year bank credit
facility (see Note 9) and the remainder from ESI's cash balances and short term
investments.
The acquisition has been accounted for using the purchase method of accounting
and the results of operations of ValueRx have been included in the consolidated
financial statements since April 1, 1998. The purchase price has been allocated
based on the estimated fair values of net assets acquired at the date of the
acquisition. The excess of purchase price over tangible net assets acquired has
been allocated to other intangible assets, consisting of customer contracts and
non-compete agreements in the amount of $57,653,000, which are being amortized
using the straight-line method over the estimated useful lives of 2 to 20 years
and to goodwill in the amount of $278,113,000 which is being amortized using
the straight-line method over 30 years. The amortization expense from ValueRx
goodwill and customer contracts is non-deductible for income tax purposes. In
conjunction with the acquisition, ValueRx and its subsidiaries retained the
following liabilities (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired $ 659,166
Cash paid for the capital stock (460,137)
-----------
Liabilities retained $199,029
===========
</TABLE>
INTERNATIONAL INC.
Effective July 1, 1999, International Inc. acquired stock in Maxima S.A. AFJP,
La Buenos Aires-New York Life Seguros de Vida S.A. and La Buenos Aires-New York
Life Seguros de Retiro S.A. to increase its ownership in each of these
companies to 40%. In addition, effective July 1, 1999, International acquired a
40% ownership in Docthos, S.A., a company licensed to conduct health care
business in Argentina. The total cost to finance this investment was
$126,900,000. The excess of purchase price over the statutory net assets
acquired amounted to $108,298,000 and is included in goodwill on the
consolidated statement of financial position, and is being amortized using the
straight-line method over 20 years.
Effective October 31, 1999, International Inc. purchased the 49% ownership
interest in Korea that it did not previously own. Accordingly, Korea has been
consolidated in the financial statements subsequent to the date of purchase.
Prior to the date of purchase, Korea was accounted for under the equity method
of accounting.
Effective December 31, 1998, International Inc. sold all of its common stock in
New York Life Worldwide (Bermuda) Ltd. to an outside party for consideration
amounting to $3,812,000. No gain or loss was recognized on the transaction.
Under the terms of the sale contract, International Inc. has undertaken to
indemnify the outside party against liabilities, costs and expenses incurred
with regard to specified matters. At December 31, 1999 and 1998, provisions
included in other liabilities for such claims were $1,910,000 for both periods.
Management believes that adequate provision has been made for potential claims
that may arise.
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<PAGE> 257
NYLCARE
Through NYLCare, the Company offered health insurance and managed care
products. NYLCare was sold to Aetna on July 15, 1998. The sale included the
stock of the Company's wholly owned healthcare subsidiary, NYLCare, including
NYLHIC, a downstream subsidiary of NYLCare. The sales price of $1,070,000,000
resulted in an after-tax gain of $373,208,000. At December 31, 1999 and 1998,
no assets or liabilities related to the transaction remain on the statement of
financial position except outstanding amounts due to and from New York Life
(see Note 12).
For 1998 and 1997, the details of operating gains were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------- ----------------
<S> <C> <C>
Revenues
Premium income $1,379,507 $2,765,107
Premium ceded on reinsurance settlement (569,687) -
Fee income 30,744 78,930
Other income 33,762 59,737
------------- ----------------
Total revenue 874,326 2,903,774
Expenses
HMO claims and capitation costs 1,054,552 1,819,722
Health, disability and death benefit costs 159,092 630,661
Reserve transfer on reinsurance ceded (569,687) -
Employee compensation 144,749 257,736
Selling, administrative and other expenses 71,172 232,259
------------- ----------------
Total expenses 859,878 2,940,378
------------- ----------------
Gain (loss) before income taxes 14,448 (36,604)
Federal income tax expense (benefit) 7,452 (8,756)
Minority interest 70 63
------------- ----------------
Net income (loss) $ 6,926 $ (27,911)
============= ================
</TABLE>
NOTE 6 - INVESTMENTS
EQUITIES
Estimated fair value of unaffiliated equity securities has been determined
using quoted market prices. At December 31, 1999 and 1998, the distribution of
gross unrealized gains and losses on equity securities were as follows (in
thousands):
<TABLE>
<CAPTION>
Unrealized Estimated
Cost Gains Losses Fair Value
------------- ----------------------------------- --------------
<S> <C> <C> <C> <C>
1999 $ 185,809 $ - $ 15,802 $ 170,007
============= ================ =============== ==============
1998 $ 6,397 $ 686 $ - $ 7,083
============= ================ =============== ==============
</TABLE>
Affiliated foreign unconsolidated equity investments total $51,583,000 and
$15,845,000 at December 31, 1999 and 1998, respectively.
FIXED MATURITIES
At December 31, 1999 and 1998, the maturity distribution of fixed maturities
was as follows (in thousands):
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<PAGE> 258
<TABLE>
<CAPTION>
1999 1998
------------------------------- ---------------------------------
Amortized Estimated Amortized Estimated
Available For Sale Cost Fair Value Cost Fair Value
------------------ --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,575 $ 2,577 $ 4,251 $ 4,261
Due after one year through five years 35,001 33,833 31,878 31,978
Due after five years through ten years 34,556 32,676 22,160 22,824
Due after ten years 64,531 60,675 15,713 15,983
--------------- ------------ -------------- --------------
Total $ 136,663 $ 129,761 $ 74,002 $ 75,046
=============== ============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------------------------- ---------------------------------
Amortized Estimated Amortized Estimated
Held to Maturity Cost Fair Value Cost Fair Value
---------------- --------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due after one year through five years - - - -
Due after five years through ten years - - - -
Due after ten years 4,775 4,801 4,119 5,007
--------------- ------------ -------------- --------------
Total $ 4,775 $ 4,801 $ 4,119 $ 5,007
=============== ============ ============== ==============
</TABLE>
At December 31, 1999 and 1998, the distribution of unrealized gains and losses
on fixed maturities was as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
Amortized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
--------------------------------- -------------- ---------------------------------- ---------------
<S> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $ 3,682 $ - $ 165 $ 3,517
Foreign Governments 85,182 - 6,750 78,432
Corporate 47,799 136 123 47,812
-------------- -------------- ---------------- ---------------
Total Available for Sale $ 136,663 $ 136 $ 7,038 $ 129,761
============== ============== ================ ===============
Held to Maturity
---------------------------------
U.S. Treasury and other
U.S. Governmental Agencies $ 4,775 $ 26 $ - $ 4,801
============== ============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
Amortized Unrealized Estimated
Available for Sale Cost Gains Losses Fair Value
--------------------------------- -------------- ---------------------------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $ 11,168 $ 31 $ 55 $ 11,144
Foreign Governments 26,211 1,530 438 27,303
Corporate 36,623 133 157 36,599
-------------- -------------- ---------------- ---------------
Total Available for Sale $ 74,002 $ 1,694 $ 650 $ 75,046
============== ============== ================ ===============
Held to Maturity
---------------------------------
U.S. Treasury and other
U.S. Governmental Agencies $ 4,119 $ 888 $ - $ 5,007
============== ============== ================ ===============
</TABLE>
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<PAGE> 259
Proceeds from investments in fixed maturities sold, matured, or repaid were
$30,807,000, $71,876,000, and $1,847,000, for 1999, 1998 and 1997,
respectively. Realized gains from investments in fixed maturities sold,
matured, or repaid were $264,000 and $5,827,000 for 1999 and 1998,
respectively, and realized losses were $289,000 and $88,000 for 1999 and 1998,
respectively. There were no realized gains or losses for 1997.
