<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay California Tax Free Fund Highlights 3
$10,000 Invested in the MainStay California
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification of Holdings--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 9
Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Accountants 21
The MainStay Funds 22
<PAGE>
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[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay California Tax Free Fund Highlights
1996 MARKET HIGHLIGHTS
o The California municipal market was relatively uneventful in comparison
with recent years, with no strong trends or clear market direction
o Anticipation of Federal Reserve policies resulted in market turbulence
during the first half of 1996, with a modest recovery in the second half of
the year
o Strong performance in the equity markets drew money away from municipal
securities, weakening demand, while supply remained moderately higher than
in 1995
o Controversy over flat tax proposals receded into the background during this
election year, reducing investor concerns about the future prospects for
tax-exempt securities
1996 FUND HIGHLIGHTS
o One-year total returns of 3.44% and 3.10% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes underperformed the average Lipper+ California municipal
debt fund for the 12 months ended 12/31/96
o A neutral duration helped the Fund perform generally in line with the
market, while geographic and sector diversification helped manage risk
o Disciplined security selection assisted performance
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
California Tax Free Fund versus
Lehman Brothers Municipal Bond
Index and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
California Lehman Brothers
Tax Free Fund Muni Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $ 9,550 $10,000 $10,000
12/91 $ 9,747.6 $10,335 $10,051
12/92 $10,510.1 $11,247 $10,349
12/93 $11,845.2 $12,628 $10,632
12/94 $11,266.7 $11,975 $10,908
12/95 $12,976.5 $14,066 $11,192
12/96 $13,422.6 $14,689 $11,563
</TABLE>
[GRAPHIC] MainStay California Tax Free Fund
[GRAPHIC] Lehman Brothers Muni Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
California Lehman Brothers
Tax Free Fund Muni Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $10,000 $10,000 $10,000
12/91 $10,206.9 $10,335 $10,051
12/92 $11,005.3 $11,247 $10,349
12/93 $12,403.4 $12,628 $10,632
12/94 $11,797.6 $11,975 $10,908
12/95 $13,556.8 $14,066 $11,192
12/96 $13,836.9 $14,689 $11,563
</TABLE>
[GRAPHIC] MainStay California Tax Free Fund
[GRAPHIC] Lehman Brothers Muni Bond Index*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 10/1/91
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 10/1/91 and includes the
historical performance of the Class A shares for periods from inception
(10/1/91) through 12/31/94. Returns shown reflect the Contingent Deferred
Sales Charge (CDSC) of 1%, as it would apply for the period shown. (The
$10,000 invested in the Lehman Brothers Municipal Bond Index begins on
9/30/91.) All results include reinvestment of distributions at net asset
value and the change in share price for the stated period. Past performance
is no guarantee of future results.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds, rated Baa or better
by Moody's, with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of California Tax Free Fund Team
CALIFORNIA TAX FREE FUND TEAM
James Flood and Ravi Akhoury
Generally speaking, 1996 was an uneventful year in the California municipal bond
markets, particularly compared to previous years, which saw problems in Orange
County and Los Angeles. For the 12 months ended December 31, 1996, there were no
major blow-ups, defaults, or political events to which municipal investors
needed to respond. As a result, general economic trends and supply and demand
factors were the primary forces driving the California municipal market
throughout the year.
The state is also benefiting from the diversification of its economy, which
previously depended largely on defense spending, agriculture, and real estate.
During the first half of 1996, California municipal securities were less
affected by Federal Reserve policies than by the market's anticipation of how
those policies might change. As it happened, over the course of the year, the
Fed only adjusted rates once, and then by only 25 basis points.
As the economy began to pick up in the second and third quarters, interest rates
started to rise, which took a toll on municipal securities. On average,
California municipal funds closed the first half of the year with negative
returns. Early in the fourth quarter, however, the municipal market rallied as
the economy showed signs of slowing. The result was positive for most municipal
investors, with the average Lipper++ California municipal debt fund providing a
positive 3.65% total return for the 12 months ended December 31, 1996.
In this context, how did the MainStay California Tax Free Fund perform?
For the 12 months ended December 31, 1996, the MainStay California Tax Free Fund
posted total returns of 3.44% and 3.10% for Class A and Class B shares,
respectively, excluding all sales charges. While the Fund generally attempts to
perform in line with the market during much of the year, these results were
below the total return of the average Lipper California municipal debt fund over
the same period.
What factors primarily contributed to the Fund's underperformance?
We believe that duration is the single most important factor affecting the
performance of a municipal portfolio. Throughout the
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.
- ----------
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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[GRAPHIC]
Insured credits
- ---------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
Treasury securities and municipal bonds--or between different securities in a
single sector, such as municipal bonds with different credit ratings.
YEAR-BY-YEAR PERFORMANCE
- --------------------------------------------------------------------------------
[GRAPHIC]
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Total
Return
Year-end %
- ------------------------------------------------
<S> <C>
12/91 2.07
12/92 7.79
12/93 12.71
12/94 -4.92
12/95 15.18 Class A
12/95 14.91 Class B
12/96 3.44 Class A
12/96 3.10 Class B
</TABLE>
- ----------
Returns are for Class A shares unless otherwise noted. See footnote * on page 9
for more information on performance.
- --------------------------------------------------------------------------------
year, we tried to maintain a relatively neutral duration for the Fund to keep
from being blindsided by changes in interest rates and market sentiment. While a
longer duration can offer more opportunity when the markets are favorable, it
also presents greater risk if the market declines.
How did your duration strategy affect the Fund's performance?
We had mixed results over the course of the year. In the second quarter, we
extended our duration a bit beyond neutral and it had a negative impact. But we
made a prompt and disciplined return to a neutral duration when we saw the
strategy wasn't paying off. Later in the year, we extended the Fund's duration
once again, and when the market rallied in October and November, that move had a
positive impact on the Fund's performance. In fact, the Fund achieved most of
its gains during the fourth quarter.
What other strategic moves have you made in 1996?
The Fund seeks to provide a high level of current income free from regular
federal income tax and California personal income tax, consistent with the
preservation of capital. So our management strategies must take both performance
and quality into account. As the number of insured credits continues to grow,
opportunities to provide performance enhancements are becoming increasingly
scarce. As a result, we've tried to find uninsured issues with attractive price,
value, and quality characteristics.
Can you give us an example?
We've identified potential opportunities among BBB-rated hospital issues, which
we've selectively purchased over time. We feel many of these issues can offer
attractive risk/reward relationships. AAA-rated bonds may represent the highest
quality, but typically provide the lowest yields. While A-rated bonds are not
quite as strong from a quality standpoint, generally they offer higher yields.
During the year, however, the difference in yield between these securities, also
known as the yield spread, dropped to as little as 10 to 15 basis points. The
Fund's investments took advantage of the wider spreads, or more significant
yield advantages, of BBB-rated issues. The Fund's BBB-rated hospital
6
<PAGE>
[GRAPHIC]
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
- -----------------------------------------------
<S> <C>
Utility -- Electric & Water 16.5%
Transportation 15.7%
Education 13.7%
Health 11.3%
Pollution Control 9.9%
All Other 32.9%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
issues have performed well and have helped contribute positively to performance.
Were there particular bonds that did well?
We bought a Riverdale California Community Hospital bond that benefited as the
market moved up and the hospital sector did well. This issue in particular
traded better than other BBB hospitals, so our security selection helped in this
instance. We currently believe that the higher yields of these BBB bonds should
more than compensate for their lower quality, and we're continuing to closely
monitor their performance.
What other bonds were positive performers during the year?
There were several. We bought Foothill-Eastern Transportation zero coupon bonds
that were issued for a toll road that's under construction. The bond is rated
BBB and provides an attractive yield. Not only did this issue help us maintain
an appropriate duration for the Fund, but we feel it may also appreciate in
price as the project nears completion. Mohave California Water Agency bonds
performed relatively well, due largely to the fact that we purchased the
security when the market was low. We also bought California Pollution Control
San Diego Gas & Electric bonds when noncallable bonds were relatively
attractive. The timing of this purchase also helped the Fund in terms of overall
performance.
What else contributed to the Fund's performance?
Prerefundings can contribute to performance and we look for issues with
characteristics that may make them attractive prerefunding candidates. A Los
Angeles County California Transportation Commission Sales Tax issue was
prerefunded this year, which helped boost the Fund's performance.
Would you say the Fund is widely diversified throughout the state and by type of
issuer?
Yes we would. While state tax free bond funds in general tend to have natural
constraints on diversification, we seek to spread risk across a variety of
municipal issuers, sectors, geographic regions, maturities, coupons, and types
of securities. That way, the Fund seeks to
[GRAPHIC]
Prerefunding
- ------------
Returning principal prior to the initial date at which a bond can be called or
"refunded" (usually 10 years after issuance). In order to prerefund, the issuer
must return the par value of the bond and provide or guarantee interest payments
through the initial call date.
7
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax. Capital gains, if any, may also be taxed.
- --------------------------------------------------------------------------------
offer investors a measure of protection if problems arise in any particular
sector or if any particular coupon goes out of favor.
Did that happen in 1996?
The Fund had a few 4.75% coupon California municipal bonds, but they did not
perform as well as we felt they should. Although these bonds generally perform
well under different interest rate scenarios, we felt demand for this particular
coupon was declining so we decided to reduce the Fund's exposure in that area.
While the bonds had weakened a bit, we think the decision was a positive one in
terms of controlling risk.
How did supply and demand affect the portfolio in 1996?
While the supply of California municipal bonds was moderate, demand decreased as
investors poured money into the equity markets. The effect was negative for the
Fund and the municipal markets in general. Another difficulty for the market as
a whole has been a reduction in the number of municipal bond dealers, which has
reduced the liquidity of municipal bonds overall.
What's your outlook for 1997?
We think California municipal bonds still represent value, particularly for
California residents in high tax brackets. Barring any major upsets in 1997, we
believe interest rate movements, economic trends, and inflation concerns will
continue to be the major determinants of value. We'll continue to search for
opportunities and manage the Fund's duration and quality to seek attractive
current yields while preserving capital for the Fund's shareholders.
Ravi Akhoury
James Flood
Portfolio Managers
QUALITY BREAKDOWN AS OF 12/31/96
[GRAPHIC]
<TABLE>
- ------------------------------------
<S> <C>
AAA 52.5%
AA 4.6%
A 27.4%
BBB 12.8%
Cash & Equivalents 2.7%
</TABLE>
- ----------
Note: Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 3.44% 6.61% 6.69%
Class B 3.10% 6.49% 6.58%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A -1.22% 5.63% 5.76%
Class B -1.90% 6.18% 6.43%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 61 out of 33 out of 32 out of
95 funds 49 funds 47 funds
Class B 72 out of n/a n/a
95 funds
Average Lipper
CA municipal
debt fund 3.65% 6.81% 6.97%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $9.78 $0.4958 $0.0000
Class B $9.75 $0.4521 $0.0000
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's administrator
and adviser. Had these expenses not been assumed, total return figures
would have been lower. This expense limitation may be terminated or revised
at any time.
Class B shares, first offered on 1/3/95, are sold with no initial sales
charge, but are subject to a maximum CDSC of up to 5% if shares are
redeemed during the first 6 years of purchase and an annual 12b-1 fee of up
to .50%. Performance figures for this class include the historical
performance of the respective Class A shares from inception (10/1/91)
through 12/31/94. Performance data for the two classes after this date vary
based on differences in their expense structures. Class A shares are sold
with a maximum initial sales charge of 4.5% and a 12b-1 fee of .25%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class A shares' initial offering through
12/31/96. Class B shares were first offered to the public on 1/3/95; Class
A shares on 10/1/91.
[GRAPHIC]
9
<PAGE>
MainStay California Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (97.3%)+
CALIFORNIA (97.3%)
Baldwin Park California Unified
School District
(zero coupon), due 8/1/17 .............. $1,255,000 $ 389,050
California Housing Finance Agency
Revenue, Home Mortgage
Series C
8.30%, due 8/1/19 (a) .................. 35,000 36,269
California Pollution Control Financing
Authority Revenue
Pacific Gas & Electric Co.
Series A
8.20%, due 12/1/18 ..................... 900,000 931,239
Series B
8.875%, due 1/1/10 (a) (b) ............. 750,000 793,335
San Diego Gas & Electric Co.
Series A
5.90%, due 6/1/14 ...................... 1,000,000 1,047,500
California State Veterans
General Obligation, Series AW
7.70%, due 4/1/12 (a) .................. 880,000 930,600
California Statewide Community
Development Corp.
5.00%, due 10/1/23 ..................... 1,000,000 911,250
7.00%, due 9/1/09 ...................... 285,000 308,513
Clovis California Unified School District
Series D
(zero coupon), due 8/1/10 .............. 1,800,000 859,500
East Bay Municipal Utilities
District Water System Revenue
4.75%, due 6/1/21 ...................... 1,000,000 885,000
Eden Township Hospital District
Revenue
7.40%, due 11/1/19 ..................... 770,000 809,463
Escondido California Union High
School District
(zero coupon), due 11/1/12 ............. 1,350,000 560,250
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/24 .............. 3,000,000 551,250
(zero coupon), due 1/1/27 .............. 1,000,000 150,000
5.00%, due 1/1/35 ...................... 1,100,000 933,625
Irvine California Unified School District
Special Tax Community Facilities
Series A
8.10%, due 11/15/13 .................... 1,250,000 1,364,063
Los Angeles California Harbor
Department Revenue
8.70%, due 9/1/15 ...................... 540,000 600,750
Los Angeles County
Metropolitan Transportation
Authority, Sales Tax Revenue
Series A
5.00%, due 7/1/25 ...................... 1,050,000 964,687
Los Angeles County California
Transportation Commission Sales
Tax Revenue, Series A
7.40%, due 7/1/15 ...................... 400,000 431,000
Mojave California Water Agency
Improvement District, Morongo
Basin
5.80%, due 9/1/22 ...................... 1,000,000 1,010,000
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24 ...................... 1,470,000 1,541,662
Oakland California Revenue, Series A
7.60%, due 8/1/21 ...................... 1,050,000 1,123,500
Port of Oakland
Port Revenue, Series A
7.60%, due 11/1/16 (a) ................. 500,000 514,705
Riverside California Hospital Revenue
Riverside Community Hospital
Series A
6.75%, due 11/1/15 ..................... 515,000 518,862
Sacramento California Municipal
Utilities District Electric Revenue
Series A
6.25%, due 8/15/10 ..................... 500,000 551,875
Santa Cruz County Public
Financing Authority Revenue
Tax Allocation, Series B
7.625%, due 9/1/21 ..................... 825,000 916,781
South Coast Air Quality Management
District, Building Corp. California
Revenue, Series B
(zero coupon), due 8/1/06 .............. 500,000 308,125
Southern California Public Power
Authority Project Revenue
Mead-Phoenix, Series A
4.875%, due 7/1/20 ..................... 940,000 838,950
Stockton California Health Facilities
Revenue, St. Joseph Medical
Center, Series A
5.50%, due 6/1/23 ...................... 1,000,000 977,500
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09 ...................... 750,000 804,375
-----------
Total Long-Term Municipal Bonds
(Cost $22,393,711) ..................... 22,563,679
-----------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
===========================
<S> <C> <C>
SHORT-TERM INVESTMENT (1.3%)
California Health Facilities Financing
Authority Revenue, St. Joseph
Health Systems, Series B
2.20%, due 7/1/13 (c) .................. $ 300,000 $ 300,000
-----------
Total Short-Term Investment
(Cost $300,000) ........................ 300,000
-----------
Total Investments
(Cost $22,693,711) (d) ................. 98.6% 22,863,679(e)
Cash and Other Assets, Less
Liabilities ............................ 1.4 323,792
---------- -----------
Net Assets ............................... 100.0% $23,187,471
========== ===========
<CAPTION>
Contracts Unrealized
Long Depreciation
===========================
<S> <C> <C>
FUTURES CONTRACTS (0.0%) (f)
Municipal Bond
March 1997 (30 year) ................... 3 $ (844)
-----------
Total Futures Contracts
(Settlement Value $348,187) ............ $ (844)(g)
===========
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Segregated or partially segregated as collateral for futures contracts.
(c) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(e) At December 31, 1996 net unrealized appreciation was $169,968, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $474,559 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $304,591.
(f) Less than one tenth of a percent.
(g) Represent the difference between the value of the contracts at the time
they were opened and the value at December 31, 1996.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $22,693,711) ............................. $ 22,863,679
Cash ......................................................................................... 40,966
Receivables:
Interest ................................................................................... 362,653
Fund shares sold ........................................................................... 98
Other assets ................................................................................. 14
------------
Total assets .............................................................................. 23,267,410
------------
LIABILITIES:
Payables:
NYLIFE Distributors ........................................................................ 15,194
Transfer agent ............................................................................. 4,965
Adviser .................................................................................... 4,932
Fund shares redeemed ....................................................................... 3,890
Custodian .................................................................................. 2,531
Trustees ................................................................................... 178
Accrued expenses ............................................................................. 43,818
Variation margin payable on futures contracts ................................................ 4,431
------------
Total liabilities ......................................................................... 79,939
------------
Net assets ................................................................................... $ 23,187,471
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A .................................................................................... $ 18,499
Class B .................................................................................... 5,217
Additional paid-in capital ................................................................... 23,151,857
Accumulated undistributed net investment income .............................................. 3,129
Accumulated net realized loss on investments ................................................. (160,355)
Net unrealized appreciation on investments ................................................... 169,124
------------
Net assets ................................................................................... $ 23,187,471
============
CLASS A
Net assets applicable to outstanding shares .................................................. $ 18,098,050
============
Shares of beneficial interest outstanding .................................................... 1,849,908
============
Net asset value per share outstanding ........................................................ $ 9.78
Maximum sales charge (4.50% of offering price) ............................................... 0.46
------------
Maximum offering price per share outstanding ................................................. $ 10.24
============
CLASS B
Net assets applicable to outstanding shares .................................................. $ 5,089,421
============
Shares of beneficial interest outstanding .................................................... 521,745
============
Net asset value per share outstanding ........................................................ $ 9.75
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest ................................................................................... $ 1,402,431
------------
Expenses:
Administration ............................................................................. 56,535
Advisory ................................................................................... 56,535
Service .................................................................................... 56,535
Shareholder communication .................................................................. 52,560
Transfer agent ............................................................................. 29,636
Professional ............................................................................... 19,930
Custodian .................................................................................. 12,447
Distribution--Class B ...................................................................... 9,459
Amortization of organization expense ....................................................... 6,559
Registration ............................................................................... 3,365
Trustees ................................................................................... 612
Miscellaneous .............................................................................. 9,149
------------
Total expenses before reimbursement ....................................................... 313,322
Expense reimbursement from Adviser and Administrator ......................................... (22,456)
------------
Net expenses .............................................................................. 290,866
------------
Net investment income ........................................................................ 1,111,565
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ...................................................................... 97,679
Futures transactions ....................................................................... (121,689)
------------
Net realized loss on investments ............................................................. (24,010)
------------
Net change in unrealized appreciation on investments:
Security transactions ...................................................................... (279,095)
Futures transactions ....................................................................... (844)
------------
Net unrealized loss on investments ........................................................... (279,939)
------------
Net realized and unrealized loss on investments .............................................. (303,949)
------------
Net increase in net assets resulting from operations ......................................... $ 807,616
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 1,111,565 $ 984,910
Net realized gain (loss) on investments ...................................... (24,010) 393,085
Net change in unrealized appreciation (depreciation) on investments .......... (279,939) 1,299,698
------------ ------------
Net increase in net assets resulting from operations ......................... 807,616 2,677,693
------------ ------------
Dividends to shareholders:
From net investment income:
Class A ..................................................................... (950,302) (933,088)
Class B ..................................................................... (186,583) (50,283)
------------ ------------
Total dividends to shareholders ........................................... (1,136,885) (983,371)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ..................................................................... 1,110,752 2,897,464
Class B ..................................................................... 3,213,809 1,997,817
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ..................................................................... 549,718 500,698
Class B ..................................................................... 117,399 41,776
------------ ------------
4,991,678 5,437,755
Cost of shares redeemed:
Class A ..................................................................... (3,046,980) (1,874,383)
Class B ..................................................................... (215,790) (136,962)
------------ ------------
Increase in net assets derived from capital share transactions ............ 1,728,908 3,426,410
------------ ------------
Net increase in net assets ................................................ 1,399,639 5,120,732
NET ASSETS:
Beginning of year .............................................................. 21,787,832 16,667,100
------------ ------------
End of year .................................................................... $ 23,187,471 $ 21,787,832
============ ============
Accumulated undistributed net investment income ................................ $ 3,129 $ 28,449
============ ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Class A Class B Class A Class B September 1 Year Ended October 1,
------ ------ ------ ------ through August 31 1991(a)
Year ended Year ended December 31 ------------------ through
December 31, 1996 December 31, 1995 1994* 1994 1993 August 31, 1992
------------------ ------------------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........... $ 9.95 $ 9.91 $ 9.10 $ 9.10 $ 9.57 $10.38 $ 9.90 $ 9.55
------ ------ ------ ------ ------ ------ ------ ------
Net investment income ........... 0.49 0.45 0.50 0.52 0.17 0.53 0.55 0.45
Net realized and unrealized gain
(loss) on investments ......... (0.16) (0.16) 0.85 0.81 (0.47) (0.51) 0.64 0.30
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................... 0.33 0.29 1.35 1.33 (0.30) 0.02 1.19 0.75
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ...... (0.50) (0.45) (0.50) (0.52) (0.17) (0.52) (0.59) (0.40)
From net realized gain
on investments ................ -- -- -- -- -- (0.31) (0.12) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (0.50) (0.45) (0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $ 9.78 $ 9.75 $ 9.95 $ 9.91 $ 9.10 $ 9.57 $10.38 $ 9.90
====== ====== ====== ====== ====== ====== ====== ======
Total investment return (b) ..... 3.44% 3.10% 15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ......... 5.0% 4.7% 5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
Net expenses .................. 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
Expenses (before
reimbursement) ............... 1.3% 1.6% 1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
Portfolio turnover rate ......... 79% 79% 107% 107% 24% 96% 154% 87%
Net assets at end of
period (in 000's) ............. $18,098 $5,089 $19,825 $1,963 $16,667 $17,356 $14,603 $10,085
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay California Tax Free Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay California Tax Free Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares are offered at
net asset value per share plus an initial sales charge. Class B shares, whose
distribution commenced on January 3, 1995, are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Class A shares and Class B shares
bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares are subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in
16
<PAGE>
Notes to Financial Statements
the Fund's calculation of net asset value unless the Adviser believes that the
particular event would materially affect net asset value, in which case an
adjustment would be made.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund has entered into contracts for the future
delivery of debt securities in order to attempt to protect against the effects
of adverse changes in interest rates or to lengthen or shorten the average
maturity or duration of the Fund's portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration amounted to $44,749 for the Fund. Such costs were
amortized over 60 months beginning at the commencement of operations of the
Fund.
17
<PAGE>
MainStay California Tax Free Fund
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Concentration of Credit Risk. The Fund invests substantially all of its assets
in debt obligations issued by political subdivisions and authorities in the
State of California and the Commonwealth of Puerto Rico. The issuer's ability to
meet its obligations may be affected by economic and political developments in
the State of California and the Commonwealth of Puerto Rico.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.25% of the average daily net assets of the Fund.
The Adviser and the Administrator have voluntarily agreed to reimburse the
expenses for the Fund to the extent that operating expenses would exceed on an
annualized basis 1.24% and 1.49% for the Class A and Class B shares,
respectively, of the average daily net assets. The expense reimbursement to the
Fund for the year ended December 31, 1996 was $22,456.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
18
<PAGE>
Notes to Financial Statements continued
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.25% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $35,009 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemptions of Class B shares of
$2,008 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At December 31, 1996, NYLIFE Securities and NYLIFE Distributors held
shares of Class A with a net asset value of $97,800 and $3,652,589,
respectively, which represents 0.5% and 20.2%, respectively, of the Class A net
assets at year end.
19
<PAGE>
MainStay California Tax Free Fund
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $564.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $664 for the year ended December
31, 1996.
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $161,199 are available to the extent provided by regulations to
offset future realized gains of the Fund through 2004. To the extent that these
loss carryforwards are used to offset future capital gains, it is probable that
the capital gains so offset will not be distributed to shareholders.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $18,846 and $17,024, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
-------------------- -------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .............................. 114 334 304 208
Shares issued in reinvestment of dividends 57 12 52 4
---- ---- ---- ----
171 346 356 212
Shares redeemed .......................... 313 22 196 14
---- ---- ---- ----
Net increase (decrease) .................. (142) 324 160 198
==== ==== ==== ====
</TABLE>
20
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay California Tax Free Fund
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
21
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares
are redeemed prior to or after the one-day guarantee date, the investor
loses the benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund may be
guaranteed by the U.S. government and its agencies, the share price of
the Fund is not guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed
by the U.S. government and there is no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
22
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
CALIFORNIA TAX FREE FUND [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
23
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
California Tax Free Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly
owned subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
California Tax Free Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN04 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Capital Appreciation Fund
Highlights 3
$10,000 Invested in the MainStay
Capital Appreciation Fund versus S&P 500
and Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 9
Top 10 Equity Holdings 10
10 Largest Purchases 10
10 Largest Sales 10
Portfolio of Investments 11
Financial Statements 14
Notes to Financial Statements 18
Report of Independent Accountants 22
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Capital Appreciation Fund Highlights
1996 MARKET HIGHLIGHTS
o Despite unusual volatility, the stock market had a strong year in 1996,
with the S&P 500 Index+ rising 22.94%
o Throughout the year, investors focused on interest rates, inflation, and
the possibility of Federal Reserve action
o Stocks declined sharply in June and July, but recovered through the second
half of the year
o While growth stocks did well through the first nine months, value stocks
were stronger in the fourth quarter
o Most of the stock market's gains were concentrated in a small number of
stocks
1996 FUND HIGHLIGHTS
o One-year total returns of 19.16% and 18.56% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes outperformed the average Lipper++ capital appreciation
fund, which returned 16.31% for the 12 months ended 12/31/96
o The Fund's financial, technology, and energy stocks contributed positively
to performance
o Health care stocks tended to underperform, as did certain media issues
which were sold in the first and second quarters
o During 1996, the Fund's track record exceeded ten years
- ----------
+ See page 4 for more information on the S&P 500 Index.
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Capital Appreciation Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Capital
Appreciation
S&P 500 Inflation Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $10,000 $ 9,450.00
12/86 $10,518 $10,193 $ 9,113.82
12/87 $11,070 $10,644 $ 8,915.07
12/88 $12,903 $11,113 $ 9,142.21
12/89 $16,983 $11,629 $11,524.50
12/90 $16,457 $12,355 $11,998.70
12/91 $21,460 $12,724 $20,201.50
12/92 $23,093 $13,100 $22,423.60
12/93 $25,412 $13,459 $25,565.90
12/94 $25,747 $13,809 $25,176.30
12/95 $35,412 $14,168 $34,185.90
12/96 $43,536 $14,637 $40,736.10
Year ended
</TABLE>
[GRAPHIC] MainStay Capital Appreciation Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Capital
Appreciation
S&P 500 Inflation Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $10,000 $10,000.00
12/86 $10,518 $10,193 $ 9,644.25
12/87 $11,070 $10,644 $ 9,433.94
12/88 $12,903 $11,113 $ 9,674.30
12/89 $16,983 $11,629 $12,195.20
12/90 $16,457 $12,355 $12,697.00
12/91 $21,460 $12,724 $21,377.20
12/92 $23,093 $13,100 $23,728.70
12/93 $25,412 $13,459 $27,053.90
12/94 $25,747 $13,809 $26,641.60
12/95 $35,412 $14,168 $35,994.20
12/96 $43,536 $14,637 $42,674.30
Year ended
</TABLE>
[GRAPHIC] MainStay Capital Appreciation Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 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 gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Capital Appreciation Fund Team
CAPITAL APPRECIATION FUND TEAM
Bob Centrella, Edmund Spelman, Rudy Carryl,
and Eileen Cook
Growth stocks had another outstanding year in 1996, with the S&P 500 returning
22.94%, as of 12/31/96--more than twice the average annual total return for the
previous 70 years.++ Unlike 1995, however, the gains were mostly concentrated in
a small number of issues. Throughout the year, investors tried to anticipate the
Federal Reserve's interest rate moves, as they watched carefully for signs of
impending inflation and reacted quickly and decisively to negative earnings
reports.
A sharp decline in small capitalization stocks in May was followed by a broader
correction in June and July, making stocks much more volatile than in recent
years. While the market recovered strongly in the second half, by the fourth
quarter, investors had shifted their focus from growth equities to value stocks.
For the entire year, the leading industries included energy, banks, and
technology, including semiconductors, computers, and software. Footwear
companies stepped ahead, while trucking, steel, and factory equipment lagged the
market. Media and health care generally underperformed the market. In general,
stock performance was strengthened by huge inflows of cash into equity mutual
funds which invest in the market. Despite heavy volatility and variable results
in different industries, for the 12 months ended 12/31/96, the average
Lipper(ss.) capital appreciation fund returned 16.31%.
Given this context, how did the MainStay Capital Appreciation Fund do in 1996?
The Fund performed very well. For the year ended December 31, 1996, the MainStay
Capital Appreciation Fund returned 19.16% and 18.56% for Class A and Class B
shares, respectively, excluding all sales charges. Both share classes
outperformed the average Lipper capital appreciation fund.
How did you manage the Fund during 1996?
We use a bottom-up investment approach, evaluating each stock on its individual
merits. When we buy stocks where we see fundamental value and strong growth
characteristics, we are often rewarded, even when it takes us in a different
direction than other growth managers. For example, in 1996, we were overweighted
in financial stocks all year long. Many growth managers don't like financial
issues, but we felt some had potential for bottom line growth in excess of 15%.
We weren't betting on where interest rates were headed. We felt that we'd found
[GRAPHIC]
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Capitalization
- --------------
Standard & Poor's defines capitalization as the market value of outstanding
common shares.
Bottom-up
investing
- ---------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
- ----------
++ Source: Ibbotson Associates, Chicago.
(ss.) See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Total
Return
Year-end %
- --------------------------------------------
<S> <C>
12/86 -3.56
12/87 -2.18
12/88 2.55
12/89 26.06
12/90 4.12
12/91 68.36
12/92 11.00
12/93 14.01
12/94 -1.52
12/95 35.79 Class A
12/95 35.11 Class B
12/96 19.16 Class A
12/96 18.56 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 9
for more information on performance.
- --------------------------------------------------------------------------------
stocks that could perform well because of their inherent strengths. As it
happened, the Federal Reserve didn't make any major moves during the year, and
financial stocks did very well.
Can you be more specific?
Certainly. Green Tree Financial is a leading financial services company that
provides financing for purchases of manufactured homes and site-built home
improvements. The company's bottom line is growing rapidly and the stock is
trading at an attractive valuation relative to its earnings potential. We held
the stock all year, and even though it had some ups and downs, overall, it
returned 46%* for the portfolio.
Were there other attractive financial stocks?
Yes, there were. SunAmerica is an annuity company that did particularly well in
the fourth quarter. For the year, it was up 91%, and it had the greatest
positive impact of any stock in the Fund's portfolio. First USA is one of the
nation's largest credit card companies, and Travelers Group is a diversified
financial company with Smith Barney as its crown jewel. Both of these stocks did
very well for the Fund during the year. The former became the target of a
takeover by Banc One in January 1997. Unfortunately, we also had some
disappointments in the financial sector. In the second quarter, we reduced our
exposure to financial services stocks and sold Bank of New York and Barnett
Banks, both of which went to all-time highs after we cut our positions. While we
sold at a profit, we missed some opportunities there.
What other stocks did you sell during the year?
We sold several of our media stocks, including Viacom, News Corp, and
Tele-Communications International, where earnings estimates were coming down and
fundamentals were deteriorating. The decision turned out to be a wise one, since
these stocks have generally underperformed the market. In the third quarter, we
also sold two airline stocks--Southwest and Atlantic Southeast. Again, we were
convinced that the fundamentals were weakening and our decision was sound. While
they've recovered a bit from where we sold them, on a relative basis, they've
both underperformed the market.
[GRAPHIC]
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is greater than the sector's general relationship to the market as a whole.
- ----------
* Returns reflect performance during the period securities were held in the
Fund.
6
<PAGE>
[GRAPHIC]
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percent
- ------------------------------------------
<S> <C>
Financial Services 12.4%
Retail 9.1%
Health Care 9.1%
Technology 9.0%
Software 6.3%
All Other 54.1%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
What did you buy during the year?
One of our most important purchases was Nike, which we bought in the first
quarter. The company manufactures and markets a wide range of high-quality
footwear, apparel, and accessory products, and its fundamentals have continued
to improve. The company benefited from the Olympic games in Atlanta and their
future orders are very strong. Over the course of the year, the stock returned
54% for the Fund. Another stock we bought in the first quarter was Safeway, a
leading supermarket chain that showed strong growth characteristics, based on
our proprietary evaluation techniques. Safeway returned 44% for the Fund in
1996.
Are there other names that did well?
We saw strong performance from Tyco International, a diversified company that
manufactures everything from fire safety systems to disposable medical products
to fiber optic cable. Earnings are growing rapidly and continue to improve. The
stock gained 30% from its purchase price. We purchased HFS for the Fund in 1995.
It's a leading hotel franchiser, with interests in real estate, condominium time
shares, and rental cars. The stock was up 49% for the year and we expect
outstanding earnings and stock price momentum to continue in 1997. We purchased
Cisco Systems, a large computer networking company, based on its current strong
fundamentals and earnings potential. Later in the year, as the market moved
toward larger, more seasoned companies, such as Microsoft and Intel, Cisco
Systems also advanced, bringing a 24% gain to the Fund.
What about other technology stocks?
Technology stocks were highly volatile in 1996, particularly during June and
July. But many advanced over the course of the year. Intel did particularly
well, racking up much of its gains during the fourth quarter. For the full year,
it was up 131%. Another networking company, 3Com, was up 57%. And Computer
Associates International did well for the year, despite a setback in late
December related to a revenue shortfall in Europe. Other technology stocks were
considerably weaker--most notably Micron Technology and Motorola. Both companies
were hurt by severe pricing pressure in their respective markets, in spite of
healthy unit
[GRAPHIC]
7
<PAGE>
sales. The Micron sale was a wise move, since the stock has underperformed.
While Motorola has come back a bit, we view our decision to sell as a positive
in reducing portfolio volatility. Lam Research, a semi-conductor equipment
company, was a major disappointment, down 39% for the year.
What happened to health care stocks in 1996?
When it became clear that President Clinton was likely to be re-elected, health
care issues started to decline. But there were also fundamental issues working
to undermine HMO stocks including higher medical costs, greater utilization, and
slow premium growth. When United Healthcare preannounced a poor second quarter
earnings performance, the Fund suffered. Even though United Healthcare was down
31% for the year, we've continued to hold the stock because we believe the
long-term fundamental is still very much intact. We sold Mylan Laboratories, the
leading name in generic drugs. While generic drugs are growing in popularity,
competitive pressures have undermined pricing in this market. Since the stock
was down 40% in 1996, the sale was definitely a wise decision.
Are there other medical stocks that did well?
Johnson & Johnson and Schering-Plough both provided positive returns for the
Fund. And we had excellent results with Medtronic, the world's largest medical
implant manufacturer, and Guidant, a company in a related business. Guidant has
developed a new product for cardiac surgery that could substantially increase
their sales in the future.
