MAINSTAY FUNDS, 497, 2001-01-03

MAINSTAY FUNDS
497, 2001-01-03

Previous: NUVEEN CALIFORNIA TAX FREE FUND INC, 40-8F-M, 2001-01-03

Next: NBT BANCORP INC, 8-K, 2001-01-03

<PAGE> 1

THE MAINSTAY(R) FUNDS

Prospectus
DECEMBER 29, 2000
<TABLE>
<S> <C>
--------------------------------------------------------
MainStay Mid Cap Growth Fund
--------------------------------------------------------
MainStay Select 20 Equity Fund
--------------------------------------------------------

[MAINSTAY FUND LOGO]

<S> <C>
--------------------------------------------------------
--------------------------------------------------------
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.
</TABLE>
<PAGE> 2

What's Inside?

<TABLE>
<C> <S>
3 Investment Objectives, Principal Investment Strategies and
Principal Risks:
An Overview
6 MainStay Mid Cap Growth Fund
10 MainStay Select 20 Equity Fund
14 Other Investment Strategies and Risks
16 Shareholder Guide
32 Know With Whom You're Investing
</TABLE>
<PAGE> 3

Investment Objectives,
Principal Investment Strategies and Principal Risks:
An Overview

This Prospectus discusses two mutual funds (the "Funds") that invest primarily
for capital appreciation. The Funds offered by this Prospectus are part of The
MainStay Funds, 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 New
York Life Investment Management LLC ("NYLIM") 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.

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.
<PAGE> 4

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 in response to a variety of events including
interest rate changes.

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.
<PAGE> 5

[This page intentionally left blank]
<PAGE> 6

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 U.S. common stocks
and securities related to U.S. common stocks of companies with market
capitalizations similar to the market capitalization of companies in the
Standard & Poor's MidCap 400 Index at the time of the Fund's investment. The
Fund seeks to participate primarily in the expanding markets of technology,
healthcare, communications and other dynamic high-growth industries. Securities
issued by many companies in these markets are frequently considered "growth
stocks." The common stocks of companies with a history of increasing earnings at
a rate that is generally higher than that of average companies are 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 towards investing in various types of
companies as well as multiple 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 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.

The Subadvisor may sell a stock if the stock's earnings growth rate decelerates,
if its valuation is deemed too high in relation to its growth rate or to its
peer group or if, in general, the Subadvisor does not believe that the security
will help the Fund meet its objective.
<PAGE> 7

7
MID CAP GROWTH FUND

PRINCIPAL RISKS

Investment in common stocks and other securities related to common stocks is
particularly subject to the risks of changing economic, stock market, industry
and company conditions and the risk inherent in management's ability to
anticipate those changes that can adversely affect the value of the Fund's
holdings.

Some of the securities in the Fund may carry above-average risk compared to
common stocks that comprise indices 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 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. In addition, the Fund normally invests in
companies in highly competitive industries and sectors. Competition and advances
in technology make these companies highly volatile investments.

The Fund intends to invest in competitive sectors of the economy, such as the
technology sector. When investing in such sectors, the Fund may invest in
companies that incur the risk of increased competition and rapidly changing
technology, which can result in the obsolescence of a product or technology.

PAST PERFORMANCE

Since the Fund commenced operations on December 29, 2000, there are no
performance figures reflecting the Fund's performance.
<PAGE> 8

8
MID CAP GROWTH FUND

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 offering price) 5.50% None None

Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds)(1) None 5.00% 1.00%

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.

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
Assuming no Assuming redemption Assuming no Assuming redemption
Expenses after redemption at the end of each period redemption at the end of each period
<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 may 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) NYLIM has voluntarily agreed to reimburse the Fund's expenses to the extent
that annual operating expenses exceed 1.50% of average daily net assets for
Class A shares and 2.25% of average daily net assets for Class B and C
shares. As a result, for the fiscal year ending December 31, 2001, it is
estimated that the management fee paid will be 0.65% and total annual fund
operating expenses will be 1.50% for Class A shares and 2.25% for Class B
and Class 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 fiscal year 2001.
<PAGE> 9

9
MID CAP GROWTH FUND

[This page intentionally left blank]
<PAGE> 10

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 U.S.
common stocks and securities related to U.S. common stocks that MacKay Shields
LLC, the Fund's Subadvisor, believes have the potential for strong capital
appreciation. The 20 stocks and securities represent the best ideas of the
growth and value teams of the Subadvisor. The common stocks of companies with a
history of increasing earnings at a rate that is generally higher than that of
average companies are considered "growth stocks." "Value stocks" are stocks of
companies that appear undervalued as compared to earnings and other
fundamentals. There is 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 and value portfolio
managers. The Fund maintains a flexible approach towards investing in various
types of companies, as well as multiple 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 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 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
<PAGE> 11

11
SELECT 20 EQUITY FUND

- growth rates and future earnings, and

- estimated value of the company's assets (liquidation value).

With regard to growth stocks, the Subadvisor may sell a security if the earnings
growth rate of a stock decelerates, if its valuation is deemed too high in
relation to its growth rate or to its peer group or if, in general, the
Subadvisor does not believe that the security will help the Fund meet its
objective. With regard to value stocks, the Subadvisor may sell a security if
there is a change in the issuer's financial condition, valuation, or if the
Subadvisor does not believe that the security will help the Fund meet its
objective.

PRINCIPAL RISKS

Investment in common stocks and other securities related to common stocks 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.

Some of the securities in the Fund 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 may engage in active and frequent trading, which may result in
increased transaction costs and the realization of greater net short-term or
long-term capital gains.

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 December 29, 2000, there are no
performance figures reflecting the Fund's performance.
<PAGE> 12

12
SELECT 20 EQUITY FUND

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 offering price) 5.50% None None

Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds)(1) None 5.00% 1.00%

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

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 may be imposed
per exchange.

(2) NYLIM has voluntarily agreed to reimburse the Fund's expenses to the extent
that annual operating expenses exceed 1.50% of average daily net assets for
Class A shares and 2.25% of average daily net assets for Class B and C
shares. As a result, for the fiscal year ending December 31, 2001, it is
estimated that the management fee paid will be 0.57% and total annual fund
operating expenses will be 1.50% for Class A shares and 2.25% for Class B
and Class C shares. This reimbursement may be discontinued at any time
without notice.

(4) "Other Expenses" are based on estimated amounts for fiscal year 2001.
<PAGE> 13

[This page intentionally left blank]
<PAGE> 14

Other Investment Strategies and Risks

Information about each Fund's principal investments, investment practices and
principal risks appears at the beginning of this Prospectus. The information
below describes other investment strategies and risks of the Funds.

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.

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 indices.

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
<PAGE> 15

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.

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.
<PAGE> 16

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

The 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 0.25% service 0.25% service
fee 1.00% total 1.00% total

Contingent deferred None in Sliding scale over 1% on sale of shares
sales charge most cases six years held for one 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 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.
<PAGE> 17

17
SHAREHOLDER GUIDE

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>
PURCHASE SALES CHARGE AS A SALES CHARGE AS A % OF
AMOUNT % OF OFFERING PRICE NET AMOUNT INVESTED
<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>

* 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 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.
<PAGE> 18

18
SHAREHOLDER GUIDE

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 a special arrangement with us. The
Funds have authorized these firms (and other intermediaries that the firms may
designate) to accept orders.
<PAGE> 19

19
SHAREHOLDER GUIDE

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, a division of NYLIM Service
Company LLC, ("MSS"), the Funds' Transfer Agent and an affiliate of New York
Life Investment Management LLC, at 1-800-MAINSTAY (1-800-624-6782), 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
<PAGE> 20

20
SHAREHOLDER GUIDE

---------------------------
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.