RESTRICTED INVESTMENTS
At December 31, 1999 and 1998, the Company, through Korea, had restricted
investments of $5,663,000 and $5,040,000 with the Financial and Insurance
Supervisory Board in South Korea in accordance with the requirements of the
South Korean Insurance Business Law ("Law").
TIME DEPOSITS
Time deposits, included in cash and cash equivalents, at December 31, 1999 and
1998, were $11,626,000 and $6,077,000, respectively.
MAINSTAY FUNDS
At December 31, 1999, the total investment in the Funds includes investments in
individual funds as follows (in thousands):
<TABLE>
<CAPTION>
Cost Fair Value
<S> <C> <C>
MainStay International Bond $ 7,870 $ 7,123
MainStay International Equity 6,433 9,714
MainStay Strategic Income 6,085 5,617
MainStay New York Tax Free 5,105 4,551
MainStay California Tax Free 2,739 2,411
Institutional Short Term Bond 1,858 1,753
Other MainStay/Institutional Funds 1,560 2,338
------------- --------------
Total 1999 $31,650 $33,507
============= ==============
Total 1998 $33,646 $35,622
============= ==============
</TABLE>
OTHER LONG-TERM INVESTMENTS
Other long-term investments include interests in limited partnerships
consisting primarily of leveraged buyout funds and an oil refinery with a total
value at December 31, 1999 and 1998 of $42,431,000 and $5,574,000,
respectively.
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<PAGE> 260
NOTE 7 - FIXED ASSETS
At December 31, 1999 and 1998, fixed assets, at cost, are comprised of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Furniture $ 25,653 $ 21,903
Equipment 56,019 47,017
Computer hardware 18,585 14,171
Computer software 58,012 38,270
Leasehold improvements 22,905 19,342
Other 6,561 6,724
------------ ------------
187,735 147,427
Less accumulated depreciation and amortization 63,737 43,976
------------ ------------
Total $123,998 $103,451
============ ============
</TABLE>
During 1999 and 1998, $16,482,000 and $10,244,000 in software development costs
were capitalized in accordance with SOP 98-1, "Accounting for the Costs of
Computer Software for Internal Use". Capitalized software development costs
totaled $42,838,000 and $27,516,000, at December 31, 1999 and 1998,
respectively. Reductions, if any, in the carrying value of capitalized software
costs to net realizable value are included in administrative and other
expenses. Amortization expense associated with these costs in 1999, 1998 and
1997 was approximately $3,810,000, $1,968,000 and $622,000, respectively.
NOTE 8 - DEFERRED POLICY ACQUISTION COSTS
An analysis of deferred policy acquisition costs for the years ended December
31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Balance at beginning of year before adjustment for unrealized gains on investments $46,269 $34,796
Current year additions 18,392 11,890
Amortized during year 2,552 (417)
------------ ------------
Balance at end of year $67,213 $46,269
============ ============
</TABLE>
NOTE 9 - NOTES PAYABLE
The carrying value of notes payable approximates fair value.
Notes payable, generally carried at the unpaid principal balance, consisted of
the following at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- -------------
<S> <C> <C>
Capital Corporation's Debt Issuance (for 1999 and 1998, respectively, the
weighted average cost is 6.05% and 5.19%) $ 75,611 $ 865,906
Term Credit Facility & Revolving Credit Facility (December 31, 1999 interest
rate is 7.94%) 385,000 360,000
9.625% Senior Notes due June 15, 2009 250,873 -
Series C 9% Fixed Rate Secured Five Year Notes - 20,578
SFD Holding Loan payable to New York Life - 24,704
Other 8 14
--------------- -------------
Total $711,492 $1,271,202
=============== =============
</TABLE>
On April 1, 1999, ESI executed a $1.05 billion credit facility ("Credit
Facility") with a bank syndicate led by Credit Suisse First Boston and Bankers
Trust Company consisting of $750,000,000 in term loans, including $285,000,000
of Term A loans and $465,000,000 of Term B loans, and a $300,000,000 revolving
credit facility. The Term A loans and the revolving credit facility mature on
March 31, 2005.
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<PAGE> 261
The Credit Facility is secured by the capital stock of each of ESI's existing
and subsequently acquired domestic subsidiaries, excluding Practice Patterns
Science ("PPS"), Great Plains Reinsurance Company, ValueRx of Michigan Inc.,
Diversified NY IPA, Inc., and Diversified Pharmaceutical Services (Puerto
Rico), Inc. and is also secured by 65% of the stock of ESI's foreign
subsidiaries. The Credit Facility requires ESI to pay interest quarterly on an
interest rate spread based on several London Interbank Offered Rates ("LIBOR")
or base rate options plus an interest rate spread. Beginning in March 2001, ESI
is required to make annual principal payments on the Term A loans of
$42,750,000 in 2001, $57,000,000 in 2002 and 2003, $62,700,000 in 2004 and
$65,550,000 in 2005. The Credit Facility contains covenants that limit the
indebtedness ESI may incur, dividends paid and the amount of annual capital
expenditures. The covenants also establish a minimum interest coverage ratio, a
maximum leverage ratio, and a minimum fixed charged coverage ratio. In
addition, ESI is required to pay an annual fee of 0.5%, payable in quarterly
installments, on the unused portion of the revolving credit facility
($200,000,000 at December 31, 1999). At December 31, 1999, ESI was in
compliance with all covenants associated with the credit facility. In January
2000, ESI paid down the revolving credit facility by $30,000,000.