Speaking of the future, what's your outlook for 1997?
We currently like being overweighted in financials and large capitalization
technology issues. We're continuing to evaluate the fundamental prospects in the
health care sector, with a focus on HMOs. While Nike was an exception, most
consumer stocks did poorly in the fourth quarter, and we're looking for ways to
improve performance in the near term while seeking companies that will do well
over the long haul. As always, we'll continue to look for opportunities and
evaluate risks, seeking long-term capital growth for our shareholders.
Edmund Spelman
Rudy Carryl
Portfolio Managers
[GRAPHIC]
PORTFOLIO COMPOSITION AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
- ---------------------------------------------
<S> <C>
Commmon Stocks 96.4%
Cash & Equivalents 3.6%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
[GRAPHIC]
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fund average annual total returns*
=====================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 19.16% 15.06% 16.15% 14.66%
Class B 18.56% 14.83% 16.04% 14.56%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund SEC returns*
=====================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 12.61% 13.76% 15.50% 14.06%
Class B 13.56% 14.60% 16.04% 14.56%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
=====================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A (cap app category) 70 out of n/a n/a n/a
189 funds
Class B (cap app category) 78 out of 26 out of 11 out of 9 out of
189 funds 78 funds 56 funds 48 funds
Average Lipper
capital appreciation
fund 16.31% 13.02% 12.48% 11.00%
Average Lipper
growth fund 19.23% 13.03% 13.47% 12.58%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
=====================================================================================
NAV 12/31/96 Income Capital Gains
Class A $30.56 $0.0000 $0.3057
Class B $30.25 $0.0000 $0.3057
=====================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
12/31/96. For the 12-month period ended 12/31/96, the Lipper growth fund
category included 673 funds. The MainStay Capital Appreciation Fund was
ranked 356 out of 673 (A shares) for the 1-year period and 380 out of 673,
77 out of 256, 21 out of 163, and 24 out of 154 (B shares) for the 1-year,
5-year, 10-year, and since-inception periods, respectively. The Fund's
Class A shares were first offered to the public on 1/3/95; Class B shares
on 5/1/86.
[GRAPHIC]
9
<PAGE>
Top 10 Equity Holdings as of 12/31/96
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
HOLDING AMOUNT
========================================================================================
<S> <C>
3Com Corp. $43,283,912
HFS Inc. 42,733,200
SunAmerica Inc. 39,050,000
Green Tree Financial Corp. 34,499,850
Computer Associates International, Inc. 33,040,219
Intel Corp. 32,014,219
Nike, Inc. Class B 29,791,350
Travelers Group Inc. 28,949,250
Medtronic, Inc. 27,812,000
American International Group, Inc. 26,851,412
========================================================================================
<CAPTION>
10 Largest Purchases for the 12 months ended 12/31/96
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
========================================================================================
<S> <C>
Cisco Systems, Inc. $20,505,941
Nike, Inc. Class B 19,417,856
Harley-Davidson, Inc. 17,205,321
Tyco International Ltd. 16,110,294
Tidewater Inc. 15,395,904
Safeway Inc. 15,212,898
AutoZone, Inc. 14,899,865
Mirage Resorts Inc. 14,460,670
Lucent Technologies Inc. 14,308,997
CUC International Inc. 13,940,551
========================================================================================
<CAPTION>
10 Largest Sales for the 12 months ended 12/31/96
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
========================================================================================
<S> <C>
Bank of New York Co., Inc. $13,971,669
Barnett Banks, Inc. 12,415,777
Micron Technology Inc. 12,069,390
Viacom, Inc. Class B 10,436,830
Southwest Airlines Co. 9,588,916
News Corp. Ltd. ADR 9,399,049
First Interstate Bancorp. 9,379,434
Warnaco Group, Inc. Class A 8,588,874
Office Depot Inc. 8,180,960
Mylan Laboratories Inc. 7,922,451
========================================================================================
</TABLE>
- ----------
Note: This breakdown is provided for infor-mational purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
[GRAPHIC]
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (96.4%)+
AUTO PARTS (0.9%)
Lear Seating Corp. (a) ................. 380,700 $ 12,991,387
------------
BANKS (2.4%)
NationsBank Corp. ...................... 169,000 16,519,750
Wells Fargo & Co. ...................... 70,333 18,972,327
------------
35,492,077
------------
BIOTECHNOLOGY (2.4%)
Amgen Inc. (a) ......................... 469,000 25,501,875
Genzyme Corp. (a) ...................... 450,600 9,800,550
Visible Genetics Inc (a) ............... 50,000 437,500
------------
35,739,925
------------
BROKERAGE (1.0%)
Schwab (Charles) Corp. ................. 452,500 14,480,000
------------
BUILDINGS (0.8%)
Oakwood Homes Corp. .................... 518,200 11,853,825
------------
COMPUTER SERVICES (0.7%)
SABRE Group Holdings, Inc. .............
Class A .............................. 395,000 11,010,625
------------
COMPUTERS & OFFICE EQUIPMENT (6.3%)
Alco Standard Corp. .................... 461,800 23,840,425
Danka Business Systems
PLC ADR (b) .......................... 341,200 12,069,950
Hewlett-Packard Co. .................... 394,000 19,798,500
Seagate Technology (a) ................ 373,600 14,757,200
Sun Microsystems (a) ................... 842,000 21,628,875
------------
92,094,950
------------
CONSUMER DURABLES (1.8%)
Black & Decker Corp. ................... 224,300 6,757,037
Harley-Davidson, Inc. .................. 406,600 19,110,200
------------
25,867,237
------------
CONSUMER FINANCIAL SERVICES (1.3%)
First Data Corp. ....................... 519,400 18,958,100
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
CONSUMER SERVICES (2.4%)
CUC International Inc. (a) ............. 696,000 $ 16,530,000
Service Corp. International ............ 662,000 18,536,000
------------
35,066,000
------------
CREDIT & FINANCE (0.7%)
Equifax Inc. ........................... 334,600 10,247,125
------------
DRUGS (4.7%)
Elan Corp. PLC ADR (a) (b) ............. 567,400 18,866,050
Pharmacia & Upjohn, Inc. ............... 330,700 13,103,988
Schering-Plough Corp. .................. 362,000 23,439,500
Teva Pharmaceutical Industries
Ltd. ADR (b) ......................... 275,000 13,818,750
------------
69,228,288
------------
ELECTRONICS (1.3%)
Harman International
Industries, Inc. ..................... 168,500 9,372,813
Vishay Intertechnology, Inc. (a) ....... 387,502 9,057,859
------------
18,430,672
------------
ENERGY (2.2%)
Abacan Resource Corp. (a) .............. 2,150,000 18,678,125
Triton Energy Ltd. (a) ................. 278,500 13,507,250
------------
32,185,375
------------
FINANCIAL SERVICES (12.4%)
Associates First Capital Corp. ......... 207,000 9,133,875
Federal National
Mortgage Association ................. 404,000 15,049,000
First USA, Inc. ........................ 677,000 23,441,125
Green Tree Financial Corp. ............. 893,200 34,499,850
Household International, Inc. .......... 290,000 26,752,500
Resource Bancshares Mortgage
Group, Inc. .......................... 321,595 4,582,729
SunAmerica Inc. ........................ 880,000 39,050,000
Travelers Group Inc. ................... 638,000 28,949,250
------------
181,458,329
------------
FOOD DISTRIBUTOR (0.6%)
Richfood Holdings, Inc. ................ 340,500 8,257,125
------------
HEALTH CARE (9.1%)
Columbia/HCA Healthcare Corp. .......... 558,840 22,772,730
HealthCare COMPARE Corp. (a) ........... 287,000 12,161,625
HEALTHSOUTH Corp. (a) .................. 570,000 22,016,250
Humana Inc. (a) ........................ 406,000 7,764,750
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Capital Appreciation Fund
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
HEALTH CARE (Continued)
Johnson & Johnson ...................... 534,884 $ 26,610,479
OrNda HealthCorp. (a) .................. 525,000 15,356,250
PacifiCare Health Systems, Inc. ........
Class B (a) .......................... 116,300 9,914,575
United Healthcare Corp. ................ 377,800 17,001,000
------------
133,597,659
------------
INDUSTRIAL (1.4%)
Tyco International Ltd. ................ 396,900 20,986,087
------------
INSURANCE (3.4%)
American International Group, Inc. ..... 248,050 26,851,412
MGIC Investment Corp. .................. 299,600 22,769,600
------------
49,621,012
------------
INTERNATIONAL OIL (0.3%)
British Petroleum Co., PLC ADR (b) ..... 32,405 4,581,257
------------
MEDICAL EQUIPMENT (4.7%)
Guidant Corp. .......................... 450,100 25,655,700
Heartport, Inc. ........................ 134,000 3,065,250
Medtronic, Inc. ........................ 409,000 27,812,000
Waters Corp. (a) ....................... 434,400 13,194,900
------------
69,727,850
------------
OIL SERVICES (1.2%)
Tidewater Inc. ......................... 402,000 18,190,500
------------
RESTAURANTS & LODGING (4.4%)
HFS Inc. (a) ........................... 715,200 42,733,200
Lone Star Steakhouse &
Saloon, Inc. (a) ..................... 319,000 8,533,250
Mirage Resorts Inc. (a) ................ 596,600 12,901,475
------------
64,167,925
------------
RETAIL (9.1%)
AutoZone, Inc. (a) ..................... 422,300 11,613,250
Bed Bath & Beyond, Inc (a) ............. 338,000 8,196,500
CompUSA Inc. (a) ....................... 176,000 3,630,000
Home Depot, Inc. (The) ................. 346,900 17,388,363
Kohl's Corp. (a) ....................... 472,600 18,549,550
Kroger Co. (a) ......................... 314,500 14,624,250
Lowe's Cos., Inc. ...................... 540,000 19,170,000
Mattel, Inc. ........................... 400,000 11,100,000
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
RETAIL (Continued)
Safeway Inc. (a) ....................... 512,300 $ 21,900,825
Staples, Inc. (a) ...................... 438,500 7,920,406
--------------
134,093,144
--------------
SOFTWARE (6.3%)
Computer Associates
International, Inc. .................. 664,125 33,040,219
Microsoft Corp. (a) .................... 204,000 16,855,500
Oracle Corp. (a) ....................... 594,000 24,799,500
Sterling Commerce, Inc. ................ 330,464 11,648,856
Sterling Software, Inc. (a) ............ 207,500 6,562,188
--------------
92,906,263
--------------
TECHNOLOGY (9.0%)
Cisco Systems, Inc. (a) ................ 400,000 25,450,000
Electronic Data Systems Corp. .......... 270,000 11,677,500
Intel Corp. ............................ 244,500 32,014,219
Lam Research Corp. (a) ................. 229,500 6,454,688
Linear Technology Corp. ................ 300,000 13,162,500
3Com Corp. (a) ......................... 589,900 43,283,912
--------------
132,042,819
--------------
TELECOMMUNICATION (0.9%)
Lucent Technologies Inc. ............... 298,100 13,787,125
--------------
TELECOMMUNICATION SERVICES (1.6%)
WorldCom, Inc. (a) ..................... 916,280 23,880,547
--------------
TEXTILE & APPAREL (3.1%)
Nike, Inc. Class B ..................... 498,600 29,791,350
Nine West Group Inc. (a) ............... 341,900 15,855,612
--------------
45,646,962
--------------
Total Common Stocks
(Cost $958,055,541) .................... 1,416,590,190
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.3%)
COMMERCIAL PAPER (3.3%)
American Express Credit Corp.
6.30%, due 1/3/97 ................... $ 22,585,000 $ 22,585,000
Texaco Inc.
6.00%, due 1/2/97 ................... 26,137,000 26,137,000
--------------
Total Short-Term Investments
(Cost $48,722,000) .................. 48,722,000
--------------
Total Investments
(Cost $1,006,777,541) (c) ........... 99.7% 1,465,312,190(d)
Cash and Other Assets,
Less Liabilities .................... 0.3 4,224,095
------------- --------------
Net Assets ............................ 100.0% $1,469,536,285
============= ==============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) ADR--American Depository Receipt.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At December 31, 1996 net unrealized appreciation was $458,534,649, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $479,229,857 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $20,695,208.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ASSETS:
<S> <C>
Investment in securities, at value (identified cost $1,006,777,541) ....... $1,465,312,190
Cash ...................................................................... 364
Receivables:
Fund shares sold ........................................................ 3,834,121
Investment securities sold .............................................. 3,591,869
Dividends and interest .................................................. 389,153
Other assets .............................................................. 44,129
--------------
Total assets ........................................................... 1,473,171,826
--------------
LIABILITIES:
Payables:
Fund shares redeemed .................................................... 1,416,028
NYLIFE Distributors ..................................................... 1,231,632
Adviser ................................................................. 349,000
Transfer agent .......................................................... 278,008
Custodian ............................................................... 21,760
Trustees ................................................................ 9,950
Accrued expenses .......................................................... 329,163
--------------
Total liabilities ...................................................... 3,635,541
--------------
Net assets ................................................................ $1,469,536,285
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ................................................................. $ 41,549
Class B ................................................................. 443,894
Additional paid-in capital ................................................ 1,017,762,869
Accumulated net realized loss on investments .............................. (7,246,676)
Net unrealized appreciation on investments ................................ 458,534,649
--------------
Net assets ................................................................ $1,469,536,285
==============
CLASS A
Net assets applicable to outstanding shares ............................... $ 126,957,852
==============
Shares of beneficial interest outstanding ................................. 4,154,921
==============
Net asset value per share outstanding ..................................... $ 30.56
Maximum sales charge (5.50% of offering price) ............................ 1.78
--------------
Maximum offering price per share outstanding .............................. $ 32.34
==============
CLASS B
Net assets applicable to outstanding shares ............................... $1,342,578,433
==============
Shares of beneficial interest outstanding ................................. 44,389,430
==============
Net asset value per share outstanding ..................................... $ 30.25
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ........................................................... $ 6,012,897
Interest ................................................................ 3,449,685
------------
Total income ........................................................... 9,462,582
------------
Expenses:
Distribution--Class B ................................................... 5,574,665
Administration .......................................................... 3,429,258
Advisory ................................................................ 3,429,258
Service ................................................................. 2,984,261
Transfer agent .......................................................... 1,929,778
Shareholder communication ............................................... 504,759
Registration ............................................................ 230,850
Recordkeeping ........................................................... 145,721
Professional ............................................................ 132,460
Custodian ............................................................... 116,823
Trustees ................................................................ 40,317
Miscellaneous ........................................................... 17,213
------------
Total expenses ......................................................... 18,535,363
------------
Net investment loss ....................................................... (9,072,781)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments .......................................... 14,861,333
Net change in unrealized appreciation on investments ...................... 192,853,116
------------
Net realized and unrealized gain on investments ........................... 207,714,449
------------
Net increase in net assets resulting from operations ...................... $198,641,668
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $27,000.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
=============== ==============
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss ............................................. $ (9,072,781) $ (2,553,635)
Net realized gain (loss) on investments ......................... 14,861,333 (7,438,705)
Net change in unrealized appreciation on investments ............ 192,853,116 206,149,738
-------------- -------------
Net increase in net assets resulting from operations ............ 198,641,668 196,157,398
-------------- -------------
Distributions to shareholders:
From net realized gain on investments:
Class A ........................................................ (1,257,189) (86,358)
Class B ........................................................ (13,410,507) (1,608,869)
-------------- -------------
Total distributions to shareholders .......................... (14,667,696) (1,695,227)
-------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................ 116,509,514 49,152,255
Class B ........................................................ 543,777,410 330,945,526
Net asset value of shares issued to shareholders in
reinvestment of distributions:
Class A ........................................................ 1,189,334 72,656
Class B ........................................................ 13,188,752 1,586,582
-------------- -------------
674,665,010 381,757,019
Cost of shares redeemed:
Class A ........................................................ (48,276,296) (10,509,357)
Class B ........................................................ (241,481,230) (164,188,120)
-------------- -------------
Increase in net assets derived from capital share
transactions ............................................... 384,907,484 207,059,542
-------------- -------------
Net increase in net assets ................................... 568,881,456 401,521,713
NET ASSETS:
Beginning of year ................................................. 900,654,829 499,133,116
-------------- -------------
End of year ....................................................... $1,469,536,285 $ 900,654,829
============== =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
===============================================
Class A Class B Class A Class B September 1
======= ======= ======== ======= through Year ended August 31
Year ended Year ended December 31 ================================
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
==================== =================== ====== ====== ====== ======
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period .................... $25.90 $25.77 $19.11 $19.11 $19.93 $19.47 $14.14 $15.96
------ ------ ------ ------ ------ ------ ------ ------
Net investment income (loss)(a) (0.08) (0.22) 0.03 (0.08) (0.03) (0.12) (0.12) (0.19)
Net realized and unrealized
gain (loss) on investments ... 5.05 5.01 6.81 6.79 (0.65) 1.13 5.64 1.30
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 4.97 4.79 6.84 6.71 (0.68) 1.01 5.52 1.11
------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
From net realized gain
on investments ............... (0.31) (0.31) (0.05) (0.05) (0.14) (0.55) (0.19) (2.93)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $30.56 $30.25 $25.90 $25.77 $19.11 $19.93 $19.47 $14.14
====== ====== ====== ====== ====== ====== ====== ======
Total investment return (b) .... 19.16% 18.56% 35.79% 35.11% (3.40%) 5.36% 39.25% 6.77%
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss) (0.3%) (0.8%) 0.2% (0.4%) (0.5%)+ (0.6%) (0.7%) (1.2%)
Expenses .................... 1.1% 1.6% 1.1% 1.7% 1.8%+ 1.8% 1.8% 2.0%
Portfolio turnover rate ........ 16% 16% 29% 29% 11% 31% 73% 157%
Average commission rate paid ... $ 0.0599 $ 0.0599 (c) (c) (c) (c) (c) (c)
Net assets at end of period
(in 000's) ................... $126,958 $1,342,578 $44,434 $856,221 $499,133 $472,497 $279,300 $128,710
</TABLE>
- ------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Capital Appreciation Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Capital Appreciation Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek long-term growth of capital.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which mature
in 60 days or less are valued at amortized cost if their term to maturity at
purchase was 60 days or less, or by amortizing the difference between market
value
18
<PAGE>
Notes to Financial Statements
on the 61st day prior to maturity and value on maturity date if their
original term to maturity at purchase exceeded 60 days.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $9,072,781 and $1,658 have been reclassified
from accumulated net investment loss and accumulated net realized loss on
investments, respectively, to additional paid-in capital, due primarily to net
investment losses incurred by the Fund in 1996.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
19
<PAGE>
MainStay Capital Appreciation Fund
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.36% of the average daily net assets of the Fund. The Administrator and
the Adviser have voluntarily agreed to reduce their combined fees to 0.65% on
assets in excess of $200 million and 0.50% on assets in excess of $500 million.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
20
<PAGE>
Notes to Financial Statements continued
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $1,430,417 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$966,555 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $144,108.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $30,604 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$145,721.
Note 4--Federal Income Tax:
The Fund utilized $4,041,812, the remaining balance of its capital loss
carryforward, during the current year. Additionally, the Fund intends to elect,
to the extent provided by the regulations, to treat $7,247,364 of qualifying
capital losses that arose during the year as if they arose on January 1, 1997.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $555,818 and $185,844, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
====================== =====================
Class A Class B Class A Class B
======== ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ............................................. 4,064 19,254 2,135 14,247
Shares issued in reinvestment of distributions .......... 39 431 3 61
------ ------ ------ ------
4,103 19,685 2,138 14,308
Shares redeemed ......................................... 1,664 8,528 422 7,192
------ ------ ------ ------
Net increase ............................................ 2,439 11,157 1,716 7,116
====== ====== ====== ======
</TABLE>
21
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Capital Appreciation Fund
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
22
<PAGE>
This page intentionally left blank
23
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests primarily in common stocks You want your investments to grow
CAPITAL APPRECIATION FUND graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating internation stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
24
<PAGE>
<TABLE>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that't double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
25
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Capital Appreciation Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer,
and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Capital Appreciation Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN05 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Convertible Fund Highlights 3
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500 and
Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 9
Top 10 Holdings 10
10 Largest Purchases 10
10 Largest Sales 10
Portfolio of Investments 11
Financial Statements 21
Notes to Financial Statements 25
Report of Independent Accountants 31
The MainStay Funds 32
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Convertible Fund
1996 MARKET HIGHLIGHTS
o Despite turbulence in June and July, the equity market was generally strong
in 1996, with sustained earnings growth and modest inflation
o As interest rates rose in the second and third quarters, bond prices
declined, undermining the softening effect bonds sometimes provide when
stocks decline
o Overall, convertible bonds had a strong year, with heavy demand and short
supply, which raised prices to unpredictably high levels
o New convertible issues were generally scarce throughout the year
1996 FUND HIGHLIGHTS
o One-year total returns of 12.13% and 11.39% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes underperformed the average Lipper+ convertible
securities fund in 1996, largely as a result of our defensive cash position
throughout most of the year
o The Fund offered strong risk-adjusted performance during the difficult
markets in June and July
o The emphasis on fundamental value and free cash flow in our convertible
investment process resulted in a number of takeovers which positively
impacted the Fund
o During 1996, the Fund's track record exceeded ten years
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Convertible Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
Convertible
S&P 500* Inflation+ Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $10,000 $ 9,450.00
12/86 $10,518 $10,193 $ 9,547.15
12/87 $11,070 $10,644 $ 8,728.11
12/88 $12,903 $11,113 $ 9,581.83
12/89 $16,983 $11,629 $10,227.70
12/90 $16,457 $12,355 $ 9,542.80
12/91 $21,460 $12,724 $14,168.20
12/92 $23,093 $13,100 $16,025.10
12/93 $25,412 $13,459 $19,946.00
12/94 $25,747 $13,809 $19,678.90
12/95 $35,412 $14,168 $24,345.90
12/96 $43,536 $14,637 $27,299.00
</TABLE>
[GRAPHIC] MainStay Convertible Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
Convertible
S&P 500* Inflation+ Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $10,000 $10,000.00
12/86 $10,518 $10,193 $10,102.80
12/87 $11,070 $10,644 $ 9,236.10
12/88 $12,903 $11,113 $10,139.50
12/89 $16,983 $11,629 $10,823.00
12/90 $16,457 $12,355 $10,098.20
12/91 $21,460 $12,724 $14,992.80
12/92 $23,093 $13,100 $16,957.80
12/93 $25,412 $13,459 $21,106.90
12/94 $25,747 $13,809 $20,824.20
12/95 $35,412 $14,168 $25,618.60
12/96 $43,536 $14,637 $28,537.00
</TABLE>
[GRAPHIC] MainStay Convertible Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (5/1/86) through
12/31/94. The Class B graph assumes an initial investment of $10,000 made on
5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge
(CDSC), as it would not apply for the period shown. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 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 gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo
CONVERTIBLE FUND TEAM
Thomas Wynn, Neil Feinberg, and Denis Laplaige
Throughout most of 1996, equities provided positive performance, supported by
sustained earnings growth and modest inflation. A market correction in June and
July, however, brought higher levels of volatility than stocks had seen in
several years.
Bonds, which often provide a softening effect when stocks decline, did just the
opposite in June and July. With rates rising, bonds declined, intensifying the
difficulties for portfolios that depended on both types of securities.
Nevertheless, both stocks and bonds recovered in the third and fourth quarters,
providing a positive, but generally unpredictable backdrop for investors in
convertible securities.
Throughout 1996, the convertible market was fueled by demand from equity
investors and equity income funds. As money poured into equities, the
convertible market received an infusion of cash that was disproportionate to its
size.
Cautious investors viewed this as an artificial trend, but by year-end, the
market had rewarded those who remained invested. For the 12 months ended
December 31, 1996, the average Lipper++ convertible securities fund provided a
total return of 14.82%.
Given this context, how did the MainStay Convertible Fund do in 1996?
For the 12-month period ended December 31, 1996, the MainStay Convertible Fund
provided total returns of 12.13% and 11.39% for Class A and Class B shares,
respectively. Both share classes under-performed the average Lipper convertible
securities fund over the same period.
What caused the Fund's underperformance?
We were particularly cautious in 1996. While the markets overall were favorable
for convertible securities, we saw more potential risk than reward in many
situations, particularly as an influx of funds inflated prices to what we felt
were artificially high levels. As a result, we held a considerable portion of
the portfolio in cash throughout most of the year.
Did your defensive management position provide any benefits to the portfolio?
Yes it did. During much of the year, we held around 20% of the portfolio in
cash. In June and July, the stock market experienced a sudden downturn (also
known as a correction), and holding cash was a definite plus during this
volatile period. In fact, the Fund's performance during this period was
exceedingly strong. We weren't able to anticipate the sustained strength in
earnings
[GRAPHIC]
Cash position
- -------------
The portion of a portfolio held in highly liquid securities (often referred to
as "cash"), either for defensive purposes or to take advantage of investment
opportunities as they may arise.
Correction
- ----------
A shift in security prices which brings them more in line with historic
averages.
- ----------
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Total
Return
Year-End %
- --------------------------------------------
<S> <C>
12/86 1.03
12/87 -8.58
12/88 9.78
12/89 6.74
12/90 -6.70
12/91 48.47
12/92 13.11
12/93 24.47
12/94 -1.34
12/95 23.72 Class A
12/95 23.02 Class B
12/96 12.13 Class A
12/96 11.39 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote * on page 9
for more information on performance.
- --------------------------------------------------------------------------------
growth over the course of the year. So overall, the Fund's defensive position
resulted in missing some opportunities. At the same time, it provided a level of
risk management that we felt was appropriate, given the risks of the convertible
market.
How did the rising stock market affect the Fund?
In a variety of ways. Early in the year, rising stock prices caused some of the
Fund's core convertible positions to convert into common stock. That was true of
American Airlines, Delta Airlines, and Newmont Mining, all of which were major
holdings. Together, these conversions added to the Fund's cash at a time when we
felt convertible securities were largely overvalued. Additionally, the rising
stock market rendered many of the convertibles we looked at to be more equity
surrogates, thus not providing the Fund with the downside protection that we
require.
What was positive about it?
In the fourth quarter, a number of new issues came to market. With the Fund's
large cash position, we were well positioned to purchase securities in a rising
market. Loral Space & Communications LTD is a good example. The company designs
and manufactures satellites for communication and information transmissions. It
was the Fund's best performer during the last quarter. New issues in Microsoft
Corp., Pier One Imports, and Host Marriott also added to performance during the
fourth quarter.
Are there other names that did well during the year?
Absolutely. Although we were generally underweighted in technology in the first
half of the year, some of the Fund's holdings including Applied Magnetics Corp.,
Quantum Corp., and EMC Corp. rebounded substantially from their summer lows.
With cash in the portfolio and strict buy and sell disciplines, we were able to
add to these positions and others when the market experienced volatility in May,
June, and July.
With all that buying activity, have you reduced the Fund's cash position?
Yes, we've dropped the Fund's cash position from around 20% to about 10% at the
end of the year. That leaves enough money to take advantage of opportunities
that may arise, without such a large defensive position that can potentially
hurt the Fund if the market continues to advance in 1997.
[GRAPHIC]
Defensive position
- ------------------
Any action, such as holding large cash reserves, taken to protect a portfolio
against anticipated market movements which might prove to be unfavorable.
Overvalued/Under-valued
- -----------------------
When the price of a security is higher than its intrinsic value, the security is
said to be overvalued. When the price is lower than the intrinsic value, a
security is said to be undervalued.
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be underweighted in a sector when that portion of the
portfolio is smaller than the sector's general relationship to the market as a
whole.
6
<PAGE>
[GRAPHIC]
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percent
- ------------------------------------------
<S> <C>
Computers & Office Equipment 13.4%
Insurance 7.4%
Retail 6.0%
Capital Goods 4.3%
Cable 4.0%
All Other 64.9%
</TABLE>
- ----------
Note: Actual percentages will vary over time. This chart does not include short
positions in common stocks.
Aside from technology, were there specific sectors that did well in 1996?
Our investment strategy doesn't focus on top down analysis. Instead, we evaluate
each security on its individual merits, and make investments based on what we
see. As a result of our research and fundamental investment disciplines, we did
very well in energy and oil services, with names like Parker & Parsley Capital
LLC, Dresser Industries, Noble Affiliates, Tidewater, and Falcon Drilling.
What other basic principles drive your management of the Fund?
We seek opportunities within specific risk management guidelines. If a security
offers a level of risk that may be equal to its return potential, chances are we
won't buy it. On the other hand, occasionally, we find a security that has just
the opposite characteristics. Microsoft Corp. offered a preferred enhanced
common stock that capped the upside potential, but provided a dividend and a
principal guarantee to reduce downside risk. In the best case, the Fund could
earn an 11.5% compounded yield, in the worst case, it could earn 2.8%. But
either way, the Fund will come out ahead. We find that kind of security very
attractive. Another attractive security was offered by Samsung, a semiconductor
company whose stock price appeared to be bottoming out when we bought their
convertibles. We believed the bonds offered positive upside potential and
limited downside risk, since they could be sold back to the company in five
years, earning approximately the 5-year Treasury rate. While the stock hasn't
done well, our bonds have appreciated in value.
Isn't Samsung a foreign company?
Yes, but when investing in foreign securities, we use dollar-denominated issues
or currency hedging to avoid any currency risk. In 1996, our foreign securities
were generally neutral for the portfolio, with slightly negative results in
Japan.
What securities did you sell during the year, and why?
Interestingly, the things we look for in a company--fundamental value, strong
management, and a catalyst for increasing earnings--are often the same things
acquirers seek. We had a number of issues that were acquired by other companies,
and all of them provided positive returns for the Fund. One example was Hasbro,
which we sold in January when Mattel made a takeover bid. We began selling ADT,
a consumer services company, throughout the first quarter and benefited when the
company received a takeover bid in the
7
<PAGE>
[GRAPHIC]
PORTFOLIO COMPOSITION AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
- ---------------------------------------------
<S> <C>
Convertible Bonds 46.5%
Convertible Preferred Stocks 24.7%
Common Stocks 16.2%
Cash & Equivalents 9.2%
Corporate Bonds 2.1%
Preferred Stocks 1.2%
Warrants 0.1%
</TABLE>
- ----------
Note: Actual percentages will vary over time. This chart does not include short
positions in common stocks.
second half of 1996, realizing positive returns on our investment. In the fall,
MFS, a telecommunications company, was acquired by WorldCom, and we sold the
Fund's position at a profit.
Were there other reasons to sell in 1996?
Yes. In April, we sold Checkpoint Systems, a manufacturer of security devices
for retail stores. We believed the common stock had risen to the point where the
downside protection was minimal, which made the risk/reward characteristics less
favorable. In that type of situation, our sell disciplines require us to let go
of the security, and the result was positive for our investors.
With all these positive transactions, what disappointments did you have?
As we already mentioned, our biggest disappointment was not being more fully
invested while the market was so positive. In terms of specific positions, we
had very few disappointments. Among the Fund's worst performing issues were
Michaels Stores, an arts and crafts retailer that suffered from poor management
execution and an out-of-favor concept. We have sold the majority of that
position at a loss. Steel was among the worst performing sectors in 1996, and
our positions in Bethlehem Steel Corp. and WHX Corp. didn't do well, but we
continue to hold them and believe they may provide potential value in the
future. Two cable issues, Tele-Communications Inc. and Cablevision Systems,
faced competitive pressures from Digital TV and were also poor performers.
Despite these weaknesses, however, the largest single loss the Fund experienced
in 1996 represented just 25 basis points of the Fund.
What's your outlook for the coming year?
Our research is pointing us to utilities, which appear underpriced for the
earnings and dividends they provide. We also like technology stocks with low
expectations in the marketplace. Their moderate valuations may offer potential
for capital appreciation. We will continue to employ our strict management
disciplines to identify liquid securities with favorable risk/reward
characteristics as we seek opportunities for capital appreciation and current
income.
Denis Laplaige
Neil Feinberg
Thomas Wynn
Portfolio Managers
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 12.13% 14.02% 11.08% 10.44%
Class B 11.39% 13.74% 10.94% 10.32%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 5.96% 12.73% 10.45% 9.86%
Class B 6.39% 13.50% 10.94% 10.32%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 24 out of n/a n/a n/a
42 funds
Class B 26 out of 6 out of 2 out of 2 out of
42 funds 20 funds 10 funds 7 funds
Average Lipper
convertible
securities fund 14.82% 12.05% 10.07% 9.57%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $13.81 $0.6202 $0.6296
Class B $13.80 $0.5362 $0.6296
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
12/31/96. Class A shares were first offered to the public on 1/3/95; Class
B shares on 5/1/86.
[GRAPHIC]
9
<PAGE>
Top 10 Holdings as of 12/31/96
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
HOLDING AMOUNT
========================================================================================
<S> <C>
Chubb Corp. (Euro), 6.00%,due 5/15/98 $34,299,168
Cooper Industries, Inc., 7.05%,due 1/1/15 28,824,580
Loral Space & Communications Ltd., 6.00% 26,156,250
Microsoft Corp., $2.196, Series A 22,194,625
Apple Computer, Inc., 6.00%,due 6/1/01 16,247,500
Hollinger, Inc., Series US, (zero coupon),due 10/5/13 15,066,213
Berkshire Hathaway, Inc., 1.00%,due 12/3/01 14,944,500
Applied Magnetics Corp., 7.00%,due 3/15/06 14,802,812
Host Marriott Finance Trust, 6.75% 14,290,625
Samsung Electronics Co., 0.25%,due 12/31/06 11,931,250
========================================================================================
<CAPTION>
10 Largest Purchases for the 12 months ended 12/31/96
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
========================================================================================
<S> <C>
Chubb Corp. (Euro), 6.00%,due 5/15/98, and Common Stock $41,423,562
Cooper Industries, Inc., 7.05%,due 1/1/15, 6.00% Preferred Stock
and Common Stock 38,624,205
Apple Computer, Inc., 6.00%,due 6/1/01, and Common Stock 37,576,813
Unisys Corp., 8.25%,due 8/1/00, 8.25%,due 3/15/06, and Common Stock 29,248,944
Quantum Corp., 5.00%,due 3/1/03, 6.375%,due 4/1/02, and Common Stock 27,620,924
Microsoft Corp., $2.196, Series A Preferred Stock 26,156,625
TCI Communications, Inc., $2.125 Preferred Stock
5.00% Preferred Stock and Common Stock 24,443,443
Time Warner, Inc., (zero coupon),due 12/17/12, (zero coupon),due 6/22/13
$1.24 Preferred Stock and Common Stock 23,667,828
Loral Space & Communications Ltd., 6.00% Preferred Stock 23,298,125
Hasbro, Inc., 6.00%,due 11/15/98, and Common Stock 20,008,344
========================================================================================
<CAPTION>
10 Largest Sales for the 12 months ended 12/31/96
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
========================================================================================
<S> <C>
Chubb Corp. (Euro), 6.00%,due 5/15/98, and Common Stock $38,300,171
Quantum Corp., 5.00%,due 3/1/03, 6.375%,due 4/1/02, and Common Stock 28,028,549
Apple Computer, Inc., 6.00%,due 6/1/01, and Common Stock 23,185,378
AMR Corp., 6.125%,due 11/1/24, and Common Stock 22,247,598
Time Warner, Inc., (zero coupon),due 6/22/13
$1.24 Preferred Stock and Common Stock 21,470,885
Hasbro, Inc., 6.00%,due 11/15/98 and Common Stock 20,479,227
Unisys Corp., 8.25%,due 8/1/00, 8.25%,due 3/15/06, and Common Stock 19,563,889
Conseco, Inc., 6.50%, Series D Preferred Stock
7.00% Preferred Stock and Common Stock 19,362,855
TJX Companies, Inc., $3.125, Series C Preferred Stock and Common Stock 18,810,117
Cypress Semiconductor Corp., 3.15%,due 3/15/01, and Common Stock 16,466,454
========================================================================================
</TABLE>
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. Dollar amounts represent the aggregate value of the
Fund's long positions and do not include the value of the Fund's short
positions, if any. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities and U.S. Government and
federal agency issues are excluded. See Portfolio of Investments for specific
type of security held.