- 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:

<TABLE>
<CAPTION>
FOR SHARES CONTINGENT DEFERRED SALES CHARGE AS A
SOLD IN THE: % OF AMOUNT REDEEMED SUBJECT TO THE CHARGE
<S> <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, the Fund 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.

- The Funds expect 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:

- 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, the Funds first redeem the Class C 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.
<PAGE> 21

21
SHAREHOLDER GUIDE
---------------------------
"Good order" means all the necessary information, signatures and documentation
have been received.
---------------------------
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.

INFORMATION ON FEES AND SALES CHARGES
RULE 12B-1 PLANS

Both Funds offered in this prospectus have 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:

- 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, MSS
must receive your completed application and check in good order within three
business days.
<PAGE> 22

22
SHAREHOLDER GUIDE

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 MSS
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 either of the Funds or

- $100 for initial and $50 for subsequent purchases through a systematic
investment plan.
<PAGE> 23

23
SHAREHOLDER GUIDE

[This page intentionally left blank]
<PAGE> 24

24
SHAREHOLDER GUIDE

BUYING AND SELLING MAINSTAY SHARES

OPENING YOUR ACCOUNT

<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>

BY PHONE: Through your investment * MSS must receive your application and check,
professional: Between 8 am payable to The MainStay Funds, in good order within
and 6 pm Eastern time any three business days. If not, MSS can cancel your
day the New York Stock order and hold you liable for costs incurred in
Exchange is open; call placing it.
before 4 pm to buy shares * $5,000 minimum.
at the current day's price.

BY MAIL: Address your order to: * MSS must receive your application and check,
The MainStay Funds payable to The MainStay Funds, in good order within
P.O. Box 8401 three business days. If not, MSS can cancel your
Boston, MA 02266-8401 order and hold you liable for costs incurred in
placing it.
* $500 minimum.
</TABLE>

BUYING ADDITIONAL SHARES OF THE FUNDS

<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>

BY WIRE: To buy shares the same day, Have your investment professional phone in your order
MSS must receive your wired and wire the purchase amount to:
money by 4 pm. 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 (1-800-624-6782)
Eligible investors can
purchase shares by using
electronic debits from a
designated bank account.

BY MAIL: Address your order to: Make your check payable to The MainStay Funds. Be
The MainStay Funds sure to write on your check the Fund name, account
P.O. Box 8401 number and class of shares.
Boston, MA 02266-8401 * $50 minimum.
Send overnight orders to:
The MainStay Funds
c/o Boston Financial
Data Services
66 Brooks Drive
Braintree, MA 02184
</TABLE>
<PAGE> 25

25
SHAREHOLDER GUIDE

SELLING SHARES

<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>

BY PHONE: TO RECEIVE PROCEEDS BY * The maximum order MSS can process is $100,000.
CHECK: * MSS will only send checks to the account's owner at
Through your investment the owner's address of record and may not send
professional, or call checks to addresses on record for 30 days or less.
1-800-MAINSTAY
(1-800-624-6782) between 8
am and 6 pm Eastern time
any day the New York Stock
Exchange is open; call
before 4 pm to sell shares
at the current day's prices
(NAV).

TO RECEIVE PROCEEDS BY * MSS must have your bank account information on
WIRE: file.
Call 1-800-MAINSTAY * Generally, after receiving your sell order by
(1-800-624-6782). Eligible phone, MSS will send the proceeds by bank wire to
investors may sell shares your designated bank account the next business day,
and have proceeds although it may take up to seven days to do so.
electronically credited to Your bank may charge you a fee to receive the wire
a designated bank account. transfer.
You can have redemption * MSS charges an $11 fee per transaction.
proceeds wired any day * $5,000 minimum.
banks and the New York
Stock Exchange are open.

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 There is a $15 fee for checks mailed to you
Data Services overnight. There is an $11 fee for wire redemptions.
66 Brooks Drive
Braintree, MA 02184
</TABLE>
<PAGE> 26

26
SHAREHOLDER GUIDE
---------------------------
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 MSS 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.
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 (1-800-624-6782) 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.
<PAGE> 27

27
SHAREHOLDER GUIDE
---------------------------
MSS 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.

EXCHANGING SHARES AMONG MAINSTAY FUNDS

This Prospectus discusses 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, 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 may 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. MSS 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.

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
<PAGE> 28

28
SHAREHOLDER GUIDE

selected plans. A plan document must be adopted for a plan to be in existence.

Custodial services are also provided 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, MSS 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 due to insufficient funds, 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. MSS 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.

- 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.

- MSS requires a written order to sell shares if:

- an account has submitted a change of address in the previous 30 days.
<PAGE> 29

29
SHAREHOLDER GUIDE

---------------------------
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 (1-800-624-6782) 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 minimums or limitations on buying
or selling shares. Consult a representative of your plan or financial
institution if in doubt.

- MSS requires a written order to sell shares and a signature guarantee if:
- MSS 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, the Funds reserve 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 of 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.

ADDITIONAL INFORMATION

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 MSS immediately. If you fail to notify MSS within one year of
the transaction, you may be required to bear the costs of correction.

DETERMINING THE FUNDS' SHARE PRICES (NAV) AND THE VALUATION OF SECURITIES

NYLIM 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
<PAGE> 30

30
SHAREHOLDER GUIDE

---------------------------
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.

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.

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 MSS directly. The five choices are:

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,
<PAGE> 31

31
SHAREHOLDER GUIDE

---------------------------
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.

will generally be a result of income generated on debt investments and will be
taxable as ordinary income.
MSS 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.

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.
<PAGE> 32

Know With Whom

You're Investing

WHO RUNS THE FUNDS' DAY-TO-DAY BUSINESS?

New York Life Investment Management LLC (formerly MainStay Management LLC), 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:

<TABLE>
<S> <C>
Mid Cap Growth Fund 0.75%
Select 20 Equity Fund 0.70%
</TABLE>

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.

PORTFOLIO MANAGERS:

MID CAP GROWTH FUND

Edmund C. Spelman

Rudolph C. Carryl
<PAGE> 33

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.

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.
<PAGE> 34

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 Funds or the Distributor. This
Prospectus and the related Statement of Additional Information do not constitute
an offer by the Funds 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.

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
mainstayfunds.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
NYLIFE Distributors Inc. is the Distributor of The MainStay Funds.

[RECYCLE LOGO]
For more information call 1-800-MAINSTAY (1-800-624-6782).
<PAGE> 35

THE MAINSTAY(R) FUNDS
GROWTH FUNDS
MainStay Select 20 Equity Fund
----------------------------------------------------------
MainStay Small Cap Growth Fund
----------------------------------------------------------
MainStay Small Cap Value Fund
----------------------------------------------------------
MainStay Mid Cap Growth Fund
----------------------------------------------------------
MainStay Capital Appreciation Fund
----------------------------------------------------------
MainStay Blue Chip Growth Fund
----------------------------------------------------------
MainStay Equity Index 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
----------------------------------------------------------
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.