Also on April 1, 1999, ESI executed a $150,000,000 in senior subordinated
bridge credit facility from Credit Suisse First Boston Corporation and Bankers
Trust Company. The proceeds from the bridge credit facility and $890,000,000 in
borrowings from the Credit Facility were used to consummate the DPS acquisition
(see Note 5), and repay $360,000,000 outstanding under the pre-existing
$440,000,000 credit facility. This facility was retired in June 1999, upon
ESI's completion of its equity offering (see Note 5).
On June 16, 1999, ESI completed the offering of $250,000,000 in Senior Notes
which require interest to be paid semi-annually on June 15 and December 15. The
Senior Notes also provide ESI an opportunity to call the debt at specified
rates beginning in June 2004. The net proceeds from the Senior Notes offering,
along with a portion of the net proceeds from the equity offering and
$23,901,000 of ESI's own cash were used to repay $414,770,000 of the Term B
loans. In July 1999, ESI paid off the remaining Term B principal balance of
$50,230,000. As a result of the refinancing of the $440,000,000 credit facility
and the repayment of the Term B loans, ESI recognized a $7,150,000, net of tax,
extraordinary loss from the write-off of deferred financing fees. The Senior
Notes are unconditionally and joint and severally guaranteed by ESI's
wholly-owned domestic subsidiaries other than PPS, Great Plains Reinsurance
Company, ValueRx of Michigan, Inc., Diversified NY IPA, Inc., and Diversified
Pharmaceutical Services, Inc. (Puerto Rico).
The Series C 9% Fixed Rate Secured Five Year Notes matured on August 16, 1999.
All outstanding principal and interest was paid from the proceeds on the
December 17, 1998 sale of the Series C alarm monitoring contracts. All of
SAMCO's security alarm monitoring contracts were sold in 1998 resulting in a
pre-tax gain of $16,600,000.
On November 1, 1993, SFD Holding entered into a loan agreement with New York
Life. The agreement allowed SFD Holding to borrow money pursuant to one or more
master notes (individually, a "Master Note," collectively, "Master Notes"),
each of which would 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 of twelve 30-day months) of 225 basis points above the one LIBOR published
in the Wall Street Journal on the 15th day of the preceding 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 provided 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. On April 30, 1999, SFD Holding paid off the remaining
principal balance of the Master Note to New York Life. At December 31, 1998 the
amount outstanding under the Master Note was $24,704,000 and the accrued
interest totaled $160,000. During 1999, 1998
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<PAGE> 262
and 1997 SFD Holding made interest payments totaling $532,000, $2,183,000 and
$2,396,000, respectively, to New York Life pursuant to the Master Notes.
OTHER:
During 1999, ESI entered into an interest rate lock with Bankers' Trust Company
related to the offering of $250,000,000 Senior Notes. Upon issuance of the
Senior Notes, ESI received $2,135,000, which is being amortized over the term
of the Senior Notes. During 1999, interest expense was reduced by $116,000.
On April 3, 1998, to manage ESI's interest rate risk, ESI entered into an
interest rate swap agreement ("swap") with The First National Bank of Chicago,
a subsidiary of Bank One Corporation. At December 31, 1999 and 1998, the swap
had a notional principal amount of $306,000,000 and $360,000,000, respectively.
Under the terms of the swap, ESI agreed to receive a floating rate of interest
on the amount of the term loan facility based on a three-month LIBOR rate in
exchange for payment of a fixed rate of interest of 5.88% per annum. The
notional principal amount of the swap began amortizing at $27,000,000 in April
1999, increasing to $36,000,000 in April 2000, to $45,000,000 in April 2001 and
to $48,000,000 in April 2002. As a result, ESI has, in effect, converted
$306,000,000 of its variable rate debt under the Credit Facility to fixed rate
debt at 5.88% per annum for the first four years of the Credit Facility, plus
the interest rate spread of 2.0%.
On June 17, 1999, ESI entered into an additional interest rate swap agreement
with Bankers Trust Company. The swap will not become effective until April 2000
and carried no notional principal amount as of December 31, 1999. Under the
terms of the agreement, ESI agreed to receive a floating rate of interest on
the notional principal amount based on a three-month LIBOR rate in exchange for
payment of a fixed rate of interest of 6.25% per annum. Beginning in April
2000, the notional principal amount will be $15,000,000 and will increase
semi-annually up to an approximate $137,000,000 in October 2002. For the
remainder of the agreement's term, the notional principal amount will amortize
until the agreement termination in April 2005. When the swap becomes effective,
ESI will, in effect, convert the notional principal amount of variable rate
debt under the Credit Facility to fixed rate debt at 6.25% per annum plus the
interest rate spread.
Along with New York Life, Capital Corporation is party to credit agreement with
a consortium of banks. This agreement totals $1,000,000,000 and consists of
$300,000,000, 364-day revolving credit facility ("Facility A") expiring on
August 2, 2000 and a $700,000,000, 5-year revolving credit facility ("Facility
B") expiring August 5, 2003. Annual facility fees for Facility A are .05% and
.04% at December 31, 1999 and 1998, respectively. Annual facility fees for
Facility B are .06% at both December 31, 1999 and 1998. For Facility A and B,
borrowing rates are capped at spreads of .16% and .14% over LIBOR,
respectively. In addition, the credit agreement contains various covenants
pertaining to allowable activities of Capital Corporation. Neither Capital
Corporation nor New York Life has utilized the credit facility to date. The
allocated cost incurred related to the facilities was $210,000 and $146,000 for
1999 and 1998, respectively.
In January 1995, the Company entered into a credit agreement, expiring January
1, 2000, with New York Life whereby the Company 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 the Company or New York Life notifies the other to
terminate the agreement. No loans were made during 1999. At December 31, 1999
and 1998 there was no outstanding principal under this agreement. Interest
expense amounted to $8,000, and $1,847,000 for 1998 and 1997, respectively.
There was no interest expense for 1999.
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NOTE 10 - REINSURANCE
International Inc. through its subsidiaries enters into reinsurance agreements
in the normal course of its insurance business. Reinsurance on certain
individual lives is ceded to reduce the risks on any one life. International
Inc. through its subsidiaries remains liable for reinsurance ceded, if the
reinsurer fails to meet its obligations. Premiums ceded for the years ended
December 31, 1999, 1998 and 1997, in connection with these reinsurance
agreements, were $5,177,000, $30,307,000, and 29,434,000 respectively.