[GRAPHIC]
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CONVERTIBLE SECURITIES (71.2%)+
BONDS (46.5%)
ADVERTISING (0.3%)
Omnicom Group, Inc.
4.25%, due 1/3/07 (c) .................. $ 2,500,000 $ 2,537,500
-------------
AIRLINES (0.8%)
Air Wisconsin Services, Inc.
7.75%, due 6/15/10 ..................... 4,955,000 4,756,800
Alaska Air Group, Inc.
6.875%, due 6/15/14 .................... 2,000,000 1,915,000
-------------
6,671,800
-------------
BANKS (0.9%)
Banco de Galicia y Buenos Aires S.A.
7.00%, due 8/1/02 ...................... 2,000,000 2,352,500
Mitsubishi Bank Limited
International Finance
(Bermuda) Trust
3.00%, due 11/30/02 .................... 4,000,000 4,240,000
Sumitomo Bank International
Finance N.V.
0.75%, due 5/31/01 ..................... (Y)175,000,000 1,594,404
-------------
8,186,904
-------------
BUILDINGS (1.0%)
U.S. Home Corp.
4.875%, due 11/1/05 (e) ................ $ 9,450,000 8,646,750
-------------
CABLE (2.0%)
Comcast Corp.
1.125%, due 4/15/07 .................... 9,500,000 4,868,750
3.375%, due 9/9/05
5.50%, beginning 9/9/97 ................ 6,000,000 5,610,000
Tele-Communications
International, Inc.
4.50%, due 2/15/06 ..................... 8,500,000 6,353,750
-------------
16,832,500
-------------
CAPITAL GOODS (3.4%)
Cooper Industries, Inc.
7.05%, due 1/1/15 (e) .................. 27,193,000 28,824,580
-------------
CELLULAR TELEPHONE (0.2%)
United States Cellular Corp.
(zero coupon), due 6/15/15 ............. 5,600,000 1,872,528
-------------
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CHEMICALS (1.3%)
RPM, Inc. of Ohio
(zero coupon), due 9/30/12 (e) ......... $ 24,650,000 $ 11,215,750
-------------
COMPUTERS & OFFICE EQUIPMENT (8.1%)
Apple Computer, Inc.
6.00%, due 6/1/01 (c) .................. 16,750,000 16,247,500
Applied Magnetics Corp.
7.00%, due 3/15/06 (c) ................. 8,375,000 14,802,812
Inacom Corp.
6.00%, due 6/15/06 (c) ................. 6,000,000 10,830,000
Platinum Technology, Inc.
6.75%, due 11/15/01 .................... 4,000,000 4,860,000
Quantum Corp.
5.00%, due 3/1/03 (c) .................. 1,200,000 1,677,000
6.375%, due 4/1/02 ..................... 1,300,000 2,028,312
Safeguard Scientifics, Inc.
6.00%, due 2/1/06 (c)(e) ............... 3,775,000 4,077,000
Unisys Corp.
8.25%, due 8/1/00 ...................... 7,074,000 6,755,670
8.25%, due 3/15/06 (e) ................. 6,920,000 8,286,700
-------------
69,564,994
-------------
CONGLOMERATES (0.1%)
Gencorp, Inc.
8.00%, due 8/1/02 ...................... 500,000 575,000
-------------
CONSUMER SERVICES (0.8%)
ADT Operations, Inc.
(zero coupon), due 7/6/10 (e) .......... 7,000,000 4,558,750
Laidlaw, Inc.
6.00%, due 1/15/99 ..................... 1,500,000 2,025,000
-------------
6,583,750
-------------
DRUGS (0.3%)
Alza Corp.
5.00%, due 5/1/06 ...................... 2,625,000 2,533,125
-------------
ELECTRICAL EQUIPMENT (3.1%)
California Microwave, Inc.
5.25%, due 12/15/03 .................... 1,500,000 1,241,250
Cypress Semiconductor Corp.
3.15%, due 3/15/01 (c)(e) .............. 5,000,000 5,375,000
S3, Incorporated
5.75%, due 10/1/03 (c) ................. 7,500,000 8,175,000
Samsung Electronics Co.
0.25%, due 12/31/06 (c) ................ 11,500,000 11,931,250
-------------
26,722,500
-------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
BONDS (Continued)
ENERGY (1.0%)
Pennzoil Co.
4.75%, due 10/1/03 (e) ................. $ 7,250,000 $ 8,265,000
-------------
FINANCE (1.9%)
Berkshire Hathaway, Inc.
1.00%, due 12/3/01 (e) ................. 16,200,000 14,944,500
UBS Finance Delaware, Inc.
Medium Term Note
2.00%, due 12/15/00 .................... 1,425,000 1,325,250
-------------
16,269,750
-------------
FINANCIAL SERVICES (0.5%)
Cityscape Financial Corp.
6.00%, due 5/1/06 (c) .................. 4,000,000 4,140,000
-------------
FOOD, BEVERAGES & TOBACCO (0.7%)
Grand Metropolitan, PLC
6.50%, due 1/31/00 (c) ................. 5,150,000 6,006,187
-------------
HEALTH CARE (2.5%)
American Medical Response, Inc.
5.25%, due 2/1/01 (c) .................. 3,000,000 3,247,500
Integrated Health Services, Inc.
5.75%, due 1/1/01 ...................... 500,000 483,125
6.00%, due 1/1/03 (e) .................. 6,000,000 5,797,500
OccuSystems, Inc.
6.00%, due 12/15/01 (c) ................ 5,000,000 5,475,000
Phoenix Shannon, PLC ADR
9.50%, due 11/1/00 (c)(f)(h) ........... 2,500,000 1,000,000
PhyMatrix Corp.
6.75%, due 6/15/03 (c) ................. 1,000,000 835,000
RoTech Medical Corp.
5.25%, due 6/1/03 (c) .................. 4,500,000 4,500,000
-------------
21,338,125
-------------
HOUSEHOLD PRODUCTS (0.6%)
Whirlpool Corp.
(zero coupon), due 5/14/11 ............. 13,700,000 5,394,375
-------------
INSURANCE (5.7%)
Chubb Corp. (Euro)
6.00%, due 5/15/98 ..................... 28,230,000 34,299,168
Fidelity National Financial, Inc.
(zero coupon), due 2/15/09 ............. 3,525,000 1,661,156
Fremont General Corp.
(zero coupon), due 10/12/13 ............ 9,085,000 5,496,425
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
INSURANCE (Continued)
Italy Province (Republic of)
5.00%, due 6/28/01 (u) ................. $ 7,500,000 $ 7,350,000
-------------
48,806,749
-------------
MEDIA (0.9%)
Time Warner, Inc.
(zero coupon), due 12/17/12 ............ 5,000,000 1,900,000
(zero coupon), due 6/22/13 ............. 13,000,000 5,476,250
-------------
7,376,250
-------------
MEDICAL EQUIPMENT (0.5%)
Healthsource, Inc.
5.00%, due 3/1/03 ...................... 3,000,000 2,400,000
Uromed Corp.
6.00%, due 10/15/03 (c) ................ 2,500,000 2,340,625
-------------
4,740,625
-------------
MINING (0.1%)
Stillwater Mining Co.
7.00%, due 5/1/03 (c) .................. 1,200,000 1,140,000
-------------
OIL SERVICES (0.5%)
Nabors Industries, Inc.
5.00%, due 5/15/06 ..................... 550,000 674,438
Valhi (Dresser), Inc.
(zero coupon), due 10/20/07 ............ 7,000,000 3,220,000
-------------
3,894,438
-------------
PAPER & FOREST PRODUCTS (0.2%)
Repap Enterprises, Inc.
8.50%, due 8/1/97 ...................... 2,000,000 1,930,000
-------------
POLLUTION & RELATED (0.2%)
U.S. Filter Corp.
4.50%, due 12/15/01 .................... 1,300,000 1,319,500
-------------
PUBLISHING (1.8%)
Hollinger, Inc.
Series US
(zero coupon), due 10/5/13 (e)(q) ...... 42,590,000 15,066,213
-------------
REAL ESTATE (0.3%)
New World China Finance Ltd.
4.00%, due 12/31/99 (c) ................ 2,600,000 2,596,750
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
BONDS (Continued)
RECREATION & ENTERTAINMENT (0.2%)
Turner Broadcasting System, Inc.
(zero coupon), due 2/13/07 ............. $ 3,000,000 $ 1,440,000
-------------
RESTAURANTS & LODGING (0.9%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12 ...................... 1,700,000 1,428,000
Hilton Hotels Corp.
5.00%, due 5/15/06 (e) ................. 6,800,000 7,012,500
-------------
8,440,500
-------------
RETAIL (4.7%)
Baker (J.), Inc.
7.00%, due 6/1/02 ...................... 750,000 600,000
Federated Department Stores, Inc.
5.00%, due 10/1/03 ..................... 6,300,000 7,371,000
Home Depot, Inc.
3.25%, due 10/1/01 ..................... 4,800,000 4,680,000
Home Shopping Network, Inc.
5.875%, due 3/1/06 (c) ................. 6,000,000 6,360,000
Michaels Stores, Inc.
6.75%, due 1/15/03 (e) ................. 3,175,000 2,413,000
Pier 1 Imports, Inc.
5.75%, due 10/1/03 (e) ................. 5,000,000 5,650,000
Price Co.
5.50%, due 2/28/12 ..................... 3,125,000 3,248,781
Saks Holdings, Inc.
5.50%, due 9/15/06 ..................... 3,000,000 2,752,500
Waban, Inc.
6.50%, due 7/1/02 (e) .................. 6,550,000 7,172,250
-------------
40,247,531
-------------
STEEL, ALUMINUM & OTHER METALS (0.7%)
Inco Ltd.
5.75%, due 7/1/04 (e)(q) ............... 4,600,000 5,617,750
-------------
TECHNOLOGY (0.2%)
DII Group, Inc.
6.00%, due 10/15/02 (c) ................ 1,750,000 1,645,000
-------------
TELECOMMUNICATION EQUIPMENT (0.1%)
BroadBand Technologies, Inc.
5.00%, due 5/15/01 (c) ................. 1,000,000 765,000
-------------
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
TELECOMMUNICATION SERVICES (0.0%) (b)
Rogers Communications, Inc.
2.00%, due 11/26/05 (q) ................ $ 500,000 $ 277,500
-------------
Total Convertible Bonds
(Cost $377,731,936) .................... 397,484,924
-------------
<CAPTION>
Shares
==============
<S> <C> <C>
PREFERRED STOCKS (24.7%)
AIRLINES (0.1%)
USAir Group, Inc. $4.375, Series B (j1) ... 14,600 934,400
-------------
AUTO PARTS (0.2%)
MascoTech, Inc.
$1.20 .................................. 122,800 1,934,100
-------------
BANKS (0.9%)
Banc One Corp.
$3.50, Series C ........................ 22,500 1,867,500
Sakura Finance (Bermuda) Trust
0.75% (c)(m) ........................... 75 3,993,688
Union Planters Corp.
8.00%, Series E ........................ 45,800 2,269,963
-------------
8,131,151
-------------
BUILDING MATERIALS (0.5%)
Owens Corning Capital LLC
6.50% (c) .............................. 75,000 4,275,000
-------------
CABLE (1.9%)
Cablevision Systems Corp.
8.50%, Series I (e)(j2) ................ 96,700 1,982,350
Merrill Lynch & Co., Inc.
6.00% (e)(n) ........................... 206,500 4,594,625
TCI Communications, Inc.
$2.125, Series A (e) ................... 205,000 7,969,375
TCI Pacific Communications, Inc.
5.00% .................................. 15,000 1,370,625
-------------
15,916,975
-------------
CAPITAL GOODS (0.9%)
Cooper Industries, Inc.
6.00% (e) .............................. 375,000 7,265,625
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
COMPUTERS & OFFICE EQUIPMENT (2.8%)
Microsoft Corp.
$2.196, Series A ....................... 277,000 $ 22,194,625
Vanstar Financing Trust
6.75% (c) .............................. 35,000 1,811,250
-------------
24,005,875
-------------
CONGLOMERATES (0.4%)
Corning Delaware L.P.
6.00% (e) .............................. 54,500 3,467,562
-------------
DOMESTIC OIL & GAS (0.3%)
Enron Corp.
6.25% .................................. 113,600 2,726,400
-------------
DOMESTIC OILS (2.7%)
Atlantic Richfield Co.
9.00% .................................. 292,400 6,286,600
Nuevo Financing I
5.75%, Series A ........................ 76,000 4,075,500
Occidental Petroleum Corp.
$3.875, Series 1993 (c) ................ 87,000 4,959,000
Parker & Parsley Capital LLC
6.25% (c) .............................. 86,500 5,730,625
Snyder Oil Corp.
$1.50 (j3) ............................. 69,000 1,673,250
-------------
22,724,975
-------------
DRUGS (1.0%)
ICN Pharmaceuticals, Inc.
Series B (c)(r) ........................ 9,000 9,000,000
-------------
ELECTRICAL EQUIPMENT (0.3%)
Elsag Bailey Process Automation N.V.
5.50% (c) .............................. 70,000 2,695,000
-------------
ENERGY (0.4%)
Unocal Corp.
6.25% .................................. 61,900 3,543,775
-------------
FINANCE (1.1%)
Fuji International Finance Trust
0.25% (c)(l) ........................... 357 9,359,789
-------------
<CAPTION>
Shares Value
==================================
<S> <C> <C>
FINANCIAL SERVICES (0.2%)
Finova Finance Trust
5.50% .................................. 30,000 $ 1,575,000
-------------
FOOD, BEVERAGES & TOBACCO (1.1%)
Chiquita Brands International, Inc.
$2.875, Series A ....................... 100,000 4,300,000
$3.75, Series B ........................ 57,000 3,035,250
Dole Food Co.
7.00% .................................. 60,000 2,152,500
-------------
9,487,750
-------------
HOUSEHOLD PRODUCTS (1.0%)
AJL PEPS
$1.44 (i) .............................. 526,900 8,627,988
-------------
PAPER & FOREST PRODUCTS (1.2%)
International Paper Co.
5.25% .................................. 89,600 4,132,800
James River Corp. of Virginia
$3.50, Series L (j5) ................... 70,000 3,622,500
9.00%, Series P (j4) ................... 82,500 2,598,750
-------------
10,354,050
-------------
PUBLISHING (0.3%)
Golden Books Financial Trust
8.75% (c) .............................. 50,000 2,837,500
-------------
REAL ESTATE (0.2%)
Security Capital Pacific Trust
$1.75, Series A ........................ 54,700 1,675,187
-------------
RESTAURANTS & LODGING (1.7%)
Host Marriott Finance Trust
6.75% (c) .............................. 269,000 14,290,625
-------------
STEEL, ALUMINUM & OTHER METALS (1.8%)
Bethlehem Steel Corp.
$3.50 (c) .............................. 257,000 9,701,750
Kaiser Aluminum Corp.
8.255% ................................. 73,500 826,875
WHX Corp.
6.50%, Series A ........................ 115,400 4,500,600
-------------
15,029,225
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
TELECOMMUNICATION EQUIPMENT (3.1%)
Loral Space & Communications
Ltd.
6.00% (c) .............................. 465,000 $ 26,156,250
-------------
TELECOMMUNICATION SERVICES (0.2%)
AirTouch Communications, Inc.
$4.25, Series C ........................ 37,800 1,710,450
-------------
TELEPHONE UTILITIES (0.3%)
Nortel Inversora, S.A.
10.00% (p) ............................. 67,000 2,747,000
-------------
TRANSPORTATION (0.1%)
Arkansas Best Corp.
$2.875, Series A ....................... 24,000 573,000
-------------
Total Preferred Stocks
(Cost $206,905,633) .................... 211,044,652
-------------
Total Convertible Securities
(Cost $584,637,569) .................... 608,529,576
-------------
<CAPTION>
Principal
Amount
============
<S> <C> <C>
CORPORATE BONDS (2.1%)
BUILDINGS (0.0%) (b)
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(d)(g) .................. $ 18,799 4,700
-------------
COMPUTERS & OFFICE EQUIPMENT (1.0%)
Businessland, Inc.
5.50%, due 3/1/07 ...................... 1,965,000 1,296,900
EMC Corp.
4.25%, due 1/1/01 ...................... 4,500,000 7,513,335
-------------
8,810,235
-------------
INSURANCE (0.2%)
Statesman Group, Inc.
6.25%, due 5/1/03 ...................... 1,500,000 1,533,750
-------------
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
MEDIA (0.9%)
American Media, Inc.
Series XW
(zero coupon), due 5/15/97 ............. $ 3,250,000 $ 3,120,000
Spanish Broadcasting System, Inc.
7.50%, due 6/15/02
12.50%, beginning 6/15/97 .............. 500,000 526,250
12.75%, due 6/1/01 (c)(k)(s) ........... 4,235,494 4,235,494
-------------
7,881,744
-------------
Total Corporate Bonds
(Cost $15,678,948) ..................... 18,230,429
-------------
<CAPTION>
Shares
=============
<S> <C> <C>
COMMON STOCKS (16.2%)
ADVERTISING (0.1%)
Omnicom Group, Inc. .................... 10,000 457,500
-------------
AEROSPACE (0.2%)
Northrop Grumman Corp. ................. 10,000 827,500
Orbital Sciences Corp. (a) ............. 59,450 1,025,512
-------------
1,853,012
-------------
APPLIANCES & FURNITURE (0.1%)
Sunbeam Corp., Inc. .................... 30,000 772,500
-------------
AUTO MANUFACTURING (0.1%)
Ford Motor Co. ......................... 30,000 956,250
-------------
AUTO PARTS (0.1%)
MascoTech, Inc. ........................ 58,200 953,025
-------------
BUILDINGS (0.0%) (b)
Toll Brothers, Inc. (a) ................ 10,000 195,000
-------------
CABLE (0.1%)
Comcast Corp., Special Class A ......... 46,900 835,406
-------------
CASINOS (0.1%)
Aztar Corp. (a) ........................ 111,500 780,500
-------------
CHEMICALS (0.9%)
Agrium, Inc. ........................... 131,100 1,802,625
Goodrich (B.F.), Co. ................... 25,000 1,012,500
IMC Global, Inc. ....................... 106,900 4,182,463
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
CHEMICALS (Continued)
Millennium Chemicals, Inc. (a) ......... 14,957 $ 265,487
Monsanto Co. ........................... 2,500 97,188
-------------
7,360,263
-------------
COMPUTERS & OFFICE EQUIPMENT (1.5%)
3Com Corp. (a) ......................... 10,000 733,750
3DO Company, (The) (a) ................. 71,000 341,688
Apple Computer, Inc. (a) ............... 25,000 521,875
Compuware Corp. (a) .................... 11,500 576,437
Safeguard Scientifics, Inc. (a) ........ 70,000 2,222,500
SCI Systems, Inc. (a) .................. 40,000 1,785,000
Sequent Computer Systems, Inc. (a) ..... 64,500 1,144,875
Sterling Commerce, Inc. (a) ............ 55,000 1,938,750
Trident Microsystems, Inc. (a) ......... 61,000 1,029,375
Viasoft, Inc. (a) ...................... 37,100 1,752,975
Viewlogic Systems, Inc. (a) ............ 36,200 411,775
Western Digital Corp. (a) .............. 10,000 568,750
-------------
13,027,750
-------------
CONGLOMERATES (0.2%)
Hanson, PLC ADR (f) .................... 209,400 1,413,450
Trizec Hahn Corp. ...................... 4,000 88,000
-------------
1,501,450
-------------
DOMESTIC OIL & GAS (0.5%)
Noble Affiliates, Inc. ................. 84,885 4,063,869
-------------
DOMESTIC OILS (0.2%)
Parker & Parsley Petroleum Co. ......... 13,900 510,825
Santa Fe Energy Resources, Inc. (a) .... 106,500 1,477,687
-------------
1,988,512
-------------
DRUGS (0.2%)
Pfizer, Inc. ........................... 10,000 828,750
Regeneron Pharmaceuticals, Inc. (a) .... 20,000 322,500
Sepracor, Inc. (a) ..................... 25,000 415,625
-------------
1,566,875
-------------
ELECTRIC UTILITIES (1.7%)
General Electric Co. ................... 45,000 4,449,375
Huaneng Power
International, Inc. ADR (a)(f) ....... 20,000 450,000
Long Island Lighting Co. ............... 104,900 2,320,913
Peco Energy Co. ........................ 72,000 1,818,000
Western Resources, Inc. ................ 60,000 1,852,500
Wisconsin Energy Corp. ................. 127,100 3,415,812
-------------
14,306,600
-------------
<CAPTION>
Shares Value
==================================
<S> <C> <C>
ELECTRICAL EQUIPMENT (0.3%)
DII Group, Inc. (a) .................... 25,000 $ 581,250
Dynatech Corp. (a) ..................... 13,600 601,800
LTX Corp. (a) .......................... 159,900 939,412
Newbridge Networks Corp. (a) ........... 30,000 847,500
-------------
2,969,962
-------------
ENERGY (0.3%)
Apogee Enterprises, Inc. ............... 10,500 417,375
Calgon Carbon Corp. .................... 50,700 621,075
Seagull Energy Corp. (a) ............... 29,200 642,400
Triton Energy Ltd. (a) ................. 26,100 1,265,850
-------------
2,946,700
-------------
FINANCE (0.1%)
Hibernia Corp., Class A ................ 50,000 662,500
-------------
FINANCIAL SERVICES (0.1%)
Cityscape Financial Corp. (a) .......... 18,700 490,875
Salomon, Inc. .......................... 10,600 499,525
-------------
990,400
-------------
FOOD, BEVERAGES & TOBACCO (0.2%)
Dole Food Co. .......................... 40,000 1,355,000
-------------
GAS UTILITIES (0.0%) (b)
United Gas Holdings Corp. (a)(d)(g) .... 29,712 50,510
-------------
HEALTH CARE (0.7%)
Health Systems International, Inc.
Class A (a) .......................... 37,500 928,125
Healthsource, Inc. (a) ................. 65,000 853,125
Horizon/CMS Healthcare Corp. (a) ....... 107,800 1,360,975
Humana, Inc. (a) ....................... 59,800 1,143,675
Isolyser Co., Inc. (a) ................. 35,800 250,600
Regency Health Services, Inc. (a) ...... 190,200 1,830,675
-------------
6,367,175
-------------
INSURANCE (1.5%)
American Bankers Insurance
Group, Inc. .......................... 28,200 1,441,725
American International Group, Inc. ..... 10,700 1,158,275
Chubb Corp. ............................ 151,000 8,116,250
Fidelity National Financial, Inc. ...... 32,340 489,143
Horace Mann Educators Corp. ............ 36,500 1,473,687
-------------
12,679,080
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
MEDICAL EQUIPMENT (0.4%)
American Medical Response, Inc. (a) .... 25,000 $ 812,500
Biomet, Inc. ........................... 32,700 494,588
Sofamor Danek Group, Inc. (a) .......... 50,500 1,540,250
Uromed Corp. (a) ....................... 29,300 285,675
-------------
3,133,013
-------------
MINING (0.5%)
Battle Mountain Gold Co. ............... 292,800 2,013,000
Homestake Mining Co. ................... 97,000 1,382,250
Santa Fe Pacific Gold Corp. ............ 21,000 322,875
Stillwater Mining Co. (a) .............. 4,000 72,500
TVX Gold, Inc. (a) ..................... 25,000 193,750
-------------
3,984,375
-------------
OIL SERVICES (0.5%)
McDermott International, Inc. .......... 50,000 831,250
Oceaneering International, Inc. (a) .... 63,500 1,008,063
Tidewater, Inc. ........................ 50,500 2,285,125
-------------
4,124,438
-------------
PAPER & FOREST PRODUCTS (0.2%)
Bowater, Inc. .......................... 29,600 1,113,700
Champion International Corp. ........... 4,600 198,950
-------------
1,312,650
-------------
PUBLISHING (0.2%)
Hollinger International, Inc. .......... 142,000 1,633,000
-------------
REAL ESTATE (0.6%)
Horizon Group, Inc. .................... 125,800 2,500,275
Meditrust Corp. ........................ 50,000 2,000,000
Simon DeBartolo Group, Inc. ............ 16,700 517,700
-------------
5,017,975
-------------
RECREATION & ENTERTAINMENT (0.2%)
Alliance Gaming Corp. (a) .............. 378,144 1,654,380
-------------
RESTAURANTS & LODGING (0.0%) (b)
Buffets, Inc. (a) ...................... 11,500 104,938
Hilton Hotels Corp. .................... 10,000 261,250
-------------
366,188
-------------
<CAPTION>
Shares Value
==================================
<S> <C> <C>
RETAIL (1.3%)
Barnes & Noble, Inc. (a) ............... 17,000 $ 459,000
Dillard Department Stores, Inc.
Class A .............................. 10,000 308,750
Hollywood Entertainment Corp. (a) ...... 66,300 1,226,550
J.C. Penney Co., Inc. .................. 55,000 2,681,250
Michaels Stores, Inc. (a) .............. 46,500 558,000
Nordstrom, Inc. ........................ 9,900 350,831
Pier 1 Imports, Inc. ................... 16,900 297,863
Price/Costco, Inc. (a) ................. 94,297 2,369,212
Rite Aid Corp. ......................... 27,100 1,077,225
Saks Holdings, Inc. (a) ................ 65,000 1,755,000
-------------
11,083,681
-------------
SERVICES (0.3%)
AccuStaff, Inc. (a) .................... 39,000 823,875
Quintiles Transnational Corp. (a) ...... 16,500 1,093,125
Sylvan Learning Systems, Inc. (a) ...... 25,500 726,750
-------------
2,643,750
-------------
STEEL, ALUMINUM & OTHER METALS (0.9%)
J&L Specialty Steel, Inc. .............. 33,700 383,338
Kaiser Aluminum Corp. (a) .............. 21,453 249,391
Newmont Mining Corp. ................... 37,500 1,678,125
Reynolds Metals Co. .................... 85,116 4,798,414
WHX Corp. (a) .......................... 40,000 355,000
-------------
7,464,268
-------------
TELECOMMUNICATION EQUIPMENT (0.3%)
Ascend Communications, Inc. (a) ........ 26,200 1,627,675
Clearnet Communications, Inc. ..........
Class A (a) .......................... 36,700 403,700
Harmonic Lightwaves, Inc. (a) .......... 53,800 827,175
-------------
2,858,550
-------------
TELECOMMUNICATION SERVICES (0.8%)
AirTouch Communications, Inc. (a) ...... 80,000 2,020,000
Boston Technology, Inc. (a) ............ 50,000 1,437,500
Lucent Technologies, Inc. .............. 40,000 1,850,000
Rogers Communications, Inc.
Class B (a)(x) ....................... 108,000 787,919
TCI Satellite Entertainment, Inc. (a) .. 11,800 116,525
Tele-Communications, Inc.
Class A (a) .......................... 29,800 389,262
WorldCom, Inc. (a) ..................... 10,000 260,625
-------------
6,861,831
-------------
TEXTILE & APPAREL (0.5%)
Burlington Industries, Inc. (a) ........ 97,000 1,067,000
Gucci Group N.V.- NY ................... 35,000 2,235,625
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
TEXTILE & APPAREL (Continued)
Shaw Industries, Inc. .................. 104,300 $ 1,225,525
-------------
4,528,150
-------------
TOBACCO (0.1%)
Imperial Tobacco Group, PLC
ADR (a)(f) ............................. 52,350 675,483
-------------
TRANSPORTATION (0.2%)
Yellow Corp. (a) ......................... 140,000 2,012,500
-------------
Total Common Stocks
(Cost $137,340,481) .................... 137,994,071
-------------
PREFERRED STOCKS (1.2%)
MEDIA (0.5%)
Spanish Broadcasting System, Inc.
Series A (a)(c)(k) ..................... 4,552 4,506,480
-------------
MINING (0.7%)
Freeport-McMoRan
Copper & Gold, Inc.
Series Silver (j6)(o) .................. 330,000 5,610,000
-------------
Total Preferred Stocks
(Cost $9,665,180) ...................... 10,116,480
-------------
WARRANTS (0.1%)
MEDIA (0.1%)
Spanish Broadcasting System, Inc.
expire 6/29/99 (a)(c) .................. 5,027 904,860
-------------
Total Warrants
(Cost $754,050) ........................ 904,860
-------------
<CAPTION>
Principal
Amount
=============
<S> <C> <C>
SHORT-TERM INVESTMENTS (9.2%)
COMMERCIAL PAPER (9.2%)
American Express Credit Corp.
6.303%, due 1/3/97 ..................... $ 38,000,000 38,000,000
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
COMMERCIAL PAPER (Continued)
Associates Corp. of North America
6.502%, due on demand (t) .............. $ 40,229,000 $ 40,229,000
-------------
Total Short-Term Investments
(Cost $78,229,000) ..................... 78,229,000
-------------
Total Investments
(Cost $826,305,228) (v) ................ 100.0% 854,004,416(w)
Liabilities in Excess of
Cash and Other Assets .................. (0.0)(b) (140,668)
------------ -------------
Net Assets ............................. 100.0% $ 853,863,748
============ =============
<CAPTION>
Shares
============
<S> <C> <C>
SHORT POSITIONS (-15.9%)
COMMON STOCKS (-15.9%)
AEROSPACE (-0.4%)
Wyman-Gordon Co. ....................... (148,600) (3,306,350)
-------------
AIRLINES (-0.1%)
UAL Corp. .............................. (5,000) (312,500)
USAir Group, Inc. ...................... (28,500) (666,188)
-------------
(978,688)
-------------
BANKS (-0.4%)
Banc One Corp. ......................... (43,400) (1,866,200)
Union Planters Corp. ................... (48,700) (1,899,300)
-------------
(3,765,500)
-------------
BUILDING MATERIALS (-0.1%)
Owens Corning .......................... (24,000) (1,023,000)
-------------
BUILDINGS (-0.4%)
Toll Brothers, Inc. .................... (10,000) (195,000)
U.S. Home Corp. ........................ (120,900) (3,143,400)
-------------
(3,338,400)
-------------
CABLE (-0.1%)
Cox Communications, Inc. ............... (40,000) (925,000)
-------------
CAPITAL GOODS (-0.8%)
Cooper Industries, Inc. ................ (163,300) (6,879,013)
-------------
CELLULAR TELEPHONE (-0.1%)
U.S. Cellular Corp. .................... (19,400) (540,775)
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
CHEMICALS (-0.0%)(b)
Lyondell Petrochemical Co. ............. (21,200) $ (466,400)
-------------
COMPUTERS & OFFICE EQUIPMENT (-3.5%)
Apple Computer, Inc. ................... (112,600) (2,350,525)
Applied Magnetics Corp. ................ (276,300) (8,254,462)
EMC Corp. .............................. (110,000) (3,643,750)
Inacom Corp. ........................... (199,400) (7,976,000)
Microsoft Corp. ........................ (10,000) (826,250)
Quantum Corp. .......................... (69,200) (1,980,850)
Safeguard Scientifics, Inc. ............ (86,900) (2,759,075)
SCI Systems, Inc. ...................... (15,000) (669,375)
Sterling Commerce, Inc. ................ (25,000) (881,250)
Viasoft, Inc. .......................... (10,000) (472,500)
-------------
(29,814,037)
-------------
CONGLOMERATES (-0.2%)
Corning, Inc. .......................... (33,500) (1,549,375)
-------------
CONSUMER SERVICES (-0.5%)
ADT Ltd. ............................... (173,300) (3,964,238)
-------------
DOMESTIC OIL & GAS (-0.4%)
Enron Oil & Gas Co. .................... (76,625) (1,934,781)
Noble Affiliates, Inc. ................. (22,715) (1,087,481)
Snyder Oil Corp. ....................... (4,600) (79,925)
-------------
(3,102,187)
-------------
DOMESTIC OILS (-0.3%)
Occidental Petroleum Corp. ............. (78,400) (1,832,600)
Parker & Parsley Petroleum Co. ......... (24,700) (907,725)
-------------
(2,740,325)
-------------
ELECTRIC UTILITIES (-0.1%)
Huaneng Power International, Inc.
ADR (f) .............................. (20,000) (450,000)
-------------
ELECTRICAL EQUIPMENT (-0.5%)
Cypress Semiconductor Corp. ............ (207,000) (2,923,875)
Elsag Bailey Process
Automation N.V ....................... (25,000) (468,750)
Newbridge Networks Corp. ............... (30,000) (847,500)
-------------
(4,240,125)
-------------
<CAPTION>
Shares Value
==================================
<S> <C> <C>
ENERGY (-0.9%)
Apogee Enterprises, Inc. ............... (10,000) $ (397,500)
Chevron Corp. .......................... (106,275) (6,907,875)
Unocal Corp. ........................... (11,300) (459,062)
-------------
(7,764,437)
-------------
FINANCIAL SERVICES (-0.3%)
Cityscape Financial Corp. .............. (48,000) (1,260,000)
Salomon, Inc. .......................... (25,600) (1,206,400)
-------------
(2,466,400)
-------------
FOOD, BEVERAGES & TOBACCO (-0.1%)
Chiquita Brands International, Inc. .... (37,000) (471,750)
Dole Food Co. .......................... (20,000) (677,500)
-------------
(1,149,250)
-------------
HOUSEHOLD PRODUCTS (-0.6%)
Amway Japan Ltd.(y) .................... (87,400) (2,801,137)
Amway Japan Ltd.ADR (f) ................ (73,977) (1,229,868)
Whirlpool Corp. ........................ (20,200) (941,825)
-------------
(4,972,830)
-------------
INSURANCE (-3.9%)
Chubb Corp. ............................ (585,900) (31,492,125)
Fremont General Corp. .................. (49,600) (1,537,600)
-------------
(33,029,725)
-------------
MEDIA (-0.3%)
HSN, Inc. .............................. (15,255) (362,306)
Time Warner, Inc. ...................... (58,400) (2,190,000)
-------------
(2,552,306)
-------------
MINING (-0.1%)
Inco Limited ........................... (15,000) (478,125)
Stillwater Mining Ltd.Co ............... (4,000) (72,500)
-------------
(550,625)
-------------
OIL SERVICES (-0.0%)(b)
Dresser Industries, Inc. ............... (3,600) (111,600)
Nabors Industries, Inc. ................ (15,200) (292,600)
-------------
(404,200)
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
PAPER & FOREST PRODUCTS (-0.2%)
Bowater, Inc. .......................... (25,000) $ (940,625)
International Paper Co. ................ (10,000) (403,750)
James River Corp. of Virginia .......... (10,000) (331,250)
-------------
(1,675,625)
-------------
REAL ESTATE (-0.1%)
Security Capital Pacific Trust ......... (19,300) (441,487)
-------------
RESTAURANTS & LODGING (-0.4%)
Hilton Hotels Corp. .................... (90,000) (2,351,250)
McDonald's Corp. ....................... (25,650) (1,160,663)
-------------
(3,511,913)
-------------
RETAIL (-0.8%)
Federated Department Stores
Inc .................................. (110,000) (3,753,750)
Michaels Stores, Inc. .................. (61,400) (736,800)
Pier 1 Imports, Inc. ................... (9,900) (174,487)
Rite Aid Corp. ......................... (27,100) (1,077,225)
Waban, Inc. ............................ (34,800) (904,800)
-------------
(6,647,062)
-------------
SERVICES (-0.1%)
Quintiles Transnational Corp. .......... (16,500) (1,093,125)
-------------
STEEL, ALUMINUM & OTHER METALS (-0.0%) (b)
Reynolds Metals Co. .................... (3,300) (186,037)
-------------
TELECOMMUNICATION SERVICES (-0.2%)
TCI Satellite Entertainment, Inc. ...... (11,800) (116,525)
Tele-Communications, Inc.
