<PAGE> 1
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON October 18,2000
FILE NO. 33-2610
FILE NO. 811-4550
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 54 [X]
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 56 [X]
THE MAINSTAY FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
51 MADISON AVENUE, NEW YORK, NEW YORK 10010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER: (212) 576-7215
Copy To:
ROBERT ANSELMI, ESQ. MITCHELL B. BIRNER, ESQ.
NEW YORK LIFE INVESTMENT DECHERT
MANAGEMENT LLC 30 ROCKEFELLER PLAZA
51 MADISON AVENUE NEW YORK, NY 10112-2200
NEW YORK, NEW YORK 10010
(NAME AND ADDRESS OF AGENT FOR SERVICE)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[ ] Immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] On May 1, 2000, pursuant to paragraph (b)(1)(v) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on [DATE], pursuant to paragraph (a)(1) of Rule 485
[X] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on [DATE], pursuant to paragraph (a)(2) of Rule 485
<PAGE> 2
THE MAINSTAY(R) FUNDS
PROSPECTUS
JANUARY 2, 2001
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund
[MAINSTAY INVESTMENTS LOGO] Neither the Securities and Exchange
Commission nor any state securities
commission has approved or disapproved
of these securities or passed upon the
accuracy or adequacy of this
prospectus. Any representation to the
contrary is a criminal offense.
<PAGE> 3
WHAT'S INSIDE?
3 Investment Objectives, Principal Investment
Strategies and Principal Risks: An Overview
5 Mid Cap Growth Fund
8 Select 20 Equity Fund
12 More About Principal Investment Strategies and
Principal Risks
15 Shareholder Guide
33 Know With Whom You're Investing
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INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND PRINCIPAL RISKS:
AN OVERVIEW
This Prospectus discusses the two mutual funds (the "Funds") that invest for
varying combinations of income and growth. The Funds offered by this Prospectus
are part of the MainStay Funds Inc., a series mutual fund with 25 different
funds (the "MainStay Funds"). The 23 funds not discussed in this Prospectus are
offered by a separate prospectus, which is available to you upon request. Each
Fund is managed by MainStay Management LLC and has a Subadvisor that is
responsible for the day-to-day portfolio management of the Fund. Each Fund
pursues somewhat different strategies to achieve its objective. Under normal
market conditions, the Mid Cap Growth Fund and the Select 20 Equity Fund invest
primarily in equity securities. In times of unusual or adverse conditions each
Fund may invest for temporary or defensive purposes outside the scope of its
principal investment focus.
EQUITY SECURITIES
Equity securities are issued to investors by corporations to raise capital.
Investors buy equity securities to seek to make money through dividend payments
and/or selling them for more than they paid. When you buy equity securities of a
corporation you become a part owner of the issuing corporation. Equity
securities may be bought on stock exchanges, such as the New York Stock Exchange
or the American Stock Exchange, or in the over-the-counter market. There are
many different types of equity securities, including:
- common and preferred stocks
- convertible securities and
- American Depositary Receipts.
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NOT INSURED -- YOU COULD LOSE MONEY
- Before considering an investment in a Fund, you should understand that
you could lose money.
- An investment in a Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
NAV WILL FLUCTUATE
The value of Fund shares, also known as the net asset value ("NAV"), fluctuates
based on the value of the Fund's holdings. Investment in common stocks and other
equity securities is particularly subject to the risks of changing economic,
stock market, industry and company conditions, currency exchange rates and the
risks inherent in management's ability to anticipate such changes that can
adversely affect the value of a Fund's holdings. In the case of debt securities,
security values usually change when interest rates change. Generally, when
interest rates go up the value of a debt security goes down; and when interest
rates go down, the value of a debt security goes up. Other factors that can
affect debt security values and Fund share prices are changes in the average
maturity of a Fund's investments and how the market views the creditworthiness
of an issuer, as well as the risks described above for equity securities.
MORE INFORMATION
The next section of this Prospectus gives you more detailed information about
the investment objectives, policies, strategies, risks, performance and expenses
of each of the Funds. Please review it carefully.
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MAINSTAY MID CAP GROWTH FUND
The Mid Cap Growth Fund's investment objective is to seek long-term growth of
capital.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its total assets in equity and
equity-related securities of companies with market capitalizations similar to
the market capitalization of those companies in the Standard & Poor's MidCap 400
Index at the time of the Fund's investment. The Fund will seek to participate
primarily in the expanding markets of technology, healthcare, communications and
other dynamic high-growth industries. Equity securities issued by companies in
these markets are frequently considered "growth stocks." MacKay Shields LLC, the
Fund's Subadvisor, will select investments based on the economic environment and
the attractiveness of particular markets, as well as the financial condition and
competitiveness of individual companies.
INVESTMENT PROCESS
The Fund maintains a flexible approach toward investing in various types of
companies as well as types of securities, including common stocks, preferred
stocks, warrants and other equity securities, depending upon the economic
environment and the relative attractiveness of the various securities markets.
As a result, the Fund may invest in any other securities that, in the judgment
of the Subadvisor, are ready for a rise in price, or are expected to undergo an
acceleration in growth of earnings. The latter could occur because of special
factors, such as:
- new management
- new products
- changes in consumer demand, and
- changes in the economy.
PRINCIPAL RISKS
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risk inherent in management's ability to anticipate such changes that
can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
securities in the Fund, therefore, may carry above-average risk compared to
common stock indexes such as the Dow Jones Industrial Average and the S&P 500
Composite Stock Price Index ("S&P 500 Index"). The principal risk of growth
stocks is that investors expect growth companies to increase their earnings at a
certain rate that is generally higher than the rate expected for non-growth
companies. If these expectations are not met, the market price of the stock may
decline significantly, even if earnings show an absolute increase. Growth
company stocks also typically
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lack the dividend yield that can cushion stock prices in market downturns. In
addition, the Fund normally invests in companies in highly competitive
industries. Competition and advances in technology make companies in these
industries highly volatile.
PAST PERFORMANCE
Since the Fund commenced operations on January 2, 2001, there are no performance
figures reflecting the Fund's performance.
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment)
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of 5.50% None None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of redemption None 5.00% 1.00%
proceeds)(1)
Exchange Fee * * *
Maximum Account Fee ** ** **
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee (2) 0.75% 0.75% 0.75%
Distribution and/or Service (12b-1) Fees (3) 0.25% 1.00% 1.00%
Other Expenses (4) 0.60% 0.60% 0.60%
Total Annual Fund Operating Expenses (2) 1.60% 2.35% 2.35%
</TABLE>
EXAMPLE
The "Example" is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and reflects what you
would pay if you redeemed all your shares or if you hold them. The Example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Your actual costs may be higher or lower
than those shown below. There is no sales charge (load) on reinvested dividends.
6
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
ASSUMING NO ASSUMING REDEMPTION ASSUMING NO ASSUMING REDEMPTION
REDEMPTION AT THE END OF EACH PERIOD REDEMPTION AT THE END OF EACH PERIOD
EXPENSES AFTER
<S> <C> <C> <C> <C> <C>
1 year $704 $238 $738 $238 $338
3 years $1,027 $733 $1,033 $733 $733
</TABLE>
* Except for systematic exchanges, exchanges processed via the transfer
agent's automated system, and certain accounts for which tracking data is not
available, after five exchanges in one calendar year, a $10 fee will be imposed
per exchange.
** An annual account fee of $12 (subject to a maximum of $36 per social
security/tax I.D. number) will be charged on accounts with balances below $500.
There are exceptions. See the Shareholder Guide.
(1) Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of purchase.
The amount of the contingent deferred sales charge applicable to Class B shares
will depend on the number of years since you purchased the shares being
redeemed. A contingent deferred sales charge of 1.00% will be imposed on
redemptions of Class C shares within one year of the date of purchase.
(2) MainStay Management has voluntarily agreed to reimburse the Fund's
expenses to the extent that annual operating expenses exceed 1.69% of average
daily net assets for Class A shares and 2.44% of average daily net assets for
Class B and C shares. This reimbursement may be discontinued at any time without
notice.
(3) Because the 12b-1 fee is an ongoing fee charged against the assets of the
Fund, long-term shareholders may indirectly pay an amount that is more than the
economic equivalent of paying other types of sales charges.
(4) "Other Expenses" are based on estimated amounts for the current fiscal
year.
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MAINSTAY SELECT 20 EQUITY FUND
The Select 20 Equity Fund's investment objective is to seek long-term growth of
capital.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its total assets in up to 20 equity
and equity-related securities that MacKay Shields LLC, the Fund's Subadvisor,
believes have the potential for strong capital appreciation. The Fund will
generally invest in twenty stocks representing the best ideas of the growth and
value teams of the Subadvisor. There will be no limit on how many of the 20
stocks will be growth stocks or value stocks and the weightings of each holding
will be reflective of the conviction of the Subadvisor.
INVESTMENT PROCESS
The Fund combines the security selection ideas of the growth equity and value
equity portfolio managers. The Fund maintains a flexible approach towards
investing in various types of companies, as well as types of securities,
including common stocks, preferred stocks, and other equity securities,
depending upon the economic environment and the relative attractiveness of the
various securities markets.
For the growth equity component, the Fund normally invests in securities of
companies with investment characteristics such as:
- participation in expanding product or service markets
- increasing unit sales volume
- increasing return on investment, and
- growth in revenues and earnings per share superior to that of the average
of common stocks comprising indexes such as the S&P 500 Index.
For the value equity component, the Subadvisor generally seeks out undervalued
equity securities. When assessing whether a stock is undervalued, the Subadvisor
considers many factors and will compare the market price to the company's
- cash flow generation capability
- "book" value
- growth rates and future earnings, and
- estimated value of the company's assets (liquidation value).
PRINCIPAL RISKS
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Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions
and the risks inherent in management's ability to anticipate such changes that
can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
securities in the Fund, therefore, may carry above average risk, compared to
common stock indexes such as the Dow Jones Industrial Average and the S&P 500
Index. The principal risk of growth stocks is that investors expect growth
companies to increase their earnings at a certain rate that is generally higher
than the rate expected for non-growth companies. If these expectations are not
met, the market price of the stock may decline significantly, even if earnings
show an absolute increase. Growth company stocks also typically lack the
dividend yield that can cushion stock prices in market downturns.
The principal risk of investing in value stocks is that they may never reach
what the Subadvisor believes is their full value or that they may even go down
in value. In addition, different types of stocks tend to shift in and out of
favor depending on market and economic conditions.
The Fund is "non-diversified," which means that it may invest a greater
percentage of its assets than diversified funds in a particular issuer. This may
make it more susceptible than diversified funds to risks associated with an
individual issuer, and to single economic, political or regulatory occurrences.
In addition, there are risks associated with investing in a relatively smaller
number of securities.
PAST PERFORMANCE
Since the Fund commenced operations on January 2, 2001, there are no performance
figures reflecting the Fund's performance.
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
9
<PAGE> 11
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(fees paid directly from your investment)
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of 5.50% None None
offering price)
Maximum Deferred Sales Charge (Load) (as a percentage of redemption None 5.00% 1.00%
proceeds)(1)
Exchange Fee * * *
Maximum Account Fee ** ** **
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee(2) 0.70% 0.70% 0.70%
Distribution and/or Service (12b-1) Fees(3) 0.25% 1.00% 1.00%
Other Expenses (4) 0.68% 0.68% 0.68%
Total Annual Fund Operating Expenses(2) 1.63% 2.38% 2.38%
</TABLE>
EXAMPLE
The "Example" is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in the Fund for the time periods indicated and reflects what you
would pay if you redeemed all your shares or if you hold them. The Example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Your actual costs may be higher or lower
than those shown below. There is no sales charge (load) on reinvested dividends.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
ASSUMING NO ASSUMING REDEMPTION ASSUMING NO ASSUMING REDEMPTION
REDEMPTION AT THE END OF EACH PERIOD REDEMPTION AT THE END OF EACH PERIOD
EXPENSES AFTER
<S> <C> <C> <C> <C> <C>
1 year $707 $241 $741 $241 $341
3 years $1,036 $742 $1,042 $742 $742
</TABLE>
* Except for systematic exchanges, exchanges processed via the transfer
agent's automated system and certain accounts for which tracking data is not
available, after five exchanges in one calendar year, a $10 fee will be imposed
per exchange.
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<PAGE> 12
** An annual account fee of $12 (subject to a maximum of $36 per social
security/tax I.D. number) will be charged on accounts with balances below $500.
There are exceptions. See the Shareholder Guide.
(1) Generally, Class A shares of the Funds are not subject to a contingent
deferred sales charge upon redemption. A contingent deferred sales charge of
1.00% will be imposed on certain redemptions of Class A shares that were
purchased at net asset value, effected within one year of the date of purchase.
The amount of the contingent deferred sales charge applicable to Class B shares
will depend on the number of years since you purchased the shares being
redeemed. A contingent deferred sales charge of 1.00% will be imposed on
redemptions of Class C shares within one year of the date of purchase.
(2) MainStay Management has voluntarily agreed to reimburse the Fund's
expenses to the extent that annual operating expenses exceed 1.69% of average
daily net assets for Class A shares and 2.44% of average daily net assets for
Class B and C shares. This reimbursement may be discontinued at any time without
notice.
(3) Because the 12b-1 fee is an ongoing fee charged against the assets of the
Fund, long-term shareholders may indirectly pay an amount that is more than the
economic equivalent of paying other types of sales charges.
(4) "Other Expenses" are based on estimated amounts for the current fiscal
year.
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MORE ABOUT PRINCIPAL
INVESTMENT STRATEGIES
AND PRINCIPAL RISKS
Information about each Fund's principal investments, investment practices and
principal risks appears at the beginning of this Prospectus. The information
below describes in greater detail the Fund's principal investments, investment
practices and risks.
DERIVATIVE SECURITIES
The value of derivative securities is based on certain underlying equity or
fixed-income securities, interest rates, currencies or indices. Derivative
securities may be hard to sell and are very sensitive to changes in the
underlying security, interest rate, currency or index, and as a result can be
highly volatile. If a Subadvisor is wrong about its expectations of changes in
interest rates or market conditions, the use of derivatives could result in a
loss. The Fund could also lose money if the counterparty to the transaction does
not meet its obligations. In addition, the leverage associated with inverse
floaters, a type of derivative, may result in greater volatility in their market
value than other income-producing securities.
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RISK MANAGEMENT TECHNIQUES
Various techniques can be used to increase or decrease a Fund's exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as foreign currency forward contracts and options on foreign currencies) and
purchasing put or call options on securities and securities indexes.
These practices can be used in an attempt to adjust the risk and return
characteristics of a Fund's portfolio of investments. For example, to gain
exposure to a particular market, a Fund may be able to purchase a futures
contract with respect to that market. When a Fund uses such techniques in an
attempt to reduce risk it is known as "hedging". If a Fund's Subadvisor judges
market conditions incorrectly or employs a strategy that does not correlate well
with the Fund's investments, these techniques could result in a loss, regardless
of whether the intent was to reduce risk or increase return. These techniques
may increase the volatility of a Fund and may involve a small investment of cash
relative to the magnitude of the risk assumed. In addition, these techniques
could result in a loss if the counterparty to the transaction does not perform
as promised.
LENDING OF PORTFOLIO SECURITIES
Portfolio securities may be lent to brokers, dealers and financial institutions
to realize additional income under guidelines adopted by the Board of Trustees.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities, a Fund's Subadvisor will
consider all relevant facts and circumstances, including the creditworthiness of
the borrower.
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PORTFOLIO TURNOVER
Portfolio turnover measures the amount of trading a Fund does during the year.
The use of certain investment strategies may generate increased portfolio
turnover. Funds with high turnover rates (over 100%) often have higher
transaction costs (which are paid by the Fund) and may generate short-term
capital gains (on which you'll pay taxes, even if you don't sell any shares by
year-end).