Commissions earned for the years ended December 31, 1999, 1998, and 1997, in
connection with these reinsurance agreements, were $926,000, $12,248,000, and
$12,348,000 respectively. Reserve credits taken for reinsurance at December 31,
1999, 1998, and 1997 were $1,425,000, $974,000, and $8,434,000, respectively.
International Inc. through its subsidiaries also assumed life insurance from
third parties. Premiums assumed for the year ended December 31, 1998, in
connection with this reinsurance agreement, were $25,525,000. Commissions
incurred for the year ended December 31, 1998 in connection with this
reinsurance agreement were $11,327,000.
NOTE 11 - CORPORATE RESTRUCTURING
During the second quarter of 1999, ESI recorded a pre-tax restructuring charge
of $9,400,000 associated with the consolidation of its Plymouth, Minnesota
facility into its Bloomington, Minnesota facility. In December 1999, the
associated accrual was reduced by $2,301,000, primarily as a result of
subleasing a portion of the unoccupied space. The consolidation plan includes
the relocation of all employees at the Plymouth facility to the Bloomington
facility that began in August 1999 and will end in the third quarter of 2000.
Included in the restructuring charge are anticipated cash expenditures of
approximately $4,823,000 for lease termination fees and rent on unoccupied
space (which payments will continue through April 2001, when the lease expires)
and anticipated non-cash charges of approximately $2,276,000 for the write-down
of leasehold improvements and furniture and fixtures. The restructuring charge
does not include any costs associated with the physical relocation of the
employees.
During December 1999, ESI recorded a pre-tax restructuring charge of $2,633,000
associated with the outsourcing of its computer operations to EDS. The
principal actions of the plan included cash expenditures of approximately
$2,148,000 for the transition of 51 employees to the outsourcer and the
elimination of contractual obligations of ValueRx which had no future economic
benefit to ESI, and non-cash charges of approximately $485,000 due to the
reduction in the carrying value of certain capitalized software to its net
realizable value. Completion of this plan will occur during the first quarter
of 2000 when all cash payments will be made.
Also in December 1999, ESI recorded a pre-tax restructuring charge of $969,000
associated with restructuring ESI's PPS majority-owned subsidiary and the
purchase of the remaining PPS common stock from management. The charge consists
of cash expenditures of $559,000 relating to stock compensation expense and
$410,000 of severance payments to 9 employees (of which $133,000 was paid
during December 1999). This plan was completed in January 2000.
During the second quarter of 1998, ESI recorded a pre-tax restructuring charge
of $1,651,000 associated with closing the non-PBM service operations of its
wholly-owned subsidiary, PhyNet, Inc., and transferring certain functions of
ESI's Vision Corporation to another vision care provider. The restructuring
plan consisted of $416,000 of cash charges associated with the severance of 61
employees and non-cash charges of $1,235,000 relating to the write-down of
long-lived assets no longer providing benefit. ESI completed the remainder of
the restructuring actions during the third quarter of 1999.
All of the restructuring charges which include tangible assets to be disposed
of are written down to their net realizable value, less cost of disposal. ESI
expects recovery to approximate its cost of disposal.
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<PAGE> 264
Considerable management judgment is necessary to estimate fair value;
accordingly, actual results could vary from such estimates.
NOTE 12 - RELATED PARTY TRANSACTIONS
NEW YORK LIFE
The Company and several of its subsidiaries are party to a service agreement
with New York Life, whereby New York Life provides services to the Company and
such subsidiaries, including office space, legal, accounting, administrative,
personnel and other services for which the Company and its subsidiaries are
billed. The Company 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 the Company and its subsidiaries. Total
amounts billed under this agreement for 1999, 1998 and 1997 are $134,060,000,
$135,763,000 and $108,865,000, respectively.
The liabilities for post-retirement benefits other than pensions are held by
New York Life. The Company is allocated additional charges that are included in
the amounts billed above during 1999, 1998 and 1997, for its share of the net
periodic post-retirement benefits expense and post-employment benefits expense.
At December 31, 1999 and 1998, the Company owed New York Life $14,380,000 and
$14,369,000, respectively, for post-retirement benefits. At December 31, 1999
and 1998, the Company owed New York Life $1,491,000 and $5,651,000,
respectively, for post-employment benefits.
NYLACOR has an agreement with New York Life whereby all the expenses incurred
by New York Life related to the administration of the long term care product
are paid by NYLACOR and reimbursed by New York Life. These expenses and the
associated reimbursements for the years ended December 31, 1999, 1998 and 1997,
totaled $8,074,000, $3,142,000 and $1,860,000, respectively. At December 31,
1999 and 1998, $653,000 and $369,000, respectively, were due from New York Life
under this agreement.
The Company, through various subsidiaries, provides investment management
services to New York Life's general and separate accounts. Investment
management fees earned from these services for the years ended December 31,
1999, 1998, and 1997 totaled $2,406,000, $4,382,000, and $8,842,000,
respectively. At December 31, 1999 and 1998, there were no amounts due from New
York Life under these agreements.
Eagle has an agreement with New York Life whereby Eagle provides financial
planning, training and materials to New York Life, its employees and agents.
For performance of these services, Eagle receives a consulting fee equal to all
costs and expenses (except commissions, depreciation and federal taxes) paid or
incurred by Eagle in performing such services, plus 5%. Consulting fees earned
for the years ended December 31, 1999, 1998, and 1997 totaled $2,358,000,
$3,191,000, and $1,782,000, respectively. At December 31, 1999 and 1998,
$32,000 and $184,000, respectively, were due from New York Life under this
agreement.
Effective January 1, 1999, Benefit Services entered into a new agreement with
New York Life. Under this agreement, Benefit Services receives a fee on assets
invested in New York Life sponsored investment products by employee benefit
plans administered by Benefit Services. These fees amounted to $2,019,000 for
1999, all of which was due from New York Life at December 31, 1999. Prior to
this agreement, New York Life provided for the payment of a $14 subsidy to
Benefit Services per year, per eligible participant in an employee benefit plan
administered by Benefit Services, which had selected one or more of New York
Life's mutual funds as part of its investment portfolio. For 1998 and 1997,
Benefit Services recognized revenue of $2,210,000 and $1,430,000, respectively.
At December 31, 1998, $587,000 relating to the subsidy was due from New York
Life.
