<PAGE> 1
THE FULL MAINSTAY LINE-UP INCLUDES:
AGGRESSIVE GROWTH
Small Cap Growth Fund
Small Cap Value Fund
GROWTH
Blue Chip Growth Fund
Capital Appreciation Fund
Equity Index Fund
International Equity Fund
GROWTH AND INCOME
Convertible Fund
Equity Income Fund
MAP Equity Fund
Growth Opportunities Fund
Research Value Fund
Strategic Value Fund
Total Return Fund
Value Fund
INCOME
Global High Yield Fund
Government Fund
High Yield Corporate Bond Fund
International Bond Fund
Money Market Fund
Strategic Income Fund
TAX-FREE INCOME
California Tax Free Fund
New York Tax Free Fund
Tax Free Bond Fund
THIS BACK PANEL IS NOT PART OF THE PROSPECTUS
MSPR08-06/99
The
MainStay
Funds
PROSPECTUS
May 1, 1999
As supplemented
June 1, 1999
MAP EQUITY FUND
CLASS I SHARES
[MAINSTAY LOGO]
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
What's Inside?
<TABLE>
<C> <S>
3 MAP Equity Fund
7 Shareholder Guide
19 Know With Whom You're Investing
21 Financial Highlights
</TABLE>
<PAGE> 3
MainStay MAP
Equity Fund
The MAP Equity Fund's investment objective is to seek long-term appreciation of
capital. The Fund also seeks to earn income, but this is a secondary objective.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of its total assets in equity-type
securities, including common stocks, as well as securities convertible into, or
exchangeable for, common stocks. The Fund primarily invests in the securities of
domestic issuers.
INVESTMENT PROCESS
In pursuing the Fund's investment objective, Markston International, LLC, the
Fund's Subadviser, seeks to identify securities that are out of favor but where
a catalyst exists for turning such securities into investments that the
Subadviser believes will have improved performance (i.e., value opportunities).
Factors examined by the Subadviser to indicate value include: statistical
indications, such as low multiples of book value or cash flow, and more
fundamental factors, such as industry consolidations. The Subadviser also places
emphasis on the presence of a catalyst that may unlock a company's potential,
such as management changes, restructurings and sales of underperforming assets.
In selecting securities for investment, the Subadviser also assesses the
judgment, quality and integrity of company management and the track record of
product development.
3
<PAGE> 4
MAP EQUITY FUND
Although under normal circumstances the Fund intends to hold its securities for
a relatively long period of time, the Subadviser may sell investments when it
believes the opportunity for current profits or the risk of market decline
outweighs the prospect of capital gains. Certain securities may be acquired from
time to time in an effort to earn short-term profits.
PRINCIPAL RISKS
The net asset value of the Fund will fluctuate and you could lose money by
investing in the Fund. An investment in the 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.
Investment in common stocks and other equity securities is particularly subject
to the risk of changing economic, stock market, industry and company conditions,
which can adversely affect the value of the Fund's holdings. The total return
for a convertible security will be partly dependent upon the performance of the
underlying common stock into which it can be converted.
The principal risk of investing in value stocks is that they may never reach
what the Subadviser 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 and therefore the Fund's
performance may be lower or higher than that of funds that invest in other types
of equity securities (such as those emphasizing growth stocks).
TEMPORARY DEFENSIVE INVESTMENTS -- In times of unusual or adverse conditions, or
during periods when the Subadviser believes that investment opportunities in the
equity markets are diminished (due to either fundamental changes in those
markets or an anticipated general decline in the value of equity securities),
for temporary defensive purposes, the Fund may invest without limit in cash,
4
<PAGE> 5
MAP EQUITY FUND
89 28.18
90 -5.09
91 27.69
92 10.53
93 8.67
94 2.76
95 32.50
96 23.82
97 27.99
98 24.23
ANNUAL RETURNS
(by calendar year 1989-1998)
preferred stock, money market investments or other debt or debt-related
instruments. During such times, the Fund may not invest in accordance with its
investment objectives or investment strategies and, as a result, the Fund may
not achieve its investment objectives.
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund by showing
changes in its performance over a ten year period and by showing how the Fund's
average annual returns for one, five and ten years compare to those of a
broad-based securities market index. The Fund commenced operations in 1970 as
the Mutual Benefit Fund. It was renamed MAP-Equity Fund on May 1, 1995. Pursuant
to an Agreement and Plan of Reorganization, the MAP-Equity Fund was reorganized
as the MainStay MAP Equity Fund. The shares of the MAP-Equity Fund are being
designated as Class I shares of the Fund. The performance figures shown reflect
the performance of the MAP-Equity Fund for the periods ended December 31, 1998.
As with all mutual funds, past performance is not necessarily an indication of
how the Fund will perform in the future.
BEST AND WORST QUARTERLY RETURNS
(1989-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 18.48% 4/98
Lowest return/worst quarter -14.53% 3/90
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
MAP Equity Fund 18.33% 20.62% 16.90%
S&P 500 Index* 28.58% 24.06% 19.21%
</TABLE>
* "S&P 500(R)" and "500" are trademarks of The McGraw-Hill Companies, Inc. The
S&P 500 Index is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gains distributions.
5
<PAGE> 6
MAP 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 Class I shares of the Fund.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee *
Maximum Account Fee **
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
MANAGEMENT FEE 0.75%
DISTRIBUTION AND/OR SERVICE (12b-1) FEES NONE
OTHER EXPENSES 0.37%(1)
-------
TOTAL ANNUAL FUND OPERATING EXPENSES 1.12%(2)
=======
FEE WAIVER 0.12%
NET EXPENSE 1.00%
</TABLE>
* 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 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 Individual accounts with
balances below $500 ($10,000 for Institutional accounts). There are
exceptions. See the Shareholder Guide.
(1) Estimated.
(2) The Manager has contractually agreed to limit total annual fund operating
expenses to 1.00% for Class I shares from the date I shares are first
offered through May 30, 2001, after which time the Manager may discontinue
the limitation. For a two-year period following expiration of the expense
limitation, the Manager may be entitled to reimbursement for a portion of
expenses paid pursuant to the expense limitation.
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 redeem all your shares at the end of each period. The Example
also assumes that your investment has a 5% return each year and that the Fund
operating expenses remain the same.
<TABLE>
<CAPTION>
Expenses after
<S> <C>
1 year $ 114
3 years $ 356
5 years $ 617
10 years $1,363
</TABLE>
6
<PAGE> 7
Shareholder
Guide
The following pages are intended to help you make the most of your investments
in the Fund.
You are eligible to buy Class I shares if you:
- - INSTITUTIONAL SHAREHOLDERS -- are an employer, association or other group
retirement plan, employee benefit trust, financial institution, endowment,
foundation or corporation
- - INSTITUTIONAL SHAREHOLDERS -- are a participant in a "wrap account" or similar
program under which you pay a fee to a broker-dealer, investment adviser or
other financial institution which has entered into a supplemental agreement
with the Distributor
- - INDIVIDUAL SHAREHOLDERS -- owned shares of the MAP-Equity Fund on June 8, 1999
or are an employee, former employee or current or former sales agent of The
Mutual Benefit Life Insurance Company or MBL Life Assurance Corporation and
their affiliates, including account rollovers from qualified employee benefit
plans such as defined benefit pension plans, 401(k) plans and sales incentive
plans
BUYING AND SELLING MAINSTAY SHARES
How to Open Your MainStay Account
If you are participating in a company savings plan, such as a 401(k) plan,
profit sharing plan, defined benefit plan or other employee-directed plan, your
company will provide you with the information you need to open an account and
buy and sell shares of the Fund. If you are a participant in a "wrap account" or
similar program, your investment professional will provide you with information.
7
<PAGE> 8
SHAREHOLDER GUIDE
When you open your account, you may also want to decide which buying and selling
options (described below) to choose, 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. NAV is generally calculated as of the close
of 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 next NAV calculated
after MainStay Shareholder Services, Inc., the Fund's transfer agent ("MSS"),
receives your order in good order.
Investment minimums
- - initial combined investment for Institutional Shareholders -- at least
$250,000, which may be spread over a thirteen-month period after opening the
account
- - $500 initial investment amount for purchases by Individual Shareholders
- - $100 initial investment amount for purchases by Individual Shareholders
through a systematic investment plan
Subsequent investments
- - $1,000 for Institutional Shareholders
- - $50 for Individual Shareholders
- - $100 for purchases by Individual Shareholders through a systematic investment
plan
- ---------------------------
"Good order" means all the necessary information, signatures and documentation
have been received.
8
<PAGE> 9
SHAREHOLDER GUIDE
BUYING ADDITIONAL SHARES -- INDIVIDUAL SHAREHOLDERS
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
BY WIRE: To buy shares the same Have your investment professional phone in your
day, MainStay must order and wire the purchase amount to:
receive your telephone State Street Bank and Trust Company
order by noon Eastern - ABA #011 0000 28
time and your wired - Attn: Custody and Shareholder Services
money by 4 pm. - The MainStay Funds
- MAP Equity Fund -- Class I
- your account number
- name(s) of investor(s)
ELECTRONICALLY: ACH Call 1-800-MainStay
Eligible investors can
purchase shares by using
electronic debits from a
designated bank account.
BY MAIL: Address your order to: Make your check payable to The MainStay Funds.
The MainStay Funds Be sure to write on your check the Fund name,
P.O. Box 8401 account number and class of shares.
Boston, MA 02266-8401 - $50 minimum for Individual Shareholders
Send overnight orders to:
The MainStay Funds
c/o Boston Financial
Data Services
2 Heritage Drive
North Quincy, MA
02171-2138
</TABLE>
9
<PAGE> 10
SHAREHOLDER GUIDE
SELLING SHARES -- INDIVIDUAL SHAREHOLDERS
Shares may be redeemed in any of the following ways. Write to us or call
1-800-MAINSTAY 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).
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
BY PHONE: TO RECEIVE PROCEEDS BY - The maximum order MainStay can process is $100,000.
CHECK: - MainStay will only send checks to the account's owner(s) at the
Through your investment owner's address of record and will not send checks to addresses
professional or call which have been changed within the last 30 days.
1-800-MAINSTAY. - This option is not available if your shares are held in certificate
form.
TO RECEIVE PROCEEDS BY - MainStay must have your bank account information on file.
WIRE: - Generally, after receiving your sell order by phone, MainStay will
Call 1-800-MAINSTAY. send the proceeds by bank wire to your designated bank account the
Eligible investors may next business day, although it may take up to seven days to do so.
sell shares and have Your bank may charge you a fee to receive the wire transfer.
proceeds electronically - MainStay charges a $10 fee per transaction.
credited to a designated - $5,000 minimum.
bank account. You can - This option is not available if your shares are held in certificate
have redemption proceeds form.
wired any day 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 documentation, if required. You
The MainStay Funds must ask to sell your shares in writing and have your signature
c/o Boston Financial guaranteed if you:
Data Services - sell amounts in excess of $100,000
2 Heritage Drive - want to send redemptions to an address other than the address of
North Quincy, MA record or
02171-2138 - want redemptions made payable to someone other than the account
holder.
There is a $15 fee for checks mailed to you overnight. There is a $10
fee for wire redemptions.
</TABLE>
10
<PAGE> 11
SHAREHOLDER GUIDE
- ---------------------------
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
neither The MainStay Funds nor MSS will 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 fail to use established safeguards for your protection. These
safeguards are among those currently in place at 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 redemptions, either totally or
partially, by a distribution-in-kind of securities (instead of cash) from the
Fund's portfolio.
SHAREHOLDER SERVICES
Automatic Services
Buying or selling shares automatically is easy with the services described
below. You select your schedule and amount, subject to certain restrictions. You
can set up most of these services with your application, or by calling
1-800-MAINSTAY for a form.
Systematic investing -- Individual Shareholders only
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.
Payroll deductions
If your employer offers this option, you can make automatic investments through
payroll deduction.
SYSTEMATIC WITHDRAWAL PLAN -- INDIVIDUAL SHAREHOLDERS ONLY
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.
11
<PAGE> 12
SHAREHOLDER GUIDE
EXCHANGING SHARES AMONG MAINSTAY FUNDS -- INDIVIDUAL SHAREHOLDERS ONLY
Individual Shareholders may exchange all or a portion of their Class I shares
into Class A shares of another MainStay Fund without the imposition of a sales
charge. Prior to making exchanges, you should note that a Rule 12b-1 fee is
imposed on Class A shares. Individual shareholders should request and read
carefully the prospectus for any MainStay Fund they wish to exchange into before
they place an exchange request. Once you exchange your Class I shares for Class
A shares of another Fund, you may not exchange those shares back into Class I
shares. Currently, the other MainStay Funds do not offer Class I shares,
therefore, Institutional Shareholders may not exchange their shares.
You may make exchanges from the Fund to Class A shares of another Fund by phone.
There is also a systematic exchange program that allows you to make regularly
scheduled, systematic exchanges from the Fund to the Class A shares of another
MainStay Fund.
The Funds discourage frequent trading by shareholders among the Funds in
response to market fluctuations. Accordingly, in order to maintain a stable
asset base and to reduce administrative expenses borne by the Fund, five
exchanges per account are permitted in each calendar year without the imposition
of any transaction fee; subsequently, a $10 processing fee will be assessed per
exchange and additional exchange requests may be denied. The processing fee will
not be charged on systematic exchanges, on exchanges processed via MainStay's
automated system and on certain accounts, such as retirement plans and broker
omnibus accounts where no participant is listed, for which tracking data is not
available.
12
<PAGE> 13
SHAREHOLDER GUIDE
- ---------------------------
MainStay tries to make investing easy by offering a variety of programs to buy,
sell and exchange Fund shares. These programs make it convenient to add to your
investment and easy to access your money when you need it.
- ---------------------------
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxation. Consult your tax adviser on the consequences. When you sell
exchanged shares, you will have to pay any applicable sales charges.
GENERAL POLICIES
Buying Shares
- - All investments must be in U.S. dollars with funds drawn on a U.S. bank. As a
rule, MainStay does not accept third-party checks, and it reserves the right
to limit the number of checks processed at one time. If your check does not
clear, your order will be canceled and you will be responsible for any losses
or fees MainStay incurs as a result.
Selling Shares
- - You may sell shares by calling or writing MSS or your investment professional.
MSS must receive your order in good order. If you have share certificates, you
must return them with a written redemption request.
- - Your shares will be sold at the next NAV calculated after MSS receives your
order in good order. MainStay will make the payment 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 is received.
- - 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.
- - MainStay requires a written order to sell shares if:
- an account has submitted a change of address in the previous thirty days
13
<PAGE> 14
SHAREHOLDER GUIDE
- - MainStay requires a written order to sell shares and a signature guarantee if:
- MainStay does not have required bank information to wire funds
- 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
- the proceeds are to be payable to someone other than the account holder(s)
Telephone purchase orders must be at least $5,000 per Fund. Wires are not
accepted when the New York Stock Exchange or banks are closed.