Class A .............................. (118,000) (1,541,375)
-------------
(1,657,900)
-------------
TRANSPORTATION (-0.0%) (b)
Yellow Corp. ........................... (25,200) (362,250)
-------------
Total Short Positions
(Proceeds $122,377,088) .............. $(135,548,585)
=============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Fair valued securities.
(e) Partially segregated as margin against common stock short position.
(f) ADR-American Depository Receipt.
(g) Issuer in bankruptcy.
(h) Issuer in default.
(i) PEPS-Premium Exchangeable Participating Shares-each PEP is exchangeable for
1.25 American Depository Shares of Amway Japan on 2/15/99.
(j1) Depository Shareseach share represents one-hundredth of a share of Series B
preferred stock.
(j2) Depository Shares-each share represents one-tenth of a share of Series I
convertible preferred stock.
(j3) Depository Shares-each share represents one-fourth of a share of $6.00
preferred stock.
(j4) Depository Shares-each share represents one-hundredth of a share of
Series P preferred stock.
(j5) Depository Share-seach share represents one-fourth of a share of Series L
$14.00 convertible preferred stock.
(j6) Depository Shares-each share represents 0.025 shares of a share of silver
denominated preferred stock.
(k) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(l) 357 Units-each unit reflects an interest in 1,000 Noncumulative Mandatory
Convertible preference shares of The Fuji Bank, Ltd. The preference shares
are convertible into ordinary shares at an initial conversion price of
(Y)2,002 per ordinary share at a future date.
(m) 75 Units--each unit reflects an interest in 3,000 of the Sakura Bank Ltd.
Series II Noncumulative Mandatory Convertible preference shares. The
preference shares are convertible into ordinary shares at an initial
conversion price of (Y)1,122 per ordinary share at a future date.
(n) STRYPES--Structured Yield Product Exchangeable for Cox Communi-cations,
Inc. common stock.
(o) Dividend equals U.S. dollar equivalent of 0.04125 oz. of silver per share.
(p) MEDS--Mandatorily Exchangeable Debt Security.
(q) Yankee bond.
(r) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(s) Floating rate. Rate shown is the rate in effect at December 31, 1996.
(t) Adjustable rate. Rate shown is the rate in effect at December 31, 1996.
(u) Convertible into Inamed Corp. at a conversion ratio of 2,924.7693 per 5,000
shares of Italy Province (Republic of).
(v) The cost for Federal income tax purposes is $829,004,120.
(w) At December 31, 1996 net unrealized appreciation was $25,000,296, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $47,842,155 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $22,841,859.
(x) Canadian security.
(y) Japanese security.
(Y) Security denominated in Japanese Yen.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $826,305,228) ............................. $ 854,004,416
Cash .......................................................................................... 604
Deposit with broker for securities sold short ................................................. 122,377,088
Receivables:
Investment securities sold .................................................................. 12,074,456
Dividends and interest ...................................................................... 11,772,797
Fund shares sold ............................................................................ 2,663,858
Unrealized appreciation on forward foreign currency contracts ................................. 411,756
Other assets .................................................................................. 382
---------------
Total assets ............................................................................... 1,003,305,357
---------------
LIABILITIES:
Securities sold short (proceeds $122,377,088) ................................................. 135,548,585
Payables:
Investment securities purchased ............................................................. 11,017,341
Fund shares redeemed ........................................................................ 1,095,665
NYLIFE Distributors ......................................................................... 855,759
Dividends on securities sold short .......................................................... 299,556
Adviser ..................................................................................... 257,768
Transfer agent .............................................................................. 77,430
Custodian ................................................................................... 18,440
Trustees .................................................................................... 5,631
Accrued expenses .............................................................................. 265,434
---------------
Total liabilities .......................................................................... 149,441,609
---------------
Net assets .................................................................................... $ 853,863,748
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized
Class A ....................................................................................... $ 41,013
Class B ....................................................................................... 577,812
Additional paid-in capital .................................................................... 832,285,849
Accumulated distribution in excess of net investment income ................................... (263,608)
Accumulated undistributed net realized gain on investments .................................... 6,283,235
Net unrealized appreciation on investments .................................................... 27,699,188
Net unrealized depreciation on securities sold short .......................................... (13,171,497)
Net unrealized appreciation on forward foreign currency contracts ............................. 411,756
---------------
Net assets .................................................................................... $ 853,863,748
===============
CLASS A
Net assets applicable to outstanding shares ................................................... $ 56,620,479
===============
Shares of beneficial interest outstanding ..................................................... 4,101,318
===============
Net asset value per share outstanding ......................................................... $ 13.81
Maximum sales charge (5.50% of offering price) ................................................ 0.80
---------------
Maximum offering price per share outstanding .................................................. $ 14.61
===============
CLASS B
Net assets applicable to outstanding shares ................................................... $ 797,243,269
===============
Shares of beneficial interest outstanding ..................................................... 57,781,155
===============
Net asset value per share outstanding ......................................................... $ 13.80
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Operations
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
ncome:
Dividends (a) ............................................................................................. $ 8,818,644
Interest .................................................................................................. 31,610,065
------------
Total income ............................................................................................. 40,428,709
------------
Expenses:
Distribution--Class B ..................................................................................... 4,035,786
Administration ............................................................................................ 2,444,000
Advisory .................................................................................................. 2,444,000
Dividends on securities sold short ........................................................................ 1,743,224
Service ................................................................................................... 1,697,223
Transfer agent ............................................................................................ 785,381
Shareholder communication ................................................................................. 327,527
Interest expense on securities sold short ................................................................. 287,314
Registration .............................................................................................. 225,356
Custodian ................................................................................................. 108,191
Professional .............................................................................................. 100,328
Recordkeeping ............................................................................................. 81,568
Trustees .................................................................................................. 20,124
Miscellaneous ............................................................................................. 43,083
------------
Total expenses ........................................................................................... 14,343,105
------------
Net investment income ....................................................................................... 26,085,604
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ..................................................................................... 43,583,816
Securities sold short ..................................................................................... (4,786,612)
Foreign currency transactions ............................................................................. 750,486
------------
Net realized gain on investments and foreign currency transactions .......................................... 39,547,690
------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ..................................................................................... 13,120,801
Securities sold short ..................................................................................... (8,782,317)
Forward foreign currency contracts ........................................................................ 262,408
------------
Net unrealized gain on investments and foreign currencies ................................................... 4,600,892
------------
Net realized and unrealized gain on investments and foreign currency transactions ........................... 44,148,582
------------
Net increase in net assets resulting from operations ........................................................ $ 70,234,186
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $29,948.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 26,085,604 $ 12,381,727
Net realized gain on investments ............................................................... 43,583,816 18,176,793
Net realized gain (loss) on short sale transactions ............................................ (4,786,612) 708,783
Net realized gain (loss) on foreign currency transactions ...................................... 750,486 (34,489)
Net change in unrealized appreciation (depreciation) on security transactions .................. 13,120,801 25,839,539
Net change in unrealized depreciation on securities sold short ................................. (8,782,317) (4,375,360)
Net change in unrealized appreciation (depreciation) on forward foreign currency contracts ..... 262,408 133,823
------------- -------------
Net increase in net assets resulting from operations ........................................... 70,234,186 52,830,816
------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (2,097,940) (511,874)
Class B ....................................................................................... (26,160,372) (10,670,355)
From net realized gain on investments:
Class A ....................................................................................... (2,448,253) (778,196)
Class B ....................................................................................... (34,512,908) (12,402,053)
------------- -------------
Total dividends and distributions to shareholders ........................................... (65,219,473) (24,362,478)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................................... 36,576,622 26,364,588
Class B ....................................................................................... 390,110,257 235,388,770
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 4,131,694 1,134,619
Class B ....................................................................................... 54,652,050 21,090,194
------------- -------------
485,470,623 283,978,171
Cost of shares redeemed:
Class A ....................................................................................... (11,095,108) (1,093,624)
Class B ....................................................................................... (79,823,414) (37,359,550)
------------- -------------
Increase in net assets derived from capital share transactions .............................. 394,552,101 245,524,997
------------- -------------
Net increase in net assets .................................................................. 399,566,814 273,993,335
NET ASSETS:
Beginning of year ................................................................................ 454,296,934 180,303,599
------------- -------------
End of year ...................................................................................... $ 853,863,748 $ 454,296,934
============= =============
Accumulated distribution in excess of net investment income/accumulated undistributed
net investment income .......................................................................... $ (263,608) $ 1,412,984
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
-------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Year ended Year ended December 31 ----------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
------------------ -------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........... $13.45 $13.45 $11.67 $11.67 $12.83 $13.92 $11.46 $10.10
------ ------ ------ ------ ------ ------ ------ ------
Net investment income ........... 0.57 0.48 0.59 0.51 0.19 0.50 0.92 0.32
Net realized and unrealized
gain (loss) on investments .... 1.02 1.02 2.14 2.14 (0.71) 0.70 2.45 1.32
Net realized and unrealized
gain (loss) on foreign
currency transactions ......... 0.02 0.02 (0.00)(b) (0.00)(b) -- (0.01) -- --
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................... 1.61 1.52 2.73 2.65 (0.52) 1.19 3.37 1.64
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ...... (0.62) (0.54) (0.55) (0.47) (0.21) (0.49) (0.42) (0.28)
From net realized gain
on investments ................ (0.63) (0.63) (0.40) (0.40) (0.43) (1.79) (0.49) --
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (1.25) (1.17) (0.95) (0.87) (0.64) (2.28) (0.91) (0.28)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $13.81 $13.80 $13.45 $13.45 $11.67 $12.83 $13.92 $11.46
====== ====== ====== ====== ====== ====== ====== ======
Total investment return (a) ..... 12.13% 11.39% 23.72% 23.02% (4.09%) 8.95% 30.80% 16.43%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ......... 4.4% 3.8% 4.9% 4.3% 4.8%+ 3.5% 3.4% 2.9%
Expenses ...................... 1.5% 2.1% 1.5% 2.1% 1.9%+ 1.9% 1.9% 2.3%
Portfolio turnover rate ......... 296% 296% 243% 243% 77% 269% 370% 291%
Average commission rate paid .... $0.0468 $0.0468 (c) (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's) ............. $56,621 $797,243 $26,836 $427,461 $180,304 $160,407 $58,943 $28,899
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Convertible Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek capital appreciation together with
current income.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser to be representative of market values at
the regular close of business of the New York Stock Exchange, (f) by appraising
options and futures contracts at the last sale price
25
<PAGE>
MainStay Convertible Fund
on the market where such options or futures are principally traded, and (g) by
appraising all other securities and other assets, including debt securities for
which prices are supplied by a pricing agent but are not deemed by the Adviser
to be representative of market values, but excluding money market instruments
with a remaining maturity of sixty days or less and including restricted
securities and securities for which no market quotations are available, at fair
value in accordance with procedures approved by the Trustees. Short-term
securities which mature in more than 60 days are valued at current market
quotations. Short-term securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at purchase was 60 days or less, or by
amortizing the difference between market value on the 61st day prior to maturity
and value at maturity date if their original term to maturity at purchase
exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
markets and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward currency contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. When the forward currency
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward currency
contracts in order to hedge its foreign currency denominated investments,
receivables and payables against adverse movements in future foreign currency
exchange rates.
The use of forward currency contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/depreciation on forward contracts reflects the Fund's
exposure at year end to credit loss in the event of a counterparty's failure to
perform its obligations.
Forward foreign currency contracts open at December 31, 1996:
<TABLE>
<CAPTION>
Contracts In Delivery Gross Unrealized
to Deliver Exchange for Date Appreciation
---------- ------------ -------- ----------------
<S> <C> <C> <C>
(Y)318,960,000 $3,000,000 3/20/97 $216,389
(Y)551,450,000 $5,000,000 6/6/97 133,370
(Y)219,600,000 $2,000,000 6/6/97 61,997
--------
Net Appreciation $411,756
========
</TABLE>
- ----------
(Y) Japanese Yen.
26
<PAGE>
Notes to Financial Statements continued
Securities Sold Short. The Fund may engage in short sales as a method of hedging
declines in the value of securities owned. When the Fund enters into a short
sale, it must segregate the security sold short, or securities equivalent in
kind and amount to the securities sold, as collateral for its obligation to
deliver the security upon conclusion of the sale. A gain, limited to the price
at which the Fund sold the security short, or a loss, unlimited as to dollar
amount, will be recognized upon termination of a short sale if the market price
on the date the short position is closed out is less or greater, respectively,
than the proceeds originally received. Any such gain or loss may be offset,
completely or in part, by the change in the value of the hedged investments.
Restricted Securities. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. Disposal of these
securities may involve time-consuming negotiations and expenses, and prompt sale
at an acceptable price may be difficult. The Fund may not invest more than 10%
of its net assets in illiquid securities. At December 31, 1996 the Fund held no
restricted securities.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is
required.Permanent book-tax differences of $85,101 and $94,034 have been
reclassified from accumulated distribution in excess of net investment income
and accumulated net realized gain on investments, respectively, to additional
paid in capital. In addition, $581,217 has been reclassified from accumulated
net realized gain on foreign currency transactions to accumulated distribution
in excess of net investment income.
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily except
when collection is not expected. Discounts on securities purchased for the Fund
are accreted on the constant yield method over the life of the respective
securities or, if applicable, over the period to the first call date.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expense incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized
27
<PAGE>
MainStay Convertible Fund
and unrealized gains and losses are incurred. Dividends on short positions are
recorded as expenses of the Fund on ex-dividend date.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.36% of the average daily net assets of the Fund.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
28
<PAGE>
Notes to Financial Statements continued
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $903,782 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$852,359 for the year ended December 31, 1996.
Trustee Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $74,793.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $15,636 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$81,568.
Note 4--Deposit with Broker:
Cash deposited with broker in the amount of $122,377,088 is partially restricted
as collateral for securities sold short.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of U.S. Government
securities were $271,953 and $270,794, respectively. Purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $1,394,393 and
$1,058,801, respectively.
29
<PAGE>
MainStay Convertible Fund
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
--------------------- --------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................................ 2,602 27,714 1,991 17,601
Shares issued in reinvestment of dividends and distributions ............... 297 3,935 85 1,583
----- ------ ----- ------
2,899 31,649 2,076 19,184
Shares redeemed ............................................................ 793 5,658 81 2,840
----- ------ ----- ------
Net increase ............................................................... 2,106 25,991 1,995 16,344
===== ====== ===== ======
</TABLE>
30
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Convertible Fund (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
31
<PAGE>
The MainStay Funds
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
CONVERTIBLE FUND graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares
are redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed
by the U.S. government and its agencies, the share price of the Fund is
not guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed
by the U.S. government and there is no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
32
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that't double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
33
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Convertible Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly
owned subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Convertible Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN06 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Equity Index Fund Highlights 3
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 7
Returns & Lipper Rankings 8
Top 10 Equity Holdings 9
Portfolio of Investments 10
Financial Statements 20
Notes to Financial Statements 24
Report of Independent Accountants 29
The MainStay Funds 30
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
[GRAPHIC]
MainStay Equity Index Fund Highlights
1996 MARKET HIGHLIGHTS
o The year was an outstanding one for stocks, particularly large
capitalization issues
o The Dow Jones Industrial Average+ recorded a 28.91% gain for the year
o Top performing sectors included oil & gas drilling, shoes, and electronic
semiconductors
o Worst performing sectors included truckers, broadcast/media, and machines
1996 FUND HIGHLIGHTS
o One-year total return of 22.04% for Class A shares, excluding all sales
charges, as of 12/31/96
o Best one-year performance of all MainStay Funds as of 12/31/96
o Fund returns closely tracked the S&P 500 Index++
- ----------
+ A price weighted average of 30 actively traded large capitalization stocks,
mainly industrials but including some service oriented firms.
++ See footnote on page 4 for more information on the S&P 500.
3
<PAGE>
$10,000 Invested in the MainStay
Equity Index Fund versus
S&P 500 and Inflation
Class A Shares
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Equity
Date Index Fund S&P 500 Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/20/90 $ 9,000.00 $10,000 $10,000
12/91 $12,430.40 $13,040 $10,298
12/92 $13,200.20 $14,032 $10,603
12/93 $14,390.90 $15,441 $10,893
12/94 $14,462.80 $15,645 $11,177
12/95 $19,656.60 $21,518 $11,467
12/96 $23,988.20 $26,454 $11,847
</TABLE>
[GRAPHIC] MainStay Equity Index Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
This graph assumes an initial investment of $10,000 made on 12/20/90
reflecting the effect of the current maximum sales charge of 3.0%, thereby
reducing the amount of the investment to $9,700. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 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 gain distributions.
The MainStay Funds are neither sponsored by nor affiliated with Standard &
Poor's.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo Equity Index Fund Team
EQUITY INDEX FUND TEAM
Holly V. Cox, CFA and James A. Mehling, CFA
To the surprise and delight of equity investors, 1996 was another stellar year
for stocks. While this year's results didn't match the 37.53% returns earned in
1995, it would be hard to be disappointed with the S&P 500 Index's* return of
22.94% for the 12 months ended 12/31/96, which was more than twice the average
annual total return of the Index over the previous 70 years.++
Large capitalization stocks led the way, with the Dow Jones Industrial
Average(ss.) increasing 28.91% for the year. The average Lipper|| S&P 500 Index
fund returned 22.30%, for the year ended 12/31/96.
Given this context, how did the MainStay Equity Index Fund do in 1996?
For the 12 months ended 12/31/96, the MainStay Equity Index Fund returned
22.04%. The Fund underperformed the average Lipper S&P 500 Index Fund for the
same period, but outperformed the average Lipper diversified U.S. stock fund,
which returned 17.72% for the year.
Which stocks did best in 1996?
The S&P 500 Index is composed primarily of large capitalization stocks, many of
which did exceedingly well in 1996. Among the strongest performing stocks were
Rowan Cos., up 135%#, Nike, up 74%, and Intel, up 131% in their respective
industry sectors: oil and gas drilling, up 104%, shoes, up 65%, and electronic
semiconductors, up 57%.
Were these sectors equally weighted in the portfolio?
No. Each sector is individually weighted in the S&P 500 by its perceived
importance in
Total return
- ------------
The performance of an investment with all income and capital gains reinvested.
Capitalization
- --------------
The amount of outstanding equity a company has issued. Companies may vary
greatly in the amount of equity capital they have raised, and their
capitalization may change with new issues or stock repurchases.
- ----------
++ Source: Ibbotson Associates, Chicago.
ss. See footnote on page 3 for more information on the Dow Jones Industrial
Average.
|| See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
# Returns reflect performance during the period securities were held in the
Fund.
5
<PAGE>
- --------------------------------------------------------------------------------
Bull market/bear market
- -----------------------
A bull market is a prolonged period of rising prices, and a bear market is a
prolonged period of falling prices.
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Year-End Total Return %
- ------------------------------------------------
<S> <C>
12/91 28.01
12/92 6.23
12/93 9.01
12/94 0.47
12/95 35.91
12/96 22.04
</TABLE>
- ----------
See footnote * on page 8 for more information on performance.
- --------------------------------------------------------------------------------
the economy. Because of this, oil and gas drilling, shoes, and electronic semi-
conductors represented 0.06%, 0.36%, and 3.27%, respectively, of the Index. So
each made a different level of contribution to the overall performance of the
Index and the Fund.
Which sectors were the worst performers?
Truckers were the weakest sector in 1996, but represented only 0.01% of the
Index. Broadcast/media and machine tools were also laggards, representing 0.47%
and 0.02% of the Index, respectively.
Why didn't the Fund outperform the Index?
Unlike an index, the returns of which are based on hypothetical investments, the
Fund is a real-world investment and incurs trading expenses and management fees.
As a result, the Fund cannot fully replicate the performance of the Index and
will usually trail it by at least a small margin. Investors should take this
into account in evaluating the performance of any indexed fund.
How does the Fund seek to track the Index?
The Fund seeks to remain as fully invested as possible at all times. Doing so
allows the Fund to participate in bull markets, like the one we had this year,
as well as participate in declines during bear markets.
Does indexing offer any advantages over other forms of investing?
While past performance is no guarantee of future results, over the five years
ended
6
<PAGE>
[GRAPHIC]
12/31/96, the average annual total return of the average Lipper U.S. diversified
stock fund was 13.65%, compared to 14.71% for the average Lipper S&P 500 Index
Fund. For the 10-year period ended 12/31/96, the numbers are 13.29% and 14.43%,
respectively. While the Equity Index Fund's returns may be higher or lower than
the S&P 500 and the Lipper averages over any given period, these figures suggest
that indexing may be an appropriate strategy for inflation-conscious investors
seeking higher equity returns over the long term.
James A. Mehling, CFA
Portfolio Manager
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Sector Percentage
- --------------------------------------------------------
<S> <C>
Oil - Integrated International 6.5%
Major Regional Banks 4.8%
Telephone 4.1%
Drugs 4.1%
Health Care - Diversified 3.9%
All Other 76.6%
</TABLE>
PORTFOLIO COMPOSITION AS OF 12/31/96
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Sector Percentage
- --------------------------------------------------------
<S> <C>
Common Stocks 98.4%
Cash & Equivalents 1.6
</TABLE>
- ----------
Note: Actual percentages will vary over time.
Inflation
- ---------
An increase in the supply of money relative to available goods and services,
resulting in higher prices or a rising "cost of living."
7
<PAGE>
[GRAPHIC]
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 22.04% 14.05% 16.19%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 18.38% 13.36% 15.60%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Equity Index Fund 41 out of 16 out of 11 out of
48 funds 16 funds 13 funds
Average Lipper
S&P 500 Index
objective fund 22.30% 14.71% 17.11%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset value & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $23.37 $0.5390 $0.8155
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for applicable sales charge. In compliance with SEC
guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. The administrator
and adviser have agreed to assume a portion of the expenses. The total
return for this Fund would have been lower without this voluntary
limitation. This voluntary expense limitation may be terminated or revised
at any time. The MainStay Equity Index Fund, first offered to the public on
12/20/90, is offered as Class A shares only. As of 1/3/95 shares were
subject to an initial sales charge of up to 3% and an annual 12b-1 fee of
.25%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Life of Fund return is from the period 12/20/90 through 12/31/96.
For the 12-month period ended 12/31/96, the Lipper equity category included
3,912 funds and the MainStay Equity Index Fund was ranked 911 out of 3,912;
447 out of 1,249; and 449 out of 1,056 funds for the 1-year, 5-year, and
since-inception periods, respectively.
8
<PAGE>
[GRAPHIC]
Top 10 Equity Holdings as of 12/31/96
<TABLE>
<CAPTION>
HOLDING AMOUNT
- --------------------------------------------------------------------------------
<S> <C>
General Electric Co. $ 6,432,412
Coca-Cola Co. 5,160,092
Exxon Corp. 4,792,690
Intel Corp. 4,243,423
Microsoft Corp. 3,894,199
Merck & Co., Inc. 3,771,032
Philip Morris Cos., Inc. 3,630,580
Royal Dutch Petroleum Co. 3,605,215
International Business Machines Corp. 3,081,759
Procter & Gamble Co. 2,902,607
</TABLE>
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed above. Short-term
securities are excluded. See Portfolio of Investments for specific type of
security held.
9
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (98.4%)+
AEROSPACE/DEFENSE (2.1%)
Boeing Co. .................................. 14,127 $ 1,502,760
General Dynamics Corp. ...................... 2,493 175,757
Lockheed Martin Corp. ....................... 7,823 715,804
McDonnell Douglas Corp. ..................... 8,420 538,880
Northrop Grumman Corp. ...................... 2,277 188,422
Raytheon Co. ................................ 9,407 452,712
Rockwell International Corp. ................ 8,540 519,872
United Technologies Corp. ................... 9,648 636,768
-----------
4,730,975
-----------
AIRLINES (0.3%)
AMR Corp. (a) ............................... 3,543 312,227
Delta Air Lines, Inc. ....................... 2,986 211,633
Southwest Airlines Co. ...................... 5,632 124,608
USAir Group, Inc. (a) ....................... 2,479 57,946
-----------
706,414
-----------
ALUMINUM (0.4%)
Alcan Aluminum Ltd. ......................... 8,863 298,018
Aluminum Co. of America ..................... 6,856 437,070
Reynolds Metals Co. ......................... 2,501 140,994
-----------
876,082
-----------
AUTOMOBILES (1.8%)
Chrysler Corp. .............................. 28,708 947,364
Ford Motor Co. .............................. 46,872 1,494,045
General Motors Corp. ........................ 29,698 1,655,663
-----------
4,097,072
-----------
AUTOPARTS - AFTER MARKET (0.3%)
Cooper Tire & Rubber Co. .................... 3,263 64,444
Echlin Inc. ................................. 2,467 78,019
Genuine Parts Co. ........................... 4,777 212,577
Goodyear Tire & Rubber Co. .................. 6,081 312,411
-----------
667,451
-----------
BEVERAGES - ALCOHOLIC (0.7%)
Anheuser-Busch Cos., Inc. ................... 19,531 781,240
Brown-Forman Corp. Class B .................. 2,663 121,832
Coors (Adolph) Co. Class B .................. 1,454 27,626
Seagram Co. Ltd. ............................ 14,654 567,843
-----------
1,498,541
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
BEVERAGES - SOFT DRINKS (3.1%)
Coca-Cola Co. ............................... 98,054 $ 5,160,092
PepsiCo, Inc. ............................... 61,532 1,799,811
----------
6,959,903
----------
BROADCAST/MEDIA (0.5%)
Comcast Corp. Class A ....................... 12,828 228,499
Tele-Communications TCI Group
Series A (a) .............................. 26,221 342,512
U.S. West Media Group (a) ................... 24,441 452,158
----------
1,023,169
----------
BUILDING MATERIALS (0.2%)
Masco Corp. ................................. 6,275 225,900
Owens-Corning Corp. ......................... 1,987 84,696
Sherwin-Williams Co. ........................ 3,410 190,960
----------
501,556
----------
CHEMICALS (2.3%)
Air Products & Chemicals, Inc. .............. 4,367 301,869
Dow Chemical Co. ............................ 9,646 756,005
Du Pont (E.I.) De Nemours & Co. ............. 22,157 2,091,067
Eastman Chemical Co. ........................ 3,146 173,816
Goodrich (B.F.) Co. ......................... 2,029 82,175
Hercules, Inc. .............................. 4,201 181,693
Monsanto Co. ................................ 23,157 900,228
Praxair, Inc. ............................... 6,052 279,149
Rohm & Haas Co. ............................. 2,543 207,572
Union Carbide Corp. ......................... 5,226 213,613
----------
5,187,187
----------
CHEMICALS - DIVERSIFIED (0.3%)
Avery Dennison Corp. ........................ 4,100 145,037
Engelhard Corp. ............................. 5,657 108,190
FMC Corp. (a) ............................... 1,441 101,050
PPG Industries Inc. ......................... 7,389 414,708
----------
768,985
----------
CHEMICALS - SPECIALTY (0.3%)
Grace (W.R.) & Co. .......................... 3,442 178,124
Great Lakes Chemical Corp. .................. 2,566 119,960
Morton International, Inc. .................. 5,582 227,467
Nalco Chemical Co. .......................... 2,706 97,754
Sigma-Aldrich Corp. ......................... 2,002 125,000
----------
748,305
----------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
COMMUNICATION - EQUIPMENT MANUFACTURERS (2.2%)
Andrew Corp. (a) ............................ 2,334 $ 123,848
Bay Networks, Inc. (a) ...................... 7,669 160,090
Cabletron Systems, Inc. (a) ................. 6,217 206,715
Cisco Systems, Inc. (a) ..................... 25,502 1,622,565
DSC Communications Corp. (a) ................ 4,579 81,850
General Instrument Corp. (a) ................ 5,424 117,294
Lucent Technologies Inc. .................... 25,062 1,159,118
Northern Telecom Ltd. ....................... 10,094 624,566
Scientific-Atlanta, Inc. .................... 3,016 45,240
Tellabs, Inc. (a) ........................... 7,104 267,288
3Com Corp. (a) .............................. 6,881 504,893
----------
4,913,467
----------
COMPUTER - SOFTWARE & SERVICES (3.3%)
Autodesk, Inc. .............................. 1,823 51,044
Automatic Data Processing, Inc. ............. 11,363 487,189
Ceridian Corp. (a) .......................... 2,625 106,312
Computer Associates
International, Inc. ....................... 14,321 712,470
Computer Sciences Corp. (a) ................. 2,981 244,815
First Data Corp. ............................ 17,680 645,320
Microsoft Corp. (a) ......................... 47,131 3,894,199
Novell Inc. (a) ............................. 13,595 128,728
Oracle Corp. (a) ............................ 25,988 1,084,999
Shared Medical Systems Corp. ................ 913 44,965
----------
7,400,041
----------
COMPUTER SYSTEMS (3.6%)
Amdahl Corp. (a) ............................ 4,582 55,557
Apple Computer, Inc. (a) .................... 4,950 103,331
Compaq Computer Corp. (a) ................... 10,530 781,853
Data General Corp. (a) ...................... 1,559 22,606
Dell Computer Corp. (a) ..................... 7,162 380,481
Digital Equipment Corp. (a) ................. 6,027 219,232
EMC Corp. (a) ............................... 9,051 299,814
Hewlett-Packard Co. ......................... 40,255 2,022,814
Intergraph Corp. (a) ........................ 1,840 18,860
International Business
Machines Corp. ............................ 20,409 3,081,759
Seagate Technology (a) ...................... 9,954 393,183
Silicon Graphics Inc. (a) ................... 6,845 174,547
Sun Microsystems (a) ........................ 14,442 370,979
Tandem Computers Inc. (a) ................... 4,545 62,494
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMPUTER SYSTEMS (Continued)
Unisys Corp. (a) ............................ 6,803 $ 45,920
----------
8,033,430
----------
CONGLOMERATES (0.3%)
Tenneco, Inc. ............................... 6,849 309,061
Textron Inc. ................................ 3,177 299,432
----------
608,493
----------
CONTAINERS - METAL & GLASS (0.1%)
Ball Corp. .................................. 1,222 31,772
Crown Cork & Seal Co., Inc. ................. 5,006 272,201
----------
303,973
----------
CONTAINERS - PAPER (0.1%)
Bemis Co., Inc. ............................. 2,023 74,598
Stone Container Corp. ....................... 3,875 57,641
Temple-Inland Inc. .......................... 2,174 117,668
----------
249,907
----------
COSMETICS (0.9%)
Alberto-Culver Co. Class B .................. 1,090 52,320
Avon Products, Inc. ......................... 5,310 303,334
Gillette Co. ................................ 17,511 1,361,480
International Flavors &
Fragrances Inc. ........................... 4,327 194,715
----------
1,911,849
----------
DRUGS (4.1%)
Lilly (Eli) & Co. ........................... 21,574 1,574,902
Merck & Co., Inc. ........................... 47,584 3,771,032
Pfizer Inc. ................................. 25,317 2,098,146
Pharmacia & Upjohn, Inc. .................... 20,045 794,283
Schering-Plough Corp. ....................... 14,470 936,933
----------
9,175,296
ELECTRIC POWER COMPANIES (2.8%)
American Electric Power Co., Inc. ........... 7,389 303,873
Baltimore Gas & Electric Co. ................ 5,822 155,739
Carolina Power & Light Co. .................. 6,007 219,256
Central & South West Corp. .................. 8,219 210,612
Cinergy Corp. ............................... 6,234 208,060
Consolidated Edison
Co. of New York, Inc. ..................... 9,214 269,510
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
ELECTRIC POWER COMPANIES (Continued)
Dominion Resources, Inc. .................... 6,932 $ 266,882
DTE Energy Co. .............................. 5,748 186,092
Duke Power Co. .............................. 8,073 373,376
Edison International ........................ 17,069 339,246
Entergy Corp. ............................... 8,928 247,752
FPL Group, Inc. ............................. 7,202 331,292
General Public Utilities Corp. .............. 4,693 157,802
Houston Industries Inc. ..................... 9,290 210,186
Niagara Mohawk
Power Corp. (a) ........................... 5,717 56,455
Northern States Power Co. ................... 2,677 122,807
Ohio Edison Co. ............................. 5,966 135,726
Pacific Gas & Electric Co. .................. 16,326 342,846