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<PAGE> 265
On October 1, 1997, (amended August 5, 1998) Capital Corporation entered into a
credit agreement with New York Life, whereby Capital Corporation agreed to make
loans to New York Life in an aggregate principal amount at any time outstanding
of up to, but not exceeding $1,000,000,000. At December 31, 1999 and 1998,
loans to New York Life were $75,370,000 and $867,077,000, respectively. During
1999, 1998 and 1997, New York Life made interest payments totaling $41,299,000,
$28,335,000, and $1,443,000 respectively. Interest receivable from New York
Life at December 31, 1999 and 1998 totaled $483,000 and $3,697,000,
respectively. This agreement and any loans made shall be automatically extended
and renewed for additional one-year periods, unless either Capital Corporation
or New York Life notifies the other to terminate the agreement. Additionally,
under a separate agreement, New York Life retains Capital Corporation as an
independent contractor to avail itself of Capital Corporation's expertise in
connection with the issuance of commercial paper. As compensation for such
services, New York Life has entered into an expense sharing agreement with
Capital Corporation, whereby Capital Corporation charges to New York Life the
costs and expenses paid or incurred by the Company. During 1999, 1998, and
1997, the total amounts under this agreement were $750,000, $626,000 and
$108,000, respectively.
Under separate agreements, New York Life retains NYLTEMPS and NYLINK as
independent contractors to avail itself of each company's expertise in the
areas of temporary employee services and enhancing agent relations,
respectively. As compensation for such services, New York Life is charged for
the costs and expenses paid or incurred by NYLTEMPS and NYLINK. During 1999,
1998, and 1997, the total amounts earned under these agreements were
$6,861,000, $9,541,000 and $9,216,000, respectively.
On July 15, 1998, the Company entered into a loan agreement with New York Life,
whereby the net proceeds from the sale of NYLCare would be retained by New York
Life until the Company declared a return of capital or paid a dividend. During
1998, the Company received interest income in connection with this loan of
$13,387,000 from New York Life. On November 30, 1998, the Company returned
capital of $276,238,000 and declared a dividend (payable on January 4, 1999) of
$373,924,000. At December 31, 1998, the amount due from New York Life as a
result of the NYLCare sale was $447,356,000. On January 4, 1999, the
outstanding amount due from New York Life was received and the Company used the
proceeds to pay total dividends of $447,356,000, including the dividend payable
at December 31, 1998 and an additional dividend of $73,432,000 related to the
final negotiated sales proceeds.
NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION ("NYLIAC")/
MAINSTAY VP SERIES FUND, INC. ("VP FUNDS")
Under an agreement with NYLIAC, a wholly owned subsidiary of New York Life,
NYLIFE Securities directs and supervises NYLIAC's sale of variable annuity
contracts and variable life insurance policies through separate accounts
maintained by NYLIAC. NYLIFE Securities' expenses incurred in connection with
the offering of these products are billed to New York Life. NYLIFE Securities
earned commission revenue under this agreement of approximately $146,529,000,
$117,446,000 and $85,690,000 during 1999, 1998 and 1997, respectively. Related
expenses reimbursed by New York Life totaled $2,099,000, $1,716,000 and
$1,343,000 during 1999, 1998 and 1997, respectively. At December 31, 1999 and
1998, $23,000 and $782,376, respectively, was due from New York Life.
MainStay Management receives administrative fees from NYLIAC for services
provided to the MainStay VP Series Fund, Inc. which is an investment option for
certain separate accounts offered by NYLIAC. During 1999, 1998, 1997,
respectively, fees of $6,495,000, $4,531,000 and $0 were earned. At December
31, 1999 and 1998, $635,000 and $447,000, respectively, were due from NYLIAC.
The Company, through various subsidiaries, provides investment management
services to several of the VP Funds. Investment management fees earned from
these services for the years ended December 31, 1999, 1998, and 1997 totaled
$16,149,000, $9,595,000, and $6,331,000, respectively. At December 31, 1999 and
1998, $1,670,000 and $949,000, respectively, were due from the VP Funds.
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MAINSTAY MUTUAL FUNDS ("FUNDS")
As Distributor of the Funds, NYLIFE Distributors has entered into various
agreements under which certain Funds have adopted Plans of Distribution ("the
Plans") pursuant to Rule 12b-1 under the Investment Company Act of 1940.
Although the Plans are required to be approved annually by Trustees of the
Funds, the management of the Company believes that such annual approval will
continue indefinitely. NYLIFE Distributors earns distribution, service, and
redemption fees related to the affiliated Funds. Distribution fees are
calculated at an annualized rate of .75% of the Funds' average daily net assets
under each of the Plans, except for the Tax Free Bond, California Tax Free, and
New York Tax Free funds for which the fee rate is .25%. Service fees are
calculated at an annualized rate of 0.25% of the average daily net assets of
certain Funds, as compensation for services rendered to shareholders of the
Funds and for the maintenance of shareholder accounts. Redemption fees are
received for certain redemptions of Fund shares for which no initial sales
charge was received, at rates which decline from 5.0% to 0% of the net asset
value of shares redeemed over a six year period. In addition, NYLIFE
Distributors receives an initial sales charge on sales of certain Fund shares
subject to rates which decline from 5.5% of the offering price to 0% depending
on the size of the investment. At December 31, 1999 and 1998 receivables from
the Funds approximated $12,080,000 and $10,486,000, respectively. For 1999,
1998 and 1997, NYLIFE Distributors earned fees and commissions on the Funds as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Distribution Fees $81,471 $75,376 $49,248
Service Fees $33,890 $30,091 $25,240
Redemption Fees $15,261 $12,713 $ 9,703
Commissions $16,711 $12,368 $ 9,631
</TABLE>
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-advisors
(which includes affiliates MacKay Shields, MSA, 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 that ranges between .50% and 1.00% of the average daily net assets of the
Funds. As the Accounting Service Agent, MainStay Management receives a separate
fee that generally is less than .05% of average daily net assets of certain
Funds on an annual basis. At December 31, 1999 and 1998 receivables from the
Funds approximated $10,109,000 and $8,618,000, respectively. For 1999, 1998 and
1997, MainStay Management earned fees and commissions on the Funds as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Management Fees $ 108,832 $ 96,016 $ 14,109
Service Fees $ 1,870 $ 1,593 $ 249
</TABLE>
MSSI is the transfer agent and shareholder servicing agent for Funds. MSSI
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 MSSI an annual
maintenance fee for each shareholder account. Transfer agent fees earned by the
Company amounted to $27,082,958, $23,934,000, and $9,935,000 during 1999, 1998
and 1997, respectively. At December 31, 1999 and 1998, transfer agent fees
receivable amounted to $2,361,000 and $2,083,000.