You will receive notice in writing if MainStay revises or terminates the
systematic withdrawal plan or the exchange privileges.
In the interests of all shareholders, MainStay reserves the right to:
- - refuse any purchase or exchange requests that could adversely affect the Fund
or its operations, including those from any individual or group who, in the
Fund's judgment, is likely to engage in excessive trading
- - change or discontinue its exchange privilege upon notice to shareholders, or
temporarily suspend this privilege without notice under extraordinary
circumstances
- - charge a $12 annual account fee (maximum of $36 per social security or tax
I.D. number) on accounts with balances less than $500 for Individual
Shareholders and $10,000 for Institutional Shareholders. With respect to
Individual Shareholders, 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
- ---------------------------
A signature guarantee helps protect against fraud. You can obtain one from most
banks, credit unions and securities dealers, but not from a notary public. For
joint accounts, each signature must be guaranteed. Please call MSS at
1-800-MAINSTAY to ensure that your signature will be guaranteed by an
appropriate institution.
- ---------------------------
The policies and fees described in this prospectus govern transactions with the
MainStay Funds. If you invest through a third party--bank, broker, 401(k) plan,
financial adviser or financial supermarket--there may be transaction fees for,
and you may be subject to different investment minimums or limitations on,
buying or selling shares. Consult a representative of your plan or financial
institution if in doubt.
14
<PAGE> 15
SHAREHOLDER GUIDE
DETERMINING THE FUND'S SHARE PRICE (NAV) AND THE VALUATION OF SECURITIES
MainStay calculates the share price of the Fund (also known as its net asset
value or NAV) at the close of trading on the New York Stock Exchange (usually 4
pm Eastern time). The value of the Fund's investments is based on current market
value. Events affecting the value of the Fund's securities that occur between
the time their prices are determined and the close of the Exchange will not be
reflected in the calculation of NAV unless the Subadviser 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 the Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
CAPITAL GAINS
Funds earn capital gains when they sell securities at a profit.
When the Fund pays dividends
The Fund declares and distributes any dividends quarterly.
Dividends are paid on the first business day of each month after a dividend is
declared.
When the Fund pays capital gains
At each fiscal year-end, the Fund matches its gains against its losses. If the
balance results in a gain, the Fund will distribute the gain to shareholders in
December.
15
<PAGE> 16
SHAREHOLDER GUIDE
HOW TO TAKE YOUR EARNINGS
You may receive your share of MainStay Fund earnings in one of five ways. You
can make your choice when you fill out the application, and change it as often
as you like by notifying your investment professional (if permitted by the
broker-dealer) or MainStay directly. The five choices are:
1. Reinvest everything in the same Fund
2. Take the dividends in cash and reinvest the capital gains in the same Fund
3. Take the capital gains in cash and reinvest the dividends in the same Fund
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 Class I shares of the MAP Equity Fund.
- ---------------------------
There is no sales charge on shares purchased through the automatic reinvestment
of dividends or capital gains.
16
<PAGE> 17
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.
- ---------------------------
BUY AFTER THE DIVIDEND PAYMENT. Avoid buying shares shortly before a dividend
payment. Part of your investment will be returned in the form of a dividend,
which may be taxable.
UNDERSTAND THE TAX CONSEQUENCES
Most of your dividends are taxable
Virtually all of the dividends you receive from the Fund are taxable, whether
you take them as cash or automatically reinvest them. Some dividends will be
taxable as long-term capital gains.
Retirement plans
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
EXCHANGES
An exchange of shares of one 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 fund.
Any gain on the transaction may be subject to federal income tax.
BACKUP WITHHOLDING
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax;
rather, it is a way in which the IRS ensures it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
ALL INCOME AFFECTS YOUR BENEFITS
The government includes tax-exempt income when computing the amount of social
security or other benefits that are subject to tax.
17
<PAGE> 18
SHAREHOLDER GUIDE
OTHER INFORMATION
Year 2000 issue
The services provided to the Fund by the Manager, the Subadviser and the Fund's
other service providers (including foreign subcustodians and depositories) are
dependent on those service providers' computer systems. Many computer software
and hardware systems in use today cannot distinguish between the year 2000 and
the year 1900 because of the way dates are encoded and calculated (the "Year
2000 Issue"). The failure to make this distinction could have a negative
implication on handling securities trades, pricing and account services. The
Manager, the Subadviser and the Fund's other service providers are taking steps
that each believes are reasonably designed to address the Year 2000 Issue with
respect to the computer systems that they use. The Fund has no reason to believe
these steps will not be sufficient to avoid any material adverse impact on the
Fund, although there can be no assurances. The costs or consequences of
incomplete or untimely resolution of the Year 2000 Issue are unknown to the
Manager, the Subadviser and the Fund's other service providers at this time but
could have a material adverse impact on the operations of the Fund and the
Manager, the Subadviser and the Fund's other service providers. In addition,
companies in which the Fund invests may experience Year 2000 Issue difficulties
which could adversely impact their business and adversely affect the value of
the securities issued by them.
18
<PAGE> 19
Know With Whom You're Investing
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, serves as the Fund's manager, handling business affairs for the Fund.
MainStay Management, Inc. is a corporation organized under the laws of Delaware
and is an indirect, wholly-owned subsidiary of New York Life Insurance Company.
The Manager provides offices and conducts clerical, recordkeeping and
bookkeeping services, and keeps most of the financial and accounting records
required for the Fund. The Manager has delegated its portfolio management
responsibilities to the Subadviser.
The Manager pays the salaries and expenses of all personnel affiliated with the
Fund, and all the operational expenses that aren't the responsibility of the
Fund, including the fee paid to the Subadviser.
The Trust, on behalf of the Fund, pays the Manager an aggregate fee for services
performed at an annual rate of 0.75% of the average daily net assets of the
Fund.
The Fund, pursuant to an Accounting Agreement with the Manager, will bear an
allocable portion of the Manager's cost of performing certain bookkeeping and
pricing services. The Fund pays the Manager a monthly fee for services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets.
19
<PAGE> 20
The Manager is not responsible for records maintained by the Fund's Custodian,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or
Subadviser.
WHO MANAGES YOUR MONEY?
Markston International, LLC ("Markston"), 50 Main Street, White Plains, New York
10606, is the Fund's Subadviser. Under the supervision of the Manager, the
Subadviser is responsible for making the specific decisions about buying,
selling and holding securities; selecting brokers and brokerage firms to trade
for them; maintaining accurate records; and, if possible, negotiating favorable
commissions and fees with the brokers and brokerage firms. For these services,
the Subadviser is paid a monthly fee by the Manager, not the Fund. The Fund's
Trustees oversee the management and operations of the Fund.
Investment decisions for the Fund are made by Michael Mullarkey and Roger Lob.
Michael Mullarkey has been a portfolio manager for the MAP-Equity Fund since
1981, and Roger Lob has been a portfolio manager for the MAP-Equity Fund since
1987. Michael Mullarkey currently is the Fund's primary portfolio manager. Fund
assets are divided between the managers within certain parameters. Markston
reviews this asset allocation by portfolio manager periodically, and may adjust
this allocation based on investment performance and new investment opportunities
identified by each portfolio manager. This dual-manager investment structure
facilitates the Fund's diversification while allowing each portfolio manager to
focus his research on a limited number of companies.
20
<PAGE> 21
Financial Highlights
The financial highlights table is intended to help you understand the MAP-Equity
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single MAP-Equity Fund share. The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the MAP-Equity Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the MAP-Equity Fund's financial statements, are
included in the annual report, which is available upon request.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year......................... $ 22.73 $ 20.66 $ 19.36 $ 16.67 $ 18.13
------- ------- ------- ------- -------
Net investment income...................................... 0.33 0.28 0.36 0.43 0.37
Net realized and unrealized gain (loss) on investments..... 4.81 5.49 4.16 4.90 0.13
------- ------- ------- ------- -------
Net increase in net assets from operations................. 5.14 5.77 4.52 5.33 0.50
------- ------- ------- ------- -------
Dividends from net investment income....................... (0.33) (0.29) (0.36) (0.43) (0.37)
Distributions from net realized gain from security
transactions............................................. (2.96) (3.41) (2.86) (2.07) (1.59)
Distribution in excess of net investments income........... -- -- -- (0.14) --
------- ------- ------- ------- -------
Total distributions........................................ (3.29) (3.70) (3.22) (2.64) (1.96)
------- ------- ------- ------- -------
Net Asset Value, End of Year............................... $ 24.58 $ 22.73 $ 20.66 $ 19.36 $ 16.67
======= ======= ======= ======= =======
Total Return(1)............................................ 24.23% 27.99% 23.82% 32.50% 2.76%
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Net Assets, End of Year (thousands)........................ $60,414 $94,172 $73,591 $60,467 $48,130
======= ======= ======= ======= =======
Ratio of Expenses to Average Net Assets.................... 0.70% 0.82% 0.74% 0.81% 1.07%
======= ======= ======= ======= =======
Ratio of Net Investment Income to Average Net Assets....... 1.10% 1.18% 1.82% 2.30% 2.03%
======= ======= ======= ======= =======
Portfolio Turnover Rate.................................... 40.57% 57.57% 52.88% 39.40% 39.31%
======= ======= ======= ======= =======
</TABLE>
- --------
(1) The Fund commenced operations in 1970 as the Mutual Benefit Fund. It was
renamed MAP-Equity Fund on May 1, 1995. Pursuant to an Agreement and Plan of
Reorganization, the MAP-Equity Fund was reorganized as the MainStay MAP
Equity Fund. The shares of the MAP-Equity Fund are being designated as
Class I shares of the Fund. Total return does not reflect the sales
commission (maximum 4.75%) charged on shares of the MAP-Equity Fund.
21
<PAGE> 22
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and in the related Statement of Additional Information, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Trust or the Distributor. This Prospectus and the related Statement of
Additional Information do not constitute an offer by the Trust or by the
Distributor to sell or a solicitation of any offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer in such jurisdiction.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more details about the Fund. A current SAI is incorporated by reference
into the prospectus and has been filed with the SEC.
ANNUAL/SEMIANNUAL REPORTS
Provide additional information about the Fund's investments and include
discussions of market conditions and investment strategies that significantly
affected the Fund's performance during the last fiscal year.
TO OBTAIN INFORMATION:
Write to NYLIFE Distributors Inc., attn: MainStay Marketing Dept., 300 Interpace
Parkway, Building A, 2nd Floor, Parsippany, N.J. 07054, call 1-800-MAINSTAY
(1-800-624-6782) or visit our website at mainstayfunds.com.
You can obtain information about the Fund (including the SAI) by visiting the
SEC's Public Reference Room in Washington, D.C. (phone 1-800-SEC-0330). You may
visit the SEC's website at sec.gov or you may send your written request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009.
THE MAINSTAY FUNDS
SEC File Number: 81-4550
[MAINSTAY LOGO]
NYLIFE DISTRIBUTORS INC.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of The MainStay Funds
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company
[NY LIFE LOGO]
[RECYCLE LOGO]
More information about the Fund is available free upon request.
<PAGE> 23
THE MAINSTAY FUNDS
MAP EQUITY FUND
CLASS I SHARES
- ------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
June 1, 1999
- ------------------------------------------------------------------------------
This Statement of Additional Information supplements the information
contained in the Fund's Prospectus dated May 1, 1999 as supplemented June 1,
1999, as amended or supplemented from time to time (the "Prospectus"), and
should be read in conjunction with the Prospectus. The Prospectus is available
without charge by writing to NYLIFE Distributors Inc., (the "Distributor") 300
Interpace Parkway, Parsippany, NJ 07054 or by calling 1-800-MAINSTAY
(1-800-624-6782). This Statement of Additional Information, although not in
itself a prospectus, is incorporated by reference in and is made a part of the
Prospectus.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the related Prospectus, in connection
with the offer contained herein, and, if given or made, such other information
or representations must not be relied upon as having been authorized by The
MainStay Funds or the Distributor. This Statement of Additional Information and
the related Prospectus do not constitute an offer by The MainStay Funds or by
the Distributor to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
Shareholder inquiries should be made by writing directly to MainStay
Shareholder Services, Inc., P.O. Box 8401, Boston, Massachusetts 02266-8401, or
by calling 1-800-MAINSTAY. In addition, you can make inquiries through your
registered representative.
The financial statements of the MAP-Equity Fund, the predecessor of the
MainStay MAP Equity Fund, including the Statement of Assets and Liabilities, the
Portfolio of Investments and the Statement of Operations for the year ended
December 31, 1998, the Statement of Changes in Net Assets for the years ended
December 31, 1998 and 1997, the Notes to the Financial Statements and the Report
of Independent Accountants, all of which are included in the MAP-Equity Fund's
1998 Annual Report to the Shareholders are hereby incorporated by reference into
this Statement of Additional Information.
1
<PAGE> 24
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The MainStay Funds 4
Additional Information About the Fund 4
Investment Practices and Instruments 4
Temporary Defensive Measures 5
Repurchase Agreements 5
Lending of Portfolio Securities 6
Cash Equivalents 6
Convertible Securities 6
Foreign Securities 7
Warrants 8
Options on Securities 8
Futures Transactions 9
Fundamental Investment Restrictions 14
Non-Fundamental Investment Restrictions 15
Trustees and Officers 16
The Manager, the Subadviser and the Distributor 23
Management Agreement 23
Sub-Advisory Agreement 24
Distribution Agreement 24
Other Services 25
Expenses Borne by the Trust 25
Portfolio Transactions and Brokerage 25
Net Asset Value 27
Shareholder Investment Account 29
Shareholder Servicing Agent 29
Purchase, Redemption, Exchanges and Repurchase 29
How to Purchase Shares of the Fund 29
Redemptions and Exchanges 31
Distributions in Kind 31
Suspension of Redemptions 31
Exchange Privileges 32
Tax-Deferred Retirement Plans 32
Cash or Deferred Profit Sharing Plans Under
Section 401(k) for Corporations and Self-Employed
Individuals 32
Individual Retirement Account ("IRA") 32
403(b)(7) Tax Sheltered Account 34
General Information 34
Calculation of Performance Quotations 34
Tax Information 36
Taxation of the Fund 36
Character of Distributions to Shareholders -- General 37
</TABLE>
2
<PAGE> 25
<TABLE>
<S> <C>
Taxation of Options, Futures and Similar
Instruments 38
Passive Foreign Investment Companies 39
Foreign Currency Gains and Losses 39
Commodity Investments 39
Dispositions of Fund Shares 40
Tax Reporting Requirements 40
Foreign Taxes 41
State and Local Taxes - General 41
Explanation of Fund Distributions 41
General Information 41
Organization and Capitalization 41
General 41
Voting Rights 41
Shareholder and Trustee Liability 42
Registration Statement 42
Other Information 42
Independent Accountants 42
Transfer Agent 42
Custodian 43
Legal Counsel 43
Code of Ethics 43
Appendix A -- Description of Securities Ratings 44
</TABLE>
3
<PAGE> 26
THE MAINSTAY FUNDS
The MainStay Funds (the "Trust") is an open-end management investment company
(or mutual fund) currently consisting of 23 separate investment portfolio. This
State of Additional Information pertains only to the MAP Equity Fund (the
"Fund"). MainStay Management, Inc. (the "Manager") serves as the manager for the
Fund and has entered into a Sub-Advisory Agreement with Markston International,
LLC ("Markston" or the "Sub-Adviser") with respect to the MAP Equity Fund.