[NYL INVESTMENT MANAGEMENT LOGO]

For more information call 1-800-MAINSTAY (1-800-624-6782). MS01a-12/00
<PAGE> 36
THE MAINSTAY FUNDS

STATEMENT OF ADDITIONAL INFORMATION

December 29, 2000

This Statement of Additional Information supplements the information
contained in the Prospectus dated December 29, 2000, 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.
<PAGE> 37
TABLE OF CONTENTS

<TABLE>
<S> <C>
THE MAINSTAY FUNDS ............................................................. 1

ADDITIONAL INFORMATION ABOUT CERTAIN FUNDS ..................................... 1
MID CAP GROWTH FUND ......................................................... 1
SELECT 20 EQUITY FUND ....................................................... 2

INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS .................. 2
TEMPORARY DEFENSIVE MEASURES ................................................ 2
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS ..................... 2
LENDING OF PORTFOLIO SECURITIES ............................................. 4
CASH EQUIVALENTS ............................................................ 4
BANK OBLIGATIONS ............................................................ 5
COMMERCIAL PAPER ............................................................ 5
U.S. GOVERNMENT SECURITIES .................................................. 5
DEBT SECURITIES ............................................................. 6
COMMON STOCK ................................................................ 6
PREFERRED STOCK ............................................................. 6
CONVERTIBLE SECURITIES ...................................................... 6
ARBITRAGE ................................................................... 7
FOREIGN SECURITIES .......................................................... 8
FOREIGN CURRENCY TRANSACTIONS ............................................... 9
BRADY BONDS ................................................................. 12
ZERO COUPON BONDS ........................................................... 12
WHEN-ISSUED SECURITIES ...................................................... 13
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES .......................... 13
WARRANTS .................................................................... 20
SHORT SALES AGAINST THE BOX ................................................. 20
OPTIONS ON SECURITIES ....................................................... 21
OPTIONS ON FOREIGN CURRENCIES ............................................... 25
SECURITIES INDEX OPTIONS .................................................... 27
LOAN PARTICIPATION INTERESTS ................................................ 28
REAL ESTATE INVESTMENT TRUSTS ("REITS") ..................................... 29
DOLLAR-WEIGHTED AVERAGE MATURITY ............................................ 30
RESTRICTED SECURITIES ....................................................... 30
SECURITIES OF OTHER INVESTMENT COMPANIES .................................... 30
SOURCES OF LIQUIDITY OR CREDIT SUPPORT ...................................... 31
STRIPPED SECURITIES ......................................................... 31
SWAP AGREEMENTS ............................................................. 31
ILLIQUID SECURITIES ......................................................... 32
RISKS ASSOCIATED WITH DEBT SECURITIES ....................................... 32
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS") .................. 33

FUNDAMENTAL INVESTMENT RESTRICTIONS ............................................ 34
</TABLE>

i
<PAGE> 38
<TABLE>
<S> <C>
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS ........................................ 35

TRUSTEES AND OFFICERS .......................................................... 37

THE MANAGER, THE SUBADVISOR AND THE DISTRIBUTOR ................................ 42
MANAGEMENT AGREEMENT ........................................................ 42
SUB-ADVISORY AGREEMENT ...................................................... 43
DISTRIBUTION AGREEMENT ...................................................... 44
DISTRIBUTION PLANS .......................................................... 44
OTHER SERVICES .............................................................. 46
EXPENSES BORNE BY THE TRUST ................................................. 46

PORTFOLIO TRANSACTIONS AND BROKERAGE ........................................... 47

NET ASSET VALUE ................................................................ 49

SHAREHOLDER INVESTMENT ACCOUNT ................................................. 51

SHAREHOLDER TRANSACTIONS ....................................................... 51

PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE ................................. 52
HOW TO PURCHASE SHARES OF THE FUNDS ......................................... 52
BY MAIL ..................................................................... 52
BY TELEPHONE ................................................................ 52
BY WIRE ..................................................................... 52
ADDITIONAL INVESTMENTS ...................................................... 53
PURCHASES AT NAV ............................................................ 55
REDUCED SALES CHARGES ON CLASS A SHARES ..................................... 56
LETTER OF INTENT ("LOI") .................................................... 56
CONTINGENT DEFERRED SALES CHARGE, CLASS A ................................... 57
CONTINGENT DEFERRED SALES CHARGE, CLASS B ................................... 58
CONTINGENT DEFERRED SALES CHARGE, CLASS C ................................... 60
REDEMPTIONS AND EXCHANGES ................................................... 60
DISTRIBUTIONS IN KIND ....................................................... 61
SUSPENSION OF REDEMPTIONS ................................................... 61
EXCHANGE PRIVILEGES ......................................................... 62

TAX-DEFERRED RETIREMENT PLANS .................................................. 63
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR
CORPORATIONS AND SELF-EMPLOYED INDIVIDUALS .................................. 63
INDIVIDUAL RETIREMENT ACCOUNT ("IRA") ....................................... 63
403(b)(7) TAX SHELTERED ACCOUNT ............................................. 65
GENERAL INFORMATION ......................................................... 65

CALCULATION OF PERFORMANCE QUOTATIONS .......................................... 66

TAX INFORMATION ................................................................ 68
TAXATION OF THE FUNDS ....................................................... 68
</TABLE>

ii
<PAGE> 39
<TABLE>
<S> <C>
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL ....................... 70
DISCOUNT .................................................................... 71
TAXATION OF OPTIONS AND SIMILAR INSTRUMENTS ................................. 71
PASSIVE FOREIGN INVESTMENT COMPANIES ........................................ 72
FOREIGN CURRENCY GAINS AND LOSSES ........................................... 73
COMMODITY INVESTMENTS ....................................................... 73
DISPOSITIONS OF FUND SHARES ................................................. 74
TAX REPORTING REQUIREMENTS .................................................. 74
FOREIGN TAXES ............................................................... 75
STATE AND LOCAL TAXES - GENERAL ............................................. 75
EXPLANATION OF FUND DISTRIBUTIONS ........................................... 75
GENERAL INFORMATION ......................................................... 76

ORGANIZATION AND CAPITALIZATION ................................................ 76
GENERAL ..................................................................... 76
VOTING RIGHTS ............................................................... 76
SHAREHOLDER AND TRUSTEE LIABILITY ........................................... 76
REGISTRATION STATEMENT ...................................................... 77

OTHER INFORMATION .............................................................. 77
INDEPENDENT ACCOUNTANTS ..................................................... 77
TRANSFER AGENT .............................................................. 77
CUSTODIANS .................................................................. 78
LEGAL COUNSEL ............................................................... 78
CONTROL PERSONS AND SHARE OWNERSHIP OF THE FUNDS ............................ 78
CODE OF ETHICS .............................................................. 78

APPENDIX A ..................................................................... 79
DESCRIPTION OF SECURITIES RATINGS ........................................... 79
MOODY'S INVESTORS SERVICE, INC .............................................. 79
STANDARD & POOR'S ........................................................... 81
</TABLE>

iii
<PAGE> 40
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. This Statement of Additional Information ("SAI") relates solely to
the Mid Cap Growth Fund and the Select 20 Equity Fund (the "Fund" or "Funds").
New York Life Investment Management LLC ("NYLIM" or the "Manager") serves as the
manager for the Funds. MacKay Shields LLC ("MacKay Shields" or the "Subadvisor")
is the Subadvisor for the Funds.

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 Prospectus discusses the investment objectives of the Funds and the
principal investment strategies to be employed in seeking to achieve those
objectives. This section contains supplemental information concerning certain of
the securities and other instruments in which the Funds may invest, the
principal investment strategies the Funds may utilize, and certain risks
involved with those strategies.

NONE OF THE FUNDS ALONE CONSTITUTES A
COMPLETE INVESTMENT PROGRAM.

Investment decisions for each Fund are made independently from those of
the other accounts and investment companies that may be managed by a Subadvisor.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which a Fund invests at the same time
as another fund or another account managed by the same Subadvisor, available
investments or opportunities for sales will be allocated equitably to each. In
some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by a Fund or the price paid or received by a Fund.

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
U.S. common stocks of companies with market capitalizations similar to the
market capitalization of companies in the Standard & Poor's MidCap 400 Index at
the time of the Fund's investment. The Fund seeks to participate primarily in
the expanding markets of technology, healthcare, communications and other
dynamic high-growth industries. Securities issued by companies in these markets
are frequently considered "growth stocks." The common stocks of companies with a
history of increasing earnings at a rate that is generally higher than that of
average companies are considered "growth stocks." MacKay Shields, 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.