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NOTE 13 - FOREIGN OPERATIONS
The Company's subsidiaries conduct insurance and investment management
operations outside the United States and Canada. The assets, liabilities, and
net (loss) income of these foreign operations at December 31, 1999 and 1998 and
for the years then ended are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Consolidated Subsidiaries:
Assets $376,041 $200,370
Liabilities 296,919 221,977
Revenue 125,959 10,523
Net Loss (18,973) (42,281)
Non-Consolidated Subsidiaries:
Assets $806,532 $511,133
Liabilities 674,727 388,991
Revenue 275,272 106,168
Net Income 36,253 49,222
</TABLE>
Dividend income earned by NYLUK on its investment in LAHC was $5,136,000 for
the year ended December 31, 1997. There were no dividends for the years ended
December 31, 1999 and 1998.
As part of NYLUK's sale of its common stock of Windsor Life Assurance Company
to LAHC in 1994, NYLUK became party to a Warranty and Indemnity Deed
(guaranteed by the Company) which indemnified the outside investors against
liabilities, costs and expenses with regard to specified matters, including the
sale of personal pension plans between 1988 and 1994. The Financial Service
Authority and the Personal Investment Authority issued a joint policy statement
on the next phase of the pension sales practices review and redress program.
The extension of this review and redress program will lead to additional claims
against NYLUK for the expenses incurred in connection with the extension of
this program. NYLUK had established a $122,734,000 reserve for the maximum
liability under the Warranty and Indemnity Deed. As of December 31, 1999, the
reserve reported on the statement of financial position in other liabilities
net of payment of claims and foreign currency translation is $87,879,000.
NOTE 14 - INCOME TAXES
Through the date of conversion to limited liability company status, NYLIFE LLC
and its 80% or more owned domestic subsidiaries were members of an affiliated
group which joined in the filing of a consolidated federal income tax return
with New York Life. Following their conversion, the income or loss of NYLIFE
LLC and certain other subsidiaries which were also converted to limited
liability companies, are included in NYLIC's federal, state, and local taxable
income. Subsidiaries that were not converted continue to be members of the same
affiliated group and continue to join in filing a consolidated tax return with
New York Life.
The tax allocation agreement both before and after the limited liability
company conversions provide that each company will be allocated its share of
tax expense or benefit determined generally on a separate company basis, but
may, where applicable, allocate the tax benefits of operating or capital losses
utilizable in the respective returns. Estimated payments for taxes are made
between the related companies both before and after the conversion. State,
local, and foreign tax returns generally are filed separately. The income tax
(payable) and receivable included ($2,264,000) and $3,054,000 due to and from
New York Life as of December 31, 1999 and 1998, respectively, pursuant to the
tax allocation agreement.
The components of income tax expense (benefit) for each year are as follows (in
thousands):
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<PAGE> 268
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ --------------
<S> <C> <C> <C>
Current
Federal $53,045 $25,722 $ 7,272
State 13,361 11,723 8,976
Foreign 1,126 534 470
------------- ------------ --------------
Total Current 67,532 37,979 16,718
------------- ------------ --------------
Deferred
Federal 112,663 (5,152) 12,241
State 9,278 3,193 406
------------- ------------ --------------
Total Deferred 121,941 (1,959) 12,647
------------- ------------ --------------
Total $189,473 $36,020 $29,365
============= ============ ==============
</TABLE>
Total income tax expense (benefit) is different from the amount computed using
the statutory federal tax rate of 35% in 1999, 1998 and 1997 for the following
reasons (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------ ---------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $150,562 $ (254) $16,272
Tax exempt investment income and capital gains (127) (157) (174)
State and local taxes, net of federal income tax benefit 14,715 9,696 6,098
Amortization of goodwill 7,998 20,971 3,300
Net foreign taxes 1,126 534 470
Equity in non-consolidated affiliates (317) (23) 178
Non-deductible losses with respect to foreign operations 2,958 12,498 7,791
Undistributed earnings of subsidiaries 5,788 2,030 1,596
Provision to return reconciliation 4,662 (48) (3,587)
Other 2,108 (9,227) (2,579)
-------------- ------------ ---------------
Total income tax expense (benefit) $189,473 $36,020 $29,365
============== ============ ===============
</TABLE>
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The net deferred tax liability at December 31, 1999 and 1998, respectively, is
attributable to the following temporary differences (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Deferred tax asset:
Non-deductible reserves $ 7,650 $ 10,156
Deferred compensation 5,750 4,978
Investments in affiliates and partnerships 4,932 4,660
Deferred rent 177 283
Depreciation 8,409 7,708
Unrealized investment losses 6,082 7
Employee benefits 6,646 8,098
Accrued expenses - ESI 30,188 33,400
Other 545 4,050
-------------- ------------
Gross deferred tax asset 70,379 73,340
Deferred tax liability:
Deferred distribution costs (63,009) (79,709)
Unrealized appreciation of subsidiary (46,734) (10,008)
ESI-Gain on sale of assets (62,987) -
Depreciation (8,384) (178)
Undistributed earnings of ESI (18,469) (12,322)
Unrealized investment gains (424) -
Other (1,100) (1,223)
-------------- ------------
Gross deferred tax liability (201,107) (103,440)
Valuation allowance - (317)
-------------- ------------
Net deferred tax liability $(130,728) $(30,417)
============== ============
</TABLE>
In 1998 the valuation allowance principally related to net operating losses of
particular subsidiaries, the use of which was subject to the separate return
limitation year (SRLY) rules. As a result of the liquidation of these
subsidiaries, management has concluded that the allowance is no longer needed.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LEASES
The subsidiaries lease office space, distribution facilities, and certain
office equipment under various agreements with various expiration dates. The
leases contain provisions for payment of real estate taxes, building
maintenance, electricity and rent escalations.
Future minimum lease payments under non-cancelable operating leases with
original or remaining lease terms in excess of one year at December 31, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
<S> <C>
2000 $ 18,353
2001 17,192
2002 15,554
2003 15,169
2004 15,158
2005 & thereafter 65,427
-------------
Total 146,853
-------------
Less future sublease rental receipts 6,738
-------------
Total $ 140,115
=============
</TABLE>
221
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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,
1999 1998
------------ ------------
<S> <C> <C>
Assets recorded under capital leases $ 382 $ 513
Accumulated depreciation (284) (328)
------------ ------------
Total $ 98 $ 185
============ ============
</TABLE>
OTHER
During 1990, the Company 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, the Company 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.
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.