The Trust, formed January 9, 1986, is a Massachusetts business trust. The
Fund is a diversified fund as defined by the Investment Company Act of 1940, as
amended (the "1940 Act").
ADDITIONAL INFORMATION ABOUT THE FUND
The Prospectus discusses the investment objectives of the Fund and the
principal investment strategies to be employed in seeking to achieve those
objectives. This section contains supplemental information concerning certain of
the securities and other instruments in which the Fund may invest, the principal
investment strategies the Fund may utilize, and certain risks involved with
those strategies.
THE FUND ALONE DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM.
Investment decisions for the Fund are made independently from those of the
other accounts and investment companies that may be managed by the Subadviser.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which the Fund invests at the same
time as another fund or another account managed by the Subadviser, available
investments or opportunities for sales will be allocated equitably to each. In
some cases, this procedure may adversely affect the size of the position
obtained for or disposed of by the Fund or the price paid or received by the
Fund.
The Fund may invest in warrants. A warrant is a right which entitles its
holder, for a specified period of time, to acquire a specified number of shares
of common stock for a specified price per share. If the share price at the time
the warrant is exercised exceeds the total of the exercise price of the warrant
and its purchase price, the Fund experiences a gain to the extent this total is
exceeded by the share price. However, if the share price at the time the warrant
expires is less than the exercise price of the warrant, the Fund will suffer a
loss of the purchase price of the warrant.
The Fund restricts its investment in securities of foreign issuers to no more
than 10% of the value of the Fund's total net assets. Such securities may be
subject to additional federal taxes which would increase the cost of such
investments and may be subject to foreign government taxes which could reduce
the income yield on such securities.
In addition, the Fund may also buy "restricted" securities which cannot be
sold publicly until registered under the Securities Act of 1933. The Fund's
ability to dispose of investments in "restricted" securities at reasonable price
levels might be limited unless and until their registration under the Securities
Act of 1933 has been completed. The Fund will endeavor to have the issuing
company pay all the expenses of any such registration, but there is no assurance
that the Fund will not have to pay all or some of these expenses.
INVESTMENT PRACTICES AND INSTRUMENTS
The Fund may engage in the following investment practices or invest in the
following instruments to the extent permitted in the Prospectus and elsewhere in
this SAI.
4
<PAGE> 27
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions - for temporary
defensive purposes - the Fund may invest without limit in cash and cash
equivalents. See "Cash Equivalents."
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System or member firms of the National Association of Securities
Dealers, Inc. that meet the repurchase agreement creditworthiness guidelines
established by the Trustees.
A repurchase agreement, which provides a means for the Fund to earn income on
uninvested cash for periods as short as overnight, is an arrangement under which
the purchaser (i.e., the Fund) purchases a security, usually in the form of a
debt obligation (the "Obligation") and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Repurchase
agreements with foreign banks may be available with respect to government
securities of the particular foreign jurisdiction. The custody of the Obligation
will be maintained by a custodian appointed by the Fund. The Fund attempts to
assure that the value of the purchased securities, including any accrued
interest, will at all times exceed the value of the repurchase agreement. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price
upon repurchase. In either case, the income to the Fund is unrelated to the
interest rate on the Obligation subject to the repurchase agreement.
The income on repurchase agreements may be subject to federal and state
income taxes when distributed by the Fund as a dividend to shareholders.
For purposes of the 1940 Act, a repurchase agreement has been deemed to be a
loan from the Fund to the seller of the Obligation. It is not clear whether a
court would consider the Obligation purchased by the Fund subject to a
repurchase agreement as being owned by the Fund or as being collateral for a
loan by the Fund to the seller. In the event of the commencement of bankruptcy
or insolvency proceedings with respect to the seller of the Obligation before
repurchase of the Obligation under a repurchase agreement, the Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Fund would be at risk of losing some or
all of the principal and income involved in the transaction. As with any
unsecured debt instrument purchased for the Fund, the Subadviser seeks to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including accrued interest), the Fund will direct the
seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
The Trustees have reviewed and approved certain sellers who they believe to
be creditworthy and have authorized the Fund to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, the Fund could experience delays in recovering its investment or
losses.
5
<PAGE> 28
LENDING OF PORTFOLIO SECURITIES
In accordance with guidelines adopted by the Board of Trustees, the Fund may
seek to increase its income by lending portfolio securities. Under present
regulatory policies, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash or U.S. government securities maintained on a current basis at an amount
at least equal to 100% of the current market value of the securities loaned. The
Fund would have the right to call a loan and obtain the securities loaned at any
time generally on less than five days' notice. For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned and would also receive compensation from
the investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery of,
or even loss of rights in, the collateral should the borrower of the securities
fail financially or breach its agreement with the Fund. However, the loans would
be made only to firms deemed by the Subadviser to be creditworthy and approved
by the Board, and when, in the judgment of the Subadviser, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. If the Subadviser determines to make securities loans, it is
intended that the value of securities loaned will not exceed 33% of the value of
the total assets of the Fund. Under the guidelines adopted by the Board of
Trustees, the Fund may not enter into a lending agreement with a counterparty
which would cause the Fund to have loans outstanding to that counterparty for
securities having a value greater than 5% of the Fund's total assets.
CASH EQUIVALENTS
The Fund may invest in cash or cash equivalents, which include, but are not
limited to: short-term obligations issued or guaranteed as to interest and
principal by the U.S. Government or any agency or instrumentality thereof
(including repurchase agreements collateralized by such securities); obligations
of banks (certificates of deposit, bankers' acceptances and time deposits) which
at the date of investment have capital, surplus, and undivided profits (as of
the date of their most recently published financial statements) in excess of
$100,000,000, and obligations of other banks or savings and loan associations if
such obligations are federally insured; commercial paper (as described in this
SAI) short-term corporate obligations which at the date of investment are rated
AA or better by S&P or Aa or better by Moody's; and other debt instruments not
specifically described above if such instruments are deemed by the Subadviser to
be of comparable high quality and liquidity.
CONVERTIBLE SECURITIES
The Fund may invest in securities convertible into common stock or the cash
value of a single equity security or a basket or index of equity securities.
Such investments may be made, for example, if the Subadviser believes that a
company's convertible securities are undervalued in the market. Convertible
securities eligible for inclusion in the Fund's portfolio include convertible
bonds, convertible preferred stocks, warrants or notes or other instruments that
may be exchanged for cash payable in an amount that is linked to the value of a
particular security, basket of securities, index or indices of securities or
currencies.
Convertible securities, until converted, have the same general
characteristics as other fixed income securities insofar as they generally
provide a stable stream of income with generally higher yields than those of
equity securities of the same or similar issuers. By permitting the holder to
exchange his investment for common stock or the cash value of a security or a
basket or index of securities, convertible securities may also enable the
investor to benefit from increases in the market price of the underlying
securities. Therefore, convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality.
6
<PAGE> 29
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 the
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or cash or
sell it to a third party.
FOREIGN SECURITIES
The Fund may invest in U.S. dollar-denominated and non-dollar-denominated
foreign debt and equity securities and in certificates of deposit issued by
foreign banks and foreign branches of U.S. banks.
Investors should carefully consider the appropriateness of foreign investing
in light of their financial objectives and goals. While foreign markets may
present unique investment opportunities, foreign investing involves risks not
associated with domestic investing. Securities denominated in foreign currencies
may gain or lose value as a result of fluctuating currency exchange rates.
Securities markets in other countries are not always as efficient as those in
the U.S. and are sometimes less liquid and more volatile. Other risks involved
in investing in the securities of foreign issuers include differences in
accounting, auditing and financial reporting standards; limited publicly
available information; the difficulty of assessing economic trends in foreign
countries; generally higher commission rates on foreign portfolio transactions;
the possibility of nationalization, expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); government
interference, including government ownership of companies in certain sectors,
wage and price controls, or imposition of trade barriers and other protectionist
measures; difficulties in invoking legal process abroad and enforcing
contractual obligations; political, social or economic instability which could
affect U.S. investments in foreign countries; and potential restrictions on the
flow of international capital. Additionally, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including foreign withholding taxes, and other foreign taxes may apply with
respect to securities transactions. Additional costs associated with an
investment in foreign securities may include higher transaction, custody and
foreign currency conversion costs. In the event of litigation relating to a
portfolio investment, the Fund may encounter substantial difficulties in
obtaining and enforcing judgments against non-U.S. resident individuals and
companies.
Investment in emerging market countries presents risks in greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. Developing countries have economic structures that are less mature.
Furthermore, developing countries have less stable political systems and may
have high inflation, rapidly changing interest and currency exchange rates, and
their securities markets are substantially less developed. The economies of
developing countries generally are heavily dependent upon international trade,
and, accordingly,
7
<PAGE> 30
have been and may continue to be adversely affected by barriers, exchange
controls, managed adjustments in relative currency values and other
protectionist measures in the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries with which they trade.
ADRs (sponsored or unsponsored) are receipts typically issued by a U.S. bank
or trust company evidencing ownership of the underlying foreign securities. Most
ADRs are traded on a U.S. stock exchange. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. European Depositary Receipts and
International Depositary Receipts are receipts typically issued by a European
bank or trust company evidencing ownership of the underlying foreign securities.
Global Depositary Receipts are receipts issued by either a U.S. or non-U.S.
banking institution evidencing ownership of the underlying foreign securities.
WARRANTS
The holder of a warrant has the right to purchase a given number of shares of
a particular issuer at a specified price until expiration of the warrant. Such
investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. If a warrant is not exercised by the date of its
expiration, the Fund will lose its entire investment in such warrant.
OPTIONS ON SECURITIES
PURCHASING OPTIONS. The Fund may purchase put or call options which are
traded on an Exchange or in the over-the-counter market. Options traded in the
over-the-counter market may not be as actively traded as those listed on an
Exchange. Accordingly, it may be more difficult to value such options and to be
assured that they can be closed out at any time. The Fund will engage in such
transactions only with firms the Subadviser deems to be of sufficient
creditworthiness so as to minimize these risks.
The Fund may purchase put options on securities to protect their holdings in
an underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
with one another. The purchase of put options on securities held in the
portfolio or related to such securities will enable the Fund to preserve, at
least partially, unrealized gains occurring prior to the purchase of the option
on a portfolio security without actually selling the security. In addition, the
Fund will continue to receive interest or dividend income on the security. The
put options purchased by the Fund may include, but are not limited to,
"protective puts" in which the security to be sold is identical or substantially
identical to a security already held by the Fund or to a security which the Fund
has the right to purchase. The Fund would ordinarily recognize a gain if the
value of the securities decreased during the option period below the exercise
price sufficiently to cover the premium. The Fund would recognize a loss if the
value of the securities remained above the difference between the exercise price
and the premium.
The Fund may also purchase call options on securities it intends to purchase
to protect against substantial increases in prices of such securities pending
their ability to invest in an orderly manner in such securities. The purchase of
a call option would entitle the Fund, in exchange for the premium paid, to
purchase a security at a specified price upon exercise of the option during the
option period. The Fund would ordinarily realize a gain if the value of the
securities increased during the option period above the exercise price
sufficiently to cover the premium. The Fund would have a loss if the value of
the securities remained below the sum of the premium and the exercise price
during the option period. In order to terminate an option position, the Fund may
sell put or call options identical to those previously purchased, which could
result in a net gain or loss depending on whether the amount received on the
sale is more or less than the premium and other transaction costs paid on the
put or call
8
<PAGE> 31
option when it was purchased.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES. Exchange markets in some
securities options are a relatively new and untested concept, and it is
impossible to predict the amount of trading interest that may exist in such
options. The same types of risk apply to over-the-counter trading in options.
There can be no assurance that viable markets will develop or continue in the
United States or abroad.
The Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. The Fund may
forego the benefits of appreciation on securities sold pursuant to call options,
or pay a higher price for securities acquired pursuant to put options written by
the Fund. If a put or call option purchased by the Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price, or, in the case
of a call, remains less than or equal to the exercise price, the Fund will not
be able to exercise profitably the option and will lose its entire investment in
the option. Also, the price of a put or call option purchased to hedge against
price movements in a related security may move more or less than the price of
the related security.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period. The ability of the Fund to successfully utilize options may
depend in part upon the ability of the Subadviser to forecast interest rates and
other economic factors correctly.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
FUTURES TRANSACTIONS
The Fund may purchase and sell stock index futures to hedge the equity
portion of its securities portfolio with regard to market (systematic) risk
(involving the market's assessment of overall economic prospects), as
distinguished from stock-specific risk (involving the market's evaluation of the
merits of the issuer of a particular security) or to gain market exposure to
that portion of the market represented by the futures contract. The Fund may
also purchase and sell other futures when deemed appropriate, in order to hedge
the equity or non-equity portions of their portfolios. In addition, the Fund
may, to the extent it invests in foreign securities, enter into contracts for
the future delivery of foreign currencies to hedge against changes in currency
exchange rates. The Fund may also purchase and write put and call options on
futures contracts of the type into which the Fund is authorized to enter and may
engage in related closing transactions. In the United States, all such futures
on debt securities, debt index futures, stock index futures, foreign currency
futures and related options will be traded on exchanges that are regulated by
the Commodity Futures Trading Commission ("CFTC"). Subject to compliance with
applicable CFTC rules, the Fund also may enter into futures contracts traded on
foreign futures exchanges such as Frankfurt, Tokyo, London or Paris as long as
trading on foreign futures exchanges does not subject the Fund to risks that are
materially greater than the risks associated with trading on U.S. exchanges.