PacifiCorp .................................. 11,588 237,554
PECO Energy Co. ............................. 8,703 219,751
PP&L Resources, Inc. ........................ 6,254 143,842
Public Service Enterprise
Group Inc. ................................ 9,554 260,346
Southern Co. (The) .......................... 26,646 602,866
Texas Utilities Co. ......................... 8,839 360,189
Unicom Corp. ................................ 8,484 230,128
Union Electric Co. .......................... 4,006 154,231
-----------
6,346,419
-----------
ELECTRICAL EQUIPMENT (3.9%)
AMP Inc. .................................... 8,523 327,070
Emerson Electric Co. ........................ 8,839 855,173
General Electric Co. ........................ 65,056 6,432,412
General Signal Corp. ........................ 1,959 83,747
Grainger (W.W.), Inc. ....................... 2,013 161,543
Honeywell, Inc. ............................. 4,969 326,712
Raychem Corp. ............................... 1,756 140,700
Thomas & Betts Corp. ........................ 2,078 92,211
Westinghouse Electric Corp. ................. 16,684 331,595
-----------
8,751,163
-----------
ELECTRONIC - DEFENSE (0.0%) (b)
EG&G, Inc. .................................. 1,866 37,553
-----------
ELECTRONIC - INSTRUMENTATION (0.1%)
Perkin-Elmer Corp. .......................... 1,672 98,439
Tektronix, Inc. ............................. 1,263 64,729
-----------
163,168
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
ELECTRONIC - SEMICONDUCTORS (3.1%)
Advanced Micro
Devices, Inc. (a) ......................... 5,210 $ 134,157
Applied Materials, Inc. (a) ................. 7,023 252,389
Intel Corp. ................................. 32,408 4,243,423
LSI Logic Corp. (a) ......................... 5,107 136,612
Micron Technology, Inc. ..................... 8,225 239,553
Motorola, Inc. .............................. 23,236 1,426,110
National Semiconductor
Corp. (a) ................................. 5,398 131,576
Texas Instruments, Inc. ..................... 7,449 474,874
----------
7,038,694
----------
ENGINEERING & CONSTRUCTION (0.1%)
Fluor Corp. ................................. 3,264 204,816
Foster Wheeler Corp. ........................ 1,587 58,917
----------
263,733
----------
ENTERTAINMENT (1.4%)
King World
Productions, Inc. (a) ..................... 1,449 53,432
Time Warner Inc. ............................ 22,472 842,700
Viacom, Inc. Class B (a) .................... 14,037 489,540
Walt Disney Co. (The) ....................... 26,703 1,859,197
----------
3,244,869
----------
FINANCIAL - MISCELLANEOUS (2.3%)
American Express Co. ........................ 18,723 1,057,850
American General Corp. ...................... 8,166 333,785
Dean Witter, Discover & Co. ................. 6,512 431,420
Federal Home Loan
Mortgage Corp. ............................ 7,031 774,289
Federal National
Mortgage Association ...................... 42,918 1,598,696
Green Tree Financial Corp. .................. 5,426 209,579
MBIA Corp. .................................. 1,710 173,137
MBNA Corp. .................................. 8,722 361,963
Transamerica Corp. .......................... 2,629 207,691
----------
5,148,410
----------
FOOD DISTRIBUTORS (0.1%)
Fleming Cos., Inc. .......................... 1,449 24,995
Supervalu Inc. .............................. 2,712 76,953
Sysco Corp. ................................. 7,109 231,931
----------
333,879
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
FOODS (2.9%)
Archer-Daniels-Midland Co. .................. 21,395 $ 470,690
Campbell Soup Co. ........................... 9,212 739,263
ConAgra, Inc. ............................... 9,530 474,117
CPC International Inc. ...................... 5,653 438,107
General Mills, Inc. ......................... 6,208 393,432
Heinz (H.J.) Co. ............................ 14,569 520,842
Hershey Foods Corp. ......................... 5,989 262,019
Kellogg Co. ................................. 8,331 546,722
Quaker Oats Co. ............................. 5,341 203,626
Ralston-Ralston Purina Group ................ 4,162 305,387
Sara Lee Corp. .............................. 18,986 707,228
Unilever, N.V ............................... 6,319 1,107,405
Wrigley (Wm.) Jr. Co. ....................... 4,538 255,262
----------
6,424,100
----------
GOLD (0.5%)
Barrick Gold Corp. .......................... 14,019 403,047
Battle Mountain Gold Co. .................... 8,871 60,988
Echo Bay Mines Ltd. ......................... 5,501 36,444
Homestake Mining Co. ........................ 5,744 81,852
Newmont Mining Corp. ........................ 3,951 176,807
Placer Dome Inc. ............................ 9,381 204,037
Santa Fe Pacific Gold Corp. ................. 5,203 79,996
----------
1,043,171
----------
HARDWARE & TOOLS (0.1%)
Black & Decker Corp. ........................ 3,424 103,148
Snap-On, Inc. ............................... 2,455 87,459
Stanley Works (The) ......................... 3,489 94,203
----------
284,810
----------
HEALTH CARE - DIVERSIFIED (3.9%)
Abbott Laboratories ......................... 30,755 1,560,816
Allergan, Inc. .............................. 2,537 90,381
American Home
Products Corp. ............................ 25,100 1,471,488
Bristol-Myers Squibb Co. .................... 19,762 2,149,117
Johnson & Johnson ........................... 52,404 2,607,099
Mallinckrodt Group Inc. ..................... 2,919 128,801
Warner-Lambert Co. .......................... 10,672 800,400
----------
8,808,102
----------
HEALTH CARE - HMOs (0.2%)
Humana Inc. (a) ............................. 6,384 122,094
---------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
HEALTH CARE - HMOs (Continued)
United Healthcare Corp. ..................... 7,171 $ 322,695
----------
444,789
----------
HEALTH CARE - MISCELLANEOUS (0.3%)
ALZA Corp. (a) .............................. 3,358 86,888
Amgen Inc. (a) .............................. 10,489 570,339
Beverly Enterprises, Inc. (a) ............... 3,974 50,669
Manor Care, Inc. ............................ 2,481 66,987
----------
774,883
HEAVY TRUCKS & PARTS (0.3%)
Cummins Engine Co., Inc. .................... 1,607 73,922
Dana Corp. .................................. 3,975 129,684
Eaton Corp. ................................. 3,018 210,506
ITT Industries, Inc. ........................ 4,658 114,121
Navistar International
Corp. (a) ................................. 2,939 26,818
PACCAR Inc. ................................. 1,550 105,400
----------
660,451
----------
HOMEBUILDING (0.0%) (b)
Centex Corp. ................................ 1,104 41,538
Kaufman & Broad Home Corp. .................. 1,561 20,098
Pulte Corp. ................................. 1,049 32,257
----------
93,893
HOSPITAL MANAGEMENT (0.6%)
Columbia/HCA
Healthcare Corp. ............................ 26,323 1,072,662
Tenet Healthcare Corp. (a) .................. 8,520 186,375
----------
1,259,037
----------
HOTEL - MOTEL (0.4%)
Harrah's Entertainment,
Inc. (a) .................................. 4,046 80,414
Hilton Hotels Corp. ......................... 9,834 256,913
ITT Corp. (a) ............................... 4,645 201,477
Marriott International Inc. ................. 5,062 279,676
----------
818,480
----------
HOUSEHOLD - FURNISHINGS & APPLIANCES (0.1%)
Armstrong World
Industries, Inc. .......................... 1,461 101,540
Maytag Corp. ................................ 3,935 77,716
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
HOUSEHOLD - FURNISHINGS & APPLIANCES (Continued)
Whirlpool Corp. ............................. 2,874 $ 134,000
----------
313,256
----------
HOUSEHOLD PRODUCTS (2.1%)
Clorox Co. (The) ............................ 2,021 202,858
Colgate-Palmolive Co. ....................... 5,831 537,910
Kimberly-Clark Corp. ........................ 11,084 1,055,751
Procter & Gamble Co. (The) .................. 27,001 2,902,607
----------
4,699,126
----------
HOUSEWARES (0.2%)
Newell Co. .................................. 6,194 195,111
Rubbermaid Inc. ............................. 5,992 136,318
Tupperware Corp. ............................ 2,385 127,896
----------
459,325
----------
INSURANCE BROKERS (0.3%)
Alexander & Alexander
Services Inc. ............................. 1,857 32,265
Aon Corp. ................................... 4,223 262,354
Marsh & McLennan Cos., Inc. ................. 2,885 300,040
----------
594,659
----------
INVESTMENT BANK/BROKERAGE (0.5%)
Merrill Lynch & Co., Inc. ................... 6,620 539,530
Morgan Stanley Group Inc. ................... 6,046 345,378
Salomon Inc. ................................ 4,229 199,291
----------
1,084,199
----------
LEISURE TIME (0.0%) (b)
Brunswick Corp. ............................. 3,904 93,696
----------
93,696
----------
LIFE INSURANCE (0.6%)
Aetna Inc. .................................. 5,875 470,000
Jefferson-Pilot Corp. ....................... 2,827 160,079
Lincoln National Corp. ...................... 4,111 215,827
Providian Corp. ............................. 3,641 187,056
Torchmark Corp. ............................. 2,821 142,461
UNUM Corp. .................................. 2,828 204,323
USLIFE Corp. ................................ 1,360 45,220
----------
1,424,966
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
MACHINE TOOLS (0.0%) (b)
Cincinnati Milacron Inc. .................... 1,561 $ 34,147
Giings & Lewis, Inc. ........................ 1,284 16,531
----------
50,678
----------
MACHINERY - DIVERSIFIED (0.8%)
Briggs & Stratton Corp. ..................... 1,139 50,116
Case Corp. .................................. 2,823 153,854
Caterpillar Inc. ............................ 7,546 567,837
Cooper Industries Inc. ...................... 4,315 181,769
Deere & Co. ................................. 10,300 418,438
Harnischfeger Industries, Inc. .............. 1,868 89,898
Ingersoll-Rand Co. .......................... 4,311 191,839
NACCO Industries, Inc. Class A .............. 345 18,457
Thermo Electron Corp. (a) ................... 2,700 111,375
Timken Co. (The) ............................ 1,244 57,068
----------
1,840,651
----------
MAJOR REGIONAL BANKS (4.8%)
Banc One Corp. .............................. 17,086 734,698
Bank of Boston Corp. ........................ 5,974 383,829
Bank of New York Co., Inc. (The) ............ 15,289 516,004
Barnett Banks, Inc. ......................... 7,599 312,509
Boatmen's Bancshares, Inc. .................. 6,161 397,384
Comerica Inc. ............................... 4,195 219,713
CoreStates Financial Corp. .................. 8,723 452,506
Fifth Third Bancorp ......................... 4,054 254,642
First Bank System, Inc. ..................... 5,551 378,856
First Union Corp. ........................... 11,246 832,204
Fleet Financial Group, Inc. ................. 10,311 514,261
KeyCorp ..................................... 9,126 460,863
Mellon Bank Corp. ........................... 5,110 362,810
National City Corp. ......................... 8,710 390,861
NationsBank Corp. ........................... 11,422 1,116,501
Norwest Corp. ............................... 14,454 628,749
PNC Bank Corp. .............................. 13,394 503,949
Republic New York Corp. ..................... 2,181 178,024
SunTrust Banks, Inc. ........................ 8,923 439,458
U.S. Bancorp ................................ 6,079 273,175
Wachovia Corp. .............................. 6,656 376,064
Wells Fargo & Co. ........................... 3,687 994,568
----------
10,721,628
----------
MANUFACTURED HOUSING (0.0%) (b)
Fleetwood Enterprises Inc. .................. 1,416 38,940
----------
MANUFACTURING - DIVERSIFIED (1.0%)
AlliedSignal Inc. ........................... 11,065 741,355
Crane Co. ................................... 1,845 53,520
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
MANUFACTURING - DIVERSIFIED (Continued)
Dover Corp. ................................. 4,494 $ 225,824
Illinois Tool Works Inc. .................... 4,790 382,601
Johnson Controls, Inc. ...................... 1,607 133,180
Millipore Corp. ............................. 1,715 70,958
Pall Corp. .................................. 4,485 114,367
Parker-Hannifin Corp. ....................... 2,961 114,739
TRINOVA Corp. ............................... 1,097 39,903
Tyco International Ltd. ..................... 6,013 317,937
-----------
2,194,384
-----------
MEDICAL PRODUCTS (1.0%)
Bard (C.R.), Inc. ........................... 2,291 64,148
Bausch & Lomb Inc. .......................... 2,197 76,895
Baxter International Inc. ................... 10,704 438,864
Becton, Dickinson & Co. ..................... 4,935 214,056
Biomet, Inc. ................................ 4,625 69,953
Boston Scientific Corp. (a) ................. 7,000 420,000
Guidant Corp. ............................... 2,912 165,984
Medtronic, Inc. ............................. 9,441 641,988
St. Jude Medical, Inc. (a) .................. 3,194 136,144
United States Surgical Corp. ................ 2,466 97,099
-----------
2,325,131
-----------
METALS - MISCELLANEOUS (0.3%)
ASARCO Inc. ................................. 1,631 40,571
Cyprus Amax Minerals Co. .................... 3,636 84,992
Freeport-McMoRan
Copper & Gold Inc. Class B ................ 7,631 227,976
Inco Ltd. ................................... 6,605 210,534
Phelps Dodge Corp. .......................... 2,587 174,623
-----------
738,696
-----------
MISCELLANEOUS (1.4%)
Airtouch Communications, Inc. (a) ........... 19,620 495,405
American Greetings Corp. Class A ............ 2,986 84,728
Corning Inc. ................................ 9,120 421,800
Harcourt General, Inc. ...................... 2,798 129,058
Harris Corp. ................................ 1,572 107,879
Jostens, Inc. ............................... 1,515 32,004
Minnesota Mining &
Manufacturing Co. ......................... 16,526 1,369,592
Pioneer Hi-Bred
International, Inc. ....................... 3,265 228,550
TRW, Inc. ................................... 5,045 249,727
Whitman Corp. ............................... 4,156 95,069
-----------
3,213,812
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
MONEY CENTER BANKS (2.9%)
BankAmerica Corp. ........................... 14,137 $ 1,410,166
Bankers Trust New York Corp. ................ 3,121 269,186
Chase Manhattan Corp. ....................... 17,232 1,537,956
Citicorp .................................... 18,536 1,909,208
First Chicago Corp. ......................... 12,484 671,015
Morgan (J.P.) & Co., Inc. ................... 7,311 713,736
-----------
6,511,267
-----------
MULTI-LINE INSURANCE (1.7%)
American International
Group, Inc. ............................... 18,462 1,998,511
CIGNA Corp. ................................. 3,035 414,657
ITT Hartford Group, Inc. .................... 4,651 313,943
Travelers Group Inc. ........................ 25,226 1,144,630
-----------
3,871,741
-----------
NATURAL GAS DISTRIBUTORS & PIPELINES (0.9%)
Coastal Corp. ............................... 4,155 203,076
Columbia Gas System, Inc. ................... 2,159 137,366
Consolidated Natural Gas Co. ................ 3,637 200,944
Eastern Enterprises ......................... 770 27,239
Enron Corp. ................................. 9,853 424,911
ENSERCH Corp. ............................... 2,690 61,870
NICOR Inc. .................................. 1,998 71,429
NorAm Energy Corp. .......................... 5,325 81,872
ONEOK Inc. .................................. 1,077 32,310
Pacific Enterprises ......................... 3,251 98,749
PanEnergy Corp. ............................. 5,912 266,040
Peoples Energy Corp. ........................ 1,406 47,628
Sonat, Inc. ................................. 3,343 172,164
Williams Cos., Inc. (The) ................... 6,184 231,919
-----------
2,057,517
-----------
OFFICE EQUIPMENT & SUPPLIES (0.6%)
Alco Standard Corp. ......................... 5,056 261,016
Moore Corp. Ltd. ............................ 4,027 82,050
Pitney Bowes Inc. ........................... 5,861 319,425
Xerox Corp. ................................. 12,730 669,916
-----------
1,332,407
-----------
OIL & GAS DRILLING (0.1%)
Helmerich & Payne, Inc. ..................... 940 48,998
Rowan Cos., Inc. (a) ........................ 3,274 74,074
-----------
123,072
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
OIL - EXPLORATION & PRODUCTION (0.3%)
Burlington Resources Inc. ................... 4,970 $ 250,364
Oryx Energy Co. (a) ......................... 3,996 98,901
Santa Fe Energy
Resources, Inc. (a) ....................... 3,481 48,299
Union Pacific
Resources Group, Inc. ..................... 9,866 288,580
----------
686,144
----------
OIL - INTEGRATED DOMESTIC (1.3%)
Amerada Hess Corp. .......................... 3,622 209,623
Ashland Inc. ................................ 2,505 109,907
Atlantic Richfield Co. ...................... 6,327 838,328
Kerr-McGee Corp. ............................ 1,974 142,128
Louisiana Land & Exploration
Co. (The) ................................. 1,378 73,895
Occidental Petroleum Corp. .................. 13,004 303,968
Pennzoil Co. ................................ 1,780 100,570
Phillips Petroleum Co. ...................... 10,295 455,554
Sun Co., Inc. ............................... 2,914 71,029
Unocal Corp. ................................ 9,748 396,012
USX-Marathon Group .......................... 11,336 270,647
----------
2,971,661
----------
OIL - INTEGRATED INTERNATIONAL (6.5%)
Amoco Corp. ................................. 19,633 1,580,457
Chevron Corp. ............................... 25,632 1,666,080
Exxon Corp. ................................. 48,905 4,792,690
Mobil Corp. ................................. 15,534 1,899,032
Royal Dutch Petroleum Co. ................... 21,114 3,605,215
Texaco Inc. ................................. 10,416 1,022,070
----------
14,565,544
----------
OIL - WELL EQUIPMENT & SERVICES (0.8%)
Baker Hughes Inc. ........................... 5,603 193,303
Dresser Industries, Inc. .................... 7,105 220,255
Halliburton Co. ............................. 4,952 298,358
McDermott International, Inc. ............... 2,154 35,810
Schlumberger Ltd. ........................... 9,691 967,889
Western Atlas Inc. (a) ...................... 2,082 147,562
----------
1,863,177
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
PAPER & FOREST PRODUCTS (1.0%)
Boise Cascade Corp. ......................... 1,901 $ 60,357
Champion International Corp. ................ 3,760 162,620
Georgia-Pacific Corp. ....................... 3,588 258,336
International Paper Co. ..................... 11,740 474,003
James River Corp. of Virginia ............... 3,388 112,228
Louisiana-Pacific Corp. ..................... 4,211 88,957
Mead Corp. .................................. 2,042 118,691
Potlatch Corp. .............................. 1,108 47,644
Union Camp Corp. ............................ 2,702 129,020
Westvaco Corp. .............................. 4,011 115,316
Weyerhaeuser Co. ............................ 7,798 369,430
Willamette Industries, Inc. ................. 2,177 151,574
----------
2,088,176
----------
PERSONAL LOANS (0.2%)
Beneficial Corp. ............................ 2,137 135,432
Household International, Inc. ............... 3,804 350,919
----------
486,351
----------
PHOTOGRAPHY/IMAGING (0.5%)
Eastman Kodak Co. ........................... 13,257 1,063,874
Polaroid Corp. .............................. 1,817 79,040
----------
1,142,914
----------
POLLUTION CONTROL (0.4%)
Browning-Ferris Industries Inc. ............. 8,380 219,975
Laidlaw Inc. Class B ........................ 12,412 142,738
WMX Technologies, Inc. ...................... 19,407 633,153
----------
995,866
----------
PROPERTY - CASUALTY INSURANCE (1.3%)
Allstate Corp. .............................. 17,488 1,012,118
Chubb Corp. ................................. 6,867 369,101
General Re Corp. ............................ 3,244 511,741
Loews Corp. ................................. 4,542 428,083
MGIC Investment Corp. ....................... 2,342 177,992
SAFECO Corp. ................................ 4,998 197,109
St. Paul Cos., Inc. (The) ................... 3,338 195,690
USF&G Corp. ................................. 4,556 95,107
----------
2,986,941
----------
PUBLISHING (0.1%)
McGraw-Hill Cos., Inc. (The) ................ 3,968 183,024
Meredith Corp. .............................. 1,122 59,186
----------
242,210
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
PUBLISHING - NEWSPAPER (0.5%)
Dow Jones & Co., Inc. ....................... 3,831 $ 129,775
Gannett Co., Inc. ........................... 5,583 418,027
Knight-Rier Inc. ............................ 3,742 143,132
New York Times Co. (The) Class A ............ 3,850 146,300
Times Mirror Co. (The) Class A .............. 4,108 204,373
Tribune Co. ................................. 2,385 188,117
----------
1,229,724
----------
RAILROADS (1.0%)
Burlington Northern Santa Fe Corp. .......... 6,051 522,655
Conrail Inc. ................................ 3,137 312,524
CSX Corp. ................................... 8,344 352,534
Norfolk Southern Corp. ...................... 4,971 434,962
Union Pacific Corp. ......................... 9,654 580,447
----------
2,203,122
----------
RESTAURANTS (0.6%)
Darden Restaurants, Inc. .................... 6,213 54,364
McDonald's Corp. ............................ 27,474 1,243,198
Wendy's International, Inc. ................. 4,957 101,619
----------
1,399,181
----------
RETAIL STORES - APPAREL (0.3%)
Charming Shoppes, Inc. (a) .................. 4,130 20,908
Gap, Inc. (The) ............................. 11,333 341,407
Limited, Inc. (The) ......................... 10,681 196,263
TJX Cos., Inc. (The) ........................ 2,908 137,767
----------
696,345
----------
RETAIL STORES - DEPARTMENT (0.7%)
Dillard Department Stores, Inc.
Class A ................................... 4,487 138,536
Federated Department Stores,
Inc. (a) .................................. 8,117 276,993
May Department Stores Co. ................... 9,862 461,048
Mercantile Stores Co., Inc. ................. 1,437 70,952
Nordstrom, Inc. ............................. 3,231 114,499
Penney (J.C.) Co. Inc. ...................... 8,899 433,826
----------
1,495,854
----------
RETAIL STORES - DRUG (0.3%)
Longs Drug Stores Corp. ..................... 759 37,286
Rite-Aid Corp. .............................. 4,872 193,662
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
RETAIL STORES - DRUG (Continued)
Walgreen Co. ................................ 9,699 $ 387,960
----------
618,908
----------
RETAIL STORES - FOOD CHAIN (0.5%)
Albertson's, Inc. ........................... 9,879 351,939
American Stores Co. ......................... 5,714 233,560
Giant Food, Inc. Class A .................... 2,345 80,903
Great Atlantic & Pacific
Tea Co., Inc. (The) ....................... 1,659 52,881
Kroger Co. (a) .............................. 4,926 229,059
Winn-Dixie Stores, Inc. ..................... 5,988 189,370
----------
1,137,712
----------
RETAIL STORES - GENERAL MERCHANDISE (1.5%)
Dayton-Hudson Corp. ......................... 8,634 338,884
Kmart Corp. (a) ............................. 18,914 196,233
Sears, Roebuck & Co. ........................ 15,414 710,971
Wal-Mart Stores, Inc. ....................... 90,609 2,072,681
----------
3,318,769
----------
RETAIL STORES - SPECIALTY (1.0%)
Autozone, Inc. (a) .......................... 2,800 77,000
Circuit City Stores, Inc. ................... 3,893 117,277
CVS Corp. ................................... 4,157 171,996
Home Depot, Inc. (The) ...................... 18,753 939,994
Lowe's Cos., Inc. ........................... 6,808 241,684
Pep Boys-Manny, Moe & Jack .................. 2,483 76,352
Price/Costco, Inc. (a) ...................... 7,715 193,839
Tandy Corp. ................................. 2,354 103,576
Toys "R" Us, Inc. (a) ....................... 10,759 322,770
Woolworth Corp. (a) ......................... 5,243 114,691
----------
2,359,179
----------
SAVINGS & LOANS (0.2%)
Ahmanson (H.F.) & Co. ....................... 4,179 135,818
Golden West Financial Corp. ................. 2,336 147,460
Great Western Financial Corp. ............... 5,401 156,629
----------
439,907
----------
SHOES (0.3%)
Nike Inc. Class B ........................... 11,336 677,326
Reebok International Ltd. ................... 2,179 91,518
Stride Rite Corp. ........................... 1,881 18,810
----------
787,654
----------
SPECIALIZED SERVICES (0.8%)
Block (H&R), Inc. ........................... 4,137 119,973
Cognizant Corp. ............................. 6,708 221,364
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
COMMON STOCKS (Continued)
SPECIALIZED SERVICES (Continued)
CUC International Inc. (a) .................. 15,505 $ 368,244
Dun & Bradstreet Corp. (The) ................ 6,704 159,220
Ecolab Inc. ................................. 2,519 94,777
HFS Inc. (a) ................................ 4,851 289,847
Interpublic Group of Cos., Inc. ............. 3,096 147,060
National Service Industries, Inc. ........... 1,855 69,331
Safety-Kleen Corp. .......................... 2,215 36,271
Service Corp. International ................. 9,186 257,208
----------
1,763,295
----------
SPECIALTY PRINTING (0.1%)
Deluxe Corp. ................................ 3,254 106,569
Donnelley (R.R.) & Sons Co. ................. 6,009 188,532
Harland (John H.) Co. ....................... 1,246 41,118
----------
336,219
----------
STEEL (0.3%)
Allegheny Teledyne Inc. ..................... 6,815 156,745
Armco Inc. (a) .............................. 4,271 17,618
Bethlehem Steel Corp. (a) ................... 4,473 40,257
Inland Steel Industries Inc. ................ 1,902 38,040
Nucor Corp. ................................. 3,466 176,766
USX-U.S. Steel Group ........................ 3,270 102,596
Worthington Industries, Inc. ................ 3,511 63,637
----------
595,659
----------
TELECOMMUNICATIONS - LONG DISTANCE (2.2%)
AT&T Corp. .................................. 64,014 2,784,609
MCI Communications Corp. .................... 27,102 885,897
Sprint Corp. ................................ 17,091 681,504
WorldCom, Inc. (a) .......................... 23,257 606,135
----------
4,958,145
----------
TELEPHONE (4.1%)
ALLTEL Corp. ................................ 7,463 234,152
Ameritech Corp. ............................. 21,794 1,321,261
Bell Atlantic Corp. ......................... 17,260 1,117,585
BellSouth Corp. ............................. 39,045 1,576,442
Frontier Corp. .............................. 3,500 79,188
GTE Corp. ................................... 38,103 1,733,687
NYNEX Corp. ................................. 17,176 826,595
Pacific Telesis Group ....................... 16,827 618,392
SBC Communications Inc. ..................... 23,959 1,239,878
US West, Inc. ............................... 18,641 601,172
----------
9,348,352
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=============================
<S> <C> <C>
TEXTILES - APPAREL MANUFACTURERS (0.2%)
Fruit of the Loom, Inc. Class A (a) ......... 2,973 $ 112,602
Liz Claiborne, Inc. ......................... 2,913 112,515
Russell Corp. ............................... 1,573 46,797
Springs Industries, Inc. Class A ............ 757 32,551
VF Corp. .................................... 2,507 169,222
-----------
473,687
-----------
TOBACCO (1.9%)
American Brands, Inc. ....................... 6,765 335,713
Philip Morris Cos., Inc. .................... 32,236 3,630,580
UST Inc. .................................... 7,425 240,384
-----------
4,206,677
-----------
TOYS (0.2%)
Hasbro Inc. ................................. 3,422 133,030
Mattel, Inc. ................................ 10,867 301,560
-----------
434,590
-----------
TRANSPORTATION - MISCELLANEOUS (0.1%)
Federal Express Corp. (a) ................... 4,483 199,493
Ryder System, Inc. .......................... 3,100 87,188
-----------
286,681
-----------
TRUCKERS (0.0%) (b)
Caliber System, Inc. ........................ 1,575 30,319
-----------
Total Common Stocks
(Cost $168,760,654) ....................... 222,139,814(c)
-----------
Principal
Amount
==============
SHORT-TERM INVESTMENT (1.2%)
U.S. GOVERNMENT (1.2%)
United States Treasury Bill
4.85%, due 02/06/97 (d) ................... $ 2,700,000 2,686,953
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Value
=================
<S> <C> <C>
Total Short-Term Investment
(Cost $2,686,953) ......................... $ 2,686,953
-------------
Total Investments
(Cost $171,447,607) (e) ................... 99.6 224,826,767(f)
Cash and Other Assets,
Less Liabilities .......................... 0.4 922,844
------- -------------
Net Assets .................................. 100.0% $ 225,749,611
===== =============
</TABLE>
<TABLE>
<CAPTION>
Contracts Unrealized
Long Depreciation
=================================
<S> <C> <C>
FUTURES CONTRACTS (0.0%)(b)
Standard & Poor's 500
March 1997 ................................ 7 $ (27,059)
-------------
Total Futures Contracts
(Settlement Value $2,605,750) ............. $ (27,059)(g)
=============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) The combined market value of common stocks and settlement value of Standard
& Poor's 500 Index futures contracts represents 99.6% of net assets.
(d) Segregated as collateral for futures contracts.
(e) The cost for Federal income tax purposes is $171,510,534.
(f) At December 31, 1996 net unrealized appreciation was $53,316,233, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $55,129,220 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,812,987.
(g) Represents the difference between the value of the contracts at the time
they were opened and the value at December 31, 1996.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value
(identified cost $171,447,607) ............................. $224,826,767
Cash ........................................................ 95,895
Receivables:
Fund shares sold .......................................... 942,802
Investment securities sold ................................ 564,593
Dividends and interest .................................... 357,370
Unamortized organization expense ............................ 49,511
Other assets ................................................ 89
------------
Total assets ............................................. 226,837,027
------------
LIABILITIES:
Payables:
Investment securities purchased ........................... 468,936
Fund shares redeemed ...................................... 295,943
NYLIFE Distributors ....................................... 80,070
NYLIFE Inc. ............................................... 33,000
Transfer agent ............................................ 20,000
Management ................................................ 18,994
Custodian ................................................. 10,355
Accrued expenses ............................................ 109,018
Variation margin payable on futures contracts ............... 51,100
------------
Total liabilities ........................................ 1,087,416
------------
Net Assets .................................................. $225,749,611
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized ...................... $ 96,592
Additional paid-in capital .................................. 171,093,963
Accumulated undistributed net
realized gain on investments ............................... 1,206,955
Net unrealized appreciation on investments .................. 53,352,101
------------
Net assets applicable to outstanding shares ................. $225,749,611
============
Shares of beneficial interest outstanding ................... 9,659,232
============
Net asset value per share outstanding ....................... $ 23.37
Maximum sales charge (3.00% of offering price) .............. 0.72
------------
Maximum offering price per share outstanding ................ $ 24.09
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................. $ 3,202,159
Interest .................................................. 988,955
------------
Total income ............................................. 4,191,114
Expenses:
Administration ............................................ 655,140
Distribution .............................................. 409,463
Management ................................................ 163,785
Transfer agent ............................................ 134,464
Shareholder communication ................................. 78,197
Registration .............................................. 57,847
Custodian ................................................. 53,572
Professional .............................................. 22,086
Amortization of organization costs ........................ 12,514
Trustees .................................................. 5,556
Miscellaneous ............................................. 7,679
------------
Total expenses before reimbursement ...................... 1,600,303
Expense reimbursement from Administrator .................... (290,022)
------------
Net expenses ............................................. 1,310,281
------------
Net investment income ....................................... 2,880,833
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions ..................................... 1,714,160
Futures transactions ...................................... 3,791,136
------------
Net realized gain on investments ............................ 5,505,296
------------
Net change in unrealized appreciation
on investments:
Security transactions ..................................... 25,949,065
Futures transactions ...................................... (316,584)
------------
Net unrealized gain on investments .......................... 25,632,481
------------
Net realized and unrealized gain on investments ............. 31,137,777
------------
Net increase in net assets resulting from operations ........ $ 34,018,610
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $29,396.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ......................... $ 2,880,833 $ 1,367,940
Net realized gain on investments .............. 5,505,296 2,374,186
Net change in unrealized appreciation
on investments ............................... 25,632,481 20,397,129
------------- -------------
Net increase in net assets resulting
from operations ............................. 34,018,610 24,139,255
------------- -------------
Dividends and distributions to shareholders:
From net investment income .................... (4,255,511) (1,179,184)
From net realized gain on investments ......... (6,641,480) (1,183,983)
------------- -------------
Total dividends and distributions to shareholders (10,896,991) (2,363,167)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares .............. 99,873,971 31,920,582
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions .................. 10,618,632 2,322,832
------------- -------------
110,492,603 34,243,414
Cost of shares redeemed ....................... (17,172,280) (8,272,732)
------------- -------------
Increase in net assets derived from
capital share transactions ................ 93,320,323 25,970,682
------------- -------------
Net increase in net assets ................... 116,441,942 47,746,770
NET ASSETS:
Beginning of year ............................... 109,307,669 61,560,899
------------- -------------
End of year ..................................... $ 225,749,611 $ 109,307,669
============= =============
Accumulated undistributed net
investment income ............................. $ -- $ 1,369,359
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
December 20
September 1 1990(a)
Year ended Year ended through Year ended August 31 through
December 31, December 31, December 31 ----------------------------- August 31
1996 1995 1994* 1994 1993 1992 1991
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period . $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41 $ 9.45
-------- -------- ------- ------- ------- ------- -------
Net investment income .................. 0.30 0.24 0.09 0.27 0.22 0.18 0.11
Net realized and unrealized gain (loss)
on investments ....................... 3.92 4.82 (0.48) 0.37 1.47 0.56 1.85
-------- -------- ------- ------- ------- ------- -------
Total from investment operations ....... 4.22 5.06 (0.39) 0.64 1.69 0.74 1.96
-------- -------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income ............. (0.54) (0.27) -- (0.25) (0.18) (0.17) --
From net realized gain on investments .. (0.82) (0.27) -- (0.18) (0.02) (0.04) --
-------- -------- ------- ------- ------- ------- -------
Total dividends and distributions ...... (1.36) (0.54) -- (0.43) (0.20) (0.21) --
-------- -------- ------- ------- ------- ------- -------
Reverse Share Split .................... 1.36 0.54 -- 0.43 0.20 0.21 --
-------- -------- ------- ------- ------- ------- -------
Net asset value at end of period ....... $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41
======== ======== ======= ======= ======= ======= =======
Total investment return (b) ............ 22.04% 35.91% (2.68%) 4.59% 13.91% 6.49% 20.74%
Ratios (to average net assets)
/Supplemental Data:
Net investment income ................ 1.8% 1.7% 2.0%+ 1.9% 1.9% 1.8% 1.9%+
Expenses ............................. 0.8% 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Expenses (before reimbursement) ...... 1.0% 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate ................ 3% 4% 2% 12% 4% 3% 1%
Average commission rate paid ........... $ 0.0465 (c) (c) (c) (c) (c) (c)
Net assets at end of period (in 000's) . $225,750 $109,308 $61,561 $62,828 $62,921 $41,742 $23,534
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charge and is not annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
MainStay Equity Index Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Equity Index Fund (the "Fund"). The Fund's objective is to
provide investment results that correspond to the total return performance of
publicly traded common stocks represented by the Standard & Poor's 500 Composite
Stock Price Index.
Note 2--Significant Account Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share is calculated on each
day the New York Stock Exchange (the "Exchange") is open for trading as of close
of regular trading on the Exchange. The net asset value per share is determined
by taking the assets attributable to the shares, subtracting the liabilities
attributable to the shares, and dividing the result by the outstanding shares.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges as nearly as possible in the manner described in (a) by reference to
their principal exchange, including the National Association of Securities
Dealers National Market System, (c) by appraising over-the-counter securities
quoted on the National Association of Securities Dealers NASDAQ system (but not
listed on the National Market System) at the bid price supplied through such
system, (d) by appraising over-the-counter securities not quoted on the NASDAQ
system at prices supplied by the pricing agent or brokers selected by the
Adviser, if these prices are deemed to be representative of market values at the
regular close of business of the New York Stock Exchange. Short-term securities
which mature in more than 60 days are valued at current market quotations.
Short-term securities which mature in 60 days or less are valued at amortized
cost if their term to maturity at purchase was 60 days or less, or by amortizing
the difference between market value on the 61st day prior to maturity and value
on maturity date if their original term to maturity at purchase exceeded 60
days.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss
24
<PAGE>
Notes to Financial Statements
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract. The Fund invests in stock
index futures contracts to gain full exposure to changes in stock market prices
to fulfill its investment objective.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts and variation margin reflect the
extent of the Fund's involvement in long futures positions. Risks arise from the
possible imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets, and the possible inability of
counterparties to meet the terms of their contracts. However, the Fund's
activities in futures contracts are conducted through regulated exchanges which
minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $5,319 and $31,047 have been reclassified from
accumulated distribution in excess of net investment income and accumulated net
realized gain on investments, respectively, to additional paid-in capital.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
annually. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
The Fund went ex-dividend on January 2, 1996 and December 27, 1996 and also
underwent a reverse share split on those days. The reverse share split rates
were 0.9715 and 0.9663, respectively, per share outstanding, calculated on fund
shares outstanding immediately after reinvestment of dividends.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Organization costs. Costs incurred in connection with the Fund's initial
organization and registration totalled $124,798. Such costs are being amortized
over ten years beginning at the commencement of operations of the Fund. This
period corresponds to the guarantee period of the original offering (See Note
6).
In the event NYLIFE Securities Inc. redeems any of the shares initially
purchased, the proceeds of such redemption will be reduced by the proportionate
amount of the unamortized deferred organizational expenses which the number of
shares redeemed by it bears to the total number of initial shares purchased by
it.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made.
25
<PAGE>
MainStay Equity Index Fund
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Management and Administration Fees. Monitor Capital Advisors, Inc.