TEMPORARY DEFENSIVE INVESTMENTS
In times of unusual or adverse conditions, for temporary defensive purposes,
each Fund may invest outside the scope of its principal investment focus. Under
such conditions, each Fund may invest without limit in money market and other
investments. During such times, a Fund may not invest in accordance with its
investment objective or investment strategies and, as a result, may not achieve
its investment objective.
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SHAREHOLDER GUIDE
The following pages are intended to help you understand the costs associated
with buying, holding and selling your MainStay investments.
BEFORE YOU INVEST:
DECIDING WHICH MAINSTAY CLASS OF SHARES TO BUY
MainStay Funds in this Prospectus are offered in three share classes: A, B and
C. These classes differ only in their sales, service and/or distribution
expenses and any other specific expenses the Board of Trustees may approve. When
you invest in Class A shares you generally pay an initial sales charge, but
Class A shares have lower ongoing service and/or distribution expenses than
either Class B or Class C shares. (These service and/or distribution expenses
are also known as Rule 12b-1 fees) A more complete description of each class
follows. You may want to review these arrangements with your investment
professional before selecting which class to invest in.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
<S> <C> <C> <C>
Initial sales charge Yes No No
Ongoing service 0.25% 0.75% distribution 0.75% distribution
and/or distribution fee 0.25% service 0.25% service
1.00% total 1.00% total
Contingent deferred None in Sliding scale over 1% on sale of shares held for one
sales charge most cases six years year or less
Redemption fee No No No
Conversion feature No Yes No
</TABLE>
Class A share considerations
- When you invest in Class A shares, you pay the public offering price,
which is the share price, or net asset value ("NAV"), plus the initial
sales charge that may apply to your purchase. The amount of the initial
sales charge is based on the size of your investment, as the tables below
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show. We also describe below how you may reduce or eliminate the initial
sales charge. (See "Reducing the Initial Sales Charge.")
- Since some of your investment goes to pay an up-front sales charge when
you purchase Class A shares, you purchase fewer shares than you would with
the same investment in Class B or Class C shares. Nevertheless, you're
usually better off purchasing Class A shares and paying an up-front sales
charge if you:
- plan to own the shares for an extended period of time, since the
higher ongoing service and/or distribution (12b-1) fees on Class B
and Class C shares may eventually exceed the cost of the up-front
sales charge, or
- qualify for a reduced or eliminated sales charge.
As compared to Class B and Class C shares, with A shares:
- your per share dividends, if any, will be higher
- your NAV per share will generally be higher
- total performance per share will be higher.
CLASS A SHARES SALES CHARGE TABLE FOR THE FUNDS
<TABLE>
<CAPTION>
SALES CHARGE AS A
PURCHASE AMOUNT % OF OFFERING SALES CHARGE AS A
PRICE % OF NAV
<S> <C> <C>
Less than $50,000 5.50% 5.82%
$50,000 to $99,999 4.50% 4.71%
$100,000 to $249,999 3.50% 3.63%
$250,000 to $499,999 2.50% 2.56%
$500,000 to $999,999 2.00% 2.04%
$1,000,000 or more* None None
</TABLE>
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* No sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of such
shares within one year of the date of purchase.
REDUCING THE INITIAL SALES CHARGE
As the Sales Charge Tables show, the larger your investment, the lower your
initial sales charge, and there is no initial sales charge for investments of $1
million or more. You can increase the amount of your investment to reduce your
initial sales charge, in the following ways:
RIGHTS OF ACCUMULATION
You can count towards the amount of your investment your total account value in
all share classes of the MainStay Funds (except shares in the MainStay Money
Market Fund). (We may terminate or change this privilege at any time on written
notice.) For example, if you have $1 million invested in Class B shares, you can
invest in Class A shares of any MainStay Fund without an initial sales charge.
LETTER OF INTENT
You can sign a Letter of Intent, in which you agree to invest a certain amount
(your goal) in any of the MainStay Funds over a 24-month period, and your
initial sales charge will be based on your
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<PAGE> 19
goal. A 90-day back-dated period can also be used to count previous purchases
toward your goal. Your goal must be at least $100,000, and the sales charge will
be adjusted if you do not meet your goal.
COMBINE WITH FAMILY MEMBERS
You can also count towards the amount of your investment all investments in any
of the MainStay Funds, in any class of shares, by your spouse and your children
under age 21 ("Family Members"), including their Rights of Accumulation and
goals under a Letter of Intent. Certain other groups may also be permitted to
combine purchases for purposes of reducing or eliminating sales charges. See
"Purchase, Redemption, Exchanges and Repurchase -- Reduced Sales Charges" in the
SAI.
TELL US YOUR INVESTMENT AMOUNT
To receive the reduced sales charge, you must tell us about any eligible amounts
under Rights of Accumulation or a Letter of Intent that you and your Family
Members have at the time of your initial or subsequent purchase. For example, if
an initial investment that was less than $1 million grows to over $1 million,
you must tell us that you qualify to purchase Class A shares without an initial
sales charge when you make a subsequent investment.
GROUP RETIREMENT PLAN PURCHASES
You will not pay an initial sales charge if you purchase shares through a group
retirement plan (other than non-ERISA 403(b) plans and IRA plans) that reaches
either
- 50 or more participants or
- an aggregate investment in shares of any class of the Funds of $1,000,000
or more.
Rights of Accumulation and goals under a Letter of Intent will count towards the
investment amount for purposes of eliminating or reducing the sales charge.
You must tell us about any initial or subsequent purchases that qualify for a
reduced or eliminated sales charge. For example, if the number of participants
in your plan increases to 50 or more subsequent to your initial investment, you
must tell us in order to purchase Class A shares without an initial sales
charge.
If your plan currently holds Class B shares, please consult your recordkeeper or
other plan administrative service providers concerning their ability to maintain
shares in two different classes. Class B and Class C shares may not be available
to new retirement plan accounts, which would be directed to invest in Class A
shares.
PURCHASES THROUGH FINANCIAL SERVICES FIRMS
You may be eligible for elimination of the initial sales charge if you purchase
shares through a financial services firm (such as a broker-dealer, investment
advisor or financial institution) that has
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a special arrangement with us. The Funds have authorized these firms (and other
intermediaries that the firms may designate) to accept orders. When an
authorized firm or its designee has received your order, it is considered
received by the Fund and will be priced at the next computed NAV. Financial
services firms may charge transaction fees or other fees and may modify other
features such as minimum investment amounts and exchange privileges. Please read
their program materials for any special provisions or additional service
features that may apply to investing in the Funds through these firms.
CONTINGENT DEFERRED SALES CHARGE
If you receive a reduced initial sales charge or your initial sales charge is
eliminated, we may impose a contingent deferred sales charge of 1% if you redeem
your shares within one year. The Fund's Distributor may pay a commission to
dealers on these purchases from its own resources.
- There are other categories of purchasers who do not pay initial sales
charges on Class A shares, such as personnel of the Funds and of New York
Life and its affiliates. These categories are described in the SAI.
- For more information about these considerations, call your investment
professional or MainStay Shareholder Services LLC ("MSS," the Funds'
Transfer Agent) at 1-800 MainStay, and read the information under
"Purchase, Redemption, Exchanges and Repurchase -- Contingent Deferred
Sales Charge, Class A" in the SAI.
CLASS B SHARE CONSIDERATIONS
Since you pay no initial sales charge, an investment of less than $1 million in
Class B shares buys more shares than the same investment would in Class A
shares. But you pay higher ongoing service and/or distribution fees. Compared to
Class A shares:
- your per share dividends, if any, will be lower
- your NAV will generally be lower
- total performance per share will be lower
In most circumstances, you pay a contingent deferred sales charge if you sell
Class B shares within six years of buying them, as shown in the following table:
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<TABLE>
<CAPTION>
FOR SHARES CONTINGENT DEFERRED SALES CHARGE AS A
SOLD IN THE: % OF AMOUNT REDEEMED SUBJECT TO THE CHARGE
<S> <C> <C>
First year 5.0%
Second year 4.0%
Third year 3.0%
Fourth year 2.0%
Fifth year 2.0%
Sixth year 1.0%
Thereafter None
</TABLE>
There are exceptions. See the SAI.
- When you sell Class B shares, MainStay first redeems the shares you've
held longest to minimize your sales charges.
- Class B shares convert to Class A shares at the end of the calendar
quarter eight years after the date they were purchased. This reduces
service and/or distribution fees.
- If you owned Class B shares of any MainStay Fund on October 24, 1997,
when the conversion feature was implemented, they will be converted on or
about December 31, 2005.
- MainStay expects all share conversions to be made on a tax-free basis. If
this cannot be reasonably assured, the Trustees reserve the right to
modify or eliminate this share class conversion feature.
CLASS C SHARE CONSIDERATIONS
- Since you pay no initial sales charge, an investment of less than
$1 million in Class C shares buys more shares than the same
investment would in Class A shares. But you pay higher ongoing
service and/or distribution fees.
- Compared to Class A shares:
20
<PAGE> 22
- your per share dividends, if any, will be lower
- your NAV will generally be lower
- total performance per share will be lower
- You pay a 1% contingent deferred sales charge only if you redeem shares
held for one year or less.
- As is the case with Class B shares, MainStay first redeems the shares
you've held longest to minimize your sales charges.
The Funds' Distributor, NYLIFE Distributors Inc., or its affiliates, at their
expense, also may from time to time provide additional promotional incentives
and/or compensation, including commission payments for sales of Class B shares,
to dealers who sell Fund shares or provide services to shareholders.
Unlike Class B shares, Class C shares will never convert to Class A shares. As a
result, long-term Class C shareholders pay higher ongoing Rule 12b-1 fees for
the life of their investment.
INFORMATION ON FEES AND SALES CHARGES
RULE 12b-1 PLANS
Each Fund offered in this prospectus has adopted a distribution plan under Rule
12b-1 of the Investment Company Act of 1940 for each class of shares. Rule 12b-1
service and/or distribution fees are paid to the Distributor. The Class A Rule
12b-1 fee may be paid for distribution or service activities. The Class B and
Class C Rule 12b-1 distribution fees are paid for distribution activities. The
Class B and Class C Rule 12b-1 service fees are paid to the Distributor for
providing shareholders with personal services and maintaining shareholder
accounts. Because Rule 12b-1 fees are ongoing, over time they will increase the
cost of an investment in the Funds and may cost more than other types of sales
charges.
CONTINGENT DEFERRED SALES CHARGE, CLASS B AND CLASS C
A contingent deferred sales charge will be imposed on redemptions of Class B and
Class C shares of the Funds, at the rates described above, at the time of any
redemption by a shareholder that reduces the current value of the shareholder's
Class B or Class C account in any Fund to an amount that 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 or Class C shares in that Fund for the
preceding year.
However, no such charge will be imposed to the extent that the net asset value
of the Class B or Class C shares redeemed does not exceed:
21
<PAGE> 23
- the current aggregate net asset value of Class B or Class C shares of
that Fund purchased more than six years prior to the redemption for Class
B shares or more than one year prior to the redemption for Class C
shares, plus
- the current aggregate net asset value of Class B or Class C shares of
that Fund purchased through reinvestment of dividends or distributions,
plus
- 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 for Class B
shares or one year for Class C shares.
The contingent deferred sales charge will be paid to and retained by the
Distributor. For information about waivers, see the SAI.
HOW TO OPEN YOUR MAINSTAY ACCOUNT
Return your completed MainStay application with a check for the amount of your
investment to your investment professional. If your initial investment is at
least $5,000 in any Fund but the Money Market Fund, have your investment
professional place your order by phone. If you place your order by phone,
MainStay must receive your completed application and check in good order within
three business days. "Good order" means all the necessary information,
signatures and documentation have been received
When you open your account, you may also want to choose certain buying and
selling options, including transactions by wire. In most cases, these choices
can be made later in writing, but it may be quicker and more convenient to
decide on them when you open your account.
You buy shares at net asset value (plus, for Class A shares, any applicable
sales charge). NAV is generally calculated as of the close of regular trading on
the New York Stock Exchange (usually 4 pm Eastern time) every day the Exchange
is open. When you buy shares, you must pay the NAV next calculated after
MainStay Shareholder Services receives your order in good order.
INVESTMENT MINIMUMS FOR THE FUNDS
- $500 for the Mid Cap Growth Fund and the Select 20 Equity Fund
- $50 for each subsequent investment in any of the Funds or
- $100 for initial and $50 for subsequent purchases through a systematic
investment plan.
The minimum initial investment amount is waived for purchases by the Trustees
and New York Life and its subsidiaries and their employees, officers, directors
or agents.
22
<PAGE> 24
BUYING AND SELLING MAINSTAY SHARES
OPENING YOUR ACCOUNT
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
By phone: Through your investment professional: * MainStay must receive your
Between 8 am and 6 pm Eastern time any application and check in good order
day the New York Stock Exchange is open; within three business days. If not,
call before 4 pm to buy shares at the MainStay can cancel your order and
current day's price. hold you liable for costs incurred in
placing it.
* $5,000 minimum.
</TABLE>
BUYING ADDITIONAL SHARES OF THE FUNDS
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
By wire: To buy shares the same day, MainStay must Have your investment professional phone
receive your wired money by 4 pm. in your order and wire the purchase amount to:
State Street Bank and Trust Company.
* ABA #011 0000 28
* The MainStay Funds (DDA #99029415)
* Attn: Custody and Shareholder Services
* Fund name and class
* your account number
* name(s) of investor(s)
Electronically: ACH Call 1-800-MainStay
Eligible investors can
purchase shares by using
electronic debits from a
designated bank account.
By mail: Address your order to:
The MainStay Funds Make your check payable to The
P.O. Box 8401 MainStay Funds. Be sure to write on
your check the
</TABLE>
23
<PAGE> 25
<TABLE>
<S> <C> <C>
Boston, MA 02266-8401 Fund name, account
number and class of shares.
* $50 minimum.
Send overnight orders to:
The MainStay Funds
c/o Boston Financial
Data Services
66 Brooks Drive
Braintree, MA 02184
</TABLE>
SELLING SHARES
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
By phone: TO RECEIVE PROCEEDS BY CHECK: * The maximum order MainStay can process is
$100,000.
Through your investment professional, * MainStay will only send checks to
or call 1-800-MAINSTAY between 8am and the account's owner at the owner's
6pm Eastern time any day the New York address of record and will not send
Stock Exchange is open; call before 4 checks to addresses on record for 30
pm to sell shares at the current day's days or less.
prices (NAV).
TO RECEIVE PROCEEDS BY WIRE: * MainStay must have your bank account
information on file.
Call 1-800-MAINSTAY. * Generally, after receiving your sell
order by phone, MainStay will send the
proceeds by bank wire to your
designated bank account the next
business day, although it may take up
to seven days to do so. Your bank may
charge you a fee to receive the wire
transfer.
Eligible investors may sell shares and
have proceeds electronically credited
to a designated bank account.
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C>
You can have redemption proceeds
wired any day banks and the New
York Stock Exchange are open. * MainStay charges a $10 fee per transaction.
* $5,000 minimum.
By mail: Address your order to: Write a letter of instruction that includes:
The MainStay Funds * your name(s) and signature(s)
P.O. Box 8401 * your account number
Boston, MA 02266-8401 * Fund name and class of shares
* dollar or share amount you want to sell.
Send overnight orders to: * Obtain a signature guarantee or other
The MainStay Funds documentation, if required.
c/o Boston Financial Data Services
66 Brooks Drive
Braintree, MA 02184
There is a $15 fee for checks mailed
to you overnight. There is a $10 fee
for wire redemptions.
</TABLE>
Reinvestment won't relieve you of any tax consequences on gains realized from
the sale. The deductions for losses may, however, be denied and, in some cases,
sales charges may not be taken into account in computing gains or losses if the
reinvestment privilege is exercised.