A futures contract is an agreement to buy or sell a security or currency (or
to deliver a final cash settlement price in the case of a contract relating to
an index or otherwise not calling for physical delivery at the end of trading in
the contracts), for a set price at a future date. When interest rates are
changing and portfolio values are falling, futures contracts can offset a
decline in the value of the Fund's current portfolio securities. When interest
rates are changing and portfolio values are rising, the purchase of futures
contracts can secure better effective rates or purchase prices for the Fund than
might later be available in the market when the Fund makes anticipated
purchases. In the United States, futures contracts are traded on boards of trade
which have been designated
9
<PAGE> 32
"contract markets" by the CFTC. Futures contracts trade on these markets through
an "open outcry" auction on the exchange floor. Currently, there are futures
contracts based on a variety of instruments, indexes and currencies, including
long-term U.S. Treasury bonds, Treasury notes, GNMA certificates, three-month
U.S. Treasury bills, three-month domestic bank certificates of deposit, a
municipal bond index and various stock indexes.
When a purchase or sale of a futures contract is made by the Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of liquid assets ("initial margin") as a partial guarantee of
its performance under the contract. The margin required for a futures contract
is set by the exchange on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract which is returned
to the Fund upon termination of the contract assuming all contractual
obligations have been satisfied. The Fund expects to earn interest income on its
initial margin deposits. A futures contract held by the Fund is valued daily at
the official settlement price of the exchange on which it is traded. Each day,
as the value of the security, currency or index fluctuates, the Fund pays or
receives cash, called "variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking-to-market." Variation
margin does not represent a borrowing or loan by the Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, the Fund
will mark-to-market its open futures positions. Moreover, the Fund will maintain
sufficient liquid assets to cover its obligations under open futures contracts.
The Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Positions taken in the futures markets are not normally held until delivery
or final cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by the Fund will usually be liquidated in this manner, the Fund
may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing-out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
FUTURES ON DEBT SECURITIES. A futures contract on a debt security is a
binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities--assuming a "long" position--the Fund will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed-upon price. By selling futures on debt securities--assuming a "short"
position--it will legally obligate itself to make the future delivery of the
security against payment of the agreed-upon price. Open futures positions on
debt securities will be valued at the most recent settlement price, unless such
price does not appear to the Subadviser to reflect the fair value of the
contract, in which case the positions will be valued by or under the direction
of the Trustees.
Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. The Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
10
<PAGE> 33
On other occasions, the Fund may take a "long" position by purchasing futures
on debt securities. This would be done, for example, when the Fund intends to
purchase particular securities and it has the necessary cash, but expects the
rate of return available in the securities markets at that time to be less
favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Fund of purchasing
the securities will be offset, at least to some extent, by the rise in the value
of the futures position taken in anticipation of the subsequent securities
purchase. The Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to lengthen the average duration of the
Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
Depending upon the types of futures contracts that are available to hedge the
Fund's portfolio of securities or portion of a portfolio, perfect correlation
between the Fund's futures positions and portfolio positions may be difficult to
achieve. Futures contracts do not exist for all types of securities and markets
for futures contracts that do exist may, for a variety of reasons, be illiquid
at particular times when the Fund might wish to buy or sell a futures contract.
SECURITIES INDEX FUTURES. A securities index futures contract does not
require the physical delivery of securities, but merely provides for profits and
losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity portion of the Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Fund may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the Fund
may enter into futures on debt securities indexes (including the municipal bond
index) to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, the
Fund may seek to protect the value of its portfolio against an overall decline
in the market for securities. Alternatively, in anticipation of a generally
rising market, the Fund can seek to avoid losing the benefit of apparently low
current prices by establishing a "long" position in securities index futures and
later liquidating that position as particular securities are in fact acquired.
To the extent that these hedging strategies are successful, the Fund will be
affected to a lesser degree by adverse overall market price movements, unrelated
to the merits of specific portfolio securities, than would otherwise be the
case. The Fund may also purchase futures on debt securities or indexes as a
substitute for the purchase of longer-term debt securities to lengthen the
average duration of the Fund's debt portfolio or to gain exposure to particular
markets represented by the index.
The Fund does not intend to use U.S. stock index futures to hedge
positions in securities of non-U.S. companies.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The Fund will only enter into futures contracts or related options
which are standardized and traded on a U.S. or foreign exchange or board of
trade, or similar entity, or quoted on an automatic quotation system. The Fund
will not enter into futures contracts for which the aggregate contract amounts
exceed 100% of the Fund's net assets. In addition, with respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Fund will
11
<PAGE> 34
not enter into a futures contract or futures option contract if, immediately
thereafter, the aggregate initial margin deposits relating to such positions
plus premiums paid by it for open futures option positions, less the amount by
which any such options are "in-the-money," would exceed 5% of the Fund's total
assets. A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in-the-money" if the exercise price exceeds the value of the futures contract
that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, the Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, the Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
When selling a put option on a futures contract, the Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which the Fund may enter into futures, futures
options or forward contracts. See "Tax Information."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. There can be no assurance that hedging strategies using futures will
be successful. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract, which in some cases may
be unlimited. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund's securities being
hedged. An incorrect correlation could result in a loss on both the hedged
securities or currencies and the hedging vehicle so that the portfolio return
might have been better had hedging not been attempted. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be
12
<PAGE> 35
unsuccessful to some degree because of market behavior or unexpected interest
rate trends. It is also possible that, when the Fund has sold stock index
futures to hedge its portfolio against a decline in the market, the market may
advance while the value of the particular securities held in the Fund's
portfolio may decline. If this occurred, the Fund would incur a loss on the
futures contracts and also experience a decline in the value of its portfolio
securities.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Fund seeks to close out a futures or a futures option position. If no liquid
market exists, the Fund would remain obligated to meet margin requirements until
the position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist. Lack of a liquid market for any reason may prevent the Fund
from liquidating an unfavorable position and the Fund would remain obligated to
meet margin requirements until the position is closed.
In addition to the risks that apply to all options transactions, there are
several special risks relating to options on futures contracts. The ability to
establish and close out positions in such options will be subject to the
development and maintenance of a liquid market in the options. It is not certain
that such a market will develop. Although the Fund generally will purchase only
those options and futures contracts for which there appears to be an active
market, there is no assurance that a liquid market on an exchange will exist for
any particular option or futures contract at any particular time. In the event
no such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that the Fund would have to
exercise options it has purchased in order to realize any profit and would be
less able to limit its exposure to losses on options it has written.
Many of the contracts discussed above are relatively new instruments without
a significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist. If the price of a
futures contract changes more than the price of the securities or currencies,
the Fund will experience either a loss or a gain on the futures contracts which
will not be completely offset by changes in the price of the securities or
currencies which are the subject of the hedge. In addition, it is not possible
to hedge fully or perfectly against currency fluctuations affecting the value of
securities denominated in foreign currencies because the value of such
securities is likely to fluctuate as a result of independent factors not related
to currency fluctuations.
ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS, AND FOREIGN CURRENCY. Options on securities, futures
contracts, options on futures contracts, currencies and options on currencies
may be traded on foreign exchanges. Such transactions may not be regulated as
effectively as similar transactions in the United States; may not involve a
clearing mechanism and related guarantees; and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities.
The value of such positions also could be adversely affected by (i) other
complex foreign political, legal and economic factors, (ii) delays in a
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United
13
<PAGE> 36
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below are fundamental policies
of the Fund; i.e., they may not be changed without a majority vote of the
outstanding shares of the Fund, as defined in the 1940 Act. Except for those
investment policies specifically identified as fundamental in the Prospectus and
this Statement of Additional Information, all other investment policies and
practices described may be changed by the Board of Trustees without the approval
of shareholders.
Unless otherwise indicated, all of the percentage limitations below, and in
the investment restrictions recited in the Prospectus apply only at the time a
transaction is entered into. Accordingly, if a percentage restriction is adhered
to at the time of investment, a later increase or decrease in the percentage
which results from a relative change in values or from a change in the Fund's
net assets will not be considered a violation. With respect to investment in
illiquid securities, the Fund will consider taking measures to reduce the
holdings of illiquid securities if they exceed the percentage limitation as a
result of changes in the values of the securities as if liquid securities have
become illiquid.
THE FUND MAY NOT:
1. With respect to 75% of total assets invest more than 5% of the value of
its total assets in the securities of any one issuer, except U.S. government
securities, or purchase the securities of any issuer if such purchase would
cause more than 10% of the voting securities of such issuer to be held by the
Fund.
2. Borrow money except from banks on a temporary basis for extraordinary or
emergency purposes, including the meeting of redemption requests, or by engaging
in reverse repurchase agreements or comparable portfolio transactions provided
that the Fund maintains asset coverage of at least 300% for all such borrowings,
and no purchases of securities will be made while such borrowings exceed 5% of
the value of the Fund's total assets.
3. Purchase securities if such purchase would cause 25% or more in the
aggregate of the market value of the total assets of the Fund to be invested in
the securities of one or more issuers having their principal business activities
in the same industry, provided that there is no limitation in respect to
investments in U.S. government securities or investments in repurchase
agreements with respect thereto (for the purposes of this restriction, telephone
companies are considered to be a separate industry from gas or electric
utilities, and wholly owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of the parents) except that at such time that the 1940 Act is
amended to permit a registered investment company to elect to be "periodically
industry concentrated" (i.e., a fund that does not concentrate its investments
in a particular industry would be permitted, but not required, to invest 25% or
more of its total assets in a particular industry) the Fund elects to be so
classified and the foregoing limitation shall no longer apply.
4. Purchase or sell real estate (excluding securities secured by real estate
or interests therein or issued by companies that invest in or deal in real
estate), commodities and commodity contracts. The Trust reserves the freedom of
action to hold and to sell real estate acquired for the Fund as a result of the
ownership of securities. Purchases and sales of foreign currencies on a spot
basis and forward foreign currency exchange contracts, options on currency,
futures contracts on currencies or securities indices and options on such
futures contracts are not deemed to be an investment in a prohibited commodity
or commodity contract for the purpose of this restriction.
14
<PAGE> 37
5. Make loans to other persons, except loans of portfolio securities. The
purchase of debt obligations and the entry into repurchase agreements in
accordance with the Fund's investment objectives and policies are not deemed to
be loans for this purpose.
6. Act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the 1933
Act, as amended, in the disposition of portfolio securities.
7. Issue senior securities, except to the extent permitted under the
Investment Company Act of 1940.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the Trustees
of the Trust have voluntarily adopted certain policies and restrictions which
are observed in the conduct of the affairs of the Fund. These represent
intentions of the Trustees based upon current circumstances. They differ from
fundamental investment policies in that the following additional investment
restrictions may be changed or amended by action of the Trustees without
requiring prior notice to or approval of shareholders.
Unless otherwise indicated, all percentage limitations apply only at the time
a transaction is entered into. Accordingly, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in the
percentage which results from a relative change in values or from a change in
the Fund's net assets will not be considered a violation.
The Fund may not:
(a) As an operating policy, the Fund may not sell securities short, except
for covered short sales or unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short, and provided that
transactions in options, futures and forward contracts are deemed not to
constitute short sales of securities.
(b) As an operating policy, the Fund may not purchase securities on margin,
except that the Fund may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments in connection with
futures contracts and options on futures contracts shall not constitute the
purchase of securities on margin.
(c) As an operating policy, the Fund may not invest in securities which are
not readily marketable, or the disposition of which is restricted under federal
securities laws (collectively, "illiquid securities"), other than Rule 144A
securities and Section 4(2) commercial paper determined to be liquid pursuant to
guidelines adopted by the Trust's Board of Trustees if, as a result, more than
15% of the Fund's net assets would be invested in illiquid securities. The Fund
may not invest more than 15% of its net assets in repurchase agreements
providing for settlement in more than seven days, or in other instruments which
for regulatory purposes or in the Subadviser's opinion may be deemed to be
illiquid, such as a certain portion of options traded in the over-the-counter
market, and securities being used to cover options the Fund has written.
(d) As an operating policy, the Fund may not purchase the securities of other
investment companies except to the permitted by the 1940 Act in connection with
a merger, consolidated, acquisition, or reorganization.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining the Fund's net asset value.
The Trustees have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Trustees have delegated the
function of making day-to-day determinations of liquidity to the Subadviser,
pursuant to guidelines approved by the Trustees.
15
<PAGE> 38
The Subadviser takes into account a number of factors in determining whether
a Rule 144A security being considered for purchase by the Fund is liquid,
including at least the following:
(i) the frequency and size of trades and quotes for the Rule 144A security
relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the 144A security and
the number of other potential purchasers;
(iii) dealer undertakings to make a market in the 144A security; and
(iv) the nature of the 144A security and the nature of the market for the
144A security (i.e., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer).
To the extent that the market for a Rule 144A security changes, a Rule 144A
security originally determined to be liquid upon purchase may be determined to
be illiquid.
To make the determination that an issue of 4(2) commercial paper is liquid,
the Subadviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in default as to
principal or interest;
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations ("NRSROs");or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper is rated
in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Subadviser has determined that the
security is of equivalent quality based on factors commonly used by rating
agencies; and
(c) there is a viable trading market for the specific security, taking into
account all relevant factors (e.g., whether the security is the subject of a
commercial paper program that is administered by an issuing and paying agent
bank and for which there exists a dealer willing to make a market in the
security, the size of trades relative to the size of the Fund's holding or
whether the 4(2) commercial paper is administered by a direct issuer pursuant to
a direct placement program).
TRUSTEES AND OFFICERS
The Board of Trustees oversees the Fund, the Manager and the Subadviser.
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.
16
<PAGE> 39
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) POSITION(S)
- ----------------------- -----------
NAME, ADDRESS AND AGE WITH TRUST DURING PAST 5 YEARS
- --------------------- ---------- -------------------
<S> <C> <C>
Richard M. Kernan, Jr.* Chairman and Director of MainStay VP Series
51 Madison Avenue Trustee Fund, Inc. From January 1987
New York, NY 10010 to present; Chairman of the
Age: 58 board and Chief Executive
Officer of MainStay VP Series
Fund, Inc. From August 1989 to
present; Executive Vice
President and Chief Investment
Officer of New York Life
Insurance Company from March
1995 to present; Executive
Vice President prior thereto;
Member of the Board of
Directors of New York Life
Insurance Company from
November 1996 to present and
Chairman of the Investment
Committee from January 1997 to
present; and Director, MacKay
Shields Financial Corporation, 1988
to present; and Director, Express
Scripts, 1992-present.
Stephen C. Roussin* President, Chief Director and Chairperson,
51 Madison Avenue Executive Officer MainStay Institutional Funds,
New York, NY 10010 and Trustee Inc., 1997 to present; Senior
Age: 35 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.
Mark Gordon* Trustee Senior Vice President, New
51 Madison Avenue York Life Insurance
New York, NY 10010 Company, 1998-present;
Age: 45 President, NYLIFE
Distributors Inc.,
1998-present; Senior Vice
President, Seligman
Financial Services,
1995-1998, Senior Vice
President, Directors of
Investments, AG Edwards,
1994-1995.