1
<PAGE> 41
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 U.S. common stocks and securities related to U.S. common stocks that
MacKay Shields, the Fund's Subadvisor, believes have the potential for strong
capital appreciation. The 20 stocks and securities represent the best ideas of
the growth and value teams of the Subadvisor. The common stocks of companies
with a history of increasing earnings at a rate that is generally higher than
that of average companies are considered "growth stocks." "Value stocks" are
stocks of companies that appear undervalued as compared to earnings and other
fundamentals. There is 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.

The Fund combines the security selection ideas of the growth and value
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).

INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS

The Funds may engage in the following investment practices or invest in
the following instruments to the extent permitted in the Prospectus 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
Subadvisor.

2
<PAGE> 42
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 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 Subadvisor seeks to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including accrued interest), the Fund will direct the
seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.

The Funds' Board of Trustees (the "Board," the "Trustees" or the "Board
of Trustees") has reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Funds to enter into repurchase
agreements with such sellers. If the other party to a repurchase agreement were
to become bankrupt, a Fund could experience delays in recovering its investment
or losses.

The Funds 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

3
<PAGE> 43
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 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 other 23 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' Subadvisor.

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 the Subadvisor determines to
make securities loans, it is intended that the value of securities loaned will
not exceed 33% of the value of the total assets of the 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

Both 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

4
<PAGE> 44
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 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

5
<PAGE> 45
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.

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

6
<PAGE> 46
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.

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.

7
<PAGE> 47
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 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

8
<PAGE> 48
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 may 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 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

9
<PAGE> 49
U.S. dollar price of the security. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying security transaction, a Fund will be able to
insulate itself from a possible loss resulting from a change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received, although a Fund would also forego any gain it
might have realized had rates moved in the opposite direction. This technique is
sometimes referred to as a "settlement" hedge or "transaction" hedge.

Another example is when the Subadvisor believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of a Fund's portfolio securities denominated in such foreign currency. Such a
hedge (sometimes referred to as a "position" hedge) will tend to offset both
positive and negative currency fluctuations, but will not offset changes in
security values caused by other factors. The Fund also may hedge the same
position by using another currency (or a basket of currencies) expected to
perform in a manner substantially similar to the hedged currency ("proxy"
hedge). The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute "transaction" or "position" hedges (including "proxy" hedges), a Fund
will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
the Fund to deliver an 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

10
<PAGE> 50
denominated in such currency or through conversion of other assets of the Fund
into such currency. If a Fund engages in an offsetting transaction, the Fund
will realize a gain or a loss to the extent that there has been a change in
forward contract prices. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. When a Fund has sold a foreign currency, a similar
process would be followed at the consummation of the forward contract.

Of course, a Fund is not required to enter into such transactions with
regard to its foreign currency-denominated securities and will not do so unless
deemed appropriate by the Subadvisor. A Fund generally will not enter into a
forward contract with a term of greater than one year.

In cases of transactions which constitute "transaction" or "settlement"
hedges or "position" hedges (including "proxy" hedges) or "cross-currency"
hedges that involve purchase and sale of two different foreign currencies
directly through the same foreign currency contract, a Fund may deem its forward
currency hedge position to be covered by underlying Fund portfolio securities or
may establish a Segregated Account with its custodian in an amount equal to the
value of the Fund's total assets committed to the consummation of the subject
hedge. The Segregated Account will consist of liquid assets. In the case of
"anticipatory" hedges and "cross-currency" hedges that involve the purchase and
sale of two different foreign currencies indirectly through separate forward
currency contracts, the Fund will establish a Segregated Account with its
custodian as described above. In the event a Fund establishes a Segregated
Account, the Fund will mark-to-market the value of the assets in the Segregated
Account. If the value of the liquid assets placed in the Segregated Account
declines, additional liquid assets will be placed in the account by the Fund on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.

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 Subadvisor believes active currency management can be employed as
an overall portfolio risk management tool. For example, in its 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.

11
<PAGE> 51
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; (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.

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.

12
<PAGE> 52
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 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.

13
<PAGE> 53
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 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

14
<PAGE> 54
backed by the full faith and credit of the U.S. government. FNMA is authorized
to borrow from the U.S. Treasury to meet its obligations.

FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation and acts as a government instrumentality under
authority granted by Congress. FHLMC was formerly owned by the twelve Federal
Home Loan Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCs") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and collection of principal, but PCs are not backed by the full
faith and credit of the U.S. government.

If either fixed or variable rate pass-through securities issued by the
U.S. government or its agencies or instrumentalities are developed in the
future, the Funds reserve the right to invest in them.

Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets a Fund's investment quality standards. There can be no assurance
that the private insurers or guarantors can meet their obligations under the
insurance policies or guarantee arrangements. A Fund may buy mortgage-related
securities without insurance or guarantees if, through an examination of the
loan experience and practices of the originator/servicers and poolers, the
Fund's Subadvisor determines that the securities meet the Fund's quality
standards.

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

15
<PAGE> 55
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 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

16
<PAGE> 56
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.

If collection of principal (including prepayments) on the mortgage
loans during any semi-annual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.

Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

OTHER MORTGAGE-RELATED SECURITIES. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.

The Funds' Subadvisor expects 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

17
<PAGE> 57
residuals is extremely sensitive to prepayments on the related underlying
mortgage assets, in the same manner as an interest-only ("IO") class of stripped
mortgage-backed securities. See "Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances, a portfolio may fail to
recoup fully its initial investment in a CMO residual.

CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the 1933 Act, as amended. CMO residuals, whether or
not registered under such Act, may be subject to certain restrictions on
transferability, and may be deemed "illiquid" and subject to a Fund's
limitations on investment in illiquid securities.

Under certain circumstances, a Fund's investment in residual interests
in "real estate mortgage investment conduits" ("REMICs") may cause shareholders
of that Fund to be deemed to have taxable income in addition to their Fund
dividends and distributions and such income may not be eligible to be reduced
for tax purposes by certain deductible amounts, including net operating loss
deductions. In addition, in some cases, the Fund may be required to pay taxes on
certain amounts deemed to be earned from a REMIC residual. Prospective investors
may wish to consult their tax advisors regarding REMIC residual investments by a
Fund.

CMOs and REMICs may offer a higher yield than U.S. government
securities, but they may also be subject to greater price fluctuation and credit
risk. In addition, CMOs and REMICs typically will be issued in a variety of
classes or series, which have different maturities and are retired in sequence.
Privately issued CMOs and REMICs are not government securities nor are they
supported in any way by any governmental agency or instrumentality. In the event
of a default by an issuer of a CMO or a REMIC, there is no assurance that the
collateral securing such CMO or REMIC will be sufficient to pay principal and
interest. It is possible that there will be limited opportunities for trading
CMOs and REMICs in the over-the-counter market, the depth and liquidity of which
will vary from time to time. Holders of "residual" interests in REMICs
(including the Fund) could be required to recognize potential phantom income, as
could shareholders (including unrelated business taxable income for tax-exempt
shareholders) of funds 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.

18
<PAGE> 58
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to fully recoup its initial investment in these securities even if
the security is in one of the highest rating categories.

Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.

RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. As is the case with
other fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline; however, when interest rates
are declining, the value of mortgage-related securities with prepayment features
may not increase as much as other fixed income securities. The value of some
mortgage-backed securities in which the Funds may invest may be particularly
sensitive to changes in prevailing interest rates, and, like the other
investments of the Funds, the ability of a Fund to successfully utilize these
instruments may depend in part upon the ability of a Subadvisor to forecast
interest rates and other economic factors correctly. If a Subadvisor incorrectly
forecasts such factors and has taken a position in mortgage-backed securities
that is or becomes contrary to prevailing market trends, the Funds could be
exposed to the risk of a loss.

Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.

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.

19
<PAGE> 59
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' Subadvisor expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables(SM)
("CARS(SM)"). CARS(SM) represent undivided fractional interests in a trust
("trust") whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS(SM) are passed through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. An investor's return on CARS(SM)
may be affected by early prepayment of principal on the underlying vehicle sales
contracts. If the letter of credit is exhausted, the trust may be prevented from
realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of Federal and state
bankruptcy and insolvency laws, or other factors. As a result, certificate
holders may experience delays in payments or losses if the letter of credit is
exhausted.

If consistent with a Fund's investment objective and policies 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

20
<PAGE> 60
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 Subadvisor believes
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 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

21
<PAGE> 61
"closing purchase transaction"--the purchase of a call option on the same
security with the same exercise price and expiration date as the covered call
option which it has previously written on any particular security. The Fund will
realize a gain or loss from a closing purchase transaction if the amount paid to
purchase a call option in a closing transaction is less or more than the amount
received from the sale of the covered call option. Also, because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the closing out of a
call option is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund. When a security is to
be sold from the Fund's portfolio, the Fund will first effect a closing purchase
transaction so as to close out any existing covered call option on that security
or otherwise cover the existing call option.

A closing purchase transaction may be made only on a national or
foreign securities exchange (an "Exchange") which provides a secondary market
for an option with the same exercise price and expiration date, except as
discussed below. There is no assurance that a liquid secondary market on an
Exchange or otherwise will exist for any particular option, or at any particular
time, and for some options no secondary market on an Exchange or otherwise may
exist. If a Fund is unable to effect a closing purchase transaction involving an
exchange-traded option, the Fund will not sell the underlying security until the
option expires, or the Fund otherwise covers the existing option portion or the
Fund delivers the underlying security upon exercise. Once an option writer has
received an exercise notice, it cannot effect a closing purchase transaction in
order to terminate its obligation under the option and must deliver or purchase
the underlying securities at the exercise price. Over-the-counter options differ
from exchange-traded options in that they are two-party contracts with price and
other terms negotiated between buyer and seller, and generally do not have as
much market liquidity as Exchange-traded options. Therefore, a closing purchase
transaction for an over-the-counter option may in many cases only be made with
the other party to the option.

Each Fund pays brokerage commissions and dealer spreads in connection
with writing covered call options and effecting closing purchase transactions,
as well as for purchases and sales of underlying securities. The writing of
covered call options could result in significant increases in a Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put option
writing transactions be covered, the Funds may, to the extent determined
appropriate by the Subadvisor, engage without limitation in the writing of
options on U.S. government securities.

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.

22
<PAGE> 62
The premium which the Funds receive from writing a put option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the
historical price volatility of the underlying security, the option period,
supply and demand and interest rates.

A covered put writer assumes the risk that the market price for the
underlying security will fall below the exercise price, in which case the writer
could be required to purchase the security at a higher price than the
then-current market price of the security. In both cases, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option.

The Funds may effect a closing purchase transaction to realize a profit
on an outstanding put option or to prevent an outstanding put option from being
exercised.

If a Fund is able to enter into a closing purchase transaction, the
Fund will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option respectively. After writing a put option, the Fund may incur a loss equal
to the difference between the exercise price of the option and the sum of the
market value of the underlying security plus the premium received from the sale
of the option.

In addition, the Funds may also write straddles (combinations of
covered puts and calls on the same underlying security). The extent to which the
Funds may write covered put and call options and enter into so-called "straddle"
transactions involving put or call options may be limited by the requirements of
the Code for qualification as a regulated investment company and the Trust's
intention that each Fund qualify as such. Subject to the limitation that all
call and put option writing transactions be covered, the Funds may, to the
extent determined appropriate by the Subadvisor, 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 Subadvisor deems 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

23
<PAGE> 63
the right to purchase. The Fund would ordinarily recognize a gain if the value
of the securities decreased during the option period below the exercise price
sufficiently to cover the premium. The Fund would recognize a loss if the value
of the securities remained above the difference between the exercise price and
the premium.

The Funds may also purchase call options on securities the Funds intend
to purchase to protect against substantial increases in prices of such
securities pending their ability to invest in an orderly manner in such
securities. The purchase of a call option would entitle the Fund, in exchange
for the premium paid, to purchase a security at a specified price upon exercise
of the option during the option period. The Fund would ordinarily realize a gain
if the value of the securities increased during the option period above the
exercise price sufficiently to cover the premium. The Fund would have a loss if
the value of the securities remained below the sum of the premium and the
exercise price during the option period. In order to terminate an option
position, the Funds may sell put or call options identical to those previously
purchased, which could result in a net gain or loss depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid on the put or call option when it was purchased.

MARRIED PUTS. Each Fund may engage in a strategy known as "married
puts." This strategy is most typically used when the Fund owns a particular
common stock or security convertible into common stock and wishes to effect a
short sale against the box (see "Short Sales Against the Box") but for various
reasons is unable to do so. The Fund may then enter into a series of stock and
related option transactions to achieve the economic equivalent of a short sale
against the box. To implement this trading strategy, the Fund will
simultaneously execute with the same broker a purchase of shares of the common
stock and an "in the money" over-the-counter put option to sell the common stock
to the broker and generally will write an over-the-counter "out of the money"
call option in the same stock with the same exercise price as the put option.
The options are linked and may not be exercised, transferred or terminated
independently of the other.

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

24
<PAGE> 64
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 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

25
<PAGE> 65
call options would enable the Fund to purchase currency for a fixed amount of
dollars which is less than the market value of such currency, resulting in a
gain that may offset, at least partially, the effect of any currency-related
increase in the price of securities the Fund intends to acquire. As in the case
of other types of options transactions, however, the benefit a Fund derives from
purchasing foreign currency options will be reduced by the amount of the premium
and related transaction costs. In addition, if currency exchange rates do not
move in the direction or to the extent anticipated, a Fund could sustain losses
on transactions in foreign currency options which would deprive it of a portion
or all of the benefits of advantageous changes in such rates.

If a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received by the Fund.

Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.

A call option written on foreign currency by a Fund is "covered" if
that Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in liquid assets in a segregated account with
its custodian.

Options on foreign currencies to be written or purchased by a Fund will
be traded on U.S. and foreign exchanges or over-the-counter. Exchange-traded
options generally settle in cash, whereas options traded over-the counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option. As with other kinds of options transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge up to the
amount of the premium received and a Fund could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to a Fund's position, a Fund may forfeit the entire amount of the
premium plus related transaction costs.

26
<PAGE> 66
A Fund also may use foreign currency options to protect against
potential losses in positions denominated in one foreign currency against
another foreign currency.

There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.

Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchanged-traded options. Foreign currency exchange-traded options generally
settle in cash, whereas options traded over-the-counter may settle in cash or
result in delivery of the underlying currency upon exercise of the option.

SECURITIES INDEX OPTIONS

The Funds 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.

27
<PAGE> 67
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 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

28
<PAGE> 68
becomes a debtor in a bankruptcy proceeding. A successor agent bank generally
will be appointed to replace the terminated bank, and assets held by the agent
bank under the corporate loan agreement should remain available to holders of
corporate loans. If, however, assets held by the agent bank for the benefit of a
Fund were determined by an appropriate regulatory authority or court to be
subject to the claims of the agent bank's general or secured creditors, the Fund
might incur certain costs and delays in realizing payment on a corporate loan,
or suffer a loss of principal and/or interest. In situations involving
intermediate Participants similar risks may arise.