CONVENIENT, YES . . .
BUT NOT RISK-FREE. Telephone redemption privileges are convenient, but you give
up some security. When you sign the application to buy shares, you agree that
The MainStay Funds will not be liable for following phone instructions that they
reasonably believe are genuine. When using the MainStay Audio Response System,
you bear the risk of any loss from your errors unless the Funds or MainStay
Shareholder Services fails to use established safeguards for your protection.
These safeguards are among those currently in place at The MainStay Funds:
- all phone calls with service representatives are tape recorded and
- written confirmation of every transaction is sent to your address
of record.
REDEMPTIONS-IN-KIND
The Trust reserves the right to pay certain large redemptions, either totally or
partially, by a distribution-in-kind of securities (instead of cash) from the
applicable Fund's portfolio.
25
<PAGE> 27
THE REINVESTMENT PRIVILEGE MAY HELP YOU AVOID SALES CHARGES
When you sell shares, you have the right--for 90 days--to reinvest any or all of
the money in the same class of any MainStay Fund without paying another sales
charge (as long as those shares haven't been reinvested once already). If you
paid a sales charge when you redeemed your shares you'll receive a pro rata
credit for reinvesting.
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. You select your schedule and amount, subject to certain restrictions. You
can set up most of these services with your application, or by calling
1-800-MAINSTAY for a form.
SYSTEMATIC INVESTING
MainStay offers three automatic investment plans.
AUTOINVEST
If you are authorized, you can automatically debit your designated bank account
by:
- making regularly scheduled investments
- purchasing shares whenever you choose.
DIVIDEND REINVESTMENT
Automatically reinvest dividends and distributions from one MainStay Fund into
the same Fund or the same class of any other MainStay Fund.
PAYROLL DEDUCTIONS
If your employer offers this option, you can make automatic investments through
payroll deduction.
SYSTEMATIC WITHDRAWAL PLAN
Withdrawals must be at least $100. You must have at least $10,000 in your
account at the time of request and shares must not be in certificate form.
The Funds will not knowingly permit systematic withdrawals if, at the same time,
you are making systematic investments.
26
<PAGE> 28
EXCHANGING SHARES AMONG MAINSTAY FUNDS
This Prospectus discusses the two mutual funds (the "Funds") that invest for
varying combinations of income and growth. The Funds offered by this Prospectus
are part of the MainStay Funds Inc., a series mutual fund with 25 different
funds. The 23 funds not discussed in this Prospectus are offered by a separate
prospectus, which is available to you upon request. You exchange shares when you
sell all or a portion of shares in one MainStay Fund and use the proceeds to
purchase shares of the same class of another MainStay Fund without paying a
sales charge. You may make exchanges from one MainStay Fund to another by phone.
There is also a systematic exchange program that allows you to make regularly
scheduled, systematic exchanges from one MainStay Fund to the same class of
another. When you redeem exchanged shares without a corresponding purchase of
another MainStay Fund, you will have to pay any applicable contingent deferred
sales charge.
The exchange privilege is not intended as a vehicle for short term trading, nor
are the Funds designed for professional market timing organizations or other
entities or individuals that use programmed or frequent exchanges in response to
market fluctuations. Excessive exchange activity may interfere with portfolio
management and have an adverse effect on all shareholders. Accordingly, in order
to maintain a stable asset base in each Fund and to reduce Fund administrative
expenses borne by each Fund, five exchanges per account are permitted in each
calendar year without the imposition of any transaction fee; subsequently, a $10
processing fee will be assessed per exchange and additional exchange requests
may be denied. The processing fee will not be charged on systematic exchanges,
on exchanges processed via MainStay's automated system and on certain accounts,
such as retirement plans and broker omnibus accounts where no participant is
listed, for which tracking data is not available. In addition, a redemption fee
applies to sales of the Floating Rate Fund within 90 days of purchase. MainStay
reserves the right to refuse any purchase or exchange requests that could
adversely affect a Fund or its operations, including those from any individual
or group who, in the Fund's judgment, is likely to, or actually engages in,
excessive trading.
The Funds reserve the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges or reject any exchange. You may not exchange
shares between classes. If you sell Class B or Class C shares and then buy Class
A shares, you may have to pay a deferred sales charge on the Class B or Class C
shares, as well as pay an initial sales charge on the purchase of Class A
shares.
MainStay tries to make investing easy by offering a variety of programs to buy,
sell and exchange Fund shares. These programs make it convenient to add to your
investment and easy to access your money when you need it.
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxes. Consult your tax adviser on the consequences. When you sell
exchanged shares, you will have to pay any applicable sales charges.
27
<PAGE> 29
INVESTING FOR RETIREMENT
You can purchase shares of the Mid Cap Growth Fund and the Select 20 Equity Fund
for retirement plans providing tax-deferred investments for individuals and
institutions. You can use MainStay Funds in established plans or the Distributor
may provide the required plan documents for selected plans. A plan document must
be adopted for a plan to be in existence.
MainStay also provides custodial services for IRA, ROTH IRA, SEP, SARSEP, SIMPLE
IRA and Education IRA plans and for 403(b)(7) TSA Custodial Accounts. Plan
administration is also available for select qualified retirement plans.
An investor should consult with his or her tax adviser before establishing any
tax-deferred retirement plan.
GENERAL POLICIES
BUYING SHARES
- All investments must be in U.S. dollars with funds drawn on a U.S. bank.
As a rule, MainStay does not accept third-party checks, and it reserves
the right to limit the number of checks processed at one time. If your
check or ACH purchase is returned unpaid, your order will be canceled and
your account will be charged a $20 fee for each returned check or ACH
purchase. In addition, the Fund may also redeem shares to cover any losses
it incurs as a result. If an AutoInvest payment is returned unpaid for two
consecutive periods, the privilege will be suspended until you notify us
to reinstate it.
SELLING SHARES
- If you have share certificates, you must return them with a written
redemption request.
- Your shares will be sold at the next NAV calculated after MSS receives
your order in good order. MainStay will make the payment, minus any
deferred sales charge, within seven days after receiving your request in
good order.
- If you buy shares by check or by ACH purchase and quickly decide to sell
them the Fund may withhold payment for 10 days from the date the check or
ACH purchase order is received.
- When you sell Class B or Class C shares, the Fund will recover any
applicable sales charges either by selling additional shares, if
available, or by reducing your proceeds by the amount of those charges.
- There will be no redemption 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 the Exchange is restricted or
the SEC deems an emergency to exist.
28
<PAGE> 30
- Unless you decline telephone privileges on your application, you may be
responsible for any fraudulent telephone order as long as MSS takes
reasonable measures to verify the order.
- MainStay requires a written order to sell shares if:
- an account has submitted a change of address in the previous 30
days.
- MainStay requires a written order to sell shares and a signature
guarantee if;
- MainStay does not have required bank information
- the proceeds from the sale will exceed $100,000
- the proceeds of the sale are to be sent to an address other than
the address of record or,
- the proceeds are to be payable to someone other than the account
holder.
In the interests of all shareholders, MainStay reserves the right to:
- change or discontinue its exchange privilege upon notice to shareholders,
or temporarily suspend this privilege without notice under extraordinary
circumstances.
- change or discontinue the systematic withdrawal plan on notice to
shareholders.
- charge a $12 annual account fee (maximum of $36 per social security or
tax I.D. number) on accounts with balances less than $500. The fee is not
charged on retirement plan accounts, accounts with automatic investment
plans and accounts for which tracking data is not available.
- change its minimum investment amounts.
CORRECTION
When you buy and sell shares directly from the Fund, you will receive
confirmation statements that describe your transaction. You should review the
information in the confirmation statements carefully. If you notice an error,
you should call MainStay immediately. If you fail to notify MainStay within one
year of the transaction, you may be required to bear the costs of correction.
A signature guarantee helps protect against fraud. You can obtain one from most
banks, credit unions and securities dealers, but not from a notary public. For
joint accounts, each signature must be guaranteed. Please call MSS at
1-800-MAINSTAY to ensure that your signature will be guaranteed by an
appropriate institution.
The policies and fees described in this prospectus govern transactions with The
MainStay Funds. If you invest through a third party--bank, broker, 401(k) plan,
financial adviser or financial supermarket--there may be transaction fees for
and you may be subject to different investment
29
<PAGE> 31
minimums or limitations on buying or selling shares. Consult a representative of
your plan or financial institution if in doubt.
DETERMINING THE FUNDS' SHARE PRICES (NAV) AND THE VALUATION OF SECURITIES
MainStay generally calculates the share price of each Fund (also known as its
net asset value, or NAV) at the close of regular trading on the New York Stock
Exchange (usually 4 pm Eastern time). The value of the Funds' investments is
based on current market prices. If current market values are not available,
investments will be valued by another method that the Board of Trustees believes
accurately reflects fair value. Changes in the value of the Funds' securities
after the close of regular trading that occur will not be reflected in the
calculation of NAV unless the Subadvisor deems a particular event would
materially affect NAV. In this case, an adjustment in the valuing of the
securities may be made.
FUND EARNINGS
DIVIDENDS AND INTEREST
Most Funds earn either dividends from stocks, interest from bonds and other
securities, or both. A mutual fund, however, always pays this income to you as
"dividends." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
CAPITAL GAINS
The Funds earn capital gains when they sell securities at a profit.
WHEN THE FUNDS PAY DIVIDENDS
The Funds declare and distribute any dividends quarterly.
Dividends are normally paid on the first business day of each month after a
dividend is declared.
WHEN THE FUNDS PAY CAPITAL GAINS
The Funds will distribute any capital gains to shareholders in December.
If you prefer to reinvest dividends and/or capital gains in another Fund, you
must first establish an account in that class of shares of the Fund. There is no
sales charge on shares purchased through the automatic reinvestment of dividends
or capital gains.
HOW TO TAKE YOUR EARNINGS
You may receive your share of MainStay Fund earnings in one of five ways. You
can make your choice at the time of application, and change it as often as you
like by notifying your investment professional (if permitted by the
broker-dealer) or MainStay directly. The five choices are:
30
<PAGE> 32
1. Reinvest everything in:
- the same Fund or
- another MainStay Fund of your choice.
2. Take the dividends in cash and reinvest the capital gains in:
- the same Fund or
- another MainStay Fund of your choice.
3. Take the capital gains in cash and reinvest the dividends in:
- the same Fund or
- another MainStay Fund of your choice.
4. Take a percentage of dividends or capital gains in cash and reinvest the
remainder in the same Fund.
5. Take everything in cash.
If you do not make one of these choices on your application, your earnings will
be automatically reinvested in the same class of shares of the same Fund.
UNDERSTAND THE TAX CONSEQUENCES
Most of your earnings are taxable.
Virtually all of the dividends and capital gains distributions you receive from
the MainStay Funds are taxable, whether you take them as cash or automatically
reinvest them. A Fund's realized earnings are taxed based on the length of time
a Fund holds its investments, regardless of how long you hold Fund shares. If a
Fund realizes long-term capital gains, the earnings are taxed as capital gains;
earnings from short-term capital gains and income generated on debt investments
and other sources are generally taxed as ordinary income. Earnings of an Equity
Fund, if any, will generally be a result of long-term capital gains and
short-term capital gains (taxed as ordinary income). Earnings of an Income Fund,
if any, will generally be a result of income generated on debt investments and
will be taxable as ordinary income.
MainStay will mail your tax report each year by January 31. This report will
tell you which dividends and redemptions should be treated as taxable ordinary
income, which, if any, as tax-exempt income, and which, if any, as long-term
capital gains.
31
<PAGE> 33
SEEK PROFESSIONAL ASSISTANCE. Your investment professional can help you keep
your investment goals coordinated with your tax considerations. But for tax
counsel, always rely on your tax adviser. For additional information on federal,
state and local taxation, see the SAI.
DO NOT OVERLOOK SALES CHARGES. The amount you pay in sales charges reduces gains
and increases losses for tax purposes.
BUY AFTER THE DIVIDEND PAYMENT. Avoid buying shares shortly before a dividend
payment. Part of your investment may be returned in the form of a dividend,
which may be taxable.
EXCHANGES
An exchange of shares of one MainStay Fund for shares of another will be treated
as a sale of shares of the first Fund and a purchase of shares of the second
MainStay Fund. Any gain on the transaction may be subject to taxes.
32
<PAGE> 34
KNOW WITH WHOM
YOU'RE INVESTING
WHO RUNS THE FUNDS' DAY-TO-DAY BUSINESS?
MainStay Management LLC (formerly MainStay Management, Inc.), 300 Interpace
Parkway, Building A, Parsippany, NJ 07054, serves as the Funds' manager,
handling business affairs for the Funds. The Manager provides offices, conducts
clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required for the Funds. The Manager has
delegated its portfolio management responsibilities to the Subadvisor. The
Manager also pays the salaries and expenses of all personnel affiliated with the
Funds and all the operational expenses that are not the responsibility of the
Funds, including the fees paid to the Subadvisor.
The Manager receives an aggregate fee for services performed as a percentage of
the average daily net assets of each Fund as follows:
MID CAP GROWTH FUND: .75%
SELECT 20 EQUITY FUND: .70%
The Manager is not responsible for records maintained by the Funds' Custodians,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or
Subadvisor.
WHO MANAGES YOUR MONEY?
Under the supervision of the Manager, the Subadvisor is responsible for making
the specific decisions about buying, selling and holding securities; selecting
and negotiating with brokers and brokerage firms; and maintaining accurate
records. For these services, each Subadvisor is paid a monthly fee by the
Manager, not the Funds. The Funds' Trustees oversee the management and
operations of the Funds.
MACKAY SHIELDS LLC (formerly MacKay-Shields Financial Corporation), 9 West 57th
St., New York, NY 10019, is the Subadvisor to each Fund in this Prospectus. The
firm was incorporated in 1969 as an independent investment advisory firm and was
privately held until 1984 when it became a wholly owned but autonomously managed
subsidiary of New York Life Insurance Company. As of September 30, 2000, MacKay
Shields managed over $30 billion in assets.
33
<PAGE> 35
PORTFOLIO MANAGERS:
MID CAP GROWTH FUND
Edmund C. Spelman
Rudolph C. Carryl
SELECT 20 EQUITY FUND
Edmund C. Spelman
Rudolph C. Carryl
Richard A. Rosen
Mark T. Spellman
PORTFOLIO MANAGER BIOGRAPHIES:
EDMUND C. SPELMAN Mr. Spelman manages the Select 20 Equity and the Mid Cap
Growth Funds. Mr. Spelman has also managed the MainStay Capital Appreciation and
Total Return Funds since 1991, the MainStay Convertible Fund since 1999 and the
MainStay Small Cap Growth Fund since inception. Mr. Spelman is a Senior Managing
Director at MacKay Shields and specializes in equity securities. He joined
MacKay Shields in 1991 after working as a securities analyst at Oppenheimer &
Co., Inc. from 1983 to 1990.
RUDOLPH C. CARRYL Mr. Carryl manages the Select 20 Equity and the Mid Cap Growth
Funds. Mr. Carryl has also managed the MainStay Capital Appreciation and Total
Return Funds since 1992, and the MainStay Small Cap Growth Fund since inception.
Mr. Carryl is a Senior Managing Director of MacKay Shields. He joined MacKay
Shields as a Director in 1992 and has 22 years of investment management and
research experience. Mr. Carryl was Research Director and Senior Portfolio
Manager at Value Line, Inc. from 1978 to 1992.
34
<PAGE> 36
RICHARD A. ROSEN Mr. Rosen manages the Select 20 Equity Fund. Mr. Rosen has also
managed the MainStay Value, Equity Income and Strategic Value Funds since 1999.
Mr. Rosen is a Managing Director in the Equity Division of MacKay Shields. Prior
to joining MacKay Shields in January, 1999, he was a Managing Director and
equity portfolio manager at Prudential Investments from August 1991 to January
1999.