The Company along with NYLIFE Securities and NYLIFE Distributors has a support
agreement whereby the Company has agreed to absorb any liability which may be
allocated to NYLIFE Securities and NYLIFE Distributors as a result of a lawsuit
alleging misrepresentations and misappropriation of funds by a New York Life
agent. At December 31, 1999, plaintiffs were seeking over $122,500,000 in
compensatory and punitive damages. At this time, neither the probability of
loss nor the amount of the plaintiffs recovery, if any, can be estimated.
NYLIFE Securities has a support agreement whereby the Company has agreed to
absorb any liability which may be allocated to NYLIFE Securities as a result of
an NASD arbitration proceeding brought by a former NYLIFE Securities registered
representative and alleging defamation and other claims. The former registered
representative is seeking $20,000,000 in compensatory and punitive damages in
this proceeding. At this time, neither the probability of loss nor the amount
of the registered representative's 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, 1999 and 1998, the net worth
of these subsidiaries exceeded the related requirements.
In the ordinary course of business (which includes the business conducted by
DPS and ValueRx prior to ESI acquiring them on April 1, 1999 and April 1, 1998,
respectfully), various legal proceedings, investigations or claims pending have
arisen against ESI and its subsidiaries (ValueRx and DPS continue to be a party
to proceedings that arose prior to their April 1, 1998 and April 1, 1999
respective acquisition dates). The effect of these actions on future financial
results is not subject to reasonable estimation because considerable
uncertainty exists about the outcomes. The ultimate liabilities resulting from
any
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<PAGE> 271
such lawsuits, investigations or claims now pending are not expected to
materially affect ESI's consolidated financial position, results of operations,
or cash flows.
For the year ended December 31, 1999, approximately 78.7% of ESI's
pharmaceutical purchases were through one wholesaler. ESI believes that other
alternative sources are readily available and that no other concentration risks
exist at December 31, 1999.
NOTE 16 - EMPLOYEE BENEFIT PLANS
LONG TERM PERFORMANCE PLAN
MacKay Shields adopted Long-Term Performance Plans ("the Plans") in 1988 and
1995. Awards under the Plans are based upon the attainment of specific goals as
set forth in each Plan. The plans are long-term in nature and require
participants to enter into multi-year employment contracts. Payments under the
1988 Plan commenced in 1996 and extend through March 2000. In accordance with
the provisions of the 1988 Plan, participants are also entitled to income on
the unpaid amount of their award. In 1999, 1998 and 1997, respectively, MacKay
Shields recorded dividend and interest income in the amount of $91,000,
$332,000 and $1,018,000 on the cash and investments segregated to fund the Plan
obligation. The accrual of income due to participants on the unpaid liability
is included in the consolidated statement of operations and other liabilities
on the consolidated statement of position. A portion of the amount payable may
be adjusted based upon the investment performance of certain registered
investment companies managed by MacKay Shields. Awards under the 1995 Plan are
based on performance during the 1995 to 1997 time period, and are payable
commencing in 1999 and extending through 2001. The amount payable to
participants in the year 2000 relating to these Plans is $3,465,000.
During 1989, International Inc. adopted a long-term performance plan, which
entitled key professionals to receive a performance award, if specified goals
were attained.
EMPLOYEE STOCK PURCHASE PLAN
In December 1998, ESI's Board of Directors approved an employee stock purchase
plan, effective March 1, 1999, that qualifies under Section 423 of the Internal
Revenue Code and permits all employees, excluding certain management level
employees, to purchase shares of ESI's Class A Common Stock. Participating
employees may elect to contribute up to 10% of their salary to purchase common
stock at the end of each six month participation period at a purchase price
equal to 85% of the fair market value of ESI's Class A common stock at the end
of the participation period. Class A Common Stock reserved for future employee
purchases under the plan was 240,000 shares at December 31, 1999.
DEFERRED COMPENSATION PLAN
In December, 1998, the Compensation Committee of ESI's Board of Directors
approved a non-qualified deferred compensation plan, effective January 1, 1999,
that provides benefits payable to eligible key employees at retirement,
termination or death. Benefit payments are funded by a combination of
contributions from participants and ESI. Participants become fully vested in
ESI contributions on the third anniversary of the end of the plan year for
which the contribution is credited to their account. For 1999, the annual ESI
contribution will be equal to 6% of each participant's total annual
compensation, with 25% being invested in ESI's Class A common stock and the
remaining being allocated to a variety of investment options. As a result of
the implementation, ESI accrued as compensation expense $224,000 in 1999 and
$797,000 in 1998 as a past service contribution which is equal to 8% of each
participant's total annual cash compensation for the period of the
participant's past service with ESI in a senior executive capacity. At December
31, 1999, 50,000 shares of Class A common stock have been reserved for future
plan contributions.
During 1998, NYLACOR enabled employees to participate in the NYLIC Executive
Officers' Deferred Compensation and Retirement Plan and Field Sales Employees'
Deferred Compensation and Retirement Plan (the "Deferred Compensation Plan").
The Deferred Compensation Plan enables eligible employees
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to defer receipt of an elected percentage of their annual compensation to a
later date. Annually, the Company matches 100% of eligible employee
contributions up to 3% of each participant's eligible compensation. A liability
equal to the market value of the participants' contributions plus Company
matching contributions is included in accrued expenses and other payables in
the accompanying balance sheet. The Deferred Compensation Plan liability at
December 31, 1999 and 1998 was $167,000 and $76,000, respectively. Deferred
Compensation Plan Company matching contributions were $2,000 for both years
ended December 31, 1999 and 1998, respectively.
OTHER
Certain subsidiaries sponsor defined contribution retirement, 401(k) and profit
sharing plans for employees. Contributions to these plans during 1999, 1998 and
1997, totaled $4,953,000, $2,680,000 and $2,094,000, respectively.
NOTE 17 - ACCOUNTING FOR STOCK-BASED COMPENSATION
NON EMPLOYEE AGREEMENTS
On December 31, 1995, ESI entered into a ten-year corporate alliance with
Premier Purchasing Partners, LP (American Healthcare Systems Purchasing
Partners, LP, 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 achievement of
certain joint purchasing goals. In accordance with the terms of the agreement,
ESI issued 454,546 shares of Class A Stock to Premier in May 1996, and may be
required to issue up to 4,500,000 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 using ESI's closing
price on December 31, 1995, the date the agreement was consummated, and are
being amortized over the then remaining term of the agreement. Amortization
expense amounted to $1,320,000, $1,164,000 and $1,164,000 in 1999, 1998 and
1997, respectively. 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 additional shares have been earned
by Premier through December 31, 1999.