</TABLE>
17
<PAGE> 40
<TABLE>
<S> <C> <C>
Harry G. Hohn* Trustee Retired Chairman and Chief
51 Madison Avenue Executive Officer, New York
New York, NY 10010 Life Insurance Company;
Age: 67 Chairman of the Board and
Chief Executive Officer, New
York Life Insurance Company,
1990 to 1997; Vice Chairman of
the Board, New York Life
Insurance Company, 1986 to
1990; Director, New York Life
Insurance Company, 1985 to
present; Chairman of the
Board, American Council of
Insurance, 1994 to 1995;
Chairman of the Board, Life
Insurance Council of New York,
1996 to 1997; Director,
Million Dollar Roundtable
Foundation, 1996 to 1997;
Director, Insurance
Marketplace Standards
Association, 1996 to 1997;
Director, Witco Corporation,
1989 to present; Member,
International Advisory Board
of Credit Commercial de France,
1995 to present; and a Life
Fellow of the American Bar
Foundation.
Edward J. Hogan Trustee Rear Admiral U.S. Navy
Box 2321 (Retired); Independent
Sun Valley, ID 83353 Management Consultant, 1992
Age: 66 to 1997.
Nancy Maginnes Kissinger Trustee Member, Council of Rockefeller
Henderson Road University, New York, NY, 1991
South Kent, CT 06785 to present; Trustee,
Age: 65 Rockefeller University, 1995
to present; Trustee, Animal
Medical Center, 1993 to
present; and Trustee, The
Masters School, 1994 to
present; Member, Board of
Overseers, Rockefeller Institute of
Government, Albany, NY,
1983- 1992 (Board dissolved).
</TABLE>
18
<PAGE> 41
<TABLE>
<S> <C> <C>
Terry L. Lierman Trustee President, Capitol Associates,
426 C Street, N.E. Inc., 1984 to present;
Washington, D.C. 20002 Managing Director, The Life
Age: 51 Services Trust, 1998 to
present; President, Employee
Health Programs, 1990 to
present; Vice Chairman,
TheraCom Inc., 1994 to
present; Director, Harvard
University, Pollin Institute,
1995 to present; Director,
PeacePac, 1994 to present;
Commissioner, State of
Maryland, Higher Education
Commission, 1995 to present;
Vice Chairman, National
Organization on Fetal Alcohol
Syndrome, 1993 to present;
Chief Executive Officer,
Medical Crisis Systems, 1997
to present; and Board Member,
Hollings Cancer Center,
Medical University of South
Carolina, 1993 to present;
Member, UNICEF National Board,
1993 to present; Member, UNICEF
National Board, 1993 to
present.
John B. McGuckian Trustee Chairman of the Board, Ulster
Ardverna Television plc, 1990 to
Cloughmills present; Director, Ulster
Northern Ireland Television plc, 1970 to
BT4 49NL present; Chairman of the
Age: 59 Board, Tedcastle Holding Ltd.
(energy), 1995 to present;
Director, Cooneen Textiles
Ltd. (clothing manufacturer),
1967 to present; Director
Allied Irish Banks plc, 1977
to present; Director, First
Trust Bank, 1991 to present;
Director, Unidare plc
(engineering), 1986 to
present; Director, Irish
Continental Group plc (ferry
operations), 1988 to present;
Director, Harbour Group Ltd.
(management company), 1980 to
present; Chairman, Industrial
Development Board, 1990 to
1997; and Chairman of Senate and
Senior Pro-Chancellor, Queen's
University, 1986 to present.
</TABLE>
19
<PAGE> 42
<TABLE>
<S> <C> <C>
Donald E. Nickelson Trustee Vice Chairman, Harbour Group
1701 Highway A-1-A Industries, Inc., 1991 to
Suite 218 present; Director, PaineWebber
Vero Beach, FL 32963 Group, 1980 to 1993;
Age: 66 President, PaineWebber Group,
1988 to 1990; Chairman of the
Board, Paine Webber
Properties, 1985 to 1989;
Director, Harbour Group, 1986
to present; Director, Sugen,
Inc., 1992 to present;
Chairman of the Board,
Omniquip International,
Inc., 1996 to present;
Director, Carey Diversified,
L.L.C., January 1,1998 to present.
Donald K. Ross* Trustee Retired Chairman and Chief
953 Cherokee Lane Executive Officer, New York
Franklin Lakes, NJ 07417 Life Insurance Company;
Age: 73 Director, New York Life
Insurance Company, 1978 to
1996; President, New York Life
Insurance Company, 1986 to
1990; Chairman of the Board,
New York Insurance Company,
1981 to 1990; New York Life
Insurance Company, 1981 to
1990; Director, MacKay-Shields
Financial Corporation, 1984 to
present; and Trustee,
Consolidated Edison Company
of New York, Inc., 1976 to
1998.
Richard S. Trutanic Trustee Managing Director, The
1155 Connecticut Ave. N.W. Somerset Group (financial
Suite 400 advisory firm), 1990 to
Washington, DC 20036 present; Chief Executive
Age: 46 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>
20
<PAGE> 43
<TABLE>
<S> <C> <C>
Jefferson C. Boyce Senior Vice Chairman, Monitor Capital
51 Madison Avenue President Advisors, Inc., 1977 to
New York, NY 10010 present; Senior Vice
Age: 40 President, MainStay
Institutional Funds Inc., 1998
to present; Senior Vice
President, New York Life
Insurance Company, 1994 to
present; Director, NYLIFE
Distributors Inc., 1993 to
present; and chief
Administrative Officer,
Pensin, Mutual Funds,
Structured Finance, Corporate
Quality, Human
Resources and Employees'
health Departments, New
York Life Insurance
company, 1992 to 1994.
Anthony W. Polis Vice President and Vice President, New York Life
51 Madison Avenue Chief Financial Insurance Company, 1988 to
New York, NY 10010 Company present; Director, Vice
Age: 54 President and Chief Financial
Officer, NYLIFE Securities
Inc., 1988 to present; Vice
President and Chief Financial
Officer, NYLIFE Distributors
Inc., 1993 to present;
Treasurer, MainStay
Institutional Funds Inc., 1990
to present; Treasurer,
MainStay VP Series Fund, Inc.,
1993 to present; Assistant
Treasurer, MainStay VP Series
Fund, Inc., 1992 to 1993; Vice
President and Treasurer,
Eclipse Financial Asset Trust,
1992 to present; Vice
President and Chief
Financial Officer, Eagle
Strategies Corp.
(registered investment
adviser), 1993 to present.
Patrick J. Farrell Vice President Vice President, New York
51 Madison Avenue Life Insurance Company,
New York, NY 10010 1996 to present; Assistant
Age: 39 Treasurer, Member of the
Dividend Committee, The
MainStay Funds, 1998 to
present.
</TABLE>
21
<PAGE> 44
<TABLE>
<S> <C> <C>
Richard Zuccaro Tax Vice President Vice President, New York Life
51 Madison Avenue Insurance Company, 1995 to
New York, NY 10010 present; Vice President -- Tax,
Age: 48 New York Life Insurance
Company, 1986 to 1995; Tax Vice
President, NYLIFE Securities
Inc., 1987 to present; Tax Vice
President, NAFCO, Inc., 1990 to
present; Tax Vice President,
NYLIFE Depositary Inc., 1990 to
present; Tax Vice President,
NYLIFE Inc., 1990 to present;
Tax Vice President, NYLIFE
Insurance Company of Arizona,
1990 to present; Tax Vice
President, NYLIFE Realty Inc.,
1991 to present; Tax Vice
President, NYLICO Inc., 1991 to
present; Tax Vice President,
New York Life Fund Inc., 1991
to present; Tax Vice President,
New York Life International
Investment, Inc., 1991 to
present; Tax Vice President,
NYLIFE Equity Inc., 1991 to
present; Tax Vice President,
NYLIFE Funding Inc., 1991 to
present; Tax Vice President,
NYLCO Inc., 1991 to present;
Tax Vice President, MainStay VP
Series Fund, Inc., 1991 to
present; Tax Vice President,
CNP Realty, 1991 to present;
Tax Vice President, New York
Life MainStay Institutional
Funds Inc., 1992 to present;
Tax Vice President, NYLIFE
Distributors, Inc., 1993 to
present; Vice President
Assistant Controller, New
York Life.
</TABLE>
- -----------------------
*Messrs. Ross, Roussin, Gordon, Hohn and Kernan 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.
Effective August 1, 1998, 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 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, 1998, 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:
22
<PAGE> 45
<TABLE>
<CAPTION>
Aggregate Total Compensation From
Name of Compensation Registrant
Trustee from the Trust Paid to Trustees
------- -------------- ----------------
<S> <C> <C>
Edward J. Hogan $48,250 $48,250
Nancy M. Kissinger 48,250 48,250
Terry L. Lierman 48,250 48,250
Donald E. Nickelson 52,250 52,250
Richard S. Trutanic 48,250 48,250
John B. McGuckian 48,250 48,250
</TABLE>
THE MANAGER, THE SUBADVISER AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Fund, MainStay Management, Inc.
(the "Manager"), subject to the supervision of the Trustees of the Trust and in
conformity with the stated policies of the Fund, administers the Fund's business
affairs and has investment advisory responsibilities. MainStay Management, Inc
is a direct subsidiary of NYLIFE Inc. which is a direct subsidiary of New York
Life Insurance Company.
The Trustees, including the Independent Trustees, approved the Management
Agreement with respect to the Fund on March 15, 1999. The sole initial
shareholder of the MAP Equity Fund approved the Management Agreement on June 8,
1999. The Management Agreement will remain in effect for two years following its
effective date, and will continue in effect thereafter only if such continuance
is specifically approved at least annually by the Trustees or by vote of a
majority of the outstanding voting securities of the Fund (as defined in the
1940 Act and the rules thereunder) and, in either case, by a majority of the
Trustees who are not "interested persons" of the Trust or the Manager (as the
term is defined in the 1940 Act).
The Manager has authorized any of its directors, officers and employees who
have been elected or appointed as Trustees or officers of the Trust to serve in
the capacities in which they have been elected or appointed.
The Management Agreement provides that the Manager shall not be liable to the
Fund for any error or judgment by the Manager or for any loss sustained by the
Fund except in the case of the Manager's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Management Agreement also provides
that it shall terminate automatically if assigned and that it may be terminated
without penalty by either party upon no more than 60 days' nor less than 30
days' written notice.
In connection with its administration of the business affairs of the Fund,
and except as indicated in the Prospectus under the heading "Manager, Subadviser
and Distributor," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the Manager,
except the fees and expenses of Trustees not affiliated with the Manager or the
Subadviser;
(b) the fees to be paid to the Subadviser pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with administering the
ordinary course of the Fund's business, other than those assumed by the Trust.
23
<PAGE> 46
SUB-ADVISORY AGREEMENT
Pursuant to the Sub-Advisory Agreement between the Manager and Markston
International, LLC ("Markston") the Subadviser, subject to the supervision of
the Trustees of the Trust and the Manager in conformity with the stated policies
of the Fund and the Trust, manages the Fund's portfolio, including the purchase,
retention, disposition and loan of securities. As compensation for services, the
Manager, not the Fund, pays the Fund's Subadviser a monthly fee calculated on
the basis of its average daily net assets during the preceding month at the
annual rates of 0.45% up to $250 million; 0.40% from $250 million to $500
million; and 0.35% in excess of $500 million.
The Trustees, including the Independent Trustees, approved the Sub-Advisory
Agreement with Markston at an in-person meeting held March 15, 1999. The
Sub-Advisory Agreement was approved by the Fund's sole shareholder on June 8,
1999. The Sub-Advisory Agreement will remain in effect for two years following
its effective date, and will continue in effect thereafter only if such
continuance is specifically approved at least annually by the Trustees or by
vote of a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act and the rules thereunder) and, in either case, by a majority of
the Trustees who are not "interested persons" of the Trust, the Manager, or the
Subadviser (as the term is defined in the 1940 Act).
The Subadviser has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or officers of the Trust to serve
in the capacities in which they have been elected or appointed. In connection
with the services they render, the Subadviser bears the salaries and expenses of
all of its personnel.
The Sub-Advisory Agreement provides that the Subadviser shall not be liable
to the Fund for any error of judgment by a Subadviser or for any loss suffered
by the Fund except in the case of the Subadviser's willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Sub-Advisory
Agreement also provides that it shall terminate automatically if assigned and
that it may be terminated without penalty by the manger immediately upon
material breach by the Subadviser, after the Subadviser has received notice and
an opportunity to cure such breach.
With respect to the MAP-Equity Fund, the predecessor to the MAP Equity Fund,
investment advisory and management services were provided by Markston Investment
Management. During the fiscal years ended December 31, 1996, 1997 and 1998,
respectively, Markston Investment Management received from the MAP-Equity Fund
advisory fees of $231,755, $432,252 and $334,330.
DISTRIBUTION AGREEMENT
NYLIFE Distributors Inc. serves as the Trust's distributor and principal
underwriter (the "Distributor")pursuant to a Distribution Agreement dated
January 1, 1994. NYLIFE Securities Inc. ("NYLIFE Securities") sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to salesmen as well as the cost of
printing and mailing prospectuses to potential investors and of any advertising
incurred by them in connection with their distribution of Trust shares. In
addition, the Distributor will pay for a variety of account maintenance and
personal services to shareholders after the sale. The Distributor is not
obligated to sell any specific amount of the Trust's shares. The Distributor
receives sales loads and distribution plan payments.
The Trust anticipates making a continuous offering of its shares, although it
reserves the right to suspend or terminate such offering at any time with
respect to any Fund or class or group of Funds or classes. The Distribution
Agreement for the MAP Equity Fund was approved by the Trustees, including a
majority of the Independent Trustees, at a meeting held on March 15, 1999.
24
<PAGE> 47
After an initial two-year period, the Distribution Agreement is subject to
annual approval by the Board of Trustees. The Distribution Agreement is
terminable at any time, without payment of a penalty, by vote of a majority of
the Trust's Trustees who are not "interested persons" (as defined in the 1940
Act) of the Trust, upon 60 days' written notice to the Distributor, or by vote
of a majority of the outstanding voting securities of that Fund, upon 60 days'
written notice to the Trust. The Distribution Agreement will terminate in the
event of its assignment.
First Priority Investment Corporation acted as distributor to the MAP-Equity
Fund until April 30, 1999 pursuant to a Distributor's Agreement. During the
fiscal years ended December 31, 1996, 1997 and 1998, the company received
$22,754, $37,552 and $162,627, respectively, for its services as distributor.
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated October 24, 1997,
the Manager performs certain bookkeeping and pricing services for the Fund. The
Fund will bear an allocable portion of the cost of providing these services to
the Trust.