("Monitor") acts as investment manager to the Fund under an Investment
Management Agreement. Monitor is a registered investment adviser and an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life").
NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned
subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.10% and 0.40%, respectively, of the average daily net assets of the
Fund.
Effective January 1, 1996, in the event the total expenses of the Fund
(including 12b-1 fees) for any fiscal year exceed 0.80% of the value of the
Fund's average annual net assets, the Administrator will reduce its fee payable
by the Fund by the difference between the Fund's total expenses and 0.80%. This
reduction amounted to $290,022 for the year ended December 31, 1996. This fee
waiver is voluntary and may be terminated at any time.
The Investment Management and Administration Agreements for the Fund also
provide that in the event the expenses of the Fund (including the fees of the
Adviser and the Administrator, but excluding interest, taxes, organization
expenses, litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the limits set by any state
that regulates mutual fund expenses, the Adviser and Administrator each will
reduce their fee payable by the Fund by 20% and 80%, respectively, of such
excess. The expenses of the Fund did not exceed the most restrictive expense
limitation for the year ended December 31, 1996.
Distribution Fees. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors (the "Distributor"). The Fund has adopted a
Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Plan, the Distributor receives payments from the Fund at an
annual rate of 0.25% of the average daily net assets of the Fund's shares, which
is an expense of the Fund for distribution or service activities as designated
by the Distributor.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
26
<PAGE>
Notes to Financial Statements continued
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charge. The Fund was advised that the amount of sales charge retained by
NYLIFE Distributors was $1,968,993 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At December 31, 1996, NYLIFE Securities owned shares of the Fund with a
net asset value of $233,700, which represents 0.10% of the Fund's net assets at
year end.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $16,383.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $3,866 for the year ended December
31, 1996.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $102,913 and $4,535, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
----- -----
<S> <C> <C>
Shares sold ........................................ 4,773 1,845
Shares issued in reinvestment
of dividends and distributions .................... 491 171
----- -----
5,264 2,016
Shares redeemed .................................... 810 502
Reduction of shares due to
reverse share split ............................... 503 174
----- -----
Net increase ....................................... 3,951 1,340
===== =====
</TABLE>
27
<PAGE>
MainStay Equity Index Fund
Note 6--Guarantee:
NYLIFE provides a guarantee to the effect that if, 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share purchased, plus the value of all cumulative
reinvested dividends and distributions attributable to such share paid during
that 10-year period ("Guaranteed Share"), is less than the public offering price
initially paid for the share ("Guaranteed Amount"), NYLIFE will pay to the
transfer agent for disbursement to shareholders an amount equal to the
difference between the net asset value of each such Guaranteed Share outstanding
and held by shareholders as of the close of business on the Guarantee Date and
the Guaranteed Amount for each such share. The Fund is not a party to the
guarantee.
28
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Equity Index Fund (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
29
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
EQUITY INDEX FUND graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating internation stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
30
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
31
<PAGE>
- -------------------------------------------------------------------------------
MAINSTAY
Equity Index Fund
- -------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer,
and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] New York Life
This report is provided for the information of shareholders of the MainStay
Equity Index Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSAN07 (297)
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Government Fund Highlights 3
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Portfolio Composition 7
Returns & Lipper Rankings 9
Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Accountants 21
The MainStay Funds 22
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity
market. The bond market took a back seat while the financial community and
investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial
Average broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Government Fund Highlights
1996 MARKET HIGHLIGHTS
o The total return of the government market was slightly positive for 1996,
with performance mostly determined by rising interest rates and supply
dynamics
o The mortgage market was a strong relative performer during 1996,
outperforming the Treasury market
o The addition of two 10-year Treasury auctions and one 30-year Treasury
auction affected supply, pricing, and demand within the government market
1996 FUND HIGHLIGHTS
o One-year total returns of 1.97% and 1.25% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Class A shares outperformed the average Lipper+ general U.S. government
fund, while the Class B shares underperformed the average Lipper general
U.S. government fund
o Security selection in Treasuries and mortgage-backed securities helped add
value throughout the year
o Seasoned mortgage-backed securities, particularly those issued in earlier
years, helped contribute positively to performance of the Fund
o The Fund closed the year with approximately 37% in mortgage pass-throughs
and about 6% invested in commercial mortgages and manufactured housing
mortgages
o Fund track record exceeded 10 years
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested In The MainStay
Government Fund Versus Lehman Brothers
Government Bond Index And Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Lehman Brothers
Government MainStay
Year-end Bond Index* Government Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
05/1/86 $10,000 $ 9,550 $10,000
12/86 $10,567 $10,115 $10,193
12/87 $10,799 $10,471.8 $10,644
12/88 $11,559 $11,142.3 $11,113
12/89 $13,203 $12,498.7 $11,629
12/90 $14,355 $13,363.8 $12,355
12/91 $16,554 $15,154.7 $12,724
12/92 $17,751 $15,733.2 $13,100
12/93 $19,643 $16,658.1 $13,459
12/94 $18,979 $16,183.7 $13,809
12/95 $22,460 $18,834.5 $14,168
12/96 $23,082 $19,205 $14,637
</TABLE>
[GRAPHIC] MainStay Government Fund
[GRAPHIC] Lehman Brothers Government Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Lehman Brothers
Government MainStay
Year-end Bond Index* Government Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
05/1/86 $10,000 $10,000 $10,000
12/86 $10,567 $10,591.6 $10,193
12/87 $10,799 $10,965.2 $10,644
12/88 $11,559 $11,667.3 $11,113
12/89 $13,203 $13,087.6 $11,629
12/90 $14,355 $13,993.5 $12,355
12/91 $16,554 $15,868.8 $12,724
12/92 $17,751 $16,474.6 $13,100
12/93 $19,643 $17,443 $13,459
12/94 $18,979 $16,946.3 $13,809
12/95 $22,460 $19,605.7 $14,168
12/96 $23,082 $19,851.7 $14,637
</TABLE>
[GRAPHIC] MainStay Government Fund
[GRAPHIC] Lehman Brothers Government Bond Index*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (5/1/86) through
12/31/94. The Class B graph assumes an initial investment of $10,000 made on
5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge
(CDSC), as it would not apply for the period shown. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* The Lehman Brothers Government Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed-rate debt issues that are
rated investment-grade by Moody's, Standard & Poor's, or Fitch, in that
order, with at least one year to maturity. The Index is unmanaged and results
assume the reinvestment of all income and capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Government Fund Team
GOVERNMENT FUND TEAM
Christopher Harms, Edward Munshower, and Ravi Akhoury
After a spectacular year in 1995, the market had high expectations for
government bonds in 1996. Moderate interest rates, controlled inflation, and
hopes for a balanced budget amendment provided a promising backdrop--but also
the potential for considerable volatility if any one of these factors failed to
materialize.
Despite a slight interest rate reduction of 25 basis points by the Federal
Reserve (Fed) early in the year, interest rates began to rise due to stalled
budget talks and a strengthening economy. By midyear, 30-year Treasury yields
had risen 95 basis points, cutting prices by 11%. Through the second half of the
year, Treasury yields declined somewhat, allowing investors to end the year with
modest, but positive returns.
The introduction of additional auctions for 10- and 30-year Treasuries redefined
supply dynamics within the U.S. government bond market and created opportunities
for selective movements among newer and older issues. Mortgage-backed securities
provided strong performance relative to Treasuries throughout the year and
offered attractive investment opportunities. For the 12 months ended December
31, 1996, the average Lipper++ general U.S. government fund returned 1.72%.
Given this context, how did the MainStay Government Fund do in 1996?
For the one-year period ended December 31, 1996, the MainStay Government Fund
provided total returns of 1.97% and 1.25% for Class A and Class B shares,
respectively. This respectively ranked our Class A shares and Class B shares in
the second and third quartiles against all Lipper government funds.
What factors were the primary influence on the bond market during the year?
Rising interest rates were the most influential factor in the market. After the
Fed eased rates slightly on January 31, 1996, signs of a strengthening economy
led to rising rates throughout the first half. Interest rates declined through
much of the third quarter, resulting in a bond rally during the election season.
In December, however, rates
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Auction
- -------
The competitive bidding process through which Treasury securities are sold.
Mortgage-backed securities
- --------------------------
Securities representing interests in "pools" of mortgages in which principal and
interest payments by the holders of underlying fixed- or adjustable-rate
mortgages are, in effect, "passed through" to investors (net of fees paid to the
issuer or guarantor of the securities).
- ----------
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
Easing/Tightening
- -----------------
When the Federal Reserve lowers interest rates on benchmark securities it is
said to be "easing" or making borrowing more affordable. When it raises interest
rates, it is said to be "tightening" or making borrowing more expensive.
Duration
- --------
A measure of price sensitivity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.
- --------------------------------------------------------------------------------
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Total
Return
Year-end %
- ---------------------------------------------
<S> <C>
12/86 5.92
12/87 3.53
12/88 6.40
12/89 12.17
12/90 6.92
12/91 13.40
12/92 3.81
12/93 5.88
12/94 -2.85
12/95 16.38 Class A
12/95 15.69 Class B
12/96 1.97 Class A
12/96 1.25 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote* on page 9
for more information on performance.
- --------------------------------------------------------------------------------
climbed again, ending the year 80 basis points higher than where they began.
How did you respond to this mixed interest rate scenario?
With rates rising in the first half and falling in the second, we kept the
Fund's duration adjustments relatively modest. Duration adjustments in the
second and fourth quarters added value, but were offset in the first and third
quarters. Overall, the Fund's duration strategy was relatively conservative,
ranging between 4 3/4 and 5 1/4 years.
What else affected the performance of the Government Fund?
The change in the Treasury's auction cycle created new supply dynamics in the
government market during the last half of the year. We started the year heavily
invested in new issues, which helped to add value. In the second quarter, we
moved to older issues, recognizing that greater supply of new securities could
reduce demand. This move also had a positive effect on the Fund's performance.
In the fourth quarter, the Treasury announced that inflation-indexed bonds would
be introduced in January 1997. While this hasn't yet had an impact on government
bonds, we anticipate that it may be an important factor in the coming year.
Given the weakness of Treasuries, what did you do to help enhance yields?
We used a variety of strategies to help enhance yields throughout the year. We
reduced the Fund's commitment to Treasuries from about 72% of the portfolio in
January to just 39% at year-end. Concurrently, we increased the Fund's holdings
among mortgage-backed securities, which outperformed Treasuries every month. In
particular, we concentrated on older issues, which had lower
6
<PAGE>
- -------------------------------------------------------------------------------
[GRAPHIC]
PORTFOLIO COMPOSTION AS OF 12/31/96
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------
<S> <C>
U.S. Treasury Notes 24.0%
Federal National Mortgage Association 26.4%
U.S. Treasury Bonds 23.1%
Government National Mortgage Association 13.7%
Asset-Backed Securities 8.2%
Federal Home Loan Mortage Corporation 3.2%
All Other 1.4%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
- --------------------------------------------------------------------------------
volatility, tamer prepayments, and in most cases, attractive yield advantages.
This strategy had a positive influence on performance throughout the year.
Were there other steps that you took?
Yes. The year of origination was an underlying theme in our mortgage-backed
security selection. Within the seasoned mortgage market, we purchased securities
that were issued specifically in certain years. This strategy added considerable
value as spreads narrowed and market participants changed their purchasing
strategies from general to specific years. We believe that many seasoned
mortgages continue to offer attractive relative value.
Were you only in traditional mortgage-backed securities?
In terms of issuance, nontraditional mortgage products of 1994 and 1995 are now
the traditional products. In the fourth quarter, we added modest positions in
AAA-rated home-equity loans and low-balance loans, which contributed positively
to performance. Toward the end of the year, we purchased Fannie Mae multifamily
project loans and Ginnie Mae adjustable-rate mortgages. We closed the year with
37% in mortgage pass-throughs and 6% of the portfolio in pools of commercial
mortgages and manufactured housing mortgages.
Why are you moving into these areas?
These AAA-rated securities offer attractive yields and liquidity versus
governments. We seek to identify ways to help enhance yield, consistent with our
strict risk-management disciplines.
What do you see ahead for 1997?
We believe that the 30-year Treasury bond is likely to trade in a range from
6.5% to
[GRAPHIC]
7
<PAGE>
7.5%. We will continue to monitor the economy and inflation expectations as
potential catalysts to determine a change in the direction of interest rates.
Whatever develops, we'll continue to seek investment-grade securities, and
manage the Government Fund to pursue current income, consistent with safety of
principal for our shareholders.
Ravi Akhoury
Edward Munshower
Portfolio Managers
[GRAPHIC]
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 1.97% 4.85% 6.62% 6.76%
Class B 1.25% 4.58% 6.48% 6.63%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A -2.62% 3.89% 6.13% 6.30%
Class B -3.75% 4.24% 6.48% 6.63%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 80 out of n/a n/a n/a
170 funds
Class B 114 out of 65 out of 30 out of 28 out of
170 funds 71 funds 40 funds 35 funds
Average Lipper
U.S. government
bond fund 1.72% 5.88% 6.92% 7.32%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $8.06 $0.5007 $0.0000
Class B $8.04 $0.4642 $0.0000
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum CDSC of up to 5%
if shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
Lipper averages listed above are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 12/31/96. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
[GRAPHIC]
9
<PAGE>
MainStay Government Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===================================
<S> <C> <C>
LONG-TERM INVESTMENTS (98.6%)+
ASSET-BACKED SECURITIES (8.2%)
AUTO LEASE (1.7%)
World Omni Automobile Lease
Securitization Trust
Series 1996-A Class A1
6.30%, due 6/25/02 .................... $ 13,300,000 $ 13,345,752
------------
COMMERCIAL MORTGAGES (1.7%)
Asset Securitization Corp.
Series 1996-MD6 Class A1-B
6.88%, due 11/13/26 .................... 13,295,000 13,348,978
------------
FIRST MORTGAGE LOAN (0.7%)
Independent National
Mortgage Corp.
Series 1996-D Class A2
7.00%, due 5/25/26 .................... 6,000,000 5,978,460
------------
MANUFACTURED HOUSING LOANS (4.1%)
Green Tree Financial Corp.
Series 1996-10 Class A6
7.30%, due 11/15/28 ................... 23,000,000 22,590,370
Series 1996-8 Class A7
8.05%, due 10/15/27 ................... 10,000,000 10,281,300
------------
32,871,670
------------
Total Asset-Backed Securities
(Cost $66,340,898) .................... 65,544,860
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (90.4%)
FEDERAL HOME LOAN MORTGAGE
ASSOCIATION GOLD (MORTGAGE PASS-
THROUGH SECURITY) (0.6%)
7.00%, due 12/1/01 .................... 4,800,000 4,849,488
------------
FEDERAL HOME LOAN MORTGAGE
CORPORATION (COLLATERALIZED
MORTGAGE OBLIGATIONS) (2.6%)
Series 1858 Class B
6.00%, due 12/15/05 ................... 11,905,000 11,774,759
Series 1783-A Class A
8.00%, due 2/15/00 .................... 8,628,497 8,819,963
------------
20,594,722
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (COLLATERALIZED
MORTGAGE OBLIGATIONS) (4.0%)
Series 1993-224 Class PD
5.25%, due 8/25/15 .................... $ 15,667,000 $ 15,534,770
Series 1993-93 Class C
5.50%, due 2/25/06 .................... 16,982,078 16,775,067
------------
32,309,837
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (22.4%)
6.00%, due 11/1/23 .................... 14,537,059 13,573,979
6.00%, due 11/21/26
ARM COFI TBA (a)(c)(d) ................ 17,565,000 17,477,175
6.605%, due 2/25/07 TBA (a) ........... 9,465,000 9,283,461
6.52%, due 12/1/03 .................... 5,725,000 5,662,826
7.00%, due 8/1/11-1/1/24 .............. 56,251,570 55,959,808
6.595%, due 1/31/03 TBA (a) ........... 5,650,000 5,611,410
6.765%, due 1/1/07 .................... 12,824,000 12,717,561
6.80%, due 1/31/04 TBA (a) ............ 8,820,000 8,855,721
6.83%, due 1/1/07 TBA (a) ............. 11,425,000 11,380,671
6.835%, due 1/22/07 TBA (a) ........... 11,610,000 11,568,901
9.00%, due 1/1/05-6/1/25 .............. 25,507,924 26,910,100
------------
179,001,613
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE PASS-
THROUGH SECURITIES) (11.3%)
6.50%, due 10/15/23-12/15/23 .......... 8,111,724 7,777,115
8.00%, due 12/15/23 ................... 35,503,711 36,430,003
9.50%, due 12/15/17 ................... 9,420,694 10,277,411
9.50%, due 1/23/27 TBA (a) ............ 33,000,000 35,877,270
------------
90,361,799
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE PASS-
THROUGH SECURITIES) (2.4%)
6.50%, due 1/20/23 ARM (c) ............ 5,720,906 5,829,947
6.50%, due 2/20/23 ARM (c) ............ 6,429,157 6,559,733
7.00%, due 11/20/21 ARM (c) ........... 2,843,416 2,908,275
7.00%, due 11/20/22 ARM (c) ........... 3,871,819 3,948,055
------------
19,246,010
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL AGENCIES (Continued)
UNITED STATES TREASURY BONDS (23.1%)
6.25%, due 8/15/23 (b) ................ $ 33,261,000 $ 31,182,187
6.50%, due 11/15/26 ................... 58,850,000 57,755,979
8.875%, due 8/15/17 ................... 44,807,000 55,343,814
11.25%, due 2/15/15 ................... 27,295,000 40,307,072
------------
184,589,052
------------
UNITED STATES TREASURY NOTES (24.0%)
5.50%, due 11/15/98 ................... 23,490,000 23,332,147
5.625%, due 11/30/00 .................. 16,000,000 15,709,920
6.375%, due 3/31/01-8/15/02 ........... 87,565,000 88,147,985
6.50%, due 5/15/05 (b) ................ 8,065,000 8,119,197
8.125%, due 2/15/98 ................... 55,160,000 56,590,850
------------
191,900,099
------------
Total U.S. Government &
Federal Agencies
(Cost $718,934,611) .................... 722,852,620
------------
Total Long-Term Investments
(Cost $785,275,509) .................... 788,397,480
------------
SHORT-TERM INVESTMENTS (12.2%)
COMMERCIAL PAPER (3.4%)
American Express Credit Corp.
6.552%, due 1/2/97 .................... 27,555,000 27,555,000
------------
Total Commercial Paper
(Cost $27,555,000) .................... 27,555,000
------------
U.S. GOVERNMENT & FEDERAL AGENCY (8.8%)
FEDERAL HOME LOAN BANK (8.7%)
6.82%, due 1/14/97 (b) ................ 69,900,000 69,731,541
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
UNITED STATES TREASURY NOTE (0.1%)
8.75%, due 10/15/97 ................... $ 500,000 $ 511,955
------------
Total U.S. Government &
Federal Agency
(Cost $70,323,191) ..................... 70,243,496
------------
Total Short-Term Investments
(Cost $97,878,191) ..................... 97,798,496
------------
Total Investments
(Cost $883,153,700) (e) ............... 110.8% 886,195,976(f)
------------- ------------
Liabilities in Excess of Cash
and Other Assets ...................... (10.8) (86,812,633)
------------- ------------
Net Assets .............................. 100.0% $799,383,343
============= ============
</TABLE>
- ----------
(a) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity will be determined upon settlement.
(b) Segregated or partially segregated as collateral for TBA's.
(c) ARM--Adjustable Rate Mortgage. Resets Monthly.
(d) COFI--Cost of Funds Indexed.
(e) The cost for Federal income tax purposes is $888,606,818.
(f) At December 31, 1996 net unrealized depreciation was $2,410,842, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $1,827,530 and aggregate gross unrealized
depreciation of all investments on which there was an excess of cost over
market value of $4,238,372.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value
(identified cost $883,153,700) ........................... $ 886,195,976
Cash ...................................................... 2,746
Receivables:
Interest ................................................ 9,249,449
Investment securities sold .............................. 6,951,255
Fund shares sold ........................................ 466,129
Other Assets .............................................. 566
-------------
Total assets ........................................... 902,866,121
-------------
LIABILITIES:
Payables:
Investment securities purchased ......................... 100,461,553
Fund shares redeemed .................................... 1,715,971
NYLIFE Distributors ..................................... 758,681
Adviser ................................................. 206,639
Transfer agent .......................................... 135,800
Custodian ............................................... 13,564
Trustees ................................................ 6,076
Accrued expenses .......................................... 184,494
-------------
Total liabilities ...................................... 103,482,778
-------------
Net assets ................................................ $ 799,383,343
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A ................................................. $ 20,375
Class B ................................................. 973,900
Addtional paid-in capital ................................. 937,341,211
Accumulated net realized loss on investments .............. (141,994,419)
Net unrealized appreciation on investments ................ 3,042,276
-------------
Net assets ................................................ $ 799,383,343
=============
CLASS A
Net assets applicable to outstanding shares ............... $ 16,413,372
=============
Shares of beneficial interest outstanding ................. 2,037,511
=============
Net asset value per share outstanding ..................... $ 8.06
Maximum sales charge (4.50% of offering price) ............ 0.38
-------------
Maximum offering price per share outstanding .............. $ 8.44
=============
CLASS B
Net assets applicable to outstanding shares ............... $ 782,969,971
=============
Shares of beneficial interest outstanding ................. 97,390,018
=============
Net asset value per share outstanding ..................... $ 8.04
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 64,478,404
------------
Expenses:
Distribution--Class B ..................................... 5,042,552
Administration ............................................ 2,643,801
Advisory .................................................. 2,643,801
Service ................................................... 2,203,176
Transfer agent ............................................ 955,044
Shareholder communication ................................. 332,925
Recordkeeping ............................................. 114,622
Professional .............................................. 103,936
Custodian ................................................. 88,747
Registration .............................................. 46,418
Trustees .................................................. 20,577
Miscellaneous ............................................. 30,271
------------
Total expenses .......................................... 14,225,870
------------
Net investment income ....................................... 50,252,534
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments ............................ (18,412,508)
Net change in unrealized appreciation on investments ........ (24,606,272)
------------
Net realized and unrealized loss on investments ............. (43,018,780)
------------
Net increase in net assets resulting from operations ........ $ 7,233,754
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income ..................... $ 50,252,534 $ 67,902,081
Net realized gain (loss) on investments ... (18,412,508) 30,263,895
Net change in unrealized appreciation
(depreciation) on investments ........... (24,606,272) 50,910,905
--------------- ---------------
Net increase in net assets resulting
from operations ......................... 7,233,754 149,076,881
--------------- ---------------
Dividends to shareholders:
From net investment income:
Class A .................................. (979,480) (587,166)
Class B .................................. (49,047,447) (65,467,814)
In excess of net investment income:
Class A .................................. -- (4,714)
Class B .................................. -- (525,566)
--------------- ---------------
Total dividends to shareholders ........ (50,026,927) (66,585,260)
--------------- ---------------
Capital share transactions: Net proceeds
from sale of shares:
Class A .................................. 10,249,736 18,152,317
Class B .................................. 69,491,869 68,492,581
Net asset value of shares issued to
shareholders in reinvestment of dividends:
Class A .................................. 672,638 395,104
Class B .................................. 36,261,617 46,973,420
--------------- ---------------
116,675,860 134,013,422
Cost of shares redeemed:
Class A .................................. (6,715,743) (6,301,705)
Class B .................................. (270,751,384 (231,727,262)
--------------- ---------------
Decrease in net assets derived from
capital share transactions ........... (160,791,267) (104,015,545)
--------------- ---------------
Net decrease in net assets ............. (203,584,440) (21,523,924)
NET ASSETS:
Beginning of year ........................... 1,002,967,783 1,024,491,707
--------------- ---------------
End of year ................................. $ 799,383,343 $ 1,002,967,783
=============== ===============
Accumulated distribution in excess
of net investment income ................... $ -- $ (530,280)
=============== ===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
--------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Year ended Year ended December 31 ------------------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
------------------ ------------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........... $ 8.41 $ 8.41 $ 7.76 $ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82
------- -------- ------- -------- ---------- ---------- ---------- --------
Net investment income ........... 0.50 0.46 0.58 0.54 0.19 0.57 0.68 0.73
Net realized and unrealized gain
(loss) on investments ......... (0.35) (0.37) 0.65 0.65 (0.29) (0.71) (0.09) 0.07
------- -------- ------- -------- ---------- ---------- ---------- --------
Total from investment operations 0.15 0.09 1.23 1.19 (0.10) (0.14) 0.59 0.80
------- -------- ------- -------- ---------- ---------- ---------- --------
Less dividends and distributions:
From net investment income ...... (0.50) (0.46) (0.58) (0.54) (0.18) (0.57) (0.70) (0.74)
In excess of net
investment income ............. -- -- (0.00)(b) (0.00)(b) -- (0.01) -- --
Return of capital ............... -- -- -- -- -- (0.01) -- --
------- -------- ------- -------- ---------- ---------- ---------- --------
Total dividends and distributions (0.50) (0.46) (0.58) (0.54) (0.18) (0.59) (0.70) (0.74)
------- -------- ------- -------- ---------- ---------- ---------- --------
Net asset value at end of period $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 8.04 $ 8.77 $ 8.88
======= ======== ======= ======== ========== ========== ========== ========
Total investment return (a) ..... 1.97% 1.25% 16.38% 15.69% (1.24%) (1.63%) 6.92% 9.46%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ........ 6.3% 5.7% 7.3% 6.7% 7.1%+ 7.1% 7.8% 8.3%
Expenses ..................... 1.0% 1.6% 1.0% 1.7% 1.7%+ 1.7% 1.7% 1.8%
Portfolio turnover rate ......... 307% 307% 540% 540% 143% 491% 629% 613%
Net assets at end of
period (in 000's) ............. $16,413 $782,970 $12,784 $990,184 $1,024,492 $1,119,586 $1,210,998 $957,010
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Government Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Government Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek a high level of current income,
consistent with safety of principal, by investing primarily in U.S. Government
securities.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.
16
<PAGE>
Notes to Financial Statements
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment would
be made.
Mortgage Dollar Rolls. The Fund enters into mortgage dollar roll transactions
("MDRs") in which it sells mortgage backed securities ("MBS") from its portfolio
to a counterparty from whom it simultaneously agrees to buy a similar security
on a delayed delivery basis. The MDR transactions of the Fund are classified as
purchase and sale transactions. The securities sold in connection with the MDR
are removed from the portfolio and a realized gain or loss is recognized. The
securities the Fund has agreed to acquire are included at market value in the
portfolio of investments and liability for such purchase commitments is included
as payables for investments purchased. The Fund maintains a segregated account
with its custodian containing securities from its portfolio having a value not
less than the repurchase price, including accrued interest. MDR transactions
involve certain risks, including the risk that the MBS returned to the Fund at
the end of the roll, while substantially similar, could be inferior to what was
initially sold to the counterparty.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $304,673 and $9,473,477 have been reclassified
from accumulated distribution in excess of net investment income and accumulated
net realized loss on investments, respectively, to additional paid-in capital
due to paydown reclasses and expiration of capital loss carryover.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. Interest
income is accrued daily except when collection is not expected. Discounts on
securities purchased for the Fund are accreted on the constant yield method over
the life of the respective securities.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
17
<PAGE>
MainStay Government Fund
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.30% of the average daily net assets of the Fund. The Administrator and
Adviser have voluntarily agreed to reduce their combined fees on assets
exceeding $1 billion to 0.55%.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
18
<PAGE>
Notes to Financial Statements continued
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $96,545 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$952,234 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $27,700.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $29,582 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund are charged to the Fund.
The fee for the year ended December 31, 1996 amounted to $114,622.
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $135,741,502, net of losses of $799,797 which have been
deferred for Federal income tax purposes, are available, as shown in the table
below, to the extent provided by regulations to offset future realized gains of
the Fund through 2004. To the extent that these carryforwards are used to offset
future capital gains, it is probable that the capital gains so offset will not
be distributed to shareholders.
19
<PAGE>
MainStay Government Fund
<TABLE>
<CAPTION>
Capital Loss Amount
Available Through (000's)
----------------- --------
<S> <C>
1998 ......................... $ 11,617
2000 ......................... 4,831
2001 ......................... 9,349
2002 ......................... 96,653
2004 ......................... 13,292
--------
$135,742
========
</TABLE>
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of U.S. Government
securities were $2,684,917 and $2,921,754, respectively. Purchases and sales of
securities other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $66,341 and $0,
respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .......................... 1,262 8,590 2,246 8,414
Shares issued in reinvestment
of dividends ....................... 84 4,497 48 5,761
----- ------- ----- ------
1,346 13,087 2,294 14,175
Shares redeemed ...................... 828 33,474 774 28,453
----- ------- ----- -------
Net increase (decrease) .............. 518 (20,387) 1,520 (14,278)
===== ======= ===== =======
</TABLE>
20
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Government Fund (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
21
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating internation stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
22
<PAGE>
<TABLE>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
GOVERNMENT FUND [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
23
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Government Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer,
and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Government Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved. MSAN08 (297)
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay High Yield Corporate Bond Fund
Highlights 3
$10,000 Invested in the MainStay High Yield
Corporate Bond Fund versus S&P 500
and Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 9
Top 10 Holdings 10
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Financial Statements 21
Notes to Financial Statements 25
Report of Independent Accountants 32
The MainStay Funds 34
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay High Yield Corporate Bond Fund Highlights
1996 MARKET HIGHLIGHTS
o High-yield bonds had a relatively strong year, with returns in the low
teens
o The strength of the equity market helped many high-yield issuers improve
credit quality through initial public offerings and other stock offerings
to pay down debt
o Both lower-tier and higher-quality credits showed strengths throughout the
year
o During 1996, defaults in the high-yield sector remained below 1%
1996 FUND HIGHLIGHTS
o One-year total returns of 16.33% and 15.58% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes outperformed the average Lipper+ high current yield fund
for the 12 months ended 12/31/96
o Class A shares and Class B shares ranked in the top 13% and 18%,
respectively, of 148 funds in their Lipper universe for the 12 months ended
12/31/96
o Strong performers included companies that raised equity capital or
benefited from takeovers
o For defensive purposes, the Fund held from 15% to 20% in cash and cash
equivalents throughout the year
o During 1996, the Fund's track record exceeded 10 years
- ----------
+ See footnote and table on page 9 for additional information on Lipper
Analytical Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
High Yield Corporate Bond Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay High Yield
Year-end S&P 500 Corporate Bond Fund Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $ 10,000 $ 9,550.00 $ 10,000
12/86 $ 10,518 $ 10,027.80 $ 10,193
12/87 $ 11,070 $ 10,046.70 $ 10,644
12/88 $ 12,903 $ 11,743.20 $ 11,113
12/89 $ 16,983 $ 11,151.10 $ 11,629
12/90 $ 16,457 $ 10,276.20 $ 12,355
12/91 $ 21,460 $ 13,592.60 $ 12,724
12/92 $ 23,093 $ 16,534.90 $ 13,100
12/93 $ 25,412 $ 20,115.00 $ 13,459
12/94 $ 15,747 $ 20,416.10 $ 13,809
12/95 $ 35,412 $ 24,556.80 $ 14,168
12/96 $ 43,536 $ 28,567.00 $ 14,637
</TABLE>
[GRAPHIC] MainStay High Yield Corporate Bond Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay High Yield
Year-end S&P 500 Corporate Bond Fund Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $ 10,000 $ 10,000.00 $ 10,000
12/86 $ 10,518 $ 10,500.30 $ 10,193
12/87 $ 11,070 $ 10,520.70 $ 10,644
12/88 $ 12,903 $ 12,296.60 $ 11,113
12/89 $ 16,983 $ 11,676.60 $ 11,629
12/90 $ 16,457 $ 10,760.40 $ 12,355
12/91 $ 21,460 $ 14,233.10 $ 12,724
12/92 $ 23,093 $ 14,233.10 $ 13,100
12/93 $ 25,412 $ 17,314.00 $ 13,459
12/94 $ 15,747 $ 21,062.80 $ 13,809
12/95 $ 35,412 $ 25,592.20 $ 14,168
12/96 $ 43,536 $ 29,579.00 $ 14,637
</TABLE>
[GRAPHIC] MainStay High Yield Corporate Bond Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (5/1/86) through
12/31/94. The Class B graph assumes an initial investment of $10,000 made on
5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge
(CDSC), as it would not apply for the period shown. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 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 gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo High Yield Corporate Bond Fund Team
HIGH YIELD CORPORATE BOND FUND TEAM
Denis Laplaige, Steve Tananbaum, and Matt Philo
Generally speaking, 1996 was a strong year for stocks, but a mixed year for
bonds. Government securities ended the first half with negative returns, and
despite a recovery in the second half, underperformed money market instruments
for the year. While mortgage-backed and corporate bonds did somewhat better,
high yield securities appeared to thrive on the strength of the economy, with
strong returns both in the higher-risk and higher-quality ends of the market.
The strength of the equity market was particularly favorable to high yield
bonds, as many companies issued stock to pay down debt. The subsequent increase
in credit quality strengthened a number of issuers and underscored the theme
that "the good tend to get better."
Default rates, which have typically ranged just below 3%, were surprisingly low
in 1996. Following a trend established in 1995, defaults remained under 1%. Over
the course of 1996, the average Lipper++ high current yield fund returned
13.67%.
How did the MainStay High Yield Corporate Bond Fund do in this context?
Very well. The MainStay High Yield Corporate Bond Fund provided total returns of
16.33% and 15.58% for Class A and Class B shares, respectively, for the year
ended December 31, 1996, excluding sales charges. These returns outpaced the
average Lipper peer fund and placed Class A shares among the top 13% of 148
funds, and Class B shares in the top 18% of 148 funds, in the Lipper universe.
How did you manage the Fund to achieve those results?
The primary contributors to performance were careful security selection, seeking
issues with improving credit quality or a stimulus for positive change, and
knowing when to sell. During the first quarter, we concentrated on special
situations, based on short-term events, such as refinancings, including Mesa
Petroleum and GPA Preferred, both of which contributed positively to
performance. We also sold issues such as Waxman Industries and Liggett Group.
After Liggett Group tried to break ranks with other tobacco companies in its
litigation proceedings, we saw that things were not going well for them. We sold
the Fund's holdings at more than 90 cents on the dollar, and the securities
ended the year in the mid-60s. This helped protect investors against potential
losses.
[GRAPHIC]
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its fixed-income securities--or a measure of the general credit risk of
securities in a fixed-income portfolio.
- ----------
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Year-End Total Return %
- ------------------------------------------------
<S> <C>
12/86 5.01
12/87 0.20
12/88 16.89
12/89 -5.04
12/90 -7.85
12/91 32.27
12/92 21.63
12/93 21.65
12/94 1.50
12/95 20.28 Class A
12/95 19.71 Class B
12/96 16.33 Class A
12/96 15.58 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote* on page 9
for more information on performance.
Were there other special events that affected the portfolio?
Yes, we bought Park Communications in the spring of 1996. The company is a
leading broadcaster and runs a number of regional newspapers, which made it an
attractive fit for a number of potential buyers. We bought the bonds based on
the valuation, management strength, and industry fundamentals. Media General
ended up taking over the company, which gave a boost to the Fund's performance.
We sold a number of the acquired securities later in the year with returns
ranging from 20%* to 40%.
With low default rates, was credit quality really a concern?