MARK T. SPELLMAN Mr. Spellman manages the Select 20 Equity Fund. Mr. Spellman
joined MacKay Shields in 1996 and is currently a Director at the firm. Prior to
joining MacKay Shields, Mr. Spellman was a research analyst and market
strategist at Deutsche Bank and a portfolio manager with Prudential Equity
Management Associates. Mr. Spellman has 13 years of investment management and
research experience.
No dealer, salesman or any other person is authorized to give any information or
to make any representations other than those contained in this Prospectus and in
the related Statement of Additional Information, in connection with the offer
contained in this Prospectus. Any other information or representations must not
be relied upon as having been authorized by the Trust or the Distributor. This
Prospectus and the related Statement of Additional Information do not constitute
an offer by the Trust or by the Distributor to sell or a solicitation of any
offer to buy any of the securities offered hereby in any jurisdiction or to any
person to whom it is unlawful.
35
<PAGE> 37
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the Funds. A current SAI is incorporated by
reference into this Prospectus and has been filed with the SEC.
TO OBTAIN INFORMATION:
More information about the Funds is included in the SAI. In addition, more
information about the 23 other MainStay Funds is included in a separate
prospectus, an SAI, and the Annual/Semiannual Reports. These documents are
available free upon request. To obtain information, or for shareholder
inquiries, call 1-800-MAINSTAY (1-800-624-6782) or visit our website at
mainstayinv.com. or write to NYLIFE Distributors Inc., attn: MainStay Marketing
Dept., 300 Interpace Parkway, Building A, Parsippany, NJ 07054.
You can also review and copy information about the Funds (including the SAI) by
visiting the SEC's Public Reference Room in Washington, D.C. (phone
1-202-942-8090). You may also visit the SEC's website at www.sec.gov, or you may
obtain information by paying a duplicating fee and sending an e-mail to
[email protected] or writing the SEC's Public Reference Section, Washington,
D.C. 20549-0103.
THE MAINSTAY FUNDS
SEC File Number: 811-04550
NYLIFE DISTRIBUTORS INC.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of The MainStay Funds, NYLIFE Distributors Inc., is an indirect
wholly owned subsidiary of New York Life Insurance Company.
36
<PAGE> 38
[MAINSTAY LOGO]
[RECYCLE LOGO]
THE MAINSTAY(R) FUNDS
GROWTH FUNDS
MainStay Small Cap Growth Fund
MainStay Small Cap Value Fund
MainStay Capital Appreciation Fund
MainStay Blue Chip Growth Fund
MainStay Equity Index Fund
MainStay Mid Cap Growth Fund
MainStay Select 20 Equity Fund
GROWTH AND INCOME FUNDS
MainStay Growth Opportunities Fund
MainStay Equity Income Fund
MainStay MAP Equity Fund
MainStay Research Value Fund
MainStay Value Fund
MainStay Strategic Value Fund
MainStay Convertible Fund
MainStay Total Return Fund
INTERNATIONAL FUNDS
MainStay International Equity Fund
MainStay Global High Yield Fund
37
<PAGE> 39
MainStay International Bond Fund
INCOME FUNDS
MainStay High Yield Corporate Bond Fund
MainStay Strategic Income Fund
MainStay Government Fund
MainStay California Tax Free Fund
MainStay New York Tax Free Fund
MainStay Tax Free Bond Fund
MainStay Money Market Fund
THIS COVER IS NOT PART OF THE PROSPECTUS.
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THE MAINSTAY FUNDS
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STATEMENT OF ADDITIONAL INFORMATION
January 2, 2001
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This Statement of Additional Information supplements the information
contained in the Prospectus dated January 2, 2001, as amended or supplemented
from time to time (the "Prospectus"), for the Mid Cap Growth Fund and the Select
20 Equity Fund 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 in itself a prospectus, is incorporated by reference in and is made
a part of the Prospectus. The Mid Cap Growth and Select 20 Equity Funds are part
of the MainStay family of Funds, which include 25 mutual funds. The 23 other
funds are offered in a separate prospectus and contained in a separate SAI, each
dated May 1, 2000, and available by writing to or calling the Distributor.
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.
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TABLE OF CONTENTS
THE MAINSTAY FUNDS............................................................1
ADDITIONAL INFORMATION ABOUT CERTAIN FUNDS....................................1
MID CAP GROWTH FUND.......................................................2
SELECT 20 EQUITY FUND....................................................2
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS.................3
TEMPORARY DEFENSIVE MEASURES..............................................3
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS...................3
LENDING OF PORTFOLIO SECURITIES...........................................4
CASH EQUIVALENTS..........................................................5
BANK OBLIGATIONS..........................................................5
COMMERCIAL PAPER..........................................................5
U.S. GOVERNMENT SECURITIES................................................6
DEBT SECURITIES...........................................................6
COMMON STOCK..............................................................7
PREFERRED STOCK...........................................................7
CONVERTIBLE SECURITIES....................................................7
ARBITRAGE.................................................................8
FOREIGN SECURITIES........................................................8
FOREIGN CURRENCY TRANSACTIONS.............................................9
BRADY BONDS..............................................................12
ZERO COUPON BONDS........................................................14
WHEN-ISSUED SECURITIES...................................................14
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES.......................15
WARRANTS.................................................................22
SHORT SALES AGAINST THE BOX..............................................22
OPTIONS ON SECURITIES....................................................22
OPTIONS ON FOREIGN CURRENCIES............................................27
SECURITIES INDEX OPTIONS.................................................29
LOAN PARTICIPATION INTERESTS.............................................29
REAL ESTATE INVESTMENT TRUSTS ("REITs")..................................31
DOLLAR-WEIGHTED AVERAGE MATURITY.........................................32
RESTRICTED SECURITIES....................................................32
SECURITIES OF OTHER INVESTMENT COMPANIES.................................32
SOURCES OF LIQUIDITY OR CREDIT SUPPORT...................................33
STRIPPED SECURITIES......................................................33
SWAP AGREEMENTS..........................................................33
ILLIQUID SECURITIES......................................................34
RISKS ASSOCIATED WITH DEBT SECURITIES....................................34
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")...............35
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FUNDAMENTAL INVESTMENT RESTRICTIONS..........................................35
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS......................................37
TRUSTEES AND OFFICERS........................................................39
THE MANAGER, THE SUBADVISORS AND THE DISTRIBUTOR.............................46
MANAGEMENT AGREEMENT.....................................................46
SUB-ADVISORY AGREEMENTS..................................................47
DISTRIBUTION AGREEMENT...................................................48
DISTRIBUTION PLANS.......................................................49
OTHER SERVICES...........................................................51
EXPENSES BORNE BY THE TRUST..............................................51
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................51
NET ASSET VALUE..............................................................54
SHAREHOLDER INVESTMENT ACCOUNT...............................................56
SHAREHOLDER TRANSACTIONS.....................................................56
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE...............................56
HOW TO PURCHASE SHARES OF THE FUNDS......................................56
ALTERNATIVE SALES ARRANGEMENTS...........................................59
PURCHASES AT NAV.........................................................60
REDUCED SALES CHARGES ON CLASS A SHARES..................................61
LETTER OF INTENT ("LOI").................................................61
CONTINGENT DEFERRED SALES CHARGE, CLASS A................................62
CONTINGENT DEFERRED SALES CHARGE, CLASS B................................63
CONTINGENT DEFERRED SALES CHARGE, CLASS C................................65
REDEMPTIONS AND EXCHANGES................................................65
DISTRIBUTIONS IN KIND....................................................66
SUSPENSION OF REDEMPTIONS................................................67
EXCHANGE PRIVILEGES......................................................67
TAX-DEFERRED RETIREMENT PLANS................................................68
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR
CORPORATIONS AND SELF-EMPLOYED INDIVIDUALS............................69
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")....................................69
403(b)(7) TAX SHELTERED ACCOUNT..........................................70
GENERAL INFORMATION......................................................70
CALCULATION OF PERFORMANCE QUOTATIONS........................................71
TAX INFORMATION..............................................................73
TAXATION OF THE FUNDS....................................................73
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL....................75
DISCOUNT.................................................................76
TAXATION OF OPTIONS AND SIMILAR INSTRUMENTS..............................77
PASSIVE FOREIGN INVESTMENT COMPANIES.....................................78
FOREIGN CURRENCY GAINS AND LOSSES........................................79
COMMODITY INVESTMENTS....................................................79
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DISPOSITIONS OF FUND SHARES..............................................79
TAX REPORTING REQUIREMENTS...............................................80
FOREIGN TAXES............................................................81
STATE AND LOCAL TAXES - GENERAL..........................................81
EXPLANATION OF FUND DISTRIBUTIONS........................................81
GENERAL INFORMATION......................................................81
ORGANIZATION AND CAPITALIZATION..............................................81
GENERAL..................................................................82
VOTING RIGHTS............................................................82
SHAREHOLDER AND TRUSTEE LIABILITY........................................82
REGISTRATION STATEMENT...................................................82
OTHER INFORMATION............................................................83
INDEPENDENT ACCOUNTANTS..................................................83
TRANSFER AGENT...........................................................83
CUSTODIANS...............................................................83
LEGAL COUNSEL............................................................83
CONTROL PERSONS AND SHARE OWNERSHIP OF THE FUNDS.........................84
CODE OF ETHICS...........................................................84
APPENDIX A...............................................................85
DESCRIPTION OF SECURITIES RATINGS........................................85
STANDARD & POOR'S........................................................87
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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 25 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, Value Fund, Mid Cap Growth
Fund and Select 20 Equity Fund (hereinafter, Mid Cap Growth Fund and Select 20
Equity Fund are individually referred to as a "Fund" or, collectively, the
"Funds"). MainStay Management LLC (the "Manager") serves as the manager for the
Mainstay 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 19 Funds, including each of the Fund's
contained in this SAI; MacKay Shields, Monitor, GAMCO, John A. Levin & Co.,
DGHM, Madison Square Advisors and Markston are sometimes jointly referred to as
the "Subadvisors." This Statement of Additional Information relates solely to
the Mid Cap Growth Fund and the Select 20 Equity Fund.
The Trust, formed January 9, 1986, is a Massachusetts business trust. The
Mid Cap Growth Fund is a diversified fund as defined by the Investment Company
Act of 1940, as amended (the "1940 Act"). The Select 20 Equity Fund is a
non-diversified fund as defined by 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
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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.
MID CAP GROWTH FUND
The Mid Cap Growth Fund's investment objective is to seek long-term
growth of capital. The Fund normally invests at least 65% of its total assets in
equity and equity-related securities of companies with market capitalizations
similar to the market capitalization of those companies in the Standard & Poor's
MidCap 400 Index at the time of the Fund's investment. The Fund will seek to
participate primarily in the expanding markets of technology, healthcare,
communications and other dynamic high-growth industries. Equity securities
issued by companies in these markets are frequently considered "growth stocks."
MacKay Shields LLC, the Fund's Subadvisor, will select investments based on the
economic environment and the attractiveness of particular markets, as well as
the financial condition and competitiveness of individual companies.
SELECT 20 EQUITY FUND
The Select 20 Equity Fund's investment objective is to seek long-term
growth of capital. The Fund normally invests at least 65% of its total assets in
up to 20 equity and equity-related securities that MacKay Shields LLC, the
Fund's Subadvisor, believes have the potential for strong capital appreciation.
The Fund combines the efforts of the Subadvisor's growth equity and value equity
portfolio managers and invests in the securities that the managers believe have
the best performance potential. Generally, the growth equity and the value
equity managers each select 10 securities, although at any given time, the Fund
may temporarily hold more than 10 securities from either group. In addition,
more assets may be allocated to either growth equity or value equity securities
based upon market conditions. The Fund combines the security selection ideas of
the growth equity and value equity portfolio managers. The Fund maintains a
flexible approach towards investing in various types of companies, as well as
types of securities, including common stocks, preferred stocks, and other equity
securities, depending upon the economic environment and the relative
attractiveness of the various securities markets. For the growth equity
component, the Fund normally invests in securities of companies with investment
characteristics such as participation in expanding product or service markets,
increasing unit sales volume, increasing return on investment, and growth in
revenues and earnings per share superior to that of the average of common stocks
comprising indexes such as S&P 500 Index.
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For the value equity component, the Subadvisor generally seeks out
undervalued equity securities. When assessing whether a stock is undervalued,
the Subadvisor considers many factors and will compare the market price to the
company's cash flow generation capability, "book" value, growth rates and future
earnings, and estimated value of the company's assets (liquidation value).
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 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
Subadvisors.
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 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. 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.
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
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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 Fund's Board of Trustees (the "Board," the "Trustees" or the "Board
of Trustees") have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the named Funds to enter into repurchase
agreements with such sellers. If the other party to a repurchase agreement were
to become bankrupt, a Fund could experience delays in recovering its investment
or losses.
The Fund's may borrow funds by entering into reverse repurchase
agreements in accordance with applicable investment restrictions. In a reverse
repurchase agreement, a Fund sells a portfolio instrument to another party, such
as a broker-dealer, in return for cash and agrees to repurchase the instrument
at a particular price and time. Under a reverse repurchase agreement, the Fund
continues to receive any principal and interest payments on the underlying
security during the term of the agreement. While a reverse repurchase agreement
is outstanding, the Funds will maintain appropriate liquid assets in a
segregated custodian account to cover their obligations under the agreement. The
Funds will enter into reverse repurchase agreements only with parties whose
creditworthiness has been found satisfactory by the Subadvisor. Such
transactions may increase fluctuations in the market value of a Fund's assets
and may be viewed as a form of leverage. Reverse repurchase agreements involve
the risk that the market value of the securities sold by a Fund may decline
below the price at which the Fund is obligated to repurchase the securities.
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
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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 instruments are deemed
by the Subadvisor to be of comparable high quality and liquidity.
BANK OBLIGATIONS
Time deposits are non-negotiable 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
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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.
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, Government National Mortgage
Association ("GNMA") pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by 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.
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COMMON STOCK
The Funds may invest in common stock. Common stock represents an equity
or ownership interest in an issuer. In the event an issuer is liquidated or
declares bankruptcy, the claims of owners of bonds and preferred stock take
precedence over the claims of those who own common stock.
PREFERRED STOCK
The Funds may invest in preferred stock. Preferred stock represents an
equity or ownership interest in an issuer that pays dividends at a specified
rate and that has precedence over common stock in the payment of dividends. In
the event an issuer is liquidated or declares bankruptcy, the claims of owners
of bonds take precedence over the claims of those who own preferred and common
stock.
CONVERTIBLE SECURITIES
The Funds may invest in securities convertible into common stock or the
cash value of a single equity security or a basket or index of equity
securities. Such investments may be made, for example, if the 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 increasingly reflects the value of the underlying
common stock and may rise accordingly. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
Holders of fixed income securities (including convertible securities)
have a claim on the assets of the issuer prior to the holders of common stock in
case of liquidation. However, convertible securities are typically subordinated
to similar non-convertible securities of the same issuer.
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Accordingly, convertible securities have unique investment
characteristics because (i) they have relatively high yields as compared to
common stocks, (ii) they have defensive characteristics since they provide a
fixed return even if the market price of the underlying common stock declines,
and (iii) they provide the potential for capital appreciation if the market
price of the underlying common stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by a
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or cash or
sell it to a third party.
ARBITRAGE
Each Fund 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
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.
Investors should carefully consider the appropriateness of foreign
investing in light of their financial objectives and goals. Foreign investments
could be more difficult to sell than U.S. investments. 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
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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.
Some foreign securities are issued by companies organized outside the
U.S. and are traded only or primarily in trading markets outside the U.S. These
foreign securities can be subject to most, if not all, of the risks of foreign
investing. Some foreign securities are issued by companies organized outside the
United States but are traded in U.S. securities markets and are denominated in
U.S. dollars. For example, American Depositary Receipts and shares of some large
foreign-based companies are traded on principal U.S. exchanges. Other securities
are not traded in the United States but are denominated in U.S. dollars. These
securities are not subject to all the risks of foreign investing. For example,
foreign trading market or currency risks will not apply to dollar denominated
securities traded in U.S. securities markets.