In addition, the Fund may reimburse NYLIFE Securities, NYLIFE Distributors
and MainStay Shareholder Services for the cost of certain correspondence to
shareholders and the establishment of shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of the Fund, is responsible under its
Management Agreement for the payment of expenses related to the Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trustees who are not affiliated with the Manager or Subadviser,
(iii) certain fees and expenses of the Trust's Custodians and Transfer Agent,
(iv) the charges and expenses of the Trust's legal counsel and independent
accountants, (v) brokers' commissions and any issue or transfer taxes chargeable
to the Trust, on behalf of the Fund, in connection with its securities
transactions, (vi) the fees of any trade association of which the Fund or the
Trust is a member, (vii) the cost of share certificates representing shares of
the Fund, (viii) reimbursement of a portion of the organization expenses of the
Fund and the fees and expenses involved in registering and maintaining
registration of the Trust and of its shares with the SEC and registering the
Trust as a broker or dealer and qualifying its shares under state securities
laws, including the preparation and printing of the Trust's registration
statements and prospectuses for such purposes, (ix) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Trustees' meetings and preparing, printing and mailing prospectuses and reports
to shareholders, (x) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business, (xi) any expenses assumed by the Fund pursuant to its plan of
distribution, (xii) all taxes and business fees payable by the Fund to federal,
state or other governmental agencies, and (xiii) costs associated with the
pricing of the Fund's shares. Fees and expenses of legal counsel, registering
shares, holding meetings and communicating with shareholders include an
allocable portion of the cost of maintaining an internal legal and compliance
department.
The Fund has entered into a committed line of credit with The Bank of New
York as agent, and various other lenders from whom it may borrow up to 5% of its
net assets in order to honor redemptions. The credit facility is expected to be
utilized in periods when the Fund experiences unusually large redemption
requests. A mutual fund is considered to be using leverage whenever it borrows
an amount more than 5% of its assets. The Fund does not intend to borrow for the
purpose of purchasing securities using the credit facility or any other source
of borrowed funds.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Fund pays a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., municipal bonds, other debt
securities and some equity securities) are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security
25
<PAGE> 48
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 Subadviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and its
other clients on the basis of the broker-dealers' professional capability, the
value and quality of their brokerage services and the level of their brokerage
commissions. Consistent with the foregoing primary considerations, the Conduct
Rules of the NASD and such other policies as the Trustees may determine, the
Subadvisers may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the Fund.
In order for the Affiliated Broker to effect any portfolio transactions for the
Fund on an exchange, the commissions, fees or other remuneration received by the
Affiliated Broker must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time. This standard would allow the Affiliated
Broker to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arms-length transaction.
The Fund will not deal with the Affiliated Broker in any portfolio transaction
in which the Affiliated Broker acts as principal.
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), the Subadviser may cause the
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Subadviser an amount of commission for
effecting a securities transaction for the Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Subadviser
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
Subadviser'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
Subadviser, 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 Subadviser'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 Subadviser for no
consideration other than brokerage or underwriting commissions. Research
provided by brokers is used for the benefit of all of the Subadviser's clients
and not solely or necessarily for the benefit of the Trust. The Subadviser's
investment management personnel attempt to evaluate the quality of Research
provided by brokers. Results of this effort are sometimes used by the Subadviser
as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Subadviser. Investment decisions for the Fund and for the
26
<PAGE> 49
Subadviser'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 the Fund is concerned. The Trust believes that over time
its ability to participate in volume transactions will produce better executions
for the Fund.
The Sub-Advisory fee that the Manager pays on behalf of the Fund to the
Subadviser will not be reduced as a consequence of the Subadviser's receipt of
brokerage and research services. To the extent the Fund's portfolio transactions
are used to obtain such services, the brokerage commissions paid by the Fund
will exceed those that might otherwise be paid, by an amount which cannot be
clearly determined. Such services would be useful and of value to the Subadviser
in serving both the Fund and other clients and, conversely, such services
obtained by the placement of brokerage business of other clients would be useful
to the Subadviser in carrying out its obligations to the Fund.
For the fiscal years ended December 31, 1996, 1997 and 1998, the MAP-Equity
Fund (predecessor to the MAP Equity Fund) paid total brokerage commissions of
$48,782 in 1996 (on portfolio transactions amounting to $52,030,342), of which
approximately 41% was paid to brokers that provided research; $61,779.48 in 1997
(on portfolio transactions amounting to $84,698,287), of which approximately
24.3% was paid to brokers that provided research; and $44,996.83 in 1998 (on
portfolio transactions amounting to $63,342,288), of which approximately 37.9%
was paid to brokers that provided research.
The Fund's portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of this calculation, portfolio
securities will exclude purchases and sales of debt securities having a maturity
at the date of purchase of one year or less.
The turnover rate for the Fund will vary from year-to-year and depending on
market conditions, turnover could be greater in periods of unusual market
movement and volatility. A higher turnover rate generally would result in
greater brokerage commissions, particularly in the case of equity oriented
Funds, or other transactional expenses which must be borne, directly or
indirectly, by the Fund and, ultimately, by the Fund's shareholders. High
portfolio turnover may also result in the realization of an increase in net
short-term capital gains by the Fund which, when distributed to non-tax exempt
shareholders, will be treated as dividends (ordinary income).
NET ASSET VALUE
The Trust determines the net asset value per share of the Class I shares of
the Fund on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated as of the close of the first session of the New
York Stock Exchange (currently 4:00 p.m., New York time) for Class I shares of
the Fund by dividing the current market value of the total assets attributable
to the class, by the total number of outstanding shares of the class.
Portfolio securities are valued (a) by appraising common and preferred stocks
which are traded on the New York Stock Exchange at the last sale price of the
first session on that day or, if no sale occurs, at the mean between the closing
bid price and asked price; (b) by appraising other common and preferred stocks
as nearly as possible in the manner described in clause (a) if traded on any
other exchange, including the National Association of Securities Dealers
National Market System and foreign securities exchanges; (c) by appraising
over-the-counter common and preferred stocks quoted on the National Association
of Securities Dealers NASDAQ system (but not listed on the National Market
System) at the closing bid price supplied through such system; (d) by appraising
over-the-counter common and preferred stocks not quoted on the NASDAQ system and
securities listed or traded on certain foreign exchanges whose operations are
similar to the U.S. over-the-counter market at prices supplied by a pricing
agent
27
<PAGE> 50
selected by the Fund's Subadviser if the prices are deemed by the Subadviser 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 Subadviser, which prices reflect
broker-dealer-supplied valuations and electronic data processing techniques
and/or matrix pricing if those prices are deemed by the Fund's Subadviser to be
representative of market values at the close of the first session of the New
York Stock Exchange; (f) by appraising exchange-traded options and futures
contracts at the last posted settlement price on the market where any such
option or futures contract is principally traded; and (g) by appraising all
other securities and other assets, including over-the-counter common and
preferred stocks not quoted on the NASDAQ system, securities listed or traded on
foreign exchanges whose operations are similar to the U.S. over-the-counter
market and debt securities for which prices are supplied by a pricing agent but
are not deemed by the Fund's Subadviser to be representative of market values,
but excluding money market instruments with a remaining maturity of 60 days or
less and including restricted securities and securities for which no market
quotation is available, at fair value in accordance with procedures approved by
and determined in good faith by the Trustees, although the actual calculations
may be done by others. Money market instruments held by the Fund with a
remaining maturity of 60 days or less are valued by the amortized cost method
unless such method does not represent fair value. Forward foreign currency
exchange contracts held by the Fund are valued at their respective fair market
values determined on the basis of the mean between the last current bid and
asked prices based on dealer or exchange quotations.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank or broker-dealer.
If such quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Trustees. For financial accounting
purposes, the Trust recognizes dividend income and other distributions on the
ex-dividend date, except that certain dividends from foreign securities are
recognized as soon as the Trust is informed after the ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open for trading). In addition, European or Far Eastern securities
trading generally in a particular country or countries may not take place on all
business days in New York. Furthermore, trading takes place in Japanese markets
on certain Saturdays and in various foreign markets on days which are not
business days in New York and on which the Fund's net asset values are not
calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the
time their prices are determined and the close of the New York Stock Exchange
generally will not be reflected in the Fund's calculation of net asset value.
However, the Subadviser, in consultation with the Manager, may, in its
judgement, determine that an adjustment to the Fund's net asset value should be
made because intervening events have caused the Fund's net asset value to be
materially inaccurate.
The proceeds received by the Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of creditors, will be specifically allocated to the
Fund and constitute the underlying assets of the Fund. The underlying assets of
the Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to the Fund and with a share of the general
liabilities of the Trust. Expenses with respect to any two or more Funds will be
allocated in proportion to the net asset values of the respective Funds except
where allocations of direct expenses can otherwise be fairly made.
To the extent that any newly organized fund or class of shares receives, on
or before December 31, any seed capital, the net asset value of such fund(s) or
class(es) will be calculated as of December 31.
28
<PAGE> 51
SHAREHOLDER INVESTMENT ACCOUNT
A Shareholder Investment Account is established for each investor in the
Fund, under which a record of the shares of the Fund held is maintained by the
Transfer Agent. If a share certificate is desired, it must be requested in
writing for each transaction. There is no charge to the investor for issuance of
a certificate. Whenever a transaction takes place in the Fund, the shareholder
will be mailed a confirmation showing the transaction. Shareholders will be sent
a quarterly statement showing the status of the Account. In addition,
shareholders will be sent a monthly statement for each month in which a
transaction occurs.
SHAREHOLDER SERVICING AGENT
The Fund may pay shareholder service fees, directly or indirectly to various
entities (shareholders service agents) that provide services to shareholders.
These may include broker-dealers, advisers, administrative service forms, banks
and other financial institutions. The Glass-Steagall Act prohibits national
banks from engaging in the business of underwriting, selling or distributing
securities. There is currently no precedent prohibiting banks from performing
shareholder servicing and recordkeeping functions. Changes in federal or state
statutes and regulations pertaining to the permissible activities of banks and
their affiliates or subsidiaries, as well as further judicial or administrative
decisions or interpretations of those provisions, could prevent a bank from
continuing to perform all or a part of such services. If a bank were prohibited
from so acting, the Trustees would consider what actions, if any, would be
necessary to continue to provide efficient and effective shareholder services.
It is not expected that shareholders would suffer any adverse financial
consequences as a result of any of these occurrences.
PURCHASE, REDEMPTION, EXCHANGES AND REPURCHASE
HOW TO PURCHASE SHARES OF THE FUND
If you are participating in a company savings plan, such as a 401(k) plan,
profit sharing plan, defined benefit plan or other employee-directed plan, your
company will provide you with the information you need to open an account and
buy and sell shares of the Fund. If you are a participant in a "wrap account" or
similar program, your investment professional will provide you with information.
BY MAIL - INDVIDUAL SHAREHOLDERS
Initial purchases of shares of the Fund should be made by mailing the
completed application form to the investor's Registered Representative. Shares
may be purchased at the NAV per share next determined after receipt in good
order of the purchase order by the Fund.
BY TELEPHONE - INDIVIDUAL SHAREHOLDERS
An investor may make an initial investment by having his or her Registered
Representative telephone MSS between 8:00 AM and 6:00 PM, Eastern time, on any
day the New York Stock Exchange is open. The purchase will be effected at the
NAV per share next determined following receipt of the telephone order as
described above. An application and payment must be received in good order by
MSS within three business days. All telephone calls are recorded to protect
shareholders and MSS. For a description of certain limitations on the liability
of the Fund and MSS for transactions effected by telephone, see "Know How to
Sell and Exchange Shares."
BY WIRE - INDIVDUAL SHAREHOLDERS
An investor may open an account and invest by wire by having his or her
Registered Representative telephone MSS between 8:00 AM and 6:00 PM, Eastern
time, to obtain an account number and instructions. For both initial and
subsequent investments, federal funds should be wired to:
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<PAGE> 52
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
ABA No.: 011 0000 28 Attn.: Custody and Shareholder Services
For Credit: MainStay MAP Equity Fund-Class I
Shareholder Account No.____________________________
Shareholder Registration ____________________________
DDA Account Number 99029415
An application must be received by MSS within three business days. The
investor's bank may charge the investor a fee for the wire.
To make a purchase effective the same day, the Registered Representative must
call MSS by 12:00 noon Eastern time, and federal funds must be received by the
Shareholder Servicing Agent before 4:00 PM Eastern time.
Wiring money to the Trust will reduce the time a shareholder must wait before
redeeming or exchanging shares because, when a shareholder purchases by check or
by ACH payment, the Trust may withhold payment for up to 10 days from the date
the check or ACH purchase is received.
ADDITIONAL INVESTMENTS
Additional investments in the Fund may be made at any time by mailing a check
payable to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401.
The shareholder's account number and the name of the Fund and class of shares
must be included with each investment. Purchases will be effected at the NAV per
share plus any applicable sales charge as described above.
SYSTEMATIC INVESTMENT PLANS
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of the Fund through AutoInvest. AutoInvest facilitates
investments by using electronic debits, authorized by the shareholder, to a
checking or savings account, for share purchases. When the authorization is
accepted (usually within two weeks of receipt) a shareholder may purchase shares
by calling MSS, toll free at 1-800-MAINSTAY (between 8:00 AM and 4:00 PM,
Eastern time). The investment will be effected at the NAV per share next
determined after receipt in good order of the order, and normally will be
credited to the shareholder's Fund account within two business days thereafter.
Shareholders whose bank is an ACH member also may use AutoInvest to
automatically purchase shares of the Fund on a scheduled basis by electronic
debit for an account designated by the shareholder on an application form. The
initial investment must be in accordance with the investment amounts previously
mentioned. Subsequent minimum investments are $50 monthly, $100 quarterly, $250
semiannually, or $500 annually. The investment day may be any day from the first
through the twenty-eighth of the respective month. Redemption proceeds from Fund
shares purchased by AutoInvest may not be paid until 10 days or more after the
purchase date. Fund shares may not be redeemed by AutoInvest.
OTHER INFORMATION
Investors may, subject to the approval of the Trust, the Distributor, the
Manager and the Subadviser, purchase shares of the Fund with liquid securities
that are eligible for purchase by the Fund and that have a value that is readily
ascertainable. These transactions will be effected only if the Subadviser
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.
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<PAGE> 53
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. number (or such other information as
the Trust has requested) has been provided.
REDEMPTIONS AND EXCHANGES - INDIVIDUAL SHAREHOLDERS
Shares may be redeemed directly from the Fund or through your Registered
Representative. Shares redeemed will be valued at the NAV per share next
determined after MSS receives the redemption request in "good order." "Good
order" with respect to a redemption request generally means that for
certificated shares, a stock power or certificate must be endorsed, and for
uncertificated shares a letter must be signed, by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed by an eligible
guarantor institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to MSS must be submitted before the
redemption request will be accepted. The signature guarantee may be waived on a
redemption of $100,000 or less which is payable to the shareholder(s) of record
and mailed to the address of record, or under such other circumstances as the
Trust may allow. Send your written request to The MainStay Funds, P.O. Box 8401,
Boston, MA 02266-8401.