While few bonds default, it's important to recognize that credit quality is
always a concern in the high yield market. We believe the strong tend to get
stronger and the weak tend to get weaker. So we look primarily for credits that
have a way of improving. In 1996, several mature leveraged buyout values were
able to be realized, including issues such as Newflow and Monarch Marking. In
addition, Selmer, a musical instrument company that's part of the Steinway
Group, and Hosiery Corp. both went public, using the proceeds of their initial
public offerings to pay down outstanding debt. The result was an improvement in
credit quality, which was ultimately good for the portfolio.
Were there more refinancings in 1996 than in previous years?
With the tremendous inflow of money into equities, the market was very receptive
to new stock issues in 1996. Naturally, that made it easier for companies to go
in that direction. American Standard was another company that announced an
equity offering to pay down debt. The result was positive for the portfolio, in
terms of credit quality and total return.
Did you concentrate primarily in issues that were improving their credit
quality?
Actually, we split the portfolio into four groups of securities, depending on
quality and other factors. While we tried to focus on improving credits, the
lower-quality issues also did extremely well in 1996. Lower-tier issues such as
GPA Preferred, Spanish
[GRAPHIC]
- ----------
* Returns reflect performance during the period securities were held in the
Fund.
6
<PAGE>
[GRAPHIC]
DIVERSIFICATION BY INDUSTRY - TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Sector Percentage
- --------------------------------------------------------
<S> <C>
Media 13.9%
Casinos 6.1%
Cable 5.6%
Cellular Telephone 4.4%
Telecommunications Services 4.5%
All Other 65.5%
</TABLE>
- ----------
Note: Actual percentages will vary over time. Excludes U.S. government & agency
issues.
Broadcasting, and Microcell provided returns between 35% and 50% for the year.
We sold Microcell when it reached our target price and now the Fund is largely
out of that position. The Fund also did well with improving credits. Le Groupe
Videotron, for example, announced the sale of its U.K. subsidiary. This BB-rated
credit was initially trading at a yield spread of about 300 basis points over
Treasuries, but we believed that after the sale, it could become an
investment-grade credit. In fact, that's just what happened. Now the bonds are
trading at a 150 basis point spread to Treasuries and providing total returns in
the mid-to-upper teens.
Can you explain what the spread over Treasuries has to do with credit quality?
High yield bonds, by their very nature, have lower credit quality and higher
risk. To compensate investors for the higher risk, issuers need to pay higher
yields than Treasury bonds, which are generally considered "riskless" credits.
In general, the larger the yield spread over Treasuries, the higher the
perceived risk. So when a company reduces its spread, it's generally because the
quality has improved. But investors who own the bonds along the way may also
benefit from price appreciation.
Were there other credit improvement stories during the year?
Owens-Illinois also tightened its spread over Treasuries significantly over the
year. Another case was Trizec, a large real estate company specializing in
commercial and retail properties. Its parent company, Horsham, proposed a
merger, seeking to buy the 52% of Trizec stock it didn't own. The result was a
substantial infusion of cash, which allowed Trizec to improve its credit rating
resulting in a positive return for the Fund.
Were there any industry events that affected the portfolio?
Well, there was an expansion in radio and TV, which benefited Park
Communications, Allbritton Communications, and Spanish Broadcasting. There was
also a contraction in the cable industry that didn't affect the portfolio too
much, since we were underweighted in domestic cable. It's important to remember,
however, that we don't select industries and then pick
[GRAPHIC]
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
high yield securities and Treasury issues--or between different securities in a
single sector, such as short-term and intermediate-term Treasury issues.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be underweight in a sector when that portion of the portfolio
is smaller than the sector's share of the market as a whole.
7
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Bottom-up
investing
- ---------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
Cash position
- -------------
The portion of a portfolio held in highly liquid securities (often referred to
as "cash"), either for defensive purposes or to take advantage of investment
opportunities as they may arise.
Certain of the Fund's investments may be speculative.
- --------------------------------------------------------------------------------
companies within them. Instead, we're bottom-up investors, selecting each
security based on its individual merits. As a result of our security selection
process, we happened to be overweighted in media and underweighted in domestic
cable, but that resulted entirely from the individual merits of the particular
issues.
It sounds like the Fund had an outstanding year. Did you have any
disappointments?
We didn't have any major losses in the portfolio. Probably our biggest
disappointment was having too large a cash position--between 15% and
20%--throughout the year. We follow strict investment disciplines, and
unfortunately, the number of issues that met our criteria was limited, so we
couldn't replace our winners fast enough. Of course, in hindsight, it's easy to
say we could have done better by having more of our cash invested. But along the
way, it wasn't clear that things would go so well. Nevertheless, our strong
security selection more than compensated for any setbacks caused by our
defensive positioning.
Looking ahead, what do you see?
We're going to remain cautious, since we believe defaults have been very low for
an unusually long time. While we may invest a higher percentage of our cash as
opportunities arise, we do not anticipate changing our criteria. Since
high-yield securities are much less liquid than equities, any dislocations could
lead to a correction. So we're going to concentrate on the higher tiers of the
high-yield market, seeking companies that are likely to benefit from initial
public offerings or other infusions of capital that can help them improve their
balance sheets. Naturally, we'll continue to seek maximum current income through
diversified high-yield investments, with our focus on what we deem to be an
appropriate balance of risk and reward.
Denis Laplaige
Steve Tananbaum
Portfolio Managers
QUALITY BREAKDOWN AS OF 12/31/96
[GRAPHIC]
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Rating Percentage
- --------------------------------------------------------
<S> <C>
BBB 2.0%
BB 12.4%
B 41.5%
CCC 7.8%
D 0.1%
Other 10.3%
U.S. Government Agency 24.3%
Cash & Equivalents 1.6%
</TABLE>
- ----------
Note: Actual percentages will vary over time. Bond quality ratings provided by
Standard &Poor's. See the prospectus for details.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 16.33% 16.01% 11.04% 10.80%
Class B 15.58% 15.75% 10.91% 10.69%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 11.09% 14.95% 10.53% 10.33%
Class B 10.58% 15.53% 10.91% 10.69%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 19 out of n/a n/a n/a
148 funds
Class B 26 out of 1 out of 6 out of 6 out of
148 funds 63 funds 43 funds 36 funds
Average Lipper high
current yield fund 13.67% 12.10% 9.38% 9.29%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $8.27 $0.7105 $0.1786
Class B $8.26 $0.6663 $0.1786
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum CDSC of up to 5%
if shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
Lipper averages listed above are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 12/31/96. For
the 5-year and 10-year periods ended 12/31/96, the Fund's Class B shares
placed among the top 1.6% and 14.0%, respectively, of Lipper high current
yield funds. Class A shares were not in existence for these periods. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. Dollar amount represents the aggregate value of the
Fund's long positions and does not include the value of the Fund's short
positions, if any. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed. Short-term securities
and U.S. Government and federal agency issues are excluded. See Portfolio of
Investments for specific type of security held.
Top 10 Holdings as of 12/31/96
<TABLE>
<CAPTION>
HOLDING AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C>
Le Groupe Videotron Ltee, 10.625%, DUE 2/15/05 $48,633,200
Owens-Illinois, Inc., 11.00%,due 12/1/03 44,055,000
Trizec Finance LTD., 10.875%,due 10/15/05 41,821,470
United International Holdings, Inc., (zero coupon),due 11/15/99 39,139,200
U.S. Cellular Corp., (zero coupon), due 6/15/15 37,918,692
Affinity Group, Inc., 11.50%,due 10/15/03 37,767,600
Casino America, Inc., 12.50%,due 8/1/03 33,084,805
Thermadyne Holdings Corp., 10.75%, due 11/1/03 32,210,160
TeleWest, PLC, (zero coupon), due 10/1/07 31,606,515
General Media, Inc., 10.625, due 12/31/00 31,593,105
</TABLE>
10
<PAGE>
10 Largest Purchases for the 12 months ended 12/31/96
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
- -------------------------------------------------------------------------------------------
<S> <C>
TeleWest, PLC, (zero coupon),due 10/1/07 $61,857,360
Casino America, Inc., 11.50%, due 6/1/01 and 12.50%, due 8/1/03 60,021,343
Spanish Broadcasting System, Inc., 7.50%,due 6/15/02, 12.25%,due 6/1/01
Series A Preferred Stock and Warrants expiration 6/29/99, 6/30/99 52,784,375
Cablevision Systems Corp., 10.50%,due 5/15/16, 11.75%, Series H
Preferred
Stock and 11.125%, Series M Preferred Stock 51,825,671
Le Groupe Videotron Ltee, 10.625%,due 2/15/05 and Common Stock 48,080,999
Comcast Cellular Corp., Series A, (zero coupon),due 3/5/00, Series B
(zero coupon), due 3/5/00 and Class A Common Stock 46,280,952
Time Warner, Inc., 10.25%, Series K Preferred Stock 46,200,000
Owens-Illinois, Inc., 11.00%,due 12/1/03 43,400,000
Microcell Telecommunications, Inc., (zero coupon),due 6/1/06, 14.00%
beginning 12/1/01 42,298,650
Unisys Corp., 8.875%,due 7/15/97, 10.625%, due 10/1/99, 11.75%
due 10/15/04, and 15.00%, due 7/1/97 39,415,299
<CAPTION>
10 Largest Sales for the 12 months ended 12/31/96
- -------------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
- -------------------------------------------------------------------------------------------
<S> <C>
Cablevision Systems Corp., 10.50%,due 5/15/16, 11.75%, Series H Preferred
Stock and 11.125%, Series M Preferred Stock $58,093,589
Time Warner, Inc., 10.25%, Series K Preferred Stock 46,776,806
TeleWest, PLC, (zero coupon),due 10/1/07 37,194,078
Microcell Telecommunications, Inc., (zero coupon),due 6/1/06, 14.00%
beginning 12/1/01 32,504,388
Continental Cablevision, Inc., 11.00%,due 6/1/07 31,616,223
Nextel Communications, Inc., (zero coupon), due 8/15/04 and Class A
Common Stock 30,174,063
Grupo Televisa, S.A., (zero coupon), due 5/15/08 and Series A
11.375%, due 5/15/03 26,298,281
Horseshoe Gaming LLC, Series B, 12.75%,due 9/30/00 25,651,688
Spanish Broadcasting System, Inc., 7.50%,due 6/15/02 24,922,000
Envirodyne Industries, Inc., 10.25%, due 12/1/01 and 12.00%,
due 6/15/00 24,391,661
</TABLE>
[GRAPHIC]
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. Dollar amount represents the aggregate value of the
Fund's long positions and does not include the value of the Fund's short
positions, if any. A shareholder owns shares of the Fund but does not own a
direct interest in any of the specific securities listed. Short-term securities
and U.S. Government and federal agency issues are excluded. See Portfolio of
Investments for specific type of security held.
11
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
LONG-TERM BONDS (71.9%)+
CONVERTIBLE BONDS (3.9%)
CELLULAR TELEPHONE (1.7%)
Cellular Communications, Inc.
(zero coupon), due 7/27/99 ........................... $ 6,800,000 $ 5,601,500
United States Cellular Corp.
(zero coupon), due 6/15/15 ........................... 113,400,000 37,918,692
---------------
43,520,192
---------------
PUBLISHING (1.2%) Hollinger, Inc.
Series U.S.
(zero coupon), due 10/5/13 (o) ...................... 88,525,000 31,315,719
---------------
TELECOMMUNICATION SERVICES (1.0%)
PLD Telekom, Inc.
9.00%, due 6/1/06 (c) ............................... 3,020,000 3,020,000
Rogers Communications, Inc.
(zero coupon), due 5/20/13 (o) ...................... 37,000,000 14,430,000
Tele-Communications
International, Inc.
4.50%, due 2/15/06 .................................. 10,000,000 7,475,000
---------------
24,925,000
---------------
Total Convertible Bonds
(Cost $98,734,712) 99,760,911
---------------
CORPORATE BONDS (47.4%)
AEROSPACE (0.9%)
K&F Industries, Inc.
11.875%, due 12/1/03 ................................ 7,175,000 7,731,063
Sequa Corp.
8.75%, due 12/15/01 ................................. 1,742,000 1,742,000
9.375%, due 12/15/03 ................................ 12,100,000 12,342,000
9.625%, due 10/15/99 ................................ 1,000,000 1,030,000
---------------
22,845,063
---------------
AUTO PARTS (1.3%
CSK Auto, Inc.
11.00%, due 11/1/06 (c) ............................. 19,920,000 20,916,000
Great Dane Holdings, Inc.
12.75%, due 8/1/01 .................................. 13,270,000 13,170,475
---------------
34,086,475
---------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
BUILDING MATERIALS (1.1%)
American Standard, Inc.
(zero coupon), due 6/1/05
10.50%, beginning 6/1/98 ............................ $ 12,950,000 $ 12,043,500
Associated Materials, Inc.
11.50%, due 8/15/03 ................................. 13,250,000 13,581,250
Miles Homes Services, Inc.
12.00%, due 4/1/01 .................................. 1,000,000 830,000
Triangle Pacific Corp.
10.50%, due 8/1/03 .................................. 1,500,000 1,582,500
---------------
28,037,250
---------------
BUILDINGS (1.7%)
Greystone Homes, Inc.
10.75%, due 3/1/04 .................................. 20,424,000 20,883,540
NVR, Inc.
11.00%, due 4/15/03 ................................. 20,606,000 21,636,300
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(e)(h)(i) ............................ 108,500 27,125
---------------
42,546,965
---------------
CABLE (2.5%)
Heartland Wireless
Communications, Inc.
14.00%, due 10/15/04 (c) ............................ 18,845,000 19,551,688
United International Holdings, Inc.
(zero coupon), due 11/15/99 ......................... 54,360,000 39,139,200
Series B
(zero coupon), due 11/15/99 ......................... 8,080,000 5,817,600
---------------
64,508,488
---------------
CASINOS (5.4%)
Argosy Gaming Co.
13.25%, due 6/1/04 .................................. 21,755,000 20,286,537
Casino America, Inc.
11.50%, due 6/1/01 (p) .............................. 10,000,000 8,900,000
12.50%, due 8/1/03 .................................. 34,918,000 33,084,805
Casino Magic Finance Corp.
11.50%, due 10/15/01 ................................ 26,683,000 24,148,115
El Comandante Capital Corp.
11.75%, due 12/15/03 ................................ 14,025,000 13,604,250
Horseshoe Gaming LLC, Series B
12.75%, due 9/30/00 ................................. 13,954,000 15,140,090
President Riverboat Casinos, Inc.
13.00%, due 9/15/01 ................................. 23,866,000 19,928,110
Treasure Bay Gaming & Resorts
Class A
(zero coupon)
due 1/1/50 (a)(e)(h)(i) ............................. 9,886,075 2,534,888
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
CORPORATE BONDS (Continued)
CASINOS (Continued)
Trump Castle Funding, Inc.
13.875%, due 11/15/05 (g) ........................... $ 216 $ 215
---------------
137,627,010
---------------
CELLULAR TELEPHONE (1.6%)
Celcaribe, S.A
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98 ........................... 2,700,000 2,308,500
(zero coupon), due 3/15/04
13.50%, beginning 3/15/98
(a)(c)(y1) .......................................... 192 2,265,600
Centennial Cellular Corp.
8.875%, due 11/1/01 ................................. 18,618,000 17,966,370
10.125%, due 5/15/05 ................................ 10,350,000 10,427,625
PriCellular Wireless Corp.
Series B
(zero coupon), due 11/15/01
14.00%, beginning 11/15/97 .......................... 9,355,000 9,167,900
---------------
42,135,995
---------------
CHEMICALS (0.6%)
Uniroyal Chemical Co., Inc.
9.00%, due 9/1/00 ................................... 14,450,000 14,775,125
---------------
CHILD CARE SERVICES (0.8%)
La Petite Holdings Corp.
9.625%, due 8/1/01 .................................. 20,292,000 20,494,920
---------------
COMPUTERS & OFFICE EQUIPMENT (0.5%)
Unisys Corp.
10.625%, due 10/1/99 ................................ 3,500,000 3,626,875
11.75%, due 10/15/04 ................................ 5,250,000 5,604,375
15.00%, due 7/1/97 .................................. 2,500,000 2,612,500
---------------
11,843,750
---------------
CONGLOMERATES (0.5%)
Figgie International, Inc.
9.875%, due 10/1/99 ................................. 11,750,000 12,043,750
---------------
CONSUMER DURABLES (0.6%)
Selmer Co., Inc.
11.00%, due 5/15/05 ................................. 13,355,000 14,523,562
11.00%, due 5/15/05 (c) ............................. 1,500,000 1,601,250
---------------
16,124,812
---------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
CONTAINERS (2.1%)
Owens-Illinois, Inc.
11.00%, due 12/1/03 ................................. $ 39,600,000 $ 44,055,000
Silgan Holdings, Inc.
13.25%, due 12/15/02 ................................ 5,377,000 5,410,606
Stone Container Corp.
11.875%, due 12/1/98 ................................ 1,900,000 2,002,125
12.625%, due 7/15/98 ................................ 3,000,000 3,172,500
---------------
54,640,231
---------------
ELECTRIC UTILITIES (0.5%)
Midland Funding Corp. I
Series C-94
10.33%, due 7/23/02 ................................. 5,508,309 5,866,349
Panda Funding Corp.
11.625%, due 8/20/12 (c) ............................ 7,660,000 7,928,100
---------------
13,794,449
---------------
ENERGY (0.4%)
Nuevo Energy Co.
12.50%, due 6/15/02 ................................. 10,000,000 10,750,000
---------------
EQUIPMENT FINANCING (1.6%) Atlas Air, Inc.
12.25%, due 12/1/02 ................................. 11,112,000 12,389,880
GPA Delaware, Inc.
8.75%, due 12/15/98 ................................. 27,110,000 27,652,200
---------------
40,042,080
---------------
FOOD, BEVERAGES & TOBACCO (2.1%)
All-American Bottling Corp.
13.00%, due 8/15/01 ................................. 15,915,000 15,539,406
Curtice-Burns Foods, Inc.
12.25%, due 2/1/05 .................................. 6,400,000 6,720,000
Great American Cookie Co.
Series B
10.875%, due 1/15/01 ................................ 4,633,000 4,239,195
National Tobacco Holding, LLC
13.50%, due 5/17/03
16.50%, beginning 6/1/01
(e)(m)(p) ........................................... 12,563,468 10,446,524
Penn Traffic Co.
8.625%, due 12/15/03 ................................ 10,733,000 8,827,893
11.50%, due 4/15/06 ................................. 10,377,000 9,131,760
---------------
54,904,778
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
CORPORATE BONDS (Continued)
INDUSTRIAL (2.5%)
Interlake Corp.
12.00%, due 11/15/01 ................................ $ 3,500,000 $ 3,745,000
Monarch Marking Systems, Inc. .
12.50%, due 7/1/03 .................................. 7,887,000 9,227,790
Newflo Corp.
Series B
13.25%, due 11/15/02 ................................ 16,285,000 18,015,281
Thermadyne Holdings Corp.
10.75%, due 11/1/03 ................................. 31,272,000 32,210,160
---------------
63,198,231
---------------
INSURANCE (0.2%)
Life Partners Group, Inc.
12.75%, due 7/15/02 ................................. 4,380,000 4,774,200
---------------
LEISURE (0.6%)
Bally's Health & Tennis Corp.
13.00%, due 1/15/03 ................................. 16,960,000 16,281,600
---------------
MACHINERY (0.1%)
Specialty Equipment Cos., Inc.
11.375%, due 12/1/03 ................................ 1,900,000 2,075,750
---------------
MEDIA (7.4%)
Affiliated Newspaper Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99 ............................ 18,422,000 15,106,040
Allbritton Communications Co.
Series B
9.75%, due 11/30/07 ................................. 23,466,000 22,762,020
American Media, Inc.
Series XW
(zero coupon), due 5/15/97 .......................... 750,000 727,500
Comcast Cellular Corp.
Series A
(zero coupon), due 3/5/00 ........................... 25,301,000 18,216,720
Series B
(zero coupon), due 3/5/00 ........................... 9,233,000 6,647,760
Garden State Newspapers, Inc.
12.00%, due 7/1/04 .................................. 9,065,000 9,880,850
General Media, Inc.
10.625%, due 12/31/00 ............................... 36,951,000 31,593,105
Maxwell Communications Corp., PLC
Facility A (a)(h)(i)(j) ............................. 9,973,584 847,755
Park Communications, Inc.
Series B
13.75%, due 5/15/04 (m) ............................. 22,010,000 24,761,250
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
MEDIA (Continued)
Park Newspapers, Inc.
Series B
11.875%, due 5/15/04 ................................ $ 16,380,000 $ 19,246,500
Spanish Broadcasting System, Inc.
7.50%, due 6/15/02
12.50%, beginning 6/15/97 ........................... 2,210,000 2,331,550
12.75%, due 6/1/01 (c)(d)(g) ........................ 25,498,502 25,498,502
Telemundo Group, Inc.
7.00%, due 2/15/06
10.50%, beginning 2/15/99 ........................... 12,500,000 12,062,500
---------------
189,682,052
---------------
PAPER & FOREST PRODUCTS (0.8%) Gaylord Container Corp.
11.50%, due 5/15/01 ................................. 18,348,000 19,815,840
---------------
POLLUTION & RELATED (0.7%) ICF Kaiser International, Inc.
13.00%, due 12/31/03 ................................ 10,174,000 9,690,735
13.00%, due 12/31/03 (c)(y2) ........................ 4,000 3,920,000
13.00%, due 12/31/03 (y3) ........................... 5,044 4,817,020
---------------
18,427,755
---------------
REAL ESTATE (0.0%) (b)
Olympia & York Maiden
Lane Finance Corp. ..................................
10.375%, due 12/31/95
(a)(h)(i)(n) ........................................ 4,000 1,560
---------------
RECREATION & ENTERTAINMENT (3.0%)
Affinity Group, Inc.
11.50%, due 10/15/03 ................................ 36,315,000 37,767,600
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 ................................. 23,312,000 17,105,180
Icon Fitness Corp.
(zero coupon), due 11/15/06
14.00%, beginning 11/15/01 (c) ...................... 7,000,000 3,675,000
LodgeNet Entertainment Corp.
10.25%, due 12/15/06 (c) ............................ 2,000,000 2,005,000
Marvel Holdings, Inc.
Series B
(zero coupon), due 4/15/98 (a)(h)(i) ................ 24,544,000 3,681,600
Six Flags Theme Parks, Series A
(zero coupon), due 6/15/05
12.25%, beginning 6/15/98 ........................... 5,000,000 4,700,000
Videotron Holdings, PLC
(zero coupon), due 7/1/04
11.125%, beginning 7/1/97 ........................... 9,250,000 8,047,500
---------------
76,981,880
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
CORPORATE BONDS (Continued)
RESTAURANTS & LODGING (2.3%)
American Restaurant Group, Inc.
12.00%, due 9/15/98 (bb) ............................ $ 2,731,517 $ 2,512,995
Series 92
13.00%, due 9/15/98 ................................. 5,479,412 5,041,059
Series 93
13.00%, due 9/15/98 ................................. 4,812,676 4,427,662
AmeriKing, Inc.
10.75%, due 12/1/06 ................................. 10,153,000 10,508,355
Family Restaurant, Inc.
9.75%, due 2/1/02 ................................... 28,218,000 20,458,050
Flagstar Corp.
10.75%, due 9/15/01 ................................. 7,000,000 6,335,000
10.875%, due 12/1/02 ................................ 3,883,000 3,543,238
FRD Acquisition Co.
Series B
12.50%, due 7/15/04 ................................. 5,000,000 5,100,000
---------------
57,926,359
---------------
RETAIL (2.3%)
Brylane L.P., Series B
10.00%, due 9/1/03 .................................. 3,685,000 3,795,550
Guitar Center Management Co.
11.00%, due 7/1/06 (c) .............................. 3,605,000 3,821,300
IHF Holdings, Inc.
Series B
(zero coupon), due 11/15/04
15.00%, beginning 11/15/99 .......................... 32,670,000 25,809,300
Petro PSC Properties L.P.
12.50%, due 6/1/02 .................................. 10,905,000 11,068,575
Waban, Inc.
11.00%, due 5/15/04 ................................. 13,250,000 14,707,500
---------------
59,202,225
---------------
STEEL, ALUMINUM & OTHER METALS (0.4%)
Easco Corp.
Series B
10.00%, due 3/15/01 ................................. 7,550,000 7,682,125
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05 ................................. 3,000,000 3,457,500
---------------
11,139,625
---------------
TELECOMMUNICATION EQUIPMENT (0.4%)
Telex Communications, Inc.
12.00%, due 7/15/04 ................................. 8,250,000 9,116,250
---------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
TELECOMMUNICATION SERVICES (1.2%)
Microcell Telecommunications, Inc.
Series B
(zero coupon), due 6/1/06
14.00%, beginning 12/1/01 ........................... $ 27,700,000 $ 15,442,750
Paging Network, Inc.
11.75%, due 5/15/02 ................................. 5,020,000 5,409,050
ProNet, Inc.
11.875%, due 6/15/05 ................................ 11,775,000 11,097,937
---------------
31,949,737
---------------
TEXTILE & APPAREL (0.8%)
Hosiery Corp. of America, Inc.
13.75%, due 8/1/02 .................................. 18,400,000 20,332,000
---------------
UTILITIES (0.5%)
Consolidated Hydro, Inc.
Series B
(zero coupon), due 7/15/03
12.00%, beginning 7/15/98 ........................... 33,789,000 11,826,150
---------------
Total Corporate Bonds
(Cost $1,148,407,876) ............................... 1,213,932,355
---------------
FOREIGN BONDS (0.1%)
MEDIA (0.0%) (b)
Maxwell Communications Corp., PLC
Facility B (a)(h)(i)(j) .............................(pound) 1,131,066 164,526
---------------
RETAIL (0.1%)
Isosceles
Bank debt
12.219%, due 6/30/98 (d) ............................ 1,051,124 242,837
Bank debt, Series B
12.219%, due 4/25/01 (d) ............................ 4,249,169 981,668
---------------
1,224,505
---------------
Total Foreign Bonds
(Cost $4,344,621) ................................... 1,389,031
---------------
U.S. GOVERNMENT &
FEDERAL AGENCY (9.3%)
Federal National Mortgage
Association (4.2%)
Series B
12.00%, due 6/26/98 ................................. $ 100,000,000 108,453,000
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
U.S. GOVERNMENT &
FEDERAL AGENCY (Continued)
United States Treasury Bonds (4.6%)
13.375%, due 8/15/01 ................................ $ 25,000,000 $ 32,105,500
15.75%, due 11/15/01 ................................ 61,000,000 85,113,910
---------------
117,219,410
---------------
United States Treasury Note (0.5%)
9.125%, due 5/15/99 ................................. 10,900,000 11,647,631
---------------
Total U.S. Government &
Federal Agency
(Cost $249,069,766) ................................. 237,320,041
---------------
YANKEE BONDS (11.2%)
CABLE (2.0%)
Australis Holdings Property Ltd.
(zero coupon), due 11/1/02
15.00%, beginning 11/1/00 (c)(y4) ................... 18,067 10,388,525
CF Cable TV, Inc.
11.625%, due 2/15/05 ................................ 6,750,000 7,830,000
TeleWest, PLC
(zero coupon), due 10/1/07
11.00%, beginning 10/1/00 ........................... 45,314,000 31,606,515
---------------
49,825,040
---------------
CELLULAR TELEPHONE (1.1%)
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01 ............................ 17,550,000 10,881,000
Occidente y Caribe Celular, S.A
(zero coupon), due 3/15/04
14.00%, beginning 3/15/01 (c) ....................... 30,000,000 17,850,000
---------------
28,731,000
---------------
COMPUTERS & OFFICE EQUIPMENT (1.1%)
International Semi-Technology
Microelectronics, Inc.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00 ........................... 44,213,000 28,959,515
---------------
CONTAINERS (0.2%)
Stone Container Finance Corp.
11.50%, due 8/15/06 (c) ............................. 5,630,000 5,784,825
---------------
MEDIA (3.0%) Grupo Televisa, S.A .
(zero coupon), due 5/15/08
13.25%, beginning 5/15/01 ........................... 12,650,000 8,349,000
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
MEDIA (continued)
Kabelmedia Holding GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01 ........................... $ 35,664,000 $ 20,061,000
Le Groupe Videotron Ltee
10.625%, due 2/15/05 ................................ 44,212,000 48,633,200
---------------
77,043,200
---------------
PAPER & FOREST PRODUCTS (0.8%)
FSW International Finance Co.
12.50%, due 11/1/06 (c) ............................. 20,020,000 21,221,200
---------------
REAL ESTATE (1.7%)
Trizec Finance Ltd.
10.875%, due 10/15/05 ............................... 37,677,000 41,821,470
---------------
RECREATION & ENTERTAINMENT (0.7%)
Plitt Theaters, Inc.
10.875%, due 6/15/04 ................................ 17,000,000 17,127,500
---------------
TELECOMMUNICATION SERVICES (0.2%)
Clearnet Communications, Inc.
(zero coupon), due 12/15/05
14.75%, beginning 12/15/00 .......................... 7,350,000 4,593,750
---------------
TESTING SERVICES (0.2%)
Intertek Finance, PLC
10.25%, due 11/1/06 (c) ............................. 1,500,000 1,563,750
Intertek Testing Services Ltd.
12.00%, due 11/8/07 (p) ............................. 4,000,000 3,920,000
---------------
5,483,750
---------------
TRANSPORTATION (0.2%)
TNT Transport, PLC
11.50%, due 4/15/04 ................................. 4,500,000 5,197,500
---------------
Total Yankee Bonds
(Cost $266,536,759) ................................. 285,788,750
---------------
Total Long-Term Bonds
(Cost $1,767,093,734) ................................. 1,838,191,088
---------------
<CAPTION>
Shares
================
<S> <C> <C>
COMMON STOCKS (5.7%)
BUILDINGS (0.2%)
NVR, Inc. (a) ......................................... 379,300 4,930,900
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)
CABLE (0.5%)
United International Holdings
Inc., Class A (a) ................................... 988,200 $ 12,105,450
---------------
CASINOS (0.5%)
Aztar Corp. (a) ....................................... 100,000 700,000
Casino America, Inc. (a) .............................. 207,925 662,761
Colorado Gaming &
Entertainment Co. (a) ............................... 368,128 1,840,640
Grand Casinos, Inc. (a) ............................... 699,600 9,444,600
---------------
12,648,001
---------------
CELLULAR TELEPHONE (0.0%) (b)
Celcaribe, S.A. (a)(c) ................................ 439,020 878,040
---------------
CHEMICALS (0.0%) (b)
Millennium Chemicals, Inc. (a) ........................ 43,856 778,444
---------------
CONGLOMERATES (0.2%)
Hanson, PLC ADR (k) ................................... 614,000 4,144,500
---------------
FOOD, BEVERAGES & TOBACCO (0.7%)
Dr. Pepper Bottling Holdings, Inc.
Class A (a) ......................................... 200,000 2,600,000
Imperial Tobacco Group, PLC
ADR (a)(k) .......................................... 153,500 1,980,641
RJR Nabisco Holdings Corp. ............................ 388,000 13,192,000
TLC Beatrice International Holdings
Inc., Class A (a) ................................... 25,000 678,125
---------------
18,450,766
---------------
GAS UTILITIES (0.1%)
UGI Corp. ............................................. 158,800 3,553,150
United Gas Holdings Corp. (a)(e)(h) ................... 98,050 166,685
---------------
3,719,835
---------------
INDUSTRIAL (0.2%)
Thermadyne Holdings Corp. (a) ......................... 199,350 5,681,475
---------------
MEDIA (1.2%)
Affiliated Newspaper
Investments, Inc. (a) ............................... 28,000 1,120,000
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
MEDIA (Continued)
Comcast Corp.
Class A ............................................. 955,000 $ 16,831,875
Le Groupe Videotron Ltee (aa) ......................... 46,800 392,646
Lin Television Corp. (a) .............................. 7,000 295,750
Matav-Cable Systems Media
Ltd. ADR (a)(k) ..................................... 254,400 3,975,000
Metromedia International Group
Inc. (a) ............................................ 725,200 7,161,350
---------------
29,776,621
---------------
REAL ESTATE (0.2%)
American Health Properties, Inc. ...................... 26,300 627,912
American Health Properties, Inc. (l) .................. 5,130 81,439
Metropolis Realty Trust, Inc. (a) ..................... 126,278 3,283,228
---------------
3,992,579
---------------
RESTAURANTS & LODGING (0.4%)
Bob Evans Farms, Inc. ................................. 190,000 2,565,000
Lone Star Steakhouse & Saloon
Inc. (a) ............................................ 257,300 6,882,775
---------------
9,447,775
---------------
RETAIL (0.1%)
Claire's Stores, Inc. ................................. 204,300 2,681,438
CVS Corp. ............................................. 21,400 885,425
Loehmann's Holdings, Inc.
Class B (a) ......................................... 43,750 43,750
---------------
3,610,613
---------------
STEEL, ALUMINUM & OTHER METALS (0.2%)
Ryerson Tull, Inc., Class A (a) ....................... 348,300 4,702,050
---------------
SUPERMARKETS (0.0%) (b)
Grand Union Co. (a) ................................... 51,999 259,995
---------------
TELECOMMUNICATION EQUIPMENT (0.0%) (b)
PageMart Wireless, Inc., Class A (a) .................. 45,500 301,438
---------------
TELECOMMUNICATION SERVICES (1.2%)
AirTouch Communications, Inc. (a) ..................... 624,000 15,756,000
Clearnet Communications, Inc.
Class A (a) ......................................... 169,500 1,864,500
Paging Network, Inc. (a) .............................. 346,350 5,281,838
Rogers Cantel Mobile
Communications, Inc., Class B (a) ................... 60,000 1,162,500
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)
TELECOMMUNICATION SERVICES (Continued)
Rogers Communications, Inc. ...........................
Class B (a)(aa) ..................................... 989,375 $ 7,218,027
---------------
31,282,865
---------------
TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of America, Inc. (a) .................... 17,400 104,400
---------------
Total Common Stocks
(Cost $148,718,237) ................................. 146,815,747
---------------
PREFERRED STOCKS (4.1%)
BANKS (0.0%) (b)
River Bank America, N.Y .
15.00%, Series A .................................... 30,000 742,500
---------------
CABLE (0.6%)
Cablevision Systems Corp.
8.50%, Series I (v) ................................. 8,000 164,000
11.75%, Series H (m) ................................ 71,901 6,740,719
TCI Pacific Communications, Inc.
5.00% (v) ........................................... 90,900 8,305,988
---------------
15,210,707
---------------
CASINOS (0.2%)
Station Casinos, Inc.
7.00% (v) ........................................... 125,600 6,013,100
---------------
DOMESTIC OIL & GAS (0.0%) (b)
Mesa, Inc.
8.00%, Series A (g)(v) .............................. 500 3,186
TransAmerican Energy Corp.
$19.00, Series A .................................... 150 15,000
---------------
18,186
---------------
DRUGS (0.3%)
ICN Pharmaceuticals, Inc.
Series B (c)(m)(v) .................................. 8,500 8,500,000
---------------
EQUIPMENT FINANCING (0.5%)
GPA Group, PLC (a)(p) ................................. 30,000,000 13,200,000
---------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
FOOD, BEVERAGES & TOBACCO (0.1%)
National Tobacco Holding, LLC
14.50% (e)(g)(p)(q) ................................. 1,676,030 $ 953,829
Seven Up Holdings Co.
16.00% (a) .......................................... 4,491 129,542
---------------
1,083,371
---------------
MEDIA (1.6%)
Paxson Communications Corp.