When a Fund acts as co-lender in connection with a participation
interest or when a Fund acquires a Participation Interest the terms of which
provide that a Fund will be in privity of contract with the corporate borrower,
the Fund will have direct recourse against the borrower in the event the
borrower fails to pay scheduled principal and interest. In all other cases, the
Fund will look to the agent bank to enforce appropriate credit remedies against
the borrower. In acquiring Participation Interests a Fund's Subadvisor will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the Participation Interest meets the
Fund's qualitative standards. There is a risk that there may not be a readily
available market for loan Participation Interests and, in some cases, this could
result in a Fund disposing of such securities at a substantial discount from
face value or holding such security until maturity. When a Fund is required to
rely upon a lending institution to pay the Fund principal, interest, and other
amounts received by the lending institution for the loan participation, the Fund
will treat both the borrower and the lending institution as an "issuer" of the
loan participation for purposes 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.

29
<PAGE> 69
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.

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

30
<PAGE> 70
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, 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

31
<PAGE> 71
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.

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.

32
<PAGE> 72
Since shares of the Funds represent an investment in securities with
fluctuating market prices, the value of shares of each Fund will vary as the
aggregate value of the Funds' portfolio securities increases or decreases.
Moreover, the value of lower rated debt securities that a Fund purchases may
fluctuate more than the value of higher rated debt securities. Lower rated debt
securities generally carry greater risk that the issuer will default on the
payment of interest and principal. Lower rated fixed income securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. Changes in the value of securities subsequent
to their acquisition will not affect cash income or yields to maturity to the
Funds but will be reflected in the net asset value of the Funds' shares.

Corporate debt securities may bear fixed, contingent, or variable rates
of interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer, participations based on revenues, sales or profits, or the purchase of
common stock in a unit transaction (where corporate debt securities and common
stock are offered as a unit).

When and if available, debt securities may be purchased at a discount
from face value. From time to time, each Fund may purchase securities not paying
interest or dividends at the time acquired if, in the opinion of the Subadvisor,
such securities have the potential for future income (or capital appreciation,
if any).

RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")

High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The prices
of high yield bonds have been found to be less sensitive to interest-rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities.

Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market.

Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Fund's net asset value and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. A Fund records the interest on these securities
annually as income even though it receives no cash interest until the security's
maturity or payment date. Also, distributions on account of such interest
generally will be taxable to shareholders 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.

33
<PAGE> 73
FUNDAMENTAL INVESTMENT RESTRICTIONS

The Funds' investment restrictions set forth below are fundamental
policies of each Fund; i.e., they may not be changed with respect to a Fund
without a majority vote of the outstanding shares of that Fund, as defined in
the 1940 Act. Except for those investment policies of a Fund specifically
identified as fundamental in the Prospectus 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 Prospectus 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:

1. 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.

34
<PAGE> 74
2. 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.

3. 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.

4. 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.

5. 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 Subadvisor 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;

35
<PAGE> 75
(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 Subadvisor,
pursuant to guidelines approved by the Trustees.

The Subadvisor takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by 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;

36
<PAGE> 76
(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
Subadvisor. Information pertaining to the Trustees and officers of the Trust is
set forth below. Trustees deemed to be "interested persons" of the Trust for
purposes of the 1940 Act are indicated by an asterisk.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
Richard M. Kernan, Jr.* Chairman and Trustee Director of MainStay VP Series Fund, Inc.
51 Madison Avenue From January 1987 to present; Chairman of the
New York, NY 10010 board and Chief Executive Officer of MainStay
Date of Birth: 12/13/40 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.

Stephen C. Roussin* President, Chief Executive President, New York Life Investment
300 Interpace Parkway Officer and Trustee Management, 2000 to present; President,
Parsippany, NJ 07054 MainStay Management, June 1997-2000; Director
Date of Birth: 7/12/63 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.
</TABLE>

37
<PAGE> 77
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
Harry G. Hohn* Trustee Retired Chairman and Chief Executive Officer,
51 Madison Avenue New York Life Insurance Company; Chairman of
New York, NY 10010 the Board and Chief Executive Officer, New
Date of Birth: 3/1/32 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); Independent
Box 2321 Management Consultant, 1992 to 1997.
Sun Valley, ID 83353
Date of Birth: 8/17/32

Nancy Maginnes Kissinger Trustee Member, Council of Rockefeller University,
Henderson Road New York, NY, 1991 to present; Trustee,
South Kent, CT 06785 Rockefeller University, 1995 to present;
Date of Birth: 4/13/34 Trustee, Animal Medical Center, 1993 to
present; and Trustee, The Masters School,
1994 to present; Member, Board of Overseers,
Rockefeller Institute of Government, Albany,
NY, 1983-1992 (Board dissolved).

Terry L. Lierman Trustee President, Capitol Associates, Inc., 1984 to
426 C Street, N.E. present; Managing Director, The Life Services
Washington, D.C. 20002 Trust, 1998 to present; Vice Chair, Employee
Date of Birth: 1/4/48 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>

38
<PAGE> 78
<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 plc,
Ardverna 1990 to present; Director, Ulster Television
Cloughmills plc, 1970 to present; Chairman of the Board,
Northern Ireland BT4 49NL Tedcastle Holding Ltd. (energy), 1995 to
Date of Birth: 11/13/39 present; Director, Cooneen Textiles Ltd.
(clothing manufacturer), 1967 to present;
Director Allied Irish Banks plc, 1977 to
present; Chairman, First Trust Bank, 1991 to
present; Director, Unidare plc
(engineering), 1986 to present; Director,
Irish Continental Group plc (ferry
operations), 1988 to present; Director,
Harbour Group Ltd. (management company),
1980 to present; Chairman, Industrial
Development Board, 1990 to 1997; and
Chairman of Senate and Senior
Pro-Chancellor, Queen's University, 1986 to
1999.

Donald E. Nickelson Trustee Vice Chairman, Harbour Group Industries,
1701 Highway A-1-A Inc., 1991 to present; Director, PaineWebber
Suite 218 Group, 1980 to 1993; President, PaineWebber
Vero Beach, FL 32963 Group, 1988 to 1990; Chairman of the Board,
Date of Birth: 12/9/32 Paine Webber Properties, 1985 to 1989;
Director, Harbour Group, 1986 to present;
Director, Sugen, Inc., 1992 to 1999; Chairman
of the Board, Omniquip International, Inc.,
1996 to 1999; Director, Carey Diversified,
L.L.C., January 1,1998 to present.

Donald K. Ross* Trustee Retired Chairman and Chief Executive Officer,
953 Cherokee Lane New York Life Insurance Company; Director,
Franklin Lakes, NJ 07417 New York Life Insurance Company, 1978 to
Date of Birth: 7/1/25 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 - present;
Suite 400 Chairman, The Somerset Group (financial
Washington, DC 20036 advisory firm), 1990 to present; Chief
Date of Birth: 2/13/52 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>

39
<PAGE> 79
<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; Chief
New York, New York 10010 Executive Officer, New York Life Investment
Date of Birth: 10/08/50 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 President Chairman, Monitor Capital Advisors, LLC, 1997
51 Madison Avenue to present; Senior Vice President, MainStay
New York, NY 10010 Institutional Funds Inc., 1998 to present;
Date of Birth: 9/17/57 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, Company 1999 to date; Treasurer of the Strong
New York, NY 10010 and Secretary Funds and Senior Vice President of Strong
Date of Birth: 6/5/46 Capital Management, Inc. from 1997 to 1998;
Partner, PricewaterhouseCoopers LLP from
1994 to 1997.