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, 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 of
these Funds may enter into contracts to purchase foreign currencies to
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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, and put and call options on foreign currencies. 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
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to such contracts if the consummation of such contracts would obligate the Fund
to deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency (or the
related currency, in the case of a "proxy" hedge).
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
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assets placed in the Segregated Account declines, additional liquid assets will
be placed in the account by the Fund on a daily basis so that the value of the
account will equal the amount of the Fund's commitments with respect to such
contracts.
It should be realized that 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.
BRADY BONDS
Each of the Funds 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;
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(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.
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ZERO COUPON BONDS
The Funds may purchase zero coupon bonds, which are debt obligations
issued without any requirement for the periodic payment of interest. Zero coupon
bonds are issued at a significant discount from face value. The discount
approximates the total amount of interest the bonds would accrue and compound
over the period until maturity at a rate of interest reflecting market rate at
the time of issuance. Because interest on zero coupon 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.
WHEN-ISSUED SECURITIES
Each Fund may from time to time purchase securities on a "when-issued"
basis. Debt 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. 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
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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 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 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
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of fees and costs which may be incurred) may expose a Fund to a lower rate of
return upon reinvestment of principal. Also, if a security subject to prepayment
has been purchased at a premium, in the event of prepayment, the value of the
premium would be lost.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. government (in the case of securities guaranteed by FNMA or FHLMC,
which are supported only by the discretionary authority of the U.S. government
to purchase the agency's obligations).
The principal governmental guarantor of mortgage-related securities is
the GNMA. GNMA is a wholly owned U.S. government corporation within the U.S.
Department of Housing and Urban Development. 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
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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.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. The mortgage-related
securities in which the Funds may invest may be: (i) privately issued securities
which are collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
Although the market for 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 15% of the value of the Fund's total assets will be illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. 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
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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 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,
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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 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
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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 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
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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.
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
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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 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 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.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS. Each 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
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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.
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
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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.
WRITING PUT OPTIONS. Each 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 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.
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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 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 and generally involve greater credit risk than Exchange-traded options,
which are guaranteed by the clearing organization of the Exchange where they are
traded. 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 portfolio security without actually selling the security. In
addition, the Fund will continue to receive interest or dividend income on the
security. The put options purchased by the Fund may include, but are not limited
to, "protective puts" in which the security to be sold is identical or
substantially identical to a security already held by the Fund or to a security
which the Fund has the right to purchase. The Fund would ordinarily recognize a
gain if the value of the securities decreased during the option period below the
exercise price sufficiently to cover the premium. The Fund would recognize a
loss if the value of the securities remained above the difference between the
exercise price and the premium.
The Funds may also purchase call options on securities the Funds intend
to purchase to protect against substantial increases in prices of such
securities pending their ability to invest in an orderly manner in such
securities. The purchase of a call option would entitle the Fund, in exchange
for the premium paid, to purchase a security at a specified price upon exercise
of the option during the option period. The Fund would ordinarily realize a gain
if the value of the securities increased during the option period above the
exercise price sufficiently to cover the premium. The Fund would have a loss if
the value of the securities remained below the sum of the premium and the
exercise price during the option period. In order to terminate an option
position, the Funds may sell put or call options identical to those previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid on the put or call option when it was purchased.
MARRIED PUTS. Each Fund may engage in a strategy known as "married puts."
This strategy is most typically used when the Fund owns a particular common
stock or security
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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.
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 Mid Cap Growth Fund and Select 20 Equity 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
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markets for the underlying securities, significant price and rate movements can
take place in the underlying markets that cannot be reflected in the options
markets.
OPTIONS ON FOREIGN CURRENCIES
Each Fund may, to the extent that it invests in foreign securities,
purchase and write options on foreign currencies. 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.
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
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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.
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.
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SECURITIES INDEX OPTIONS
The Funds may purchase call and put options on securities indexes for the
purpose of hedging against the risk of unfavorable price movements which may
adversely affect the value of a Fund's securities.
Unlike a securities option, which gives the holder the right to purchase
or sell specified securities at a specified price, an option on a securities
index gives the holder the right to receive a cash "exercise settlement amount"
equal to (i) the difference between the value of the underlying securities index
on the exercise date and the exercise price of the option, multiplied by (ii) a
fixed "index multiplier." In exchange for undertaking the obligation to make
such a cash payment, the writer of the securities index option receives a
premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options are
based on a broad market index such as the S&P 500 Composite Price Index or the
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. The
principal risk involved in the purchase of securities index options is that the
premium and transaction costs paid by a Fund in purchasing an option will be
lost as a result of unanticipated movements in prices of the securities
comprising the securities index on which the option is based. Gains or losses on
a Fund's transactions in securities index options depend on price movements in
the securities market generally (or, for narrow market indexes, in a particular
industry or segment of the market) rather than the price movements of individual
securities held by a Fund.
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.
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
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<PAGE> 73
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 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
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<PAGE> 74
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 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.
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<PAGE> 75
DOLLAR-WEIGHTED AVERAGE MATURITY
Dollar-weighted average maturity is derived by multiplying the value of
each investment by the time remaining to its maturity, adding these
calculations, and then dividing the total by the value of the Fund's portfolio.
An obligation's maturity is typically determined on a stated final maturity
basis, although there are some exceptions to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of mortgage securities, including collateralized mortgage
obligations, and some asset-backed securities are determined on a weighted
average life basis, which is the average time for principal to be repaid. For a
mortgage security, this average time is calculated by estimating the timing of
principal payments, including unscheduled prepayments, during the life of the
mortgage. The weighted average life of these securities is likely to be
substantially shorter than their stated final maturity.
RESTRICTED SECURITIES
Restricted securities are subject to legal restrictions on their sale.
Difficulty in selling securities may result in a loss or be costly to a Fund.
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is required,
the holder of a registered security may be obligated to pay all or part of the
registration expense and a considerable period may elapse between the time it
decides to seek registration and the time it may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the holder might obtain a less favorable
price than prevailed when it decided to seek registration of the security.
SECURITIES OF OTHER INVESTMENT COMPANIES
Securities of other investment companies, including shares of closed-end
investment companies, unit investment trusts, and open-end investment companies,
represent interests in professionally managed portfolios that may invest in any
type of instrument. Investing in other investment companies involves
substantially the same risks as investing directly in the underlying
instruments, but may involve additional expenses at the investment
company-level,
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<PAGE> 76
such as portfolio management fees and operating expenses. Certain types of
investment companies, such as closed-end investment companies, issue a fixed
number of shares that trade on a stock exchange or over-the-counter at a premium
or a discount to their net asset value. Others are continuously offered at net
asset value, but may also be traded in the secondary market.
SOURCES OF LIQUIDITY OR CREDIT SUPPORT
Issuers may employ various forms of credit and liquidity enhancements,
including letters of credit, guarantees, puts, and demand features, and
insurance provided by domestic or foreign entities such as banks and other
financial institutions. The Subadvisor may rely on its evaluation of the credit
of the liquidity or credit enhancement provider in determining whether to
purchase a security supported by such enhancement. In evaluating the credit of a
foreign bank or other foreign entities, the Subadvisor will consider whether
adequate public information about the entity is available and whether the entity
may be subject to unfavorable political or economic developments, currency
controls, or other government restrictions that might affect its ability to
honor its commitment. Changes in the credit quality of the entity providing the
enhancement could affect the value of the security or a Fund's share price.
STRIPPED SECURITIES
Stripped securities are the separate income or principal components of a
debt security. The risks associated with stripped securities are similar to
those of other debt securities, although stripped securities may be more
volatile, and the value of certain types of stripped securities may move in the
same direction as interest rates. U.S. Treasury securities that have been
stripped by a Federal Reserve Bank are obligations issued by the U.S. Treasury.
Privately stripped government securities are created when a dealer
deposits a U.S. Treasury security or other U.S. Government security with a
custodian for safekeeping. The custodian issues separate receipts for the coupon
payments and the principal payment, which the dealer then sells.
SWAP AGREEMENTS
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a Fund's
exposure to long- or short-term interest rates (in the United States or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. Swap agreements can
take many different forms and are known by a variety of names.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
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<PAGE> 77
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if the Fund agreed to pay fixed
rates in exchange for floating rates while holding fixed-rate bonds, the swap
would tend to decrease the Fund's exposure to long-term interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall volatility
of a Fund's investments and its share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that determine
the amounts of payments due to and from a Fund. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declined, the value of a
swap agreement would be likely to decline, potentially resulting in losses. A
Fund may be able to eliminate its exposure under a swap agreement either by
assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
ILLIQUID SECURITIES
Illiquid securities cannot be sold or disposed of in the ordinary course
of business at approximately the prices at which they are valued. Difficulty in
selling securities may result in a loss or may be costly to a Fund. Under the
supervision of the Board of Trustees, the Subadvisor determines the liquidity of
a Fund's investments and, through reports from the Subadvisor, the Board
monitors investments in illiquid securities. In determining the liquidity of a
Fund's investments, the Subadvisor may consider various factors, including (1)
the frequency and volume of trades and quotations, (2) the number of dealers and
prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, and (4) the nature of the security and the market in which it trades
(including any demand, put or tender features, the mechanics and other
requirements for transfer, any letters of credit or other credit enhancement
features, any ratings, the number of holders, the method of soliciting offers,
the time required to dispose of the security, and the ability to assign or
offset the rights and obligations of the security).
RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that a Fund invests in debt securities, it will be subject
to certain risks. The value of the debt securities held by a Fund, and thus the
net asset value of the shares of beneficial interest of the Fund, generally will
fluctuate depending on a number of factors, including, among others, changes in
the perceived creditworthiness of the issuers of those securities, movements in
interest rates, the average maturity of the Fund's investments, changes in the
relative values of the currencies in which the Fund's investments are
denominated relative to the U.S. dollar, and the extent to which the Fund hedges
its interest rate, credit and currency exchange rate risks. Generally, a rise in
interest rates will reduce the value of fixed income securities held by a Fund,
and a decline in interest rates will increase the value of fixed income
securities held by a Fund. 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
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<PAGE> 78
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 even if the Fund does not distribute
cash to them. Therefore, in order to pay taxes on this interest, shareholders
may have to redeem some of their shares to pay the tax or the Fund may have to
sell some of its assets to reduce the Fund's assets and may thereby increase its
expense ratio and decrease its rate of return.
FUNDAMENTAL INVESTMENT RESTRICTIONS
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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.
THE MID CAP GROWTH FUND MAY NOT:
1. With respect to 75% of its total assets, invest more than 5% of
the value of the total assets of the 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 the Fund.
2. 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, with respect to the 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) and at such time
that the 1940 Act is amended to permit a registered investment company to elect
to be "periodically industry concentrated" (i.e., the Fund 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
with respect to the Fund.
THE MID CAP GROWTH FUND AND THE SELECT 20 EQUITY FUND MAY NOT:
3. 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.
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<PAGE> 80
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). The Trust reserves the freedom of action to hold and to sell
real estate acquired for any Fund as a result of the ownership of securities.
Purchases and sales of foreign currencies on a spot basis and forward foreign
currency exchange contracts, options on currency, futures contracts on
currencies or securities indices and options on such futures contracts are not
deemed to be an investment in a prohibited commodity or commodity contract for
the purpose of this restriction.
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 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
1940 Act.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to each Fund'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 Funds. Each Fund
may not:
(a) purchase from or sell portfolio securities of a Fund to any of
the officers or Trustees of the Trust, its investment advisers, its principal
underwriter or the officers, or directors of its Subadvisors or principal
underwriter;
(b) invest more than 15% 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;
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<PAGE> 81
(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; and
(f) purchase or sell any put or call options or any combination
thereof, except that the Trust may purchase and sell or write (i) put and call
options on currencies, securities indexes and covered put and call options on
securities, and (ii) may also engage in closing purchase transactions with
respect to any put and call option position it has entered into; and may not
write any covered put options on U.S. government securities if, as a result,
more than 50% of its total assets (taken at current value) would be subject to
put options written by such Fund.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
The Trustees have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Trustees have delegated the
function of making day-to-day determinations of liquidity to the 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;
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(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 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> 83
<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, New York Life Investment
300 Interpace Parkway Executive Officer Management, 2000 to present; President,
Parsippany, NJ 07054 and Trustee MainStay Management, June 1997-2000;
Date of Birth: 7/12/63 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 Chief
Date of Birth: 3/1/32 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, 1992
Sun Valley, ID 83353 to 1997.
Date of Birth: 8/17/32
</TABLE>
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<PAGE> 84
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
Nancy Maginnes Kissinger Trustee Member, Council of Rockefeller
Henderson Road University, New York, NY, 1991 to
South Kent, CT 06785 present; Trustee, Rockefeller
Date of Birth: 4/13/34 University, 1995 to present; 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, 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; 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>
41
<PAGE> 85
<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 Television
Ardverna plc, 1990 to present; Director, Ulster
Cloughmills Television plc, 1970 to present;
Northern Ireland Chairman of the Board, Tedcastle Holding
BT4 49NL Ltd. (energy), 1995 to present;
Date of Birth: 11/13/39 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 Industries,
1701 Highway A-1-A Inc., 1991 to present; Director,
Suite 218 PaineWebber Group, 1980 to 1993;
Vero Beach, FL 32963 President, PaineWebber Group, 1988 to
Date of Birth: 12/9/32 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.
</TABLE>
42
<PAGE> 86
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
Donald K. Ross* Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance
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.
Richard S. Trutanic Trustee Senior Managing Director, Groupe Arnault
1155 Connecticut Ave. N.W. (private investment firm), 1999 -
Suite 400 present; Chairman, The Somerset Group
Washington, DC 20036 (financial advisory firm), 1990 to
Date of Birth: 2/13/52 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.
</TABLE>
43
<PAGE> 87
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
Gary E. Wendlandt* Trustee Executive Vice President, New York Life
51 Madison Avenue Insurance Company, May 1999 to present;
New York, New York 10010 Chief Executive Officer, New York Life
Date of Birth: 10/08/50 Investment Management LLC, December 1999
to present; Chairman and Manager, New
York Life Asset Investment LLC, Manager,
New York Life Benefit Services LLC,
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 - May 1999.
Jefferson C. Boyce* Senior Vice Chairman, Monitor Capital Advisors, LLC,
51 Madison Avenue President 1977 to present; Senior Vice President,
New York, NY 10010 MainStay Institutional Funds Inc., 1998
Date of Birth: 9/17/57 to present; Senior Vice President, New
York Life Insurance Company, 1994 to
present; Director, NYLIFE Distributors
Inc., 1993 to present; and Chief
Administrative Officer, Pension, Mutual
Funds, Structured Finance, Corporate
Quality, Human Resources and Employees'
Health Departments, New York Life
Insurance Company, 1992 to 1994.
John A. Flanagan* Vice President, Chief Vice President, New York Life Insurance
51 Madison Avenue Financial Officer, and Company 1999 to date; Treasurer of the
New York, NY 10010 Secretary Strong Funds and Senior Vice President
Date of Birth: 6/5/46 of Strong Capital Management, Inc. from
1997 to 1998; Partner,
PricewaterhouseCoopers LLP from 1994 to
1997.
</TABLE>
44
<PAGE> 88
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
Patrick J. Farrell* Vice President and Vice President, New York Life Insurance
51 Madison Avenue Asst. Secretary Company, 1996 to present; Assistant
New York, NY 10010 Treasurer, Member of the Dividend
Date of Birth: 9/27/59 Committee, The MainStay Funds, 1998 to
present.