Upon the redemption of shares the Fund will make payment in cash, except as
described below, of the net asset value of the shares next determined after such
redemption request was received. There will be no redemption, however, during
any period in which the right of redemption is suspended or date of payment is
postponed because the New York Stock Exchange is closed or trading on such
Exchange is restricted or the SEC deems an emergency to exist.
The value of the shares redeemed from the Fund may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned the shares.
SYSTEMATIC WITHDRAWAL PLAN - INDIVIDUAL SHAREHOLDERS
Dividends and capital gains distributions on shares held under the Systematic
Withdrawal Plan are reinvested in additional full and fractional shares of the
same Fund at NAV. MSS acts as agent for the shareholder in redeeming sufficient
full and fractional shares to provide the amount of the systematic withdrawal
payment and any contingent deferred sales charge, if applicable.
DISTRIBUTIONS IN KIND
The Trust has agreed to redeem shares of the Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the NAV of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of the Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings or during which trading
on the New York Stock Exchange is restricted; (ii) when the SEC determines that
a state of emergency exists which may make payment or transfer not reasonably
practicable; (iii) as the SEC may by order permit for the protection of the
security holders of the Trust; or (iv) at any other time when the Trust may,
under applicable laws and regulations, suspend payment on the redemption or
repurchase of its shares.
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<PAGE> 54
EXCHANGE PRIVILEGES
Exchanges will be based upon the Fund's NAV per share next computed following
receipt of a properly executed exchange request.
Subject to the conditions and limitations described herein, Class I shares of
the Fund may be exchanged for Class A shares of a MainStay Fund registered in
the state of residence of the investor or where an exemption from registration
is available and only with respect to Funds that are available for sale to new
investors.
INVESTORS SHOULD READ THE PROSPECTUS CAREFULLY BEFORE THEY PLACE AN
EXCHANGE REQUEST.
Generally, shareholders may exchange their Class I shares of the Fund for
Class A shares of another MainStay Fund, without the imposition of a sales
charge. Any such exchanges will be based upon each Fund's NAV per share next
computed following receipt of a properly executed exchange request.
Exchanges may only be made with respect to Funds registered in the state of
residence of the investor or where an exemption from registration is available
and only with respect to Funds that are available for sale to new investors. An
exchange may be made by either writing to MSS at the following address: The
MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401, or by calling
MSS at 1-800-MAINSTAY (8:00 AM to 6:00 PM Eastern time).
In times when the volume of telephone exchanges is heavy, additional phone
lines will be added by MSS. However, in times of very large economic or market
changes, the telephone exchange privilege may be difficult to implement. When
calling MSS to make a telephone exchange, shareholders should have available
their account number and Social Security or Taxpayer I.D. numbers. Under the
telephone exchange privilege, shares may only be exchanged among accounts with
identical names, addresses and Social Security or Taxpayer I.D. numbers. Shares
may be transferred among accounts with different names, addresses and Social
Security or Taxpayer I.D. numbers only if the exchange request is in writing and
is received in "good order." If the dealer permits, the dealer representative of
record may initiate telephone exchanges on behalf of a shareholder, unless the
shareholder notifies the Fund in writing not to permit such exchanges.
It is the policy of The MainStay Funds to discourage frequent trading by
shareholders among the Funds in response to market fluctuations. Accordingly, in
order to maintain a stable asset base in each Fund and to reduce administrative
expenses borne by each Fund, except for systematic exchanges, exchanges
processed via MainStay's automated system and as to certain accounts for which
tracking data is not available, after five exchanges per calendar year, a $10
fee will be imposed on each trade date on which a shareholder makes an exchange
and additional exchange requests may be denied.
TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(k) FOR CORPORATIONS
AND SELF-EMPLOYED INDIVIDUALS
Shares of the Fund may also be purchased as an investment under a specimen
cash or deferred profit sharing plan intended to qualify under Section 401(k) of
the Code (a "401(k) Plan") adopted by a corporation, a self-employed individual
(including sole proprietors and partnerships), or other organization. The Fund
may be used as funding vehicles for qualified retirement plans including 401(k)
plans, which may be administered by third-party administrator organizations.
NYLIFE Distributors does not sponsor or administer such qualified plans at this
time.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
Shares of the Fund may also be purchased as an underlying investment for an
IRA made available by NYLIFE Distributors. Three types of IRAs are available --
a traditional IRA, the Roth IRA and the Education IRA.
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<PAGE> 55
An individual may contribute as much as $2,000 of his or her earned income to
a traditional IRA. A married individual filing a joint return may also
contribute to a traditional IRA for a nonworking spouse. The maximum deduction
allowed for a contribution to a spousal IRA is the lesser of (i) $2,000 or (ii)
the sum of (a) the compensation includible in the working spouse's gross income
plus (b) any compensation includible in the gross income of the nonworking
spouse, reduced by the amount of the deduction taken by the working spouse. The
maximum deduction for an IRA contribution by a married couple is $4,000.
An individual who has not attained age 70-1/2 may make a contribution to a
traditional IRA which is deductible for federal income tax purposes. For the
1999 tax year, a contribution is deductible only if the individual (and his or
her spouse, if applicable) has an adjusted gross income below a certain level
($51,000 for married individuals filing a joint return, with a phase-out of the
deduction for adjusted gross income between $51,000 and $61,000; $31,000 for a
single individual, with a phase-out for adjusted gross income between $31,000
and $41,000). These phase-out limits will gradually increase, eventually
reaching $50,000 - $60,000 for single filers in 2005 and thereafter (and
reaching $80,000 - $100,000 if married filing jointly in 2007 and thereafter).
In addition, a married individual may make a deductible IRA contribution even
though the individual's spouse is an active participant in a qualified
employer's retirement plan, subject to a phase-out for adjusted gross income
between $150,000 - $160,000 ($0-$10,000 for non-participant spouses filing a
separate return). However, an individual not permitted to make a deductible
contribution to an IRA may nonetheless make nondeductible contributions up to
the maximum contribution limit for that year. The deductibility of IRA
contributions under state law varies from state to state.
Distributions from IRAs (to the extent they are not treated as a tax-free
return of nondeductible contributions) are taxable under federal income tax laws
as ordinary income. There are special rules for determining how withdrawals are
to be taxed if an IRA contains both deductible and nondeductible amounts. In
general, all traditional IRAs are aggregated and treated as one IRA, all
withdrawals are treated as one withdrawal, and then a proportionate amount of
the withdrawal will be deemed to be made from nondeductible contributions;
amounts treated as a return of nondeductible contributions will not be taxable.
Certain early withdrawals are subject to an additional penalty tax. However,
there are exceptions for certain withdrawals, including: withdrawals up to a
total of $10,000 for qualified first-time homebuyer expenses or withdrawals used
to pay "qualified higher education expenses" of the taxpayer or his or her
spouse, child or grandchild. There are also special rules governing when IRA
distributions must begin and the minimum amount of such distributions; failure
to comply with these rules can result in the imposition of an excise tax.
ROTH IRAS. Roth IRAs are a form of individual retirement account which
feature nondeductible contributions that may be made even after the individual
attains the age of 70-1/2. In certain cases, distributions from a Roth IRA may
be tax free. The Roth IRA, like the traditional IRA, is subject to a $2,000
($4,000 for a married couple) contribution limit (taking into account both Roth
IRA and traditional IRA contributions). The maximum contribution that can be
made is phased-out for taxpayers with adjusted gross income between $95,000 and
$110,000 ($150,000 - $160,000 if married filing jointly). If the Roth IRA has
been in effect for five years, and distributions are (1) made on or after the
individual attains the age of 59-1/2; (2) made after the individual's death; (3)
attributable to disability; or (4) used for "qualified first-time home buyer
expenses," they are not taxable. If these requirements are not met,
distributions are treated first as a return of contributions and then as taxable
earnings. Taxable distributions may be subject to the same excise tax described
above with respect to traditional IRAs. All Roth IRAs, like traditional IRAs,
are treated as one IRA for this purpose. Unlike the traditional IRA, Roth IRAs
are not subject to minimum distribution requirements during the account owner's
lifetime. However, the amount in a Roth IRA is subject to required distribution
rules after the death of the account owner.
EDUCATION IRAS. A taxpayer may make non-deductible contributions of up to
$500 per year per beneficiary to an Education IRA. Contributions cannot be made
after the beneficiary becomes 18 years old. The maximum contribution is phased
out for taxpayers with adjusted gross income between $95,000 and $110,000
($150,000 - $160,000 if married filing jointly). Earnings are tax-deferred until
a distribution is made. If a distribution does not exceed the beneficiary's
"qualified higher education expenses" for the year, no part of the distribution
is taxable. If part of a distribution is taxable, a penalty tax will generally
apply as well. Any balance remaining in an Education IRA when the beneficiary
becomes 30 years old must be distributed and any earnings will be taxable and
subject to a penalty tax upon distribution.
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All income and capital gains deriving from IRA investments in the Fund are
reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA or
Education IRA combined with tax-deferred compounded earnings on IRA investments
can lead to substantial retirement and/or education savings.
403(b)(7) TAX SHELTERED ACCOUNT
Shares of the Fund may also be purchased as the underlying investment for tax
sheltered custodial accounts (403(b)(7) TSA plans) made available by NYLIFE
Distributors. In general, employees of tax-exempt organizations described in
Section 501(c)(3) of the Code (such as hospitals, churches, religious,
scientific, or literary organizations and educational institutions) or a public
school system are eligible to participate in a 403(b)(7) TSA plan.
GENERAL INFORMATION
Shares of the Fund may also be a permitted investment under profit sharing,
pension, and other retirement plans, IRAs, and tax-deferred annuities other than
those offered by the Fund depending on the provisions of the relevant plan.
Third-party administrative services, available for some corporate plans, may
limit or delay the processing of transactions.
The custodial agreements and forms provided by the Fund's Custodian and
Transfer Agent designate New York Life Trust Company as custodian for IRAs and
403(b)(7) TSA plans (unless another trustee or custodian is designated by the
individual or group establishing the plan) and contain specific information
about the plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by New York Life Trust Company, tax consequences and
redemption information, see the specific documents for that plan.
The federal tax laws applicable to retirement plans, IRAs and 403(b)(7) TSA
plans are extremely complex and change from time to time. Therefore, an investor
should consult with his or her own professional tax adviser before establishing
any of the tax-deferred retirement plans described above.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time the Fund may publish its yield and/or average annual total
return in advertisements and communications to shareholders. The average annual
total return is determined for a particular period by calculating the actual
dollar amount of the investment return on a $1,000 investment in the Fund made
at the maximum public offering price at the beginning of the period, and then
calculating the annual compounded rate of return which would produce that
amount. Total return for a period of one year is equal to the actual return of
the Fund during that period and reflects fee waivers and reimbursements in
effect for each period. This calculation assumes a complete redemption of the
investment. It also assumes that all dividends and distributions are reinvested
at net asset value on the reinvestment dates during the period.
Quotations of the Fund's average annual total return will be calculated
according to the following SEC formula:
n
P(1+T) = ERV
where:
<TABLE>
<S> <C>
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)
</TABLE>
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<PAGE> 57
The Fund may quote total rates of return in addition to its average annual
total return. Such quotations are computed in the same manner as the average
annual compounded rate, except that such quotations will be based on the Fund's
actual return for a specified period as opposed to its average return over 1, 5,
and 10-year periods.
The average annual total returns of the MAP Equity Fund's Class I Shares for
the 1-year, 5-year and 10-year periods ended December 31, 1998 are 18.33%,
20.62%, and 16.90%, respectively. These figures are based on the performance of
the Mutual Benefit Fund, which was renamed the MAP-Equity Fund in 1995. The
current shareholders of the MAP-Equity Fund approved an Agreement and Plan of
Reorganization at their June 3, 1999 meeting. On June 9, 1999 the MAP-Equity
Fund was reorganized as the MainStay MAP Equity Fund and existing MAP-Equity
Fund shareholders became Class I shareholders of MainStay Map Equity Fund.
The performance data quoted represents historical performance and the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The Fund may also include its current dividend rate in its prospectus, in
supplemental sales literature, or in communications to shareholders. The current
dividend rate of each Fund for a particular period is calculated by annualizing
total distributions per share from net investment income (including equalization
credits, excluding realized short-term capital gains and premiums from writing
options) during this period and dividing this amount by the maximum offering
price per share on the last day of the period. The current dividend rate does
not reflect all components of the Fund's performance including (i) realized and
unrealized capital gains and losses, which are reflected in calculations of the
Fund's total return, or (ii) the amortized discount and premium on debt
obligations in income using the current market value of the obligations, as is
currently required for yield calculations. In addition, the current dividend
rate does not take into account the imposition of any contingent deferred sales
charge on the redemption of Fund shares. Any performance figure which does not
take into account the contingent deferred sales charge would be reduced to the
extent such charge is imposed upon a redemption.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's yield, current dividend rate,
total return or tax-equivalent yield of any prior period should not be
considered as a representation of what an investment may earn or what an
investor's yield, current dividend rate, total return or tax-equivalent yield
may be in any future period.
In addition, advertising for the Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for the Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for the
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for the Fund may discuss
the investment philosophy, personnel and assets under management of the Fund's
Manager and Subadviser, and other pertinent facts relating to the management of
the Fund by the Subadviser.
From time to time the Fund may publish an indication of its past performance
as measured by independent sources such as Lipper Analytical Services,
Incorporated, Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's Personal
Finance, Financial World, Forbes, Money, Morningstar, Personal Investor, Sylvia
Porter's Personal Finance, and The Wall Street Journal.
In addition, performance information for the Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Morgan Stanley Capital
International indexes, the Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, the Merrill Lynch 1 to 3 Year Treasury Index, the
Salomon Brothers World Government Benchmark Bond Index, the Salomon Brothers
non-U.S. Dollar
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<PAGE> 58
World Government Bond Index, the Lehman Brothers Municipal Bond Index and the
Lehman Brothers Government Corporate Index; (ii) other groups of mutual funds
tracked by Morningstar Inc. or Lipper Analytical Services, widely used
independent research firms which rank mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) and other
measures of the performance of the economy to assess the real rate of return
from an investment in the Fund. Advertisements for the Fund may also include
general information about the performance of unmanaged indexes with investment
parameters similar to the Fund's. Unmanaged indexes may assume the reinvestment
of dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, advertisements for the Fund may include general
information about the services and products offered by the Fund, MainStay
Institutional Funds Inc. and New York Life Insurance Company and its
subsidiaries. For example, such advertisements may include statistical
information about those entities including, but not limited to, the number of
current shareholder accounts, the amount of assets under management, sales
information, the distribution channels through which the entities' products are
available, marketing efforts and statements about this information by the
entities' officers, directors and employees.