12.50% (g) .......................................... 13,550 12,804,750
Spanish Broadcasting System, Inc.
Series A (c)(g) .................................... 27,418 27,143,820
---------------
39,948,570
---------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
$0.056, Series A (g) ................................ 2,297 1,148
---------------
TELECOMMUNICATION SERVICES (0.8%)
AirTouch Communications, Inc.
6.00%, Series B (v) ................................. 100,000 2,725,000
K-III Communications Corp.
10.00%, Series D .................................... 174,000 17,052,000
---------------
19,777,000
---------------
Total Preferred Stocks
(Cost $98,748,421) .................................. 104,494,582
---------------
WARRANTS (1.1%)
APPLIANCES & FURNITURE (0.0%) (b)
Central Rents, Inc.
expire 2003 (a) ..................................... 10,500 630,000
---------------
BUILDING MATERIALS (0.0%) (b)
Degeorge Financial Corp.
expire 4/1/97 (a) ................................... 12,000 1,200
---------------
CABLE (0.0%) (b)
United International Holdings
Inc. (a) ............................................ 20,834 354,178
---------------
CASINOS (0.0%) (b)
Belle Casino, Inc. (a)(c) ............................. 5,500 55
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
WARRANTS (Continued)
CASINOS (Continued)
Boomtown, Inc.
expire 11/1/98 (a)(c) ............................... 7,350 $ 7,350
Casino America, Inc.
expire 5/3/01 (a) ................................... 36,808 36,808
HDA Management Corp.
expire 12/15/98 (a)(c) .............................. 6,450 322,500
Louisiana Casino, Inc.
expire 12/1/98 (a) .................................. 12,000 60,000
---------------
426,713
---------------
CELLULAR TELEPHONE (0.0%) (b)
Occidente y Caribe Celular, S.A.
expire 3/15/04 (a)(c) ............................... 120,000 1,200
---------------
CONGLOMERATES (0.0%) (b)
IFA Capital, Inc.
Series H
expire 11/14/99 (a)(c) .............................. 8,000 800,000
---------------
DOMESTIC OIL & GAS (0.1%)
TransAmerican Refining Corp.
expire 2/15/02 (a) .................................. 774,665 1,936,662
---------------
FOOD, BEVERAGES & TOBACCO (0.2%)
Browne Bottling Co.
expire 8/15/03 (a) .................................. 1,426 7,130
Cookies USA, Inc.
expire 1/15/01 (a)(c) ............................... 834 8,340
National Tobacco Holding, LLC
Class A
expire 5/17/06 (a)(e)(p)(r)(t) ...................... 4,259,246 4,259,246
expire 5/17/06 (a)(e)(p)(s) ......................... 547,970 0(z)
---------------
4,274,716
---------------
GAS UTILITIES (0.0%) (b)
UGI Corp.
expire 3/31/98 (a) .................................. 34,580 5,187
---------------
HOUSEHOLD PRODUCTS (0.0%) (b)
Chattem, Inc.
expire 6/17/99 (a)(c) ............................... 9,500 190,000
---------------
MEDIA (0.7%)
General Media, Inc.
expire 12/21/00 (a) ................................. 34,486 172,430
</TABLE>
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
MEDIA (Continued)
Park Communications, Inc. (a) ......................... 220,100 $ 4,512,050
Spanish Broadcasting System, Inc.
expire 6/29/99 (a)(c) ............................... 30,262 5,447,160
expire 6/30/99 (a)(c) ............................... 44,650 8,037,000
---------------
18,168,640
---------------
POLLUTION & RELATED (0.0%) (b)
ICF Kaiser International, Inc.
expire 12/31/98 (a) ................................. 48,835 18,313
---------------
RETAIL (0.0%) (b)
Petro PSC Properties L.P.
expire 6/1/97 (a) ................................... 14,010 714,510
---------------
TELECOMMUNICATION SERVICES (0.1%
Microcell Telecommunications, Inc.
expire 6/1/06 (a)(c)(u) ............................. 110,800 27,700
expire 6/1/06 (a)(c) ................................ 110,800 775,600
Nextel Communications, Inc.
Series A
expire 12/15/98 (a) ................................. 3,087 15,435
Series C
expire 1999 (a) ..................................... 3,500 17,500
---------------
836,235
---------------
TESTING SERVICES (0.0%) (b)
Intertek Testing Services Ltd.
expire 12/31/99 (a)(c)(p) ........................... 691 220,000
---------------
Total Warrants
(Cost $19,317,964) .................................. 28,577,554
---------------
<CAPTION>
Notional
Principal
Amount
===============
<S> <C> <C>
PURCHASED PUT OPTION (0.0%) (b)
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Underlying security, RJR Nabisco, Inc.
8.75%, due 8/15/05
expire 10/6/97 (f) .................................. $ 25,000,000 150,000
---------------
Total Purchased Put Option
(Cost $500,000) ..................................... 150,000
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (15.6%)
RETAIL (0.6%) Cosmar Corp.
11.50%, due 12/4/97
(c)(d)(m)(p) ........................................ $ 16,700,000 $ 16,700,000
---------------
U.S. GOVERNMENT (15.0%)
United States Treasury Note
8.50%, due 4/15/97 .................................. 379,650,000 382,971,938
---------------
Total Short-Term Investments
(Cost $400,761,315) ................................. 399,671,938
---------------
Total Investments
(Cost $2,435,139,671) (w) ........................... 98.4% 2,517,900,909(x)
Cash and Other Assets,
Less Liabilities .................................... 1.6 40,084,261
=============== ===============
Net Assets ............................................ 100.0% $ 2,557,985,170
=============== ===============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at December 31, 1996.
(e) Fair valued securities. Aggregate at 0.72% of net assets.
(f) Purchased put option is based on spread between the risk/duration of RJR
Nabisco, Inc., Note 8.75%, due 8/15/05, multiplied by the yield on the RJR
Nabisco Note less the yield on the U.S. Treasury Bond 6.50%, due 8/15/05,
less 3.50%, multiplied by the notional principal.
(g) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(h) Issuer in bankruptcy.
(i) Issue in default.
(j) Multiple tranche facilities.
(k) ADR--American Depository Receipt.
(l) Depository Shares--each share represents one-tenth of a share of
Psychiatric Group preferred stock.
(m) CIK ("Cash in Kind")--interest or dividend payment is made with cash or
additional securities.
(n) The company defaulted on the payment of principal to its creditors on
maturity date.
(o) Yankee bond.
(p) Restricted securities.
(q) The 61.33% preferred membership interest entitles the Fund to a Payment in
Kind dividend of 14.50% for the first five years beginning June 30, 1996
and 17.50% for the sixth and seventh year.
(r) The warrants entitle the Fund to 9.8919% of the total voting rights and
13.9441% non-voting rights with dividend payments.
(s) The redeemable warrants can be redeemed by National Tobacco Corp. for
nominal consideration during the first five years, only on a pro-rata basis
with prepayment of the subordinated notes.
(t) Investment in noncontrolled affiliate (cost $2,960,051).
(u) Conditional warrants.
(v) Convertible preferred stock.
(w) The cost for Federal income tax purposes is $2,437,023,118.
(x) At December 31, 1996, net unrealized appreciation was $80,877,791 based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $125,353,506 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $44,475,715.
(y1) 192 Units--each unit reflects $10,000 principal amount of 0%/13.50% Senior
Secured Note Trust Certificates, plus 1,626 Ordinary Share Trust
Certificates.
(y2) 4,000 Units--each unit reflects $1,000 principal amount of 13.00% Senior
Notes, plus 7 warrants to buy 1 share of common stock at $2.30 per share at
a future date.
(y3) 5,044 Units--each unit reflects $1,000 principal amount of 13.00% Senior
Subordinated Notes, plus 4.8 warrants to acquire 1 share of common stock at
$5.00 per share at a future date.
(y4) 18,067 Units--each unit reflects $1,000 principal amount of 15.00% Senior
Discounted Notes, plus 1 warrant to acquire 186.527 shares of Australis
Media common stock at $0.20 per share at a future date.
(z) Security has no value.
(aa) Canadian security.
(bb) Exchangeable into American Restaurant Group, Inc. 13.00% Senior Notes, due
9/15/98.
(pound) Security denominated in British Pound Sterling.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ASSETS:
<S> <C>
Investment in securities, at value
(identified cost $2,435,139,671) ................................... $ 2,517,900,909
Cash ................................................................ 440,211
Receivables:
Dividends and interest ............................................ 39,683,906
Fund shares sold .................................................. 8,871,312
Investment securities sold ........................................ 4,944,386
Other assets ........................................................ 29,858
---------------
Total assets ..................................................... 2,571,870,582
---------------
LIABILITIES:
Payables:
Investment securities purchased ................................... 8,503,539
NYLIFE Distributors ............................................... 2,322,646
Fund shares redeemed .............................................. 1,581,082
Adviser ........................................................... 597,265
Transfer agent .................................................... 160,981
Custodian ......................................................... 40,436
Trustees .......................................................... 16,684
Accrued expenses .................................................... 516,698
Unrealized depreciation on forward foreign currency contracts ....... 146,081
---------------
Total liabilities ................................................ 13,885,412
---------------
Net assets .......................................................... $ 2,557,985,170
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share) unlimited number of shares authorized:
Class A ........................................................... $ 141,291
Class B ........................................................... 2,956,489
Additional paid-in capital .......................................... 2,459,498,843
Accumulated undistributed net investment income ..................... 823,169
Accumulated undistributed net realized gain on investments .......... 11,950,221
Net unrealized appreciation on investments .......................... 82,761,238
Net unrealized depreciation on forward foreign currency contracts ... (146,081)
---------------
Net assets .......................................................... $ 2,557,985,170
===============
CLASS A
Net assets applicable to outstanding shares ......................... $ 116,805,387
===============
Shares of beneficial interest outstanding ........................... 14,129,093
===============
Net asset value per share outstanding ............................... $ 8.27
Maximum sales charge (4.50% of offering price) ...................... 0.39
---------------
Maximum offering price per share outstanding ........................ $ 8.66
===============
CLASS B
Net assets applicable to outstanding shares ......................... $ 2,441,179,783
===============
Shares of beneficial interest outstanding ........................... 295,648,907
===============
Net asset value per share outstanding ............................... $ 8.26
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
INVESTMENT INCOME:
<S> <C>
Income:
Dividends (a) ............................................. $ 7,971,051
Interest .................................................. 198,749,051
-------------
Total income ............................................. 206,720,102
-------------
Expenses:
Distribution--Class B ..................................... 11,527,597
Administration ............................................ 5,816,110
Advisory .................................................. 5,816,110
Service ................................................... 5,173,736
Transfer agent ............................................ 1,582,485
Professional .............................................. 538,650
Shareholder communication ................................. 474,934
Registration .............................................. 420,895
Custodian ................................................. 235,461
Recordkeeping ............................................. 233,333
Trustees .................................................. 64,455
Miscellaneous ............................................. 49,161
-------------
Total expenses ........................................... 31,932,927
-------------
Net investment income ....................................... 174,787,175
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ..................................... 70,039,639
Securities sold short ..................................... (508,346)
Foreign currency transactions ............................. (912,219)
-------------
Net realized gain on investments and
foreign currency transactions .............................. 68,619,074
-------------
Net change in unrealized appreciation
(depreciation) on investments:
Security transactions ..................................... 58,603,932
Securities sold short ..................................... 375,243
Forward foreign currency contracts ........................ 42,977
-------------
Net unrealized gain on investments and foreign
currency ................................................. 59,022,152
-------------
Net realized and unrealized
gain on investments and foreign currency
transactions ............................................. 127,641,226
-------------
Net increase in net assets resulting from operations ........ $ 302,428,401
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $212,825.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ......................................................... $ 174,787,175 $ 132,026,507
Net realized gain on investments .............................................. 70,039,639 40,528,746
Net realized loss on securities sold short .................................... (508,346) (220,429)
Net realized gain (loss) on foreign currency transactions ..................... (912,219) 13,599
Net change in unrealized appreciation (depreciation) on securities transactions 58,603,932 68,715,773
Net change in unrealized depreciation on securities sold short ................ 375,243 (375,243)
Net change in unrealized depreciation on forward foreign currency contracts ... 42,977 (189,058)
--------------- ---------------
Net increase in net assets resulting from operations .......................... 302,428,401 240,499,895
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ...................................................................... (6,713,725) (2,874,284)
Class B ...................................................................... (164,209,186 (141,411,911)
From net realized gain on investments and foreign currency transactions:
Class A ...................................................................... (2,453,906) (551,204)
Class B ...................................................................... (51,503,367) (20,770,265)
In excess of net investment income:
Class A ...................................................................... -- (59,920)
Class B ...................................................................... -- (2,948,014)
In excess of net realized gain on investments and foreign currency
transactions:
Class A ...................................................................... -- (83,042)
Class B ...................................................................... -- (3,129,179)
--------------- ---------------
Total dividends and distributions to shareholders .......................... (224,880,184) (171,827,819)
--------------- ---------------
Capital share transactions: Net proceeds from sale of shares:
Class A ...................................................................... 101,308,968 49,974,931
Class B ...................................................................... 913,192,615 493,045,911
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A ...................................................................... 7,136,763 2,657,250
Class B ...................................................................... 152,975,773 116,525,515
--------------- ---------------
1,174,614,119 662,203,607
Cost of shares redeemed:
Class A ...................................................................... (37,057,233) (10,194,187)
Class B ...................................................................... (301,207,596) (205,507,147)
--------------- ---------------
Increase in net assets derived from capital share transactions ............. 836,349,290 446,502,273
--------------- ---------------
Net increase in net assets ...................................................... 913,897,507 515,174,349
NET ASSETS:
Beginning of year ............................................................... 1,644,087,663 1,128,913,314
--------------- ---------------
End of year ..................................................................... $ 2,557,985,170 $ 1,644,087,663
=============== ===============
Accumulated undistributed net investment income/(excess distribution) ........... $ 823,169 $ (3,007,934)
=============== ===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
-------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Year ended Year ended December 31 -------------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
---------------------- --------------------- ------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........... $ 7.92 $ 7.92 $ 7.44 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66
-------- ---------- ------- ---------- ---------- ---------- -------- --------
Net investment income ........... 0.72 0.67 0.84 0.81 0.23 0.69 0.70 0.79
Net realized and unrealized gain
(loss) on investments ......... 0.52 0.52 0.61 0.61 (0.27) (0.08) 0.54 0.75
Net realized and unrealized gain
(loss) on foreign currency
transactions .................. (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) -- -- -- --
-------- ---------- ------- ---------- ---------- ---------- -------- --------
Total from investment operations 1.24 1.19 1.45 1.42 (0.04) 0.61 1.24 1.54
-------- ---------- ------- ---------- ---------- ---------- -------- --------
Less dividends and distributions:
From net investment income ...... (0.71) (0.67) (0.84) (0.81) (0.22) (0.67) (0.72) (0.79)
In excess of net
investment income ............. -- -- (0.01) (0.01) -- -- -- --
From net realized gain
on investments ................ (0.18) (0.18) (0.10) (0.10) -- (0.17) -- --
In excess of net realized
gain on investments ........... -- -- (0.02) (0.02) -- -- -- --
-------- ---------- ------- ---------- ---------- ---------- -------- --------
Total dividends and distributions (0.89) (0.85) (0.97) (0.94) (0.22) (0.84) (0.72) (0.79)
-------- ---------- ------- ---------- ---------- ---------- -------- --------
Net asset value at end of period $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ 7.70 $ 7.93 $ 7.41
======== ========== ======= ========== ========== ========== ======== ========
Total investment return (a) ..... 16.33% 15.58% 20.28% 19.71% (0.48%) 7.95% 18.58% 24.55%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ........ 9.0% 8.4% 10.2% 9.5% 9.1%+ 8.7% 9.9% 11.0%
Expenses ..................... 1.0% 1.6% 1.0% 1.6% 1.6%+ 1.6% 1.7% 1.9%
Portfolio turnover rate ......... 118% 118% 137% 137% 45% 190% 207% 226%
Average commission rate paid .... $ 0.0630 $ 0.0630 (c) (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's) ............. $116,805 $2,441,180 $42,850 $1,601,238 $1,128,913 $1,090,261 $808,538 $447,819
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay High Yield Corporate Bond Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's primary objective is to maximize current income through investment in
a diversified portfolio of high yield debt securities which are ordinarily rated
in the lower rating categories of recognized rating agencies.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing tech-
25
<PAGE>
MainStayHigh Yield Corporate Bond Fund
niques if those prices are deemed by the Adviser to be representative of market
values at the regular close of business of the New York Stock Exchange (f) by
appraising options and futures contracts at the last sale price on the market
where such options or futures are principally traded, and (g) by appraising all
other securities and other assets, including debt securities for which prices
are supplied by a pricing agent but are not deemed by the Adviser to be
representative of market values, but excluding money market instruments with a
remaining maturity of sixty days or less and including restricted securities and
securities for which no market quotations are available, at fair value in
accordance with procedures approved by the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and market
value on maturity date if their original term to maturity at purchase exceeded
60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
markets and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward currency contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" such contract on a daily basis to reflect the market value
of the contract at the end of each day's trading. When the forward currency
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward currency
contracts in order to protect against adverse changes in the level of foreign
currency exchange rates. This practice is known as hedging.
The use of forward currency contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/depreciation on forward contracts reflects the Fund's
exposure at year end to credit loss in the event of a counterparty's failure to
perform its obligations.
26
<PAGE>
Notes to Financial Statements continued
Forward foreign currency contracts open at December 31, 1996:
<TABLE>
<CAPTION>
Contracts In Delivery Appreciation/
to Deliver Exchange For Date (Depreciation
- -------------- ------------- -------- ----------------
<S> <C> <C> <C>
$11,466,348 C$15,350,000 1/22/97 $(251,190)
$ 2,700,000 C$ 3,680,370 1/22/97 (11,014)
C$27,435,000 $20,160,935 1/22/97 116,123
---------
Net Depreciation $(146,081)
=========
</TABLE>
- ----------
C$ Canadian Dollars.
Securities Sold Short. The Fund may engage in short sales as a method of hedging
declines in the value of securities owned. When the Fund enters into a short
sale, it must segregate the security sold short, or securities equivalent in
kind and amount to the securities sold, as collateral for its obligation to
deliver the security upon conclusion of the sale. A gain, limited to the price
at which the Fund sold the security short, or a loss, unlimited as to dollar
amount, will be recognized upon termination of a short sale if the market price
on the date the short position is closed out is less or greater, respectively,
than the proceeds originally received. Any such gain or loss may be offset,
completely or in part, by the change in the value of the hedged investments.
At December 31, 1996 there were no open short sales.
Restricted Securities. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt sale
at an acceptable price may be difficult.
The issuers of the securities will bear the costs involved in registration under
the Securities Act of 1933 and in connection with the disposition of such
securities. The Fund does not have the right to demand that such securities be
registered. The Fund may not invest more than 10% of its net assets in illiquid
securities.
27
<PAGE>
MainStay High Yield Corporate Bond Fund
Restricted securities held at December 31, 1996:
<TABLE>
<CAPTION>
Principal Percent
Acquisition Amount/ 12/31/96 of
Security Date Shares Cost Value Net Assets
- -------- -------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Casino America, Inc.
11.50%, due 6/1/01 10/28/96 $10,000,000 $ 9,400,000 $ 8,900,000 0.3%
Cosmar Corp.
11.50%, due 12/4/97 12/4/96 16,700,000 16,700,000 16,700,000 0.6
GPA Group, PLC
Preferred Stock 3/6/96 30,000,000 9,862,500 13,200,000 0.5
Intertek Testing Services Ltd.
12.00%, due 11/8/07 11/8/96 4,000,000 3,776,560 3,920,000 0.2
Warrants, expire 12/31/99 11/8/96 691 223,440 220,000 0.0(b)
National Tobacco Holding, LLC
13.50%, due 5/17/03
16.50%, beginning 6/1/01 5/17/96 12,563,468 9,603,417 10,446,524 0.4
Preferred Interest 5/17/96 1,676,030 1,650,766 953,829 0.1
Redeemable Warrants
expire 5/17/06 5/17/96 547,970 0(a) 0(a) 0.0
Warrants, expire 5/17/06 5/17/96 4,259,246 2,960,051 4,259,246 0.2
----------- ----------- ---
$54,176,734 $58,599,599 2.3%
=========== =========== ===
</TABLE>
- ----------
(a) Security has no value.
(b) Less than one tenth of a percent.
Financial Instruments with Concentration of Credit Risk. The Fund invests in
Loan Participations. When the Fund purchases a Participation, the Fund typically
enters into a contractual relationship with the lender or third party selling
such Participation ("Selling Participant"), but not with the Borrower. As a
result, the Fund assumes the credit risk of the Borrower, the Selling
Participant and any other persons interpositioned between the Fund and the
Borrower ("Intermediate Participants"). The Fund may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. The Fund may be considered to have a concentration of credit risk
in the banking industry, since the Fund will only acquire Participations if the
Selling Participant and each Intermediate Participant is a financial
institution. The Fund held no Loan Participations at December 31, 1996.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $33,161, $222,520 and $723,161 have been
reclassified from accumulated undistributed net investment income, accumulated
undistributed net realized gain on investments and accumulated net realized loss
on foreign currency transactions to additional paid-in capital.
28
<PAGE>
Notes to Financial Statements continued
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily except
when collection is not expected. Discounts on securities purchased for the Fund
are accreted on the constant yield method over the life of the respective
securities or, if applicable, over the period to the first call date.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
The Fund invests primarily in high yield bonds. These bonds may involve special
risks not commonly associated with investment in higher rated debt securities.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. Also, the secondary
market on which high yield bonds are traded may be less liquid than the market
for higher grade bonds.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred. Dividends on short
positions are recorded as an expense of the Fund on ex-dividend date.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
29
<PAGE>
MainStay High Yield Corporate Bond Fund
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.30% the average daily net assets of the Fund. The Administrator and
Adviser have voluntarily agreed to reduce their combined fees to 0.55% on assets
exceeding $500 million.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator will each reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years, its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $1,413,313 for the year
ended December 31, 1996. The Fund was also
30
<PAGE>
Notes to Financial Statements continued
advised that NYLIFE Distributors retained contingent deferred sales charges for
redemption of Class B shares of $1,482,294 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $112,347.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $54,555 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$233,333.
Note 4--Affiliated Issuers:
Issuers in which the Fund held 5% or more of the outstanding voting securities
are defined as "Affiliated" in the Investment Company Act of 1940. As of
December 31, 1996, the Fund owned 9.89% of the outstanding voting shares of
National Tobacco Holding, LLC ("NTH"). Included in investment income are
$117,432 and $1,060,301 of dividends and interest, respectively, earned on the
Fund's investments in NTH.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of U.S. Government
securities were $389,402 and $101,954, respectively. Purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $2,416,718 and
$1,994,351, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
----------------- ----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ........................ 12,344 111,564 6,348 61,789
Shares issued in reinvestment
of dividends and distributions .... 869 18,686 334 14,700
------ ------- ----- ------
13,213 130,250 6,682 76,489
Shares redeemed .................... 4,492 36,876 1,274 25,907
------ ------- ----- ------
Net increase ....................... 8,721 93,374 5,408 50,582
====== ======= ===== ======
</TABLE>
31
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay High Yield Corporate Bond
Fund (one of the thirteen funds constituting The MainStay Funds, hereafter
referred to as the "Fund") at December 31, 1996, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
32
<PAGE>
This page intentionally left blank
33
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
34
<PAGE>
<TABLE>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities (ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD [Horizontal bar An aggressive high yield bond You want to maximize current income
CORPORATE BOND FUND graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
35
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
High Yield Corporate Bond Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer,
and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay High
Yield Corporate Bond Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSAN09 (297)
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay International Bond Fund Highlights 3
$10,000 Invested in the MainStay
International Bond Fund versus Salomon Brothers
Non-U.S. Dollar World Government Bond
Index--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Country--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 9
Top 10 Holdings 10
10 Largest Purchases 10
10 Largest Sales 10
Portfolio of Investments 11
Financial Statements 13
Notes to Financial Statements 17
Report of Independent Accountants 24
The MainStay Funds 26
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: The philosophy, the strategies, the education, and
the communication between the mutual fund company, the registered
representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified Prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as navigating through the Star ratings and what is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your registered representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your registered representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay International Bond Fund Highlights
1996 MARKET HIGHLIGHTS
o The strength of the U.S. dollar relative to other currencies increased the
risk of unhedged international bond investments
o European monetary union requirements forced governments to reduce their
deficits, which led to lower European interest rates and a European bond
market rally
o Emerging markets offered outstanding performance throughout the year
o Overall, international bonds outperformed U.S. debt securities, and on a
hedged basis, the results were even more dramatic
1996 FUND HIGHLIGHTS
o One-year total returns of 13.90% and 13.13% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes outperformed the average Lipper+ international income
fund for the 12 months ended 12/31/96
o Risk management strategies included hedging European currencies seeking to
minimize unfavorable currency exposure
o The Fund had favorable results from country allocations, especially in
Spain, Italy, Sweden, and Canada
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay International
Bond Fund versus Salomon Brothers Non-U.S.
Dollar World Government Bond Index
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Salomon Brothers
MainStay Non-U.S. Dollar
International World Government
Year-end Bond Fund Bond Index
- ---------------------------------------------------
<S> <C> <C>
9/13/94 $ 9,550.00 $10,000
12/94 $ 9,569.01 $10,256
12/95 $11,356.50 $12,261
12/96 $12,934.60 $12,761
</TABLE>
[GRAPHIC] MainStay International Bond Fund
[GRAPHIC] Salomon Brothers Non-U.S. Dollar World Government Bond Index
CLASS B SHARES
[GRAPHIC]
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Salomon Brothers
MainStay Non-U.S. Dollar
International World Government
Year-end Bond Fund Bond Index
- ---------------------------------------------------
<S> <C> <C>
9/13/94 $10,000.00 $10,000
12/94 $10,020.00 $10,256
12/95 $11,819.40 $12,261
12/96 $13,371.40 $12,761
</TABLE>
[GRAPHIC] MainStay International Bond Fund
[GRAPHIC] Salomon Brothers Non-U.S. Dollar World Government Bond Index
- ----------
The Class A graph assumes an initial investment of $10,000 made on 9/13/94
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (9/13/94)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 9/13/94. Returns reflect the Contingent Deferred Sales
Charge (CDSC) of 3.0%, as it would apply for the period shown. (The $10,000
invested in the Salomon Brothers Non-U.S. Dollar World Government Bond
Index begins on 8/31/94.) All results include reinvestment of distributions
at net asset value and the change in share price for the stated period.
Past performance is no guarantee of future results.
* The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of International Bond Fund Manager
INTERNATIONAL BOND FUND MANAGER
Joseph Portera
The international bond market had a strong year in 1996. While some provided
minimal returns, emerging markets provided spectacular results of 35%.+ Other
major developed markets also turned in excellent results, with Italy and Spain
up 22%, Sweden up 18%, and Canada up 12%, in local terms. Although the Canadian
market wasn't the top performer, it picked up substantially at the end of the
year, providing a 5% return in the fourth quarter alone.
Signs of economic recovery in Japan gave the bond markets a scare in the first
quarter. With the suggestion that short-term rates had bottomed out in Japan,
investors started selling bonds on fears that rates would rise. While the
phenomenon was short-lived, it had an impact around the world.
In Europe, economic reform and fiscal consolidation led to dramatically lower
interest rates, which fueled a European bond market rally. The U.S. dollar's
strengthening relative to most major currencies posed a risk for international
bond investors. While international bond returns were attractive on a local
basis, they were particularly strong when the currency was hedged back into U.S.
dollars.
Given this background, how did the MainStay International Bond Fund do in 1996?
For the 12 months ended December 31, 1996, the MainStay International Bond Fund
provided total returns of 13.90% and 13.13% for Class A and Class B shares,
respectively, excluding all sales charges. These results placed the Fund well
ahead of the average Lipper++ international income fund, which returned 8.75%
over the same period.
What were the major contributors to this positive performance?
There were several factors that helped our portfolio. First, the Fund entirely
avoided the Japanese market, where returns were much too low to compensate for
the risk. Second, we made selective use of currency hedging against European
currencies, which gave the Fund's performance a considerable boost. Third, we
selected
[GRAPHIC]
Currency
management/hedging
- ------------------
The process of managing or "hedging" the risks associated with owning securities
denominated in different currencies, the relative values of which may change at
any time. There can be no assurance that currency hedging will be beneficial to
investors.
- ----------
+ Source: Salomon Brothers Brady Bond Index
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
Weighting .
- ---------
The proportion of a portfolio allocated to a specific market sector or country,
i.e., a fund is said to be overweighted in a country when that portion of the
portfolio is larger than the country's total bonds relative to international
bond markets as a whole.
International
diversification .
- ---------------
Purchasing securities in several international markets, which may react
differently to economic, monetary, and market trends. Diversification may help
reduce investment risk.
- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Year-End Total Return %
- -------- --------------
<S> <C>
12/94 0.20
12/95 18.68 Class A
12/95 17.96 Class B
12/96 13.90 Class A
12/96 13.13 Class B
</TABLE>
- ----------
See footnote * on page 9 for more information on performance.
- --------------------------------------------------------------------------------
strong markets and overweighted the portfolio where we felt returns
would be highest. And fourth, we adjusted the Fund's duration throughout the
year in ways that helped benefit the portfolio.
Why was hedging so important this year?
The U.S. dollar was strengthening most of the year against many major
currencies. Hedging is a risk management strategy that helped us avoid giving
back the gains we made in the local markets when the returns were translated
back to U.S. dollars. In some cases, the Fund benefited from remaining unhedged,
as with Australian bonds during the first half of the year. But most of the
Fund's investments were hedged for most of the year, which enhanced the
performance of the portfolio.
Can you give an example of a currency used to hedge the Fund?
We used the Deutsche mark as a hedging vehicle for the Fund's Italian, Spanish,
and Swedish government bond positions. That allowed us to help protect the
Fund's foreign bond returns from dollar strength and to benefit from most or all
the capital gains and interest income from them without having to take currency
losses when we translated the returns back into dollars.
Which countries did you concentrate in during 1996?
While the Fund invests in a diversified array of markets, we concentrated on
those which we thought would potentially be stellar performers. We invested in
Canada because it's already been through the pain of fiscal consolidation and
currency weakness that Europe is just now going through. It's an export giant
and has huge surpluses with the United States, which is its largest trading
partner. We felt their bonds represented excellent value and would provide
attractive yields. We're also
6
<PAGE>
[GRAPHIC]
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
- -------------------------------
<S> <C>
Italy 14.0%
France 8.7%
Canada 8.6%
Germany 7.8%
U.K. 7.5%
All other 53.4%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
bullish on the Canadian currency right now. So there's a lot to like there.
Where else did you focus the Fund's investments?
In Europe we focused on Italy, Sweden, and Spain. Several European currencies
have rallied in 1996, with the Italian lira up 12% versus the Deutsche mark, the
Swedish krona up 5%, and the Spanish peseta unchanged. But each of these
countries provided much higher yields than German bonds, so we're picking
countries with positive returns such as Italy and Spain, with 22%, and Sweden,
with 18% as well as earning positive returns on key currencies. We believe that
the vast majority of an international bond portfolio's return will come from its
country and currency selections. And they both paid off for the Fund during the
year.
How and why did you adjust the duration of the portfolio in 1996?
With the Japanese bond scare, fears of U.S. rate hikes, and the threat of a bond
sell-off, we lowered our duration in Belgium, Germany, and Denmark. In the first
quarter, the dollar block worked well for the Fund by helping us avoid losses.
In the middle of the second quarter and throughout the rest of the year, we
increased the Fund's duration in Spain, Italy, and Sweden, which also had a
positive effect as those bond markets rallied. The Fund's duration stance,
coupled with the Fund's country and currency weightings placed us in the right
place at the right time and helped the Fund outperform its peers.
What was the Fund's position in other European countries?
The Fund wasn't heavily invested in the U.K., which was a laggard in 1996. The
British market suffered political and
[GRAPHIC]
Duration .
- --------
Equals the weighted average time until bond investors recover their investment.
It is a measurement of interest rate risk.
7
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
Yield curve
- -----------
When interest rates available from various short-, intermediate-, and long-term
securities are plotted on a graph, the resulting line is known as a "yield
curve." The "front-end" of the yield curve, then, would consist of short- to
intermediate-term bonds which generally offer lower interest rates than longer
term investments.
Investments in foreign securities may be subject to greater risks than domestic
investments. These risks include currency fluctuations, changes in U.S. or
foreign tax or currency laws, and changes in monetary policies and economic and
political conditions in foreign countries.
- --------------------------------------------------------------------------------
economic setbacks, which may get worse if the U.K. doesn't converge with other
European nations in its monetary policies. France traded very much like Germany,
and the Fund's underweighted position in French bonds resulted in an overall
positive.
Where did you position the Fund on the yield curve throughout the year?
The Fund stayed largely at the front end of the yield curve, or in shorter-term
paper with maturities from two to ten years. We didn't find the added yield of
longer-term bonds was worth the risks we'd have to take. Our yield curve
decisions also contributed to our positive performance in 1996.
Were there any disappointments during the year?
Looking back, the Fund might have benefited if it did not entirely avoid
emerging markets. The rise in oil prices helped a lot of emerging market
economies, most notably Venezuela and Mexico. I think we missed some important
opportunities by not taking advantage of these markets at least to some degree.
What do you see ahead for 1997?
We will probably continue to be overweighted in shorter-term bonds, unless the
direction of the European market changes. We're continuing to look at Italy,
which tends to be very volatile from a political standpoint. We're considering
adding limited exposure in emerging markets. And naturally, we'll continue to
seek out promising countries, currencies, and securities that have the potential
to maximize current income for our shareholders, with a reasonable level of
risk.
Joseph Portera
Portfolio Manager
QUALITY BREAKDOWN AS OF 12/31/96
[GRAPHIC]
[THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
AAA 55.2%
AA 19.7%
A 1.7%
Cash & Equivalents 23.4%
</TABLE>
- ----------
Note: Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 13.90% n/a 14.07%
Class B 13.13% n/a 13.46%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 8.77% n/a 11.82%
Class B 8.13% n/a 12.34%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 10 out of n/a n/a
44 funds
Class B 11 out of n/a 9 out of
44 funds 28 funds
Average Lipper
international
income fund 8.75% 8.54% 11.90%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $10.95 $0.7325 $0.1515
Class B $10.98 $0.6531 $0.1515
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's administrator
and adviser. Had these expenses not been assumed, total return figures
would have been lower. This expense limitation may be terminated or revised
at any time.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (9/13/94) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
12/31/96. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
- -----------
Note: This breakdown is provided for infor-mational purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
Top 10 Holdings as of 12/31/96
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
HOLDING COUNTRY AMOUNT
=========================================================================================
<S> <C> <C>
Buoni Poliennali del Tesoro, 8.50%, due 1/1/04 Italy $1,044,924
Buoni Poliennali del Tesoro, 8.50%, due 8/1/97 Italy 1,011,269
Buoni Poliennali del Tesoro, 8.50%, due 4/1/99 Italy 927,382
United Kingdom Treasury Bond, 8.50%, due 7/16/07 United Kingdom 906,919
Province of Ontario, 7.25%, due 9/27/05 Canada 827,186
Australian Government, 10.00%, due 2/15/06 Australia 781,414
Buoni