Richard W. Zuccaro* Tax Vice President Vice President, New York Life Insurance
51 Madison Avenue Company, 1995 to present; Vice President
New York, NY 10010 -- Tax, New York Life Insurance Company,
Date of Birth: 12/12/49 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>
------------------
*Messrs. Ross, Wendlandt, Roussin, Hohn, Kernan, Boyce, Flanagan, Farrell, and
Zucccaro are deemed to be "interested persons" of the Trust as that term is
defined in the 1940 Act.
45
<PAGE> 89
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, and a fee of $2,000 for each Board of Trustees meeting and
a fee of $1,000 for each Board committee meeting attended and are reimbursed for
all out-of-pocket expenses related to attendance at such meetings. Trustees who
are affiliated with New York Life Insurance Company do not receive compensation
from the Trust.
For the fiscal year ended December 31, 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 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>
As of September 30, 2000, 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 New York Life Investment Management
Holdings 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 after the initial two years, 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, the Management
Agreement on behalf of the Funds at an in-person meeting held on December 11,
2000.
46
<PAGE> 90
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.
SUB-ADVISORY AGREEMENTS
The Manager has entered into Sub-Advisory agreements for the management
of each Funds. Pursuant to the Sub-Advisory Agreements between the Manager and
MacKay Shields with respect to the Mid Cap Growth Fund and the Select 20 Equity
Fund, 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
MacKay Shields 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>
Mid Cap Growth Fund .375%(1)
Select 20 Equity Fund .35%(1)
</TABLE>
-----------------
(1) 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.
The Sub-Advisory 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
47
<PAGE> 91
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 Sub-Advisory 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.
Because the Funds have not yet commenced operations, no fees were payable
under the Management Agreement or Sub-Advisory Agreements.
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 Mid Cap Growth Fund and the Select 20 Equity Fund 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 December __, 2000.
After an initial two-year period, the Distribution Agreement is subject
to annual approval by the Board of Trustees. The Distribution Agreement is
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.
48
<PAGE> 92
DISTRIBUTION PLANS
Each of the Funds has adopted separate plans of distribution pursuant to
Rule 12b-1 under the 1940 Act for each class of shares of each Fund (the "Class
A Plans," the "Class B Plans," the "Class C Plans" and, collectively, the
"Plans"). Under the 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. With regard to Class B shares
that are converted to Class A shares, the ongoing annual service fee may
continue to be paid after any such conversion.
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% 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 in those years.
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.
49
<PAGE> 93
As noted above, the Class B shares of each Fund 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% of the average
daily net assets attributable to the Fund's Class B shares. Pursuant to the
Class B Plan, the Class B shares also pay a service fee to the Distributor at
the annual rate of 0.25% of the average daily net assets of the Funds' Class B
shares.
The Class C shares of each Fund also 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% 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).
Because the Funds commenced operations January 2, 2001, no distribution
or service fees pursuant to the Class A, Class B and Class C Plans have been
paid. Similarly, NYLIFE Distributors did not retain any amounts for sales
charges including CDSC for Class A Shares of the Funds and no investors paid
contingent deferred sales charges.
50
<PAGE> 94
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. The Mid Cap Growth Fund and the Select 20 Equity Fund
have not yet paid any amounts for these services.
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 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
51
<PAGE> 95
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.
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 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
52
<PAGE> 96
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 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.
Because they have not commenced operations, the Funds have not paid any
brokerage commissions.
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<PAGE> 97
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, by dividing the current market value of the total assets
attributable to that class, by the total number of outstanding shares of that
class.
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 at the last posted settlement price on the market where any such option
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
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<PAGE> 98
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 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.
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> 99
SHAREHOLDER INVESTMENT ACCOUNT
A Shareholder Investment Account is established for each investor in the
Funds, under which a record of the shares of each Fund held is maintained by the
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
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<PAGE> 100
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."
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. The share purchase is effected at the NAV next
determined after receipt in good order of the purchase order by MSS.
BY TELEPHONE
An investor may make an initial investment in the Funds 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 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
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 ________________ 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
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<PAGE> 102
certifications as the Trust may require. A notice of redemption, sent by first
class mail to the shareholder's address of record, will fix a date not less than
30 days after the mailing date, and shares will be redeemed at the NAV
determined as of the close of business on that date unless a certified Taxpayer
I.D. number (or such other information as the Trust has requested) has been
provided.
ALTERNATIVE SALES ARRANGEMENTS
INITIAL SALES CHARGE ALTERNATIVE CLASS A SHARES
The sales charge on Class A shares of the Funds is a variable percentage
of the public offering price depending upon the investment orientation of the
Fund and the amount of the sale.
The sales charge applicable to an investment in Class A shares of the of
the Mid Cap Growth and Select 20 Equity Funds 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>
* 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."
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<PAGE> 103
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. 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.
The sales charge applicable to an investment in Class A shares of the Mid
Cap Growth Fund and the Select 20 Equity 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>
<S> <C>
Net Asset Value per Class A Share at December 15, 2000 $10.00
Per Share Sales Charge - 5.50% of offering price (5.82% of net asset value 0.55
per share)
Class A Per Share Offering Price to the Public $10.55
</TABLE>
PURCHASES AT NAV
Purchases of Class A shares in an amount equal to $1 million or more will
not be subject to an initial sales charge, but may be subject to a contingent
deferred sales charge of 1% on share redeemed within one year of the date of
purchase. See "Reduced Sales Charges on Class A Shares-Contingent Deferred Sales
Charge, Class A."
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<PAGE> 104
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 (and
immediate family members) 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.
In addition, the Trust will treat Class A share purchases of Funds in an
amount less than $1,000,000 by defined contribution plans, other than 403(b)
plans, that are sponsored by employers with 50 or more employees as if such
purchases were equal to an amount more than $1,000,000 but less than $2,999,999.
Such purchases by defined contribution plans may be subject to a contingent
deferred sales charge of 1% on shares redeemed within one year of the date of
purchase. See "Reduced Sales Charges on Class A Shares-Contingent Deferred Sales
Charge, Class A."
Class A shares of the Funds 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 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.
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) whether incorporated
or not, provided the organization has been in existence for at least six months
and has some purpose other than the purchase at a discount of redeemable
securities of a registered investment company.
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.
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<PAGE> 105
On the initial purchase, if required (or, on subsequent purchases if
necessary), 5% of the dollar amount specified in the LOI will be held in escrow
by the 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 entities that are affiliate with or have a relationship with New York
Life as 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; 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.
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<PAGE> 106
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 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.
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>
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<PAGE> 107
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 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,
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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 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
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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 MainStay 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.
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.
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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 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. 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).
In addition, an exchange privilege between Class A shares of the Funds
and MainStay Equity Index Fund is offered. Any exchanges between a Fund and
MainStay Equity Index Fund will be subject to the conditions applicable to Class
A share exchanges described herein. 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-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
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in order to determine the applicable contingent deferred sales charge, if any,
shares will be deemed to have been held from the date of purchase of the shares,
regardless of exchanges into other Funds. However, where a shareholder
previously exchanged his or her Class B or Class C shares into the MainStay
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 MainStay 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 MainStay 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.
TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR CORPORATIONS AND
SELF-EMPLOYED INDIVIDUALS
Shares of a Fund may also be purchased as an investment under a specimen
cash or deferred profit sharing plan intended to qualify under Section 401(k) of
the Code (a "401(k) Plan") adopted by a corporation, a self-employed individual
(including sole proprietors and partnerships), or other organization. The Funds
may be used as funding vehicles for qualified retirement plans including 401(k)
plans, which may be administered by third-party administrator
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organizations. NYLIFE Distributors does not sponsor or administer such qualified
plans at this time.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
Shares of a Fund may also be purchased as an underlying investment for an
IRA made available by NYLIFE Distributors. 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
2001 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
($53,000 for married individuals filing a joint return, with a phase-out of the
deduction for adjusted gross income between $53,000 and $63,000; $33,000 for a
single individual, with a phase-out for adjusted gross income between $33,000
and $43,000). 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 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 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
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depending on the provisions of the relevant plan. Third-party administrative
services, available for some corporate plans, may limit or delay the processing
of transactions.
The custodial agreements and forms provided by the Funds' Custodian and
Transfer Agent designate New York Life Trust Company as custodian for IRAs and
403(b)(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 a Fund may publish its average annual total return in
advertisements and communications to shareholders. Total return and yield are
computed separately for Class A and Class B shares. The average annual total
return of each Fund is determined for a particular period by calculating the
actual dollar amount of the investment return on a $1,000 investment in the Fund
made at the maximum public offering price at the beginning of the period, and
then calculating the annual compounded rate of return which would produce that
amount. Total return for a period of one year is equal to the actual return of
the Fund during that period and reflects fee waivers and reimbursements in
effect for each period. This calculation assumes a complete redemption of the
investment and the deduction of the maximum contingent deferred sales charge at
the end of the period in the case of Class B shares. In the case of Class A
shares, the calculation assumes the maximum sales charge is deducted from the
initial $1,000 purchase order. It also assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
In considering any average annual total return quotation, investors
should remember that the maximum initial sales charge reflected in each
quotation for Class A shares is a one-time fee which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of your investment will be affected less by this charge the
longer you retain your investment in the Fund.
Quotations of each Fund's average annual total return will be calculated
according to the following SEC formula:
P(1+T)(n) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
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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.
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.
Because the Funds began operations on January 2, 2001, there are no
historical performance figures for the Funds.
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.
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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 Inc., Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Spot Market Prices,
Barron's, BusinessWeek, Kiplinger's Personal Finance, Financial World, Forbes,
Money, Morningstar, Personal Investor, Sylvia Porter's Personal Finance, and The
Wall Street Journal.
In addition, performance information for a Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Morgan Stanley Capital
International indexes, the Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, the Merrill Lynch 1 to 3 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
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federal tax consequences of the purchase, ownership, and disposition of Fund
shares, as well as the tax consequences arising under the laws of any state,
foreign country, or other taxing jurisdiction.
Each Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
each Fund must, among other things: (i) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies ("Qualifying
Income Test"); (ii) diversify its holdings so that, at the end of each quarter
of the taxable year, (a) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. Government securities, the securities
of other regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities on any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or of two or more issuers which the Fund controls (as
that term is defined in the relevant provisions of the Code) and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses; and (iii) distribute at least 90% of the sum of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of any net long-term capital
losses) and its net tax-exempt interest each taxable year. The Treasury
Department is authorized to promulgate regulations under which foreign currency
gains would constitute qualifying income for purposes of the Qualifying Income
Test only if such gains are directly related to investing in securities (or
options 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 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
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years that were not distributed during such years. To avoid application of the
excise tax, each Fund intends to make its distributions in accordance with the
calendar year distribution requirement. A distribution is treated as paid on
December 31 of the calendar year if it is declared by a Fund in October,
November or December of that year to shareholders of record on a date in such a
month and paid by the Fund during January of the following calendar year. Such
distributions are taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Provided that a Fund qualifies as a regulated investment company, under
the Code, it generally will not be subject to any excise or income taxes in
Massachusetts. A Fund's investments, if any, in REMIC residual interests (as
explained previously in this SAI) or in Passive Foreign Investment Companies, as
explained below, may cause the Fund to become liable for certain taxes.
Investors that are tax-exempt organizations should carefully consider whether
distributions of a Fund's earnings will be subject to tax in their hands.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming a Fund qualifies as a RIC, distributions of taxable net
investment income and net short-term capital gains in excess of net long-term
capital losses will be treated as ordinary income in the hands of shareholders.
If a Fund's investment income is derived exclusively from sources (such
as interest) other than dividends, no portion of such distributions will be
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
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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 intends to elect to treat such capital
gains as having been distributed to shareholders. As a result, such capital
gains will be taxable to the shareholders. Shareholders will be able to claim
their proportionate share of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities and will be
entitled to increase the adjusted tax basis of the relevant Fund shares by the
difference between their pro-rata share of such gains and their tax credit.
Distributions by a Fund result in a reduction in the net asset value of a
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would generally be
taxable to the shareholder (except to the extent the distribution is an exempt
interest dividend as described below) as ordinary income or capital gain as
described above, even though, from an investment standpoint, it may constitute a
partial return of investment. In particular, investors should be careful to
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those investors purchasing shares just prior to a distribution
will then receive a partial return of their investment upon such distribution,
which may nevertheless be taxable to them.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Any distributions that are not from a Fund's net investment income or net
capital gain may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of such share on
the reinvestment date.
DISCOUNT
Certain of the bonds purchased by the Funds, such as zero coupon bonds,
may be treated as bonds that were originally issued at a discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the 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
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such a bond by a Fund generally is determined on the basis of a constant yield
to maturity which takes into account the semiannual compounding of accrued
interest.
In addition, some of the bonds may be purchased by a Fund at a discount
which exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a Fund elects to include market discount in
income in tax years to which it is attributable). Realized accrued market
discount on obligations that pay tax-exempt interest is nonetheless taxable.
Generally, market discount accrues on a daily basis for each day the bond is
held by a Fund at a constant rate over the time remaining to the bond's
maturity. In the case of any debt security having a fixed maturity date of not
more than one year from date of issue, the gain realized on disposition will be
treated as short-term capital gain.
TAXATION OF OPTIONS AND SIMILAR INSTRUMENTS
Many of the options 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 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, 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 and forward
contracts to a Fund are not entirely clear. The hedging transactions in which a
Fund engages may increase the amount of short-term capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
accelerate the recognition of gains or losses from the affected straddle
positions.
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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 or forward contracts.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain of the Funds may invest in shares of foreign corporations which
may be classified under the Code as passive foreign investment companies
("PFICs"). In general, a foreign corporation is classified as a PFIC if at least
one-half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each taxable year, with the result that
unrealized gains are treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC Shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
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.
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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, 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 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.
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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.
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.
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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 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.
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.
Some states exempt from the state personal income tax distributions from
a Fund derived from interest on obligations issued by the U.S. government or by
such state or its municipalities or political subdivisions. Each investor should
consult his or her own tax adviser to determine the tax status of distributions
from the Funds in his or her own state and locality.
EXPLANATION OF FUND DISTRIBUTIONS
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions.
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
amounts constituting ordinary income to him or her.
ORGANIZATION AND CAPITALIZATION
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GENERAL
The Funds are separate series of the Trust, an open-end investment
company established under the laws of The Commonwealth of Massachusetts by a
Declaration of Trust dated January 9, 1986, as amended. The Mid Cap Growth Fund
and the Select 20 Equity Growth Fund were formed pursuant to a Designation of
Series on [ ] and became a series of the Trust pursuant to a reorganization
which occurred on [ ]. The organizational expenses of each Fund will be
amortized and deferred over a period not to exceed 60 months. The Declaration of
Trust and By-laws authorize the Trustees to establish additional series or
"Funds" as well as additional classes of shares.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate
votes will be taken by each Fund or class on matters affecting an individual
Fund or a particular class of shares issued by a Fund. Shares have noncumulative
voting rights, which means that holders of more than 50% of the shares voting
for the election of Trustees can elect all Trustees and, in such event, the
holders of the remaining shares voting for the election of Trustees will not be
able to elect any person or persons as Trustees. Shares have no preemptive or
subscription rights and are transferable.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. Notice of such disclaimer will
normally be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the relevant Fund for any loss suffered by a shareholder as a
result of an obligation of the Fund. The Declaration of Trust also provides that
the Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which a Fund would be
unable to meet its obligations. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
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
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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.
NYLIFE Distributors Inc. is a corporation organized under the laws of
Delaware. NYLIFE Distributors Inc. is a wholly owned subsidiary of New York Life
Investment Management Holdings LLC, 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.
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 [ ]. 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 [ ]. State Street has its principal office at 225 Franklin Street,
Boston, Massachusetts.
LEGAL COUNSEL
Dechert, 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.