Patrick J. Farrell* Vice President and Asst. Vice President, New York Life Insurance
51 Madison Avenue Secretary Company, 1996 to present; Assistant
New York, NY 10010 Treasurer, Member of the Dividend Committee,
Date of Birth: 9/27/59 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, 1986 to
Date of Birth: 12/12/49 1995; Tax Vice President, NYLIFE Securities
Inc., 1987 to present; Tax Vice President,
NAFCO, Inc., 1990 to present; Tax Vice
President, NYLIFE Depositary Inc., 1990 to
present; Tax Vice President, NYLIFE Inc.,
1990 to present; Tax Vice President, NYLIFE
Insurance Company of Arizona,
</TABLE>

40
<PAGE> 80
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
--------------------- ---------- -------------------
<S> <C> <C>
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.

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
COMPENSATION FROM REGISTRANT
NAME OF 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>

41
<PAGE> 81
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 SUBADVISOR AND THE DISTRIBUTOR

MANAGEMENT AGREEMENT

Pursuant to the Management Agreement for the Funds, NYLIM, 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. NYLIM is a wholly-owned 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 "Independent Trustees"). The Trustees, including the Independent
Trustees, approved the Management Agreement on behalf of the Funds at an
in-person meeting held on December 11, 2000.

The Manager has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or officers of the Trust to serve
in the capacities in which they have been elected or appointed.

The Management Agreement provides that the Manager shall not be liable
to a Fund for any error or judgment by the Manager or for any loss sustained by
a Fund except in the case of the Manager's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Management Agreement also provides
that it shall terminate automatically if assigned and that it may be terminated
without penalty by either party upon no more than 60 days' nor less than 30
days' written notice.

In connection with its administration of the business affairs of each
of the Funds, and except as indicated in the Prospectus under the heading
"Manager, 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 Subadvisor pursuant to the Sub-Advisory
Agreement; 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.

42
<PAGE> 82
SUB-ADVISORY AGREEMENT

The Manager has entered into a Sub-Advisory Agreement with MacKay
Shields for the management of the Mid Cap Growth Fund and the Select 20 Equity
Fund. Pursuant to this Sub-Advisory Agreement, subject to the supervision of the
Trustees of the Trust and the Manager in conformity with the stated policies of
each of the Funds and the Trust, Mackay Shields manages these 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 Agreement will remain in effect for two years
following its effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Trustees or
by vote of a majority of the outstanding voting securities of each of the Funds
(as defined in the 1940 Act and the rules thereunder) and, in either case, by a
majority of the Trustees who are not "interested persons" of the Trust, the
Manager, or any Subadvisor (as the term is defined in the 1940 Act) (the
"Independent Trustees"). The Trustees, including the Independent Trustees,
approved the Sub-Advisory Agreement on behalf of the Funds at an in-person
meeting held on December 11, 2000.

The Subadvisor has authorized any of its directors, officers and
employees who have been elected or appointed as Trustees or officers of the
Trust to serve in the capacities in which they have been elected or appointed.
In connection with the services it renders, the Subadvisor bears the salaries
and expenses of all of its personnel.

The Sub-Advisory Agreement provides that the Subadvisor shall not be
liable to a Fund for any error of judgment by the 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
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.

Because the Funds have not yet commenced operations, no fees were
payable under the Management Agreement or the Sub-Advisory Agreement.

43
<PAGE> 83
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 11, 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 Independent Trustees, upon 60 days' written notice to
the Distributor, or by vote of a majority of the outstanding voting securities
of that Fund, upon 60 days' written notice to the Trust. The Distribution
Agreement will terminate in the event of its assignment.

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

44
<PAGE> 84
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.

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

45
<PAGE> 85
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 December 29, 2000, 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.

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 ("MSS"), a division of NYLIM
Service Company LLC and the Funds' transfer agent, for the cost of certain
correspondence to shareholders and the establishment of shareholder accounts.

EXPENSES BORNE BY THE TRUST

Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of each Fund, is responsible under its
Management Agreement for the payment of expenses related to each Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trustees who are not affiliated with the Manager or Subadvisor,
(iii) certain fees and expenses of the Trust's Custodians and Transfer Agent,
(iv) the charges and expenses of the Trust's legal counsel and independent
accountants, (v) brokers' commissions and

46
<PAGE> 86
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

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

47
<PAGE> 87
primary considerations, the Conduct Rules of the NASD and such other policies as
the Trustees may determine, the Subadvisor 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 the Sub-Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act"), the Subadvisor may cause a
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Subadvisor an amount of commission for
effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Subadvisor
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Subadvisor's overall responsibilities to the Trust or to its other clients. The
term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling securities,
and the availability of securities or of purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts;
and effecting securities transactions and performing functions incidental
thereto such as clearance and settlement.

Although commissions paid on every transaction will, in the judgment of
the Subadvisor, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers (except the Affiliated Broker) who were selected to
execute transactions on behalf of the Trust and the Subadvisor's other clients
in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.

Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Subadvisor for no
consideration other than brokerage or underwriting commissions. Research
provided by brokers is used for the benefit of all of the Subadvisor's clients
and not solely or necessarily for the benefit of the Trust. The Subadvisor's
investment management personnel attempt to evaluate the quality of Research
provided by brokers. Results of this effort are sometimes used by the Subadvisor
as a consideration in the selection of brokers to execute portfolio
transactions.

In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Subadvisor. Investment

48
<PAGE> 88
decisions for a Fund and for the Subadvisor's other clients are made with a view
to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment 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 Subadvisor will not be reduced as a consequence of the Subadvisor's 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
Subadvisor 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 Subadvisor in carrying out its obligations to the Funds.

Because they have not commenced operations, the Funds have not paid any
brokerage commissions.

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.

49
<PAGE> 89
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 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

50
<PAGE> 90
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.

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
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);

51
<PAGE> 91
- exchange requests between identical registrations; and

- redemptions less than $100,000 to the record address only.

PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE

HOW TO PURCHASE SHARES OF THE FUNDS

GENERAL INFORMATION

The three classes of shares each represent an interest in the same
portfolio of investments of each Fund, have the same rights and are identical in
all respects, except that, to the extent applicable, each Class Bears its own
service and distribution expenses and may bear incremental transfer agency costs
resulting from its sales arrangements. Each class of each Fund has exclusive
voting rights with respect to provisions of the Rule 12b-1 plan for such class
of a Fund pursuant to which its distribution and service fees are paid, and each
class has similar exchange privileges. The net income attributable to Class B
and Class C shares and the dividends payable on Class B and Class C shares will
be reduced by the amount of the higher Rule 12b-1 fee and incremental expenses
associated with such class. Likewise, the NAV of the Class B and Class C shares
generally will be reduced by such class specific expenses (to the extent the
Fund has undistributed net income) and investment performance of Class B and
Class C shares will be lower than that of Class A shares. For additional
information on the features of Class A, Class B and Class C shares, see
"Alternative Sales Arrangements."

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

52
<PAGE> 92
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.

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

53
<PAGE> 93
normally will be credited to the shareholder's Fund account within two business
days thereafter. Shareholders whose bank is an ACH member also may use
AutoInvest to automatically purchase shares of a Fund on a scheduled basis by
electronic debit for an account designated by the shareholder on an application
form. The initial investment must be in accordance with the investment amounts
previously mentioned. Subsequent minimum investments are $50 monthly, $100
quarterly, $250 semiannually, or $500 annually. The investment day may be any
day from the first through the twenty-eighth of the respective month. Redemption
proceeds from Fund shares purchased by AutoInvest may not be paid until 10 days
or more after the purchase date. Fund shares may not be redeemed by AutoInvest.