Effective January 1, 1996, ESI executed a multi-year contract with The
Manufacturers Life Insurance Company ("Manulife"), to introduce pharmacy
benefit management services in Canada. Manulife's Group Benefits Division
continues to work with ESI Canada to provide these services. Under the terms of
the agreement, ESI is the exclusive third-party provider of pharmacy benefit
management services to Manulife's Canadian clients. ESI will also issue shares
of Class A Common Stock as an advance discount to Manulife based upon
achievement of certain volumes of Manulife pharmacy claims processed. No shares
will be issued until after the fourth year of the agreement based on volumes
reached in years two through four. ESI anticipates issuing no more than 474,000
shares to Manulife over a period up to the first six years of the agreement.
Except for certain exemptions from registration under the 1933 Act, any shares
issued to Manulife cannot be traded until they have been registered under the
1933 Act and any applicable state securities laws. In accordance with the terms
of the agreement, no stock has been issued since inception.
If Manulife has not exercised an early termination option at the end of the
sixth or tenth year of the agreement, ESI will issue at each of those times a
ten-year warrant as an advance discount to purchase up to approximately 237,000
additional shares of ESI's Class A Common Stock exercisable at 85% of the
market price at those times. The actual number of shares for which such warrant
is to be issued will be based on the volume of Manulife pharmacy claims
processed in year six and year ten, respectively.
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Pursuant to an agreement with Coventry Corporation, an operator of health
maintenance organizations located principally in Pennsylvania and Missouri, on
January 3, 1995, ESI issued 50,000 shares of Class A Common Stock as an advance
discount to Coventry in a private placement. These shares were valued at $13.69
per share, the split-adjusted per share market value of our Class A Common
Stock on November 22, 1994, which was the date the agreement was consummated
and the obligation of the parties became unconditional. No revision of the
consideration for the transaction occurred between November 22, 1994 and
January 3, 1995. The shares issued to Coventry were being amortized over a
six-year period. However, due to Coventry extending the agreement for only two
years, as discussed below, instead of three years, the estimated useful life of
the shares issued has been reduced to five years and ended in 1999.
Amortization expense was $171,000, $171,000 and $114,000 for each of the years
ended December 31, 1999, 1998 and 1997, respectively. Except for certain
exemptions from registration under the 1993 Act, these shares cannot be traded
until they have been registered under the 1933 Act and any applicable state
securities laws.
Effective January 1, 1998, Coventry renewed the agreement for a two-year term
through December 31, 1999. As part of the agreement, ESI issued warrants as an
advance discount to purchase an additional 50,000 shares of our Class A Common
Stock, exercisable at 90% of the market value at the time of renewal. During
1998, ESI expensed the advance discount, which represented 10% of the market
value.
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. For companies that choose to continue applying the
intrinsic value method SFAS 123 mandates certain pro-froma disclosures as if
the fair value method has been utilized. Note that due to the adoption of the
methodology prescribed by FAS 123, the pro forma results shown below only
reflect the impact of options granted in 1999, 1998 and 1997. Because future
options may be granted and vesting typically occurs over a five year period,
the pro forma impact shown for 1999, 1998 and 1997 is not necessarily
representative of the impact in future years.
<TABLE>
<CAPTION>
(in thousands, except per share data) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $150,218 $42,674 $33,429
Pro forma 142,753 38,585 32,034
Basic earnings per share
As reported $4.16 $1.29 $1.02
Pro forma 3.95 1.16 0.98
Diluted earnings per share
As reported $4.06 $1.27 $1.01
Pro forma 3.86 1.14 0.97
</TABLE>
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The fair value of options granted (which is amortized to expense over the
option vesting period in determining the pro forma impact), is estimated on the
date of grant using the Black-Scholes multiple option-pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life of option 2-7 years 2-7 years 2-7 years
Risk-free interest rate 4.6-6.3% 4.1-5.9% 5.7-6.6%
Expected volatility of stock 59% 44% 40%
Expected dividend yield None None None
</TABLE>
A summary of the status of ESI's three fixed stock option plans as of December
31, 1999, 1998 and 1997, and changes during the years ending on those dates is
presented below.
<TABLE>
<CAPTION>
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(share data in thousands) Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,780 $28.02 1,702 $17.21 1,677 $12.56
Granted 843 60.43 1,866 40.65 602 22.78
Exercised (196) 30.28 (133) 14.71 (529) 8.80
Forfeited/cancelled (141) 50.35 (655) 38.82 (48) 17.56
------------- ------------- --------------
Outstanding at end of year 3,286 35.24 2,780 28.02 1,702 17.21
============= ============= ==============
Options exercisable at year end 1,391 800 641
Weighted-average fair value of
Options granted during the year $ 32.40 $ 18.07 $ 9.91
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- ----------------------------------
Range of
Exercise Prices Number Weighted-Average Number
(share data in Outstanding at Remaining Weighted-Average Exercisable Weighted-Average
thousands) 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- -------------------- ------------------- ------------------- --------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$3.25 - 16.50 728 4.55 $11.74 643 $11.34
17.00 - 28.41 716 7.21 22.60 341 21.20
28.50 - 42.39 683 8.27 34.72 227 33.04
51.63 - 55.13 875 9.53 53.00 110 55.13
65.25 - 88.56 284 9.34 73.97 70 65.69
------------------- ----------------
$3.25 -88.56 3,286 7.64 35.24 1,391 23.50
</TABLE>
NOTE 18 - SUBSEQUENT EVENTS
On January 1, 2000, New York Life reorganized its asset management operations
to be under a separate holding company known as New York Life Asset Management
LLC ("NYLAM"). As part of the reorganization, the Company distributed all of
the issued and outstanding shares of stock or limited liability company
interests of MacKay Shields, MSSI, NYLIFE Distributors, Benefit Services,
MainStay Management, Monitor Capital and MSA to New York Life. The assets,
equity and net income related to these asset management subsidiaries for the
year ended December 31, 1999 is as follows (in thousands):
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<TABLE>
<CAPTION>
1999
------------------
<S> <C>
Assets $464,743
Equity 242,092
Net Income 20,492
</TABLE>
On January 1, 2000, the Company distributed all of the issued and outstanding
shares of Internatinal, Inc. to New York Life. The assets, equity and net
income related to International Inc. for the year ended December 31, 1999 is as
follows (in thousands):
<TABLE>
<CAPTION>
1999
------------------
<S> <C>
Assets $459,132
Equity 247,519
Net Income (36,886)
</TABLE>
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