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CONTROL PERSONS AND SHARE OWNERSHIP OF THE FUNDS
Because the Funds have not yet begun operations, there are no control
persons or beneficial or record owners of 5% or more of the Funds' shares.
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.
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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.
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Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
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
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rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S
--------------------------------------------------------------------------------
Corporate and Municipal Long-Term Debt Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
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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.
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B: A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
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396838.8.02 10/10/00 10:43 PM
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THE MAINSTAY FUNDS
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
a. Exhibits:
(1) Fifth Amended and Restated Establishment and Designation of Series
of Shares of Beneficial Interest, Par Value $.01 Per Share dated
October 26, 1992 -- Previously filed as Exhibit 1(b) to
Post-Effective Amendment No. 16*
(2) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(b) to Post-Effective Amendment No. 11*
(3) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(b) to Post-Effective Amendment No.
23*
(4) Form of Declaration of Trust as Amended and Restated December 31,
1994 -- Previously filed as Exhibit a(4) to Post-Effective
Amendment No. 53*
(5) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(e) to Post-Effective Amendment No.
28*
(6) Form of Establishment and Designation of an Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(g) to Post-Effective Amendment No.
35*
(7) Establishment and Designation of an Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(h) to Post-Effective Amendment No. 38*
(8) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(i) to Post-Effective Amendment No. 47*
(9) Establishment and Designations of Class of Shares of Beneficial
Interest, Par Value $0.01 Per Share -- Previously filed as Exhibit
a(10) to Post-Effective Amendment No. 51*
(10) Establishment and Designations of Additional Series of Shares of
Beneficial Interest, Par Value $0.01 Per Share -- Previously filed
as Exhibit a(11) to Post-Effective Amendment No. 51*
(11) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $0.01 Per Share***
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b. Amended and Restated By-Laws dated December 31, 1994 -- Previously filed
as Exhibit 2(b) to Post-Effective Amendment No. 32*
c. See the Declaration of Trust, as amended and supplemented from time to
time (Exhibit 23(a)(1)-(11)) and the Amended and Restated By-Laws dated
December 31, 1994 (Exhibit 23(b)(2)).
d. (1) (a) Form of Management Agreement between the MainStay Funds and
MainStay Management, Inc. - Previously filed as Exhibit d(1)(a)
to Post-Effective Amendment No. 53*
(b) Amendment to Management Agreement between the MainStay Funds and
MainStay Management, Inc.*
(c) Amended and Restated Schedule A to the Management Agreement**
(2) (a) (i) Form of Sub-Advisory Agreement - Strategic Value Fund --
Previously filed as Exhibit 5(b)(1) to Post-Effective
Amendment No. 38*
(ii) Amendment to Form of Sub-Advisory Agreement - Strategic
Value Fund -- Previously filed as Exhibit d(2)(a)(ii) to
Post-Effective Amendment No. 53*
(b) (i) Sub-Advisory Agreement - Blue Chip Growth Fund --
Previously filed as Exhibit d(2)(c) to Post-Effective
Amendment No. 51*
(ii) Amendment to Sub-Advisory Agreement - Blue Chip Growth Fund
-- Previously filed as Exhibit d(2)(b)(ii) to
Post-Effective Amendment No. 53*
(c) (i) Sub-Advisory Agreement - Growth Opportunities Fund --
Previously filed as Exhibit d(2)(d) to Post-Effective
Amendment No. 51*
(ii) Amendment to Sub-Advisory Agreement - Growth Opportunities
Fund -- Previously filed as Exhibit d(2)(c)(ii) to
Post-Effective Amendment No. 53*
(d) (i) Sub-Advisory Agreement - Research Value Fund --
Previously filed as Exhibit d(2)(e) to Post-Effective
Amendment No. 51*
(ii) Amendment to Sub-Advisory Agreement - Research Value Fund
-- Previously filed as Exhibit d(2)(d)(ii) to Post-
Effective Amendment No. 53*
(e) (i) Sub-Advisory Agreement - Small Cap Value Fund --
Previously filed as Exhibit d(2)(f) to Post-Effective
Amendment No. 51*
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<PAGE> 136
(ii) Amendment to Sub-Advisory Agreement - Small Cap Value
Fund -- Previously filed as Exhibit d(2)(e)(ii) to Post-
Effective Amendment No. 53*
(f) (i) Sub-Advisory Agreement - Equity Index Fund --Previously
filed as Exhibit d(2)(f) to Post-Effective Amendment No.
51*
(ii) Amendment to Sub-Advisory Agreement - Equity Index Fund --
Previously filed as Exhibit d(2)(f)(ii) to Post-Effective
Amendment No. 53*
(g) (i) Sub-Advisory Agreement - MacKay Shields Financial Service
Corporation - Previously filed as Exhibit d(2)(g)(i) to
Post-Effective Amendment No. 53*
(ii) Amendment to Sub-Advisory Agreement - MacKay-Shields
Financial Services Corp. -- Previously filed as Exhibit
d(2)(g)(ii) to Post-Effective Amendment No. 53*
(iii) Amended and Restated Schedule A to the Sub-Advisory
Agreement**
(h) (i) Form of Sub-Advisory Agreement - MAP Equity Fund -
Previously filed as Exhibit d(2)(i) to Post-Effective
Amendment No. 51*
(ii) Amendment to Sub-Advisory Agreement - MAP Equity Fund --
Previously filed as Exhibit d(2)(h)(ii) to Post-Effective
Amendment No. 53*
e. (1) (a) Distribution Agreement between the MainStay Funds and NYLIFE
Distributors Inc. (Composite including Capital Appreciation,
Value, Convertible, Global, Total Return, National
Resources/Gold Metals Fund, High Yield Corporate Bond,
Government, Tax Free Bond and Money Market Funds). -- Previously
filed as Exhibit e(1)(a) to Post-Effective Amendment No. 53*
(b) Distribution Agreement between MainStay Funds and NYLIFE
Distributors Inc. for the California Tax Free and New York Tax
Free Funds -- Previously filed as Exhibit e(1)(b) to
Post-Effective Amendment No. 53*
(c) Distribution Agreement between MainStay Funds and NYLIFE
Distributors Inc. for the Equity Index Fund -- Previously filed
as Exhibit e(i)(c) to Post-Effective Amendment No. 53*
(d) Distribution Agreement between MainStay Funds and NYLIFE
Distributors Inc. for the International Equity and International
Bond Funds -- Previously filed as Exhibit e(1)(d) to
Post-Effective Amendment No. 53*
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(e) Distribution Agreement between MainStay Funds and NYLIFE
Distributors Inc. for the Strategic Income, Strategic Value,
Blue Chip Growth, Research Value, Small Cap Value, Growth
Opportunities, Small Cap Growth, Equity Income, Global High
Yield and MAP Equity Funds - Previously filed as Exhibit e(1)(e)
to Post-Effective Amendment No. 53*
(i) Amendment and Restated Appendix A and B to the Distribution
Agreement**
(2) (a) Form of Soliciting Dealer Agreement -- Previously filed as
Exhibit e(2)(a) to Post-Effective Amendment No. 53*
f. Inapplicable
g. Special Custody Agreement with State Street Bank -- Previously filed as
Exhibit g to Post-Effective Amendment No. 53*
(1) Custodian Contract with State Street Bank and Trust Company ***
(i) Amendment to Custodian Contract dated 6/23/98 -- Previously
filed as Exhibit g(1)(i) to Post-Effective Amendment No. 53*
(ii) Amendment to Custodian Contract dated 1/27/97 -- Previously
filed as Exhibit g(1)(ii) to Post-Effective Amendment No. 53*
(iii) Amendment to Custodian Contract dated 5/12/89 -- Previously
filed as Exhibit g(1)(iii) to Post-Effective Amendment No. 53*
(iv) Amendment to Custodian Contract dated 6/30/88 -- Previously
filed as Exhibit g(1)(iv) to Post-Effective Amendment No. 53*
(v) Amendment to Custodian Contract dated 4/27/92 -- Previously
filed as Exhibit g(1)(v) to Post-Effective Amendment No. 53*
(vi) Amendment to Custodian Contract dated 10/25/88 -- Previously
filed as Exhibit g(1)(vi) to Post-Effective Amendment No. 53*
(2) Fee schedule for Custodian Contract with State Street Bank and Trust
Company***
(3) Custodian Contract with The Bank of New York***
h. (1) (a) Form of Transfer Agency Agreement - Previously filed as Exhibit
h(1)(a) to Post-Effective Amendment No. 53*
(i) Amended and Restated Fee Schedule to Transfer Agency
Agreement**
(b) Form of Sub-Transfer Agency Agreement - Previously filed as
Exhibit h(1)(b) to Post-Effective Amendment No. 53*
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<PAGE> 138
(i) Amended and Restated Fee Schedule to Sub-Transfer Agency
Agreement**
(2) Form of Guaranty Agreement - Equity Index Fund --Previously filed as
Exhibit h(2) to Post-Effective Amendment No. 53*
(3) Form of Service Agreement with New York Life Benefit Services, Inc.
- Previously filed as Exhibit 9(g) to Post-Effective Amendment No.
37*
(4) Fund Accounting Agreement - Previously filed as Exhibit h(8) to
Post-Effective Amendment No. 51*
i. Opinion and consent of counsel***
j. Not applicable.
k. Not Applicable.
l. Investment representation letter relating to initial capital***
m. (1) Plan of Distribution pursuant to Rule 12b-1 (Class A shares) -
Previously filed as Exhibit m(1) to Post-Effective Amendment No. 51*
(i) Amended and Restated Schedule A to Plan of Distribution**
(2) Plan of Distribution pursuant to Rule 12b-1 (Class B shares) -
Previously filed as Exhibit m(2) to Post-Effective Amendment No. 51*
(i) Amended and Restated Schedule A to Plan of Distribution**
(3) Plan of Distribution pursuant to Rule 12b-1 (Class C shares) -
Previously filed as Exhibit m(3) to Post-Effective Amendment No. 51*
(i) Amended and Restated Schedule A to Plan of Distribution**
n. Amended and Restated Multiple Class Plan Pursuant to Rule 18f-3 -
Previously filed as Exhibit n to Post-Effective Amendment No. 52*
(1) Amended and Restated Exhibit A to Amended and Restated Multiple
Class Plan Pursuant to Rule 18f-3**
o. Codes of Ethics
(1) The MainStay Funds**
(2) MacKay Shields, LLC**
(3) MainStay Management, LLC**
(4) Monitor Capital Advisors, LLC**
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<PAGE> 139
(5) Madison Square Advisors, Inc.**
(6) Dalton, Greiner, Hartman, Maher & Co.**
(7) Gabelli Asset Management**
(8) John A. Levin & Co.**
(9) Markston International LLC**
(10) NYLIFE Distributors, Inc.**
Powers of Attorney - Previously filed with Post-Effective Amendment No.
53*
---------------------------
* Incorporated herein by reference.
** Filed herewith.
*** To be filed by amendment.
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ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following chart indicates the persons controlled by New York
Life. Onership is 100% unless otherwise indicated. Subsidiaries of other
subsidiaries are indicated accordingly.
Name of Organization (Jurisdiction) (1)
---------------------------------------
MainStay VP Series Fund, Inc. (Maryland) (2)
The MainStay Funds (Massachusetts) (2)
New York Life Investment Management Holdings LLC (Delaware)
MacKay Shields LLC (Delaware)
MacKay Shields Domestic General Partner LLC (Delaware)
Madison Square Advisors LLC (Delaware)
NYLCAP Manager LLC (Delaware)
New York Life Capital Partners LLC (Delaware)
MainStay Management LLC (Delaware)
MainStay Shareholder Services LLC (Delaware)
Monitor Capital Advisors LLC (Delaware)
New York Life Investment Management LLC (Delaware)
New York Life Benefit Services LLC (Delaware)
New York Life International Investment Asia Ltd. (Mauritius)
NYLIFE Distributors Inc. (Delaware)
New York Life Insurance and Annuity Corporation (Delaware)
New York Life International, Inc. (Delaware)
GEO New York Life, S.A. (Mexico)
New York Life Insurance Ltd. (South Korea)
La Buenos Aires New York Life Seguros de Vida S.A. (Argentina) 40%
La Buenos Aires New York Life Seguros de Retiro S.A. (Argentina) 40%
Maxima S.A. AFJP (Argentina) 40%
New York Life Insurance Worldwide Ltd. (Hong Kong) [incorporated in
Bermuda]
--------------------
1 By including the indicated corporation in this list, New York Life is
not stating or admitting that said corporations are under its actual
control; rather, these corporations are listed here to ensure full
compliance with the requirements of this Form N-1A.
2 This entity is an unaffiliated registered investment company for
which New York Life and/or its subsidiaries perform investment
management, administrative, distribution and underwriting services.
It is not a subsidiary of New York Life but is included for
informational purposes only.
New York Life International Holdings Ltd. (Mauritius)
New York Life International India Fund LLC (Mauritius) (90%)
New York Life Insurance (Philippines), Inc.
New York Life Worldwide Capital, Inc. (DE)
NYLife Thailand, Inc. (Thailand)
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NYLI-VB Asset Management Co. LLC (Mauritius) (90%)
P.T. Asuransi Jiwa Sewu-New York Life (50.2%) (Indonesia)
Seguros Monterrey, S.A.
Corporativo Seguros
Centro Nacional de Servicios y Operaciones
Centro de Capacitacion Monterrey
Fianzas Monterrey, S.A.
Operadora FMA
Max New York Life Insurance Company PVD Ltd. (26%)
New York Life Settlement Corporation
New York Life Irrevocable Trust of 1996(3)
NYLIFE LLC (Delaware)
Avanti Corporate Health Systems, Inc. (Delaware)
Avanti of the District, Inc. (Maryland)
Eagle Strategies Corp. (Arizona)
New York Life Capital Corporation (Delaware)
New York Life (U.K.) Ltd. (England)(4) (99.97%)
Life Assurance Holding Corporation Limited (23%)
(South Korea)
Windsor Life Assurance Company Limited (Indonesia)
Windsor Construction Company Limited
New York Life International Investment Inc. (Delaware)
Monetary Research Ltd. (Bermuda)
NYL Management Limited (formerly Quorum Capital Management
Limited) (England)
New York Life International Investment Asia Ltd. (Mauritius)
New York Life Trust Company (New York)
NYLCare NC Holdings, Inc. (Delaware)
WellPath Community Health Plans LLC (North Carolina)
(NYLCare NC Holdings, Inc. owns 25%; Duke Medical
Strategies, Inc. owns remaining 75%)
ETHIX Southeast, Inc. (North Carolina)
WPCHP Holdings, Inc. (formerly Sanus-New England, Inc.)
(Delaware)
WellPath Preferred Services LLC (99.9%; WPCHP
Holdings, Inc. owns
--------------------
3 An unaffiliated trust formed solely for the purpose of holding shares
of New York Life Settlement Corporation. It is not a subsidiary of
New York Life but is included for informational purposes only.
4 One Share is held in the name of a Nominee as required by British
law.
other 0.1%) (Delaware)
WellPath Select Holdings LLC (99.9%; WPCHP
Holdings, Inc. owns other 0.1%) (North Carolina)
WellPath Select, Inc. (formerly WellPath
Community Health Plans, Inc.)
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NYLIFE Administration Corp. (Delaware)
NYLIFE Structured Asset Management Company Ltd.
NYLIFE HealthCare Management, Inc. (Delaware)
Express Scripts, Inc. (39.4% of total combined stock and 89.6%
of the voting rights) (Delaware)
Express Scripts Vision Corporation (Delaware)
ESI Canada Holdings, Inc. (Canada)
ESI Canada, Inc. (Canada)
ESI/VRX Sales Development Co.
Diversified Pharmaceutical Services (P.R.), Inc.
Diversified Pharmaceutical Services, Inc.
Diversified NY IPA, Inc.