OTHER INFORMATION

Investors may, subject to the approval of the Trust, the Distributor,
the Manager and the Subadvisor to the particular Fund, purchase shares of a Fund
with liquid securities that are eligible for purchase by that Fund and that have
a value that is readily ascertainable. These transactions will be effected only
if the Subadvisor intends to retain the security in the Fund as an investment.
The Trust reserves the right to amend or terminate this practice at any time. An
investor must call MAINSTAY at 1-800-MAINSTAY before sending any securities.

The Trust and the Distributor reserve the right to redeem shares of any
shareholder who has failed to provide the Trust with a certified Taxpayer I.D.
number or such other tax-related certifications as the Trust may require. A
notice of redemption, sent by first class mail to the shareholder's address of
record, will fix a date not less than 30 days after the mailing date, and shares
will be redeemed at the NAV determined as of the close of business on that date
unless a 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 A PERCENTAGE OF
SALES CHARGE AS A PERCENTAGE OF: OFFERING PRICE:
NET AMOUNT RETAINED RETAINED BY
AMOUNT OF PURCHASE OFFERING PRICE INVESTED BY DEALER THE 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>

54
<PAGE> 94
----------

* No sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% may be imposed on certain
redemptions of such shares within one year of the date of purchase. See
"Reduced Sales Charges on Class A Shares -- Contingent Deferred Sales
Charge, Class A."

Although an investor will not pay an initial sales charge on
investments of $1,000,000 or more, the Distributor may pay, from its own
resources, a commission to dealers on such investments. In such cases, the
dealer will receive a commission of 1.00% on the portion of a sale from
$1,000,000 to $2,999,999, 0.50% of any portion from $3,000,000 to $4,999,999 and
0.40% on any portion of $5,000,000 or more. 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 Mid Cap
Growth Fund aggregating less than $50,000 at a price based upon the net asset
value of Class A shares of the Mid Cap Growth Fund on December 29, 2000. 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 29, 2000 $ 10.00
Per Share Sales Charge - 5.50% of offering price
(5.82% of net asset value per share) 0.58
Class A Per Share Offering Price to the Public $ 10.58
</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."

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

55
<PAGE> 95
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.

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

56
<PAGE> 96
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.

57
<PAGE> 97
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>

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.

58
<PAGE> 98
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,
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.

59
<PAGE> 99
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 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.

60
<PAGE> 100
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.

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.

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.

61
<PAGE> 101
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. Certain additional conditions may
apply to exchanges between a Fund and MainStay Equity Index Fund. 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 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

62
<PAGE> 102
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
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

63
<PAGE> 103
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.

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

64
<PAGE> 104
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 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

65
<PAGE> 105
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

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.

66
<PAGE> 106
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 December 29, 2000, 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.

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,

67
<PAGE> 107
the Salomon Brothers World Government Benchmark Bond Index, the Salomon Brothers
non-U.S. Dollar World Government Bond Index, the Lehman Brothers Municipal Bond
Index and the Lehman Brothers Government Corporate Index; (ii) other groups of
mutual funds tracked by Morningstar Inc. or Lipper Analytical Services, widely
used independent research firms which rank mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) and other
measures of the performance of the economy to assess the real rate of return
from an investment in the Funds. Advertisements for a Fund may also include
general information about the performance of unmanaged indexes with investment
parameters similar to the Fund's. Unmanaged indexes may assume the reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs and expenses.

From time to time, advertisements for the Funds may include general
information about the services and products offered by the Funds, MainStay
Institutional Funds Inc. and New York Life Insurance Company and its
subsidiaries. For example, such advertisements may include statistical
information about those entities including, but not limited to, the number of
current shareholder accounts, the amount of assets under management, sales
information, the distribution channels through which the entities' products are
available, marketing efforts and statements about this information by the
entities' officers, directors and employees.

TAX INFORMATION

TAXATION OF THE FUNDS

The following summarizes certain federal income tax considerations
generally affecting the Funds and their stockholders. No attempt is made to
present a detailed explanation of the tax treatment of the Funds or their
stockholders, and the discussion here is not intended as a substitute for
careful tax planning. The discussion is based upon provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal tax consequences of
the purchase, ownership, and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.

Each Fund intends to be treated as a regulated investment company
("RIC") under Subchapter M of the Code. To qualify as a regulated investment
company, each Fund must, among other things: (i) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
certain securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies ("Qualifying
Income Test"); (ii) diversify its holdings so that, at the end of each quarter
of the taxable year, (a) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. Government securities, the securities
of other regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting

68
<PAGE> 108
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 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.

69
<PAGE> 109
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 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

70
<PAGE> 110
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 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

71
<PAGE> 111
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.

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

72
<PAGE> 112
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.

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,

73
<PAGE> 113
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.

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).

74
<PAGE> 114
Under the federal income tax law, a Fund will be required to report to
the IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares (other than shares of the Money Market Fund), except in the case of
certain exempt shareholders. Under the backup withholding provisions of Section
3406 of the Code, all such taxable distributions and proceeds from the
redemption or exchange of a Fund's shares may be subject to withholding of
federal income tax at the rate of 31% in the case of nonexempt shareholders who
fail to furnish a Fund with their taxpayer identification number and with
required certifications regarding their status under the federal income tax law
or if the IRS or a broker notifies a Fund that the number furnished by the
shareholder is incorrect. In addition, both the Fund and the shareholder are
potentially subject to a $50 penalty imposed by the IRS if a correct, certified
taxpayer identification number is not furnished and used on required information
returns.

If the withholding provisions are applicable, any such distributions
and proceeds, whether taken in cash or reinvested in shares, will be reduced by
the amounts required to be withheld. Backup withholding is not an additional tax
and any amounts withheld are creditable against the shareholder's U.S. Federal
tax liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.

FOREIGN TAXES

Investment income and gains received by a Fund from sources outside the
United States may be subject to foreign taxes which were paid or withheld at the
source. The payment of such taxes will reduce the amount of dividends and
distributions paid to the Funds' stockholders. Since the percentage of each
Fund's total assets 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.

75
<PAGE> 115
GENERAL INFORMATION

The foregoing discussion generally relates to U.S. federal income tax
law as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of a Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
amounts constituting ordinary income to him or her.

ORGANIZATION AND CAPITALIZATION

GENERAL

The Funds are separate series of 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 [ ]. 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.

76
<PAGE> 116
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 Prospectus do not contain all the information
included in the Company's registration statement filed with the SEC under the
1933 Act with respect to the securities offered hereby, certain portions of
which have been omitted pursuant to the rules and regulations of the SEC. The
registration statement, including the exhibits filed therewith, may be examined
at the offices of the SEC in Washington, D.C.

Statements contained herein and in the Prospectus as to the contents
of any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.

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, a division of NYLIM Service Company
LLC, 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.

77
<PAGE> 117
CUSTODIANS

The Bank of New York ("BONY") serves as custodian for the Funds. BONY
has its principal office at 48 Wall Street, New York, New York 10286.

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.

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

Pursuant to Rule 17j-1 under the 1940 Act, 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 the
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 Subadvisor has adopted its own Codes of Ethics to govern the personal
trading activities of its personnel.

The Distributor has adopted its own Code of Ethics which is designed to
identify and address certain conflicts of interest between personal investment
activities of its employees and the interests of its clients such as each Fund,
in compliance with Rule 17j-1 under the 1940 Act. The Code of Ethics permits
employees of the Distributor to engage in personal securities transactions,
including with respect to securities held by one or more Funds, subject to
certain requirements and restrictions. The employees of the Distributor must
disclose all personal securities holdings immediately upon commencement of
employment, as well as on an annual basis thereafter.

78
<PAGE> 118
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.

79
<PAGE> 119
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

80
<PAGE> 120
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.

81
<PAGE> 121
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.

82
<PAGE> 122
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.