TAX INFORMATION
TAXATION OF THE FUND
The following summarizes certain federal income tax considerations generally
affecting the Fund and its stockholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its stockholders, and
the discussion here is not intended as a substitute for careful tax planning.
The discussion is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisors with regard to the federal tax consequences of the purchase, ownership,
and disposition of Fund shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
The Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. To qualify as a regulated investment company,
the Fund must, among other things: (i) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies ("Qualifying
Income Test"); (ii) diversify its holdings so that, at the end of each quarter
of the taxable year, (a) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. Government securities, the securities
of other regulated investment companies, and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (b) not more than 25% of
the value of its total assets is invested in the securities on any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies), or of two or more issuers which the Fund controls (as
that term is defined in the relevant provisions of the Code) and which are
determined to be engaged in the same or similar trades or businesses or related
trades or businesses; and (iii) distribute at least 90% of the sum of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of any net long-term capital
losses) and its net tax-exempt interest each taxable year. The Treasury
Department is authorized to promulgate regulations under which foreign currency
gains would constitute qualifying income for purposes of the Qualifying Income
Test only if such gains are directly related to investing in securities (or
options and futures with respect to securities). To date, no such regulations
have been issued.
Certain requirements relating to the qualification of the Fund as a regulated
investment company may limit the extent to which the Fund will be able to engage
in certain investment practices, including transactions in futures contracts and
other types of derivative securities transactions. In addition, if the Fund were
unable to dispose of portfolio securities due to settlement problems relating to
foreign investments or due to the holding of illiquid securities, the Fund's
ability to qualify as a regulated investment company might be affected.
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<PAGE> 59
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. The
Fund intends to distribute to its shareholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Fund, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, the Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution is treated as paid on December 31 of the calendar
year if it is declared by the Fund in October, November or December of that year
to shareholders of record on a date in such a month and paid by the Fund during
January of the following calendar year. Such distributions are taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
Provided that the Fund qualifies as a regulated investment company, under the
Code, it generally will not be subject to any excise or income taxes in
Massachusetts. The Fund's investments, if any, or in Passive Foreign Investment
Companies, as explained below, may cause the Fund to become liable for certain
taxes. Investors that are tax-exempt organizations should carefully consider
whether distributions of the Fund's earnings will be subject to tax in their
hands.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming the Fund qualifies as a RIC, distributions of taxable net investment
income and net short-term capital gains in excess of net long-term capital
losses will be treated as ordinary income in the hands of shareholders.
If the Fund's investment income is derived exclusively from sources (such as
interest) other than dividends, no portion of such distributions will be
eligible for the dividends-received deduction available to corporations. If a
portion of the Fund's net investment income is derived from dividends from
domestic corporations, then a portion of such distributions may be eligible for
the corporate dividends-received deduction. The dividends-received deduction is
reduced to the extent shares of the Fund are treated as debt-financed under the
Code and is generally eliminated unless such shares are deemed to have been held
for more than 45 days. The 45-day holding period must occur during the 90-day
period beginning 45 days before the date on which the shares become ex-dividend.
In the case of dividends on certain preferred stock, the holding period
requirement is 90 days during a 180-day period. In addition, the entire dividend
(including the deducted portion) is includable in the corporate shareholder's
alternative minimum taxable income. Finally, if such dividends are large enough
to constitute "extraordinary dividends" under Section 1059 of the Code and the
applicable holding period requirements are not met, the shareholder's basis in
its shares could be reduced by all or a portion of the amount of the dividends
that qualifies for the dividends-received deduction.
Distributions of the Fund's net capital gain, whether received in cash or
reinvested in Fund shares, will generally be taxable to shareholders as
long-term capital gains, regardless of how long a Shareholder has held the
Fund's shares. Net capital gains from assets held for one year or less will be
taxed as ordinary income.
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 the 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 the Fund for reinvestment, requiring federal income taxes to be
paid thereon by the 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
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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 Fund shares by the
difference between their pro-rata share of such gains and their tax credit.
Distributions by the Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would generally be
taxable to the shareholder (except to the extent the distribution is an exempt
interest dividend as described below) as ordinary income or capital gain as
described above, even though, from an investment standpoint, it may constitute a
partial return of investment. In particular, investors should be careful to
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those investors purchasing shares just prior to a distribution
will then receive a partial return of their investment upon such distribution,
which may nevertheless be taxable to them.
Distributions of taxable net investment income and net realized capital gains
will be taxable as described above, whether received in shares or in cash. Any
distributions that are not from the Fund's net investment income or net capital
gain may be characterized as a return of capital to shareholders or, in some
cases, as capital gain. Shareholders electing to receive distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the net asset value of such share on the
reinvestment date.
TAXATION OF OPTIONS, FUTURES AND SIMILAR INSTRUMENTS
Many of the options, futures contracts and forward contracts entered into by
the Fund will be classified as "Section 1256 contracts." Generally, gains or
losses on Section 1256 contracts are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"). Also, certain Section 1256 contracts held by
the Fund are "marked-to-market" at the times required pursuant to the Code with
the result that unrealized gains or losses are treated as though they were
realized. The resulting gain or loss generally is treated as 60/40 gain or loss,
except for foreign currency gain or loss on such contracts, which generally is
ordinary in character.
Distribution of Fund gains from hedging transactions will be taxable to
shareholders. Generally, hedging transactions and certain other transactions in
options, futures and forward contracts undertaken by the Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Fund. In addition, losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules rather than being taken into account in the taxable
year in which such losses are realized.
Furthermore, certain transactions (including options, futures contracts,
notional principal contracts, short sales and short sales against the box) with
respect to an "appreciated position" in certain financial instruments may be
deemed a constructive sale of the appreciated position, requiring the immediate
recognition of gain as if the appreciated position were sold. Because only a few
regulations implementing the straddle rules have been promulgated, and
regulations relating to constructive sales of appreciated positions have yet to
be promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Fund are not entirely clear. The hedging transactions
in which the Fund engages may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to the Fund that did not engage in such hedging transactions.
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The diversification requirements applicable to the Fund's status as a
regulated investment company may limit the extent to which the Fund will be able
to engage in transactions in options, futures contracts or forward contracts.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations which may be classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If the Fund receives a so-called "excess distribution"
with respect to PFIC stock, the Fund itself may be subject to a tax on a portion
of the excess distribution, whether or not the corresponding income is
distributed by the Fund to Shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC in a given year. If this
election were made, the special rules, discussed above, relating to the taxation
of excess distributions, would not apply. Alternatively, the Fund may elect to
mark to market its PFIC shares at the end of each taxable year, with the result
that unrealized gains are treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC Shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss and the timing of the recognition
of income with respect to PFIC shares, as well as subject the Fund itself to tax
on certain income from PFIC shares, the amount that must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to the Fund that did not invest in PFIC shares.
FOREIGN CURRENCY GAINS AND LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward and other contracts, gain or
loss attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of the Fund's net investment income to be distributed to its shareholders. If
Section 988 losses exceed other investment company taxable income (which
includes, among other items, dividends, interest and the excess, if any, of net
short-term capital gains over net long-term capital losses) during the taxable
year, the Fund would not be able to make any ordinary dividend distributions,
and distributions made before the losses were realized would be recharacterized
as a return of capital to shareholders or, in some cases, as capital gain,
rather than as an ordinary dividend.
COMMODITY INVESTMENTS
A regulated investment company is required under the Code to derive at least
90% of its gross income from certain qualifying sources. Qualifying income
includes, inter alia, interest, dividends, and gain from the sale of stock or
securities, but it does not include gain from the sale of commodities such as
gold and other precious metals.
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DISPOSITIONS OF FUND SHARES
Upon redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares. Such gain or loss
generally will be a capital gain or loss if the shares of the Fund were capital
assets in the hands of the shareholder, and generally will be taxable to
shareholders as long-term capital gains if the shares had been held for more
than one year. A loss realized by a shareholder on the redemption, sale or
exchange of shares of the Fund with respect to which capital gain dividends have
been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less at the time of their disposition. Furthermore, a loss realized by
a shareholder on the redemption, sale or exchange of shares of the Fund with
respect to which exempt-interest dividends have been paid will, to the extent of
such exempt-interest dividends, be disallowed if such shares have been held by
the shareholder for six months or less at the time of their disposition. A loss
realized on a redemption, sale or exchange also will be disallowed to the extent
the shares disposed of are replaced (whether through reinvestment of
distributions, or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders should be aware that redeeming shares of the Fund after
tax-exempt interest has been accrued by the Fund but before that income has been
declared as a dividend may be disadvantageous. This is because the gain, if any,
on the redemption will be taxable, even though such gains may be attributable in
part to the accrued tax-exempt interest which, if distributed to the shareholder
as a dividend rather than as redemption proceeds, might have qualified as an
exempt-interest dividend.
Under certain circumstances, the sales charge incurred in acquiring shares of
the 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 the 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 the Fund distribution in his or her own state and locality (or foreign
country).
Under the federal income tax law, the Fund will be required to report to the
IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares except in the case of certain exempt shareholders. Under the backup
withholding provisions of Section 3406 of the Code, all such taxable
distributions and proceeds from the redemption or exchange of the Fund's shares
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt shareholders who fail to furnish the Fund with their taxpayer
identification number and with required certifications regarding their status
under the federal income tax law or if the IRS or a broker notifies the Fund
that the number furnished by the shareholder is incorrect. In addition, both the
Fund and the shareholder are potentially subject to a $50 penalty imposed by the
IRS if a correct, certified taxpayer identification number is not furnished and
used on required information returns.
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If the withholding provisions are applicable, any such distributions and
proceeds, whether taken in cash or reinvested in shares, will be reduced by the
amounts required to be withheld. Backup withholding is not an additional tax and
any amounts withheld are creditable against the shareholder's U.S. Federal tax
liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
FOREIGN TAXES
Investment income and gains received by the Fund from sources outside the
United States may be subject to foreign taxes which were paid or withheld at the
source. The payment of such taxes will reduce the amount of dividends and
distributions paid to the Fund's stockholders. Since the percentage of Fund's
total assets which will be invested in foreign stocks and securities will not be
more than 50%, any foreign tax credits or deductions associated with such
foreign taxes will not be available for use by its shareholders. The effective
rate of foreign taxes to which the Fund will be subject depends on the specific
countries in which the Fund's assets will be invested and the extent of the
assets invested in each such country and, therefore, cannot be determined in
advance.
STATE AND LOCAL TAXES - GENERAL
The state and local tax treatment of distributions received from the Fund and
any special tax considerations associated with foreign investments of the Fund
should be examined by shareholders with regard to their own tax situations.
EXPLANATION OF FUND DISTRIBUTIONS
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year the Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions.
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Each shareholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and
non-U.S. tax consequences of ownership of shares of the Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty)
on amounts constituting ordinary income to him or her.
ORGANIZATION AND CAPITALIZATION
GENERAL
The Fund is a separate series of an open-end investment company, The MainStay
Funds ("Trust"), established under the laws of The Commonwealth of Massachusetts
by a Declaration of Trust dated January 9, 1986, as amended. The Fund was
originally formed as the Mutual Benefit Fund, a Delaware corporation. The Fund
was renamed the MAP-Equity Fund in 1995. The Map-Equity Fund was reorganized as
the MainStay MAP Equity Fund on June 9, 1999.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate votes
will be taken by each class on matters affecting the Fund or a particular class
of shares issued by the Fund. Shares have noncumulative voting rights, which
means that holders of more than 50% of the shares voting for the election of
Trustees can elect all Trustees and, in such event, the holders of the remaining
shares voting for the election of Trustees will not be able to elect any person
or persons as Trustees. Shares have no preemptive or subscription rights and are
transferable.
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SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. Notice of such disclaimer will
normally be given in each agreement, obligation or instrument entered into or
executed by the Trust or the Trustees. The Declaration of Trust provides for
indemnification by the Fund for any loss suffered by a shareholder as a result
of an obligation of the Fund. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Trustees believe that, in view of the above,
the risk of personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Company's registration statement filed with
the SEC under the Securities Act of 1933 with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York,
10036, has been selected as independent accountants of the Trust. The Fund's
Annual Report, which is incorporated by reference in this SAI, has been so
incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
TRANSFER AGENT
MainStay Shareholder Services, Inc. ("MSS"), an affiliate of the Manager,
serves as the transfer agent and dividend disbursing agent for the Fund. MSS has
its principal office and place of business at 260 Cherry Hill Road, Parsippany,
New Jersey. Pursuant to its Transfer Agency and Service Agreement dated April
28, 1997 with the Trust, MSS provides transfer agency services, such as the
receipt of purchase and redemption orders, the receipt of dividend reinvestment
instructions, the preparation and transmission of dividend payments and the
maintenance of various records of accounts. The Fund pays MSS fees in the form
of per account charges, as well as out-of-pocket expenses and advances incurred
by MSS. MSS has entered into a Sub-Transfer Agency and Service Agreement with
Boston Financial Data Services, Inc. ("BFDS") located at 2 Heritage Drive, North
Quincy, Massachusetts 02171 and pays to BFDS per account, and transaction fees
and out-of-pocket expenses for performing certain transfer agency and
shareholder recordkeeping services.
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CUSTODIANS
The Bank of New York ("BONY") serves as custodian for the Fund. The Trust has
also appointed BONY as its foreign custody manager with respect to certain
securities held outside of the United States. BONY has its principal office at
48 Wall Street, New York, New York 10286.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006, passes
upon certain legal matters in connection with the shares offered by the Trust,
and also acts as counsel to the Trust.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading activities
of all Trustees, officers of the Trust and persons who, in connection with their
regular functions, play a role in the recommendation of any purchase or sale of
a security by the Trust or obtain information pertaining to such purchase or
sale or who have the power to influence the management or policies of the Trust
or the Manager or a Subadviser unless such power is the result of their position
with the Trust or Manager or Subadviser. Such persons are generally required to
preclear all security transactions with the Trust's Compliance Officer or his
designee and to report all transactions on a regular basis. The Trust has
developed procedures for administration of the Code. The Subadviser has adopted
its own Codes of Ethics to govern the personal trading activities of its
personnel.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
Corporate and Municipal Bond Ratings Aaa: Bonds which are rated Aaa are judged
to be of the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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
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of construction or elimination of basis of condition, e.g., Con.(Baa).
Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
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
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conditions than debt in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions for the obligor. In the
event of adverse business, financial or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or a similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
A-1: A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign(+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic
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conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
B: A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
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