Express Scripts Specialty Distribution Services, Inc.
ESI Utilization Management Co.
ESI Claims, Inc.
ESI Mail Pharmacy Services, Inc.
Great Plains Reinsurance Company
IVTx, Inc.
Practice Patterns Science, Inc.
Value Health, Inc.
ValueRx of Michigan, Inc.
Your Pharmacy.com, Inc. (Delaware)
NYLIFE Refinery Inc.
NYLIFE Securities Inc. (Delaware)
NYLINK Insurance Agency Incorporated (Delaware)
NYLINK Insurance Agency of Alabama, Incorporated (Alabama)
NYLINK Insurance Agency of Hawaii, Incorporated (Hawaii)
NYLINK Insurance Agency of Idaho, Incorporated (Idaho)(5)(4)
NYLINK Insurance Agency of Massachusetts, Incorporated)
(Massachusetts)
NYLINK Insurance Agency of Montana, Incorporated (Montana)
NYLINK Insurance Agency of Nevada, Incorporated (Nevada)
NYLINK Insurance Agency of New Mexico, Incorporated (New Mexico)
NYLINK Insurance Agency of Ohio, Incorporated (Ohio) (4)
NYLINK Insurance Agency of Oklahoma, Incorporated (Oklahoma) (4)
NYLINK Insurance Agency of Texas, Incorporated (Texas) (4)
NYLINK Insurance Agency of Washington, Incorporated (Washington)
NYLINK Insurance Agency of Wyoming, Incorporated (Wyoming)
--------------------
5 These entities are unaffiliated insurance agencies for which New York
Life and its subsidiaries perform administrative services. They are
not subsidiaries of New York Life but are included for informational
purposes only.
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NYLTEMPS Inc.
Prime Provider Corp.
Prime Provider Corp. of Texas
WellPath of Arizona Reinsurance company (formerly Sanus Reinsurance
Company)
NYLIFE Insurance Company of Arizona (Arizona)
ITEM 25. INDEMNIFICATION
New York Life Insurance Company maintains Directors & Officers
Liability insurance coverage totaling $100 million. The coverage limit applies
each year and has been extended to cover Directors, Trustees and Officers of the
Trust, and subsidiaries and certain affiliates of New York Life. Subject to the
policies' terms, conditions, deductible and retentions, Directors, Officers and
Trustees are covered for claims, including related expenses, made against them
while acting in their capacities as such. The primary policy in the amount of
$25 million is issued by National Union Fire Insurance Company of Pittsburgh,
PA, and the excess policies in the amount at $75 million are issued by various
insurance companies. The issuing insurance companies may be changed from time to
time and there is no assurance that any or all of the current coverage will be
maintained by New York Life.
Article IV of Registrant's Declaration of Trust states as follows:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in
paragraph b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by
the Trust, or by one or more Series thereof if
the claim arises from his or her conduct with
respect to only such Series to the fullest
extent permitted by law against all liability
and against all expenses reasonably incurred or
paid by him in connection with any claim,
action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of
his being or having been a Trustee or officer
and against amounts paid or incurred by him in
the settlement thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims,
actions, suits or proceedings (civil, criminal,
or other, including appeals), actual or
threatened; and the words "liability" and
"expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid
in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(iii) against any liability to the Trust or a Series
thereof or the Shareholders by reason of a
final adjudication by a court or other body
before which a proceeding was brought that he
engaged in willful misfeasance, bad faith,
gross negligence or reckless disregard of the
duties involved in the conduct of his office;
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<PAGE> 144
(iv) with respect to any matter as to which he shall
have been finally adjudicated not to have acted
in good faith in the reasonable belief that his
action was in the best interest of the Trust or
a Series thereof;
(v) in the event of a settlement or other
disposition not involving a final adjudication
as provided in paragraph (b)(i) or (b)(ii)
resulting in a payment by a Trustee or officer,
unless there has been a determination that such
Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in
the conduct of his office;
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available facts
(as opposed to a full trial-type inquiry) by
(x) vote of a majority of the Disinterested
Trustees acting on the matter (provided that a
majority of the Disinterested Trustees then in
office act on the matter) or (y) written
opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be severable, shall
not affect any rights to which any Trustee or officer may now or hereafter be
entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors, administrators
and assigns of such a person. Nothing contained herein shall affect any rights
to indemnification to which personnel of the Trust other than Trustees and
officers may be entitled by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceedings of the character described in paragraph
(a) of this Section 4.3 shall be advanced by the Trust or a Series thereof to
final disposition thereof upon receipt of an undertaking by or on behalf of the
recipient, to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by surety bond or
some other appropriate security provided by the
recipient, or the Trust or a Series thereof
shall be insured against losses arising out of
any such advances; or
(ii) a majority of the Non-interested Trustees
acting on the matter (provided that a majority
of the Disinterested Trustees acts on the
matter) or an independent legal counsel in a
written opinion shall determine, based upon a
review of readily available facts (as opposed
to a full trial-type inquiry), that there is
reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who is
not (i) an "Interested Person" of the Trust (including anyone who has been
exempted from being an "Interested Person" by any rule, regulation or order of
the Commission), or (ii) involved in the claim, action, suit or proceeding.
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<PAGE> 145
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 26. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISOR
The business of MainStay Management LLC, New York Life Insurance Company,
GAMCO Investors, Inc., John A. Levin & Co., Inc., Dalton, Greiner, Hartman,
Maher & Co., MacKay Shields LLC, Madison Square Advisors LLC, Markston
International, LLC and Monitor Capital Advisors LLC is summarized under "Know
with Whom You're Investing" in the Prospectus constituting Part A of this
Registration Statement, which summary is incorporated herein by reference.
The business or other connections of each manager and officer of MainStay
Management LLC is currently listed in the investment adviser registration on
Form ADV for MainStay Management LLC. (File No. 801-54912) and is hereby
incorporated herein by reference.
The business or other connections of each manager and officer of MacKay
Shields LLC is currently listed in the investment adviser registration on Form
ADV for MacKay Shields LLC (File No. 801-5594) and is hereby incorporated herein
by reference.
The business or other connections of each manager and officer of Monitor
Capital Advisors LLC is currently listed in the investment adviser registration
on Form ADV for Monitor Capital Advisors, LLC (File No. 801-34412) and is hereby
incorporated herein by reference.
The business or other connections of each manager and officer at Madison
Square Advisors LLC is currently listed in the investment adviser registration
on Form ADV for Madison Square Advisors LLC (File No. 801-55061) and is
incorporated herein by reference.
The business or other connections of each director and officer of New
York Life Insurance Company is currently listed in the investment adviser
registration on Form ADV for New York Life Insurance Company (File No.
801-19525) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of GAMCO
Investors, Inc. is currently listed in the investment adviser registration on
Form ADV for GAMCO Investors, Inc. (File No. 801-14132) and is hereby
incorporated herein by reference.
13
<PAGE> 146
The business or other connections of each director and officer of John A.
Levin & Co., Inc. is currently listed in the investment adviser registration on
Form ADV for John A Levin & Co., Inc. (File No. 801-52602) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of Dalton,
Greiner, Hartman, Maher & Co. is currently listed in the investment adviser
registration on Form ADV for Dalton, Greiner, Hartman, Maher & Co. (File No.
801-36175) and is hereby incorporated here in by reference.
The business and other connections of each director and officer of
Markston International, LLC is currently listed in the investment adviser
registration on Form ADV for Markston International, LLC (File No. 801-56141)
and is hereby incorporated by reference.
ITEM 27. PRINCIPAL UNDERWRITERS
a. The MainStay Institutional Funds, Inc. (File No. 33-36962)
NYLIFE Distributors Inc. also acts as the principal underwriter for:
NYLIAC Variable Universal Life Separate Account I
NYLIAC Multi-Funded Annuity Separate Account I
NYLIAC Multi-Funded Annuity Separate Account II
NYLIAC Variable Annuity Separate Account I
NYLIAC Variable Annuity Separate Account II
NYLIAC Variable Annuity Separate Account III
NYLIAC Variable Life Insurance Separate Account
NYLIAC Corporate Sponsored Variable Universal Life Separate Account I
NYLIAC Institutionally Owned Life Insurance Separate Account
b.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Business Positions and Office with Positions and Office with Registrant
Address NYLIFE Distributors Inc.
<S> <C> <C>
Boyce, Jefferson C.(2) Director Senior Vice President
Brady, Robert E. (1) Director and Vice President None
Boccio, Frank M.(2) Director None
Rock, Robert D.(2) Director None
</TABLE>
14
<PAGE> 147
<TABLE>
<CAPTION>
<S> <C> <C>
Gallo, Michael G.(2) Director None
Hildebrand, Phillip J.(2) Director None
Levy, Richard D.(2) Director None
Roussin, Stephen C.(3) Chairman and Director President and Trustee
Wendlandt, Gary E.(2) Director Trustee
Lee, Brian (3) President None
Flanagan, John A.(3) Senior Vice President and Vice President, Chief Financial
Chief Financial Officer Officer, and Secretary
Calhoun, Jay S.(2) Senior Vice President and Treasurer None
Warga, Thomas J.(2) Senior Vice President and None
General Auditor
Livornese, Linda M.(2) Vice President None
Murray, Thomas J.(2) Corporate Vice President None
Zuccaro, Richard W.(2) Vice President Tax Vice President
Krystel, David E.(2) Vice President None
McInerney, Barbara (2) Vice President None
Adasse, Louis H.(2) Corporate Vice President None
Leier, Albert W. (3) Corporate Vice President None
Arizmendi, Arphiela(3) Corporate Vice President Assistant Treasurer
Cirillo, Antoinette B.(3) Corporate Vice President Assistant Treasurer
Lorito, Geraldine(3) Assistant Vice President Assistant Treasurer
Gomez, Mark A.(2) Secretary None
Goldstein, Paul Z.(2) Assistant Secretary None
Whittaker, Lori S.(2) Assistant Secretary None
</TABLE>
(1) 260 Cherry Hill Road, Parsippany, NJ 07054
(2) 51 Madison Avenue, New York, NY 10010
(3) Morris Corporate Center I, Building A, 300 Interpace Parkway, Parsippany,
NJ 07054
(c) Inapplicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, the Manager and
NYLIFE Distributors Inc., Morris Corporate
15
<PAGE> 148
Center I, Building A, 300 Interpace Parkway, Parsippany, NJ 07054, at MacKay
Shields LLC, 9 West 57th Street, New York, NY 10019; Madison Square Advisors
LLC, 51 Madison Avenue, New York New York 10010; Monitor Capital Advisors, LLC,
504 Carnegie Center, Princeton, New Jersey 08540; New York Life Insurance
Company, 51 Madison Avenue, New York, NY 10010; GAMCO Investors, Inc., One
Corporate Center, Rye, NY 10580; John A. Levin & Co., Inc., One Rockefeller
Plaza, 25th Floor, New York, NY 10020; Dalton, Greiner, Hartman, Maher & Co.,
1100 Fifth Ave. South, Suite 301, Naples, FL 34102; and Markston International,
LLC, 50 Main Street, White Plains, NY 10606. Records relating to the
Registrant's transfer agent are maintained by MainStay Shareholder Services,
LLC, 260 Cherry Hill Road, Parsippany, NJ 07054. Records relating to the duties
of the Registrant's custodian for the Capital Appreciation Fund, Convertible
Fund, High Yield Corporate Bond Fund, Government Fund, Money Market Fund, Tax
Free Fund, Total Return Fund and Value Fund are maintained by State Street Bank
and Trust Company, 1776 Heritage Drive, Quincy, MA 02171; and records relating
to Registrant's custodian for the Blue Chip Growth Fund, California Tax Free
Fund, Equity Income Fund, Equity Index Fund, Global High Yield Fund, Growth
Opportunities Fund, International Bond Fund, International Equity Fund, MAP
Equity Fund, New York Tax Free Fund, Research Value Fund, Small Cap Growth Fund,
Small Cap Value Fund, Strategic Income Fund and Strategic Value Fund are
maintained by The Bank of New York, 110 Washington Street, New York, NY 10286.
ITEM 29. MANAGEMENT SERVICES.
Inapplicable.
ITEM 30. UNDERTAKINGS.
Inapplicable.
16
<PAGE> 149
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Parsippany
and the State of New Jersey, on the 12th day of October, 2000.
THE MAINSTAY FUNDS
By: /s/ Stephen C. Roussin
---------------
STEPHEN C. ROUSSIN, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities indicated on October 12, 2000.
<TABLE>
<CAPTION>
Signatures Title
<S> <C>
/s/ Richard M. Kernan, Jr.*
-----------
RICHARD M. KERNAN, JR. Chairman and Trustee
-----------
/s/ Stephen C. Roussin President, Chief Executive Officer and
----------- Trustee
STEPHEN C. ROUSSIN
/s/ John A. Flanagan Vice President and Chief Financial
------------ Officer
JOHN A. FLANAGAN (Principal Financial and Accounting Officer)
/s/ Edward J. Hogan* Trustee
-----------
EDWARD J. HOGAN
/s/ Harry G. Hohn* Trustee
-----------
HARRY G. HOHN
/s/ Donald K. Ross* Trustee
-----------
DONALD K. ROSS
/s/ Nancy M. Kissinger* Trustee
</TABLE>
17
<PAGE> 150
<TABLE>
<CAPTION>
<S> <C>
-----------
NANCY M. KISSINGER
/s/ Terry L. Lierman* Trustee
-----------
TERRY L. LIERMAN
/s/ John B. McGuckian* Trustee
-----------
JOHN B. McGUCKIAN
/s/ Donald E. Nickelson* Trustee
-----------
DONALD E. NICKELSON
/s/ Richard S. Trutanic* Trustee
-----------
RICHARD S. TRUTANIC
/s/ Gary E. Wendlandt* Trustee
-----------
GARY E. WENDLANDT
*By: /s/ John A. Flanagan
-----------
As Attorney-in-Fact
</TABLE>
* Pursuant to power of attorney filed with Post-Effective Amendment No. 53.
18
<PAGE> 151
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Amended and Restated Schedule A to the Management Exhibit d(1)(c)
Agreement
Amended and Restated Schedule A to the Sub-Advisory Exhibit d(2)(g)(iii)
Agreement
Amended and Restated Appendix A and B to the Distribution Exhibit e(1)(e)(i)
Agreement.
Amended and Restated Fee Schedule to the Transfer Agency Exhibit h (1)(a)(i)
Agreement
Amended and Restated Schedule A to the Sub-Transfer Agency Exhibit h (1)(b)(i)
Agreement
Amended and Restated Fee Schedule to the Distribution Exhibit m(1)(i)
Agreement pursuant to Rule 12b-1 (Class A shares)
Amended and Restated Fee Schedule to the Distribution Exhibit m(2)(i)
Agreement pursuant to Rule 12b-1 (Class B shares)
Amended and Restated Schedule A to the Distribution Exhibit m(3)(i)
Agreement pursuant to Rule 12b-1 (Class C shares)
Amended and Restated Exhibit A to the Amended and Restated Exhibit n(1)
Multiple Class Plan Pursuant to Rule 18f-3
Code of Ethics - The MainStay Funds Exhibit o(1)
Code of Ethics - MacKay Shields, LLC Exhibit o(2)
Code of Ethics - MainStay Management, LLC Exhibit o(3)
Code of Ethics - Monitor Capital Advisors, LLC Exhibit o(4)
Code of Ethics - Madison Square Advisors, Inc. Exhibit o(5)
Code of Ethics - Dalton, Greiner, Hartman, Maher & Co. Exhibit o(6)
Code of Ethics - Gabelli Asset Management Exhibit o(7)
Code of Ethics - John A. Levin & Co. Exhibit o(8)
Code of Ethics - Markston International LLC Exhibit o(9)
Code of Ethics - NYLIFE Distributors, Inc. Exhibit o(10)
</TABLE>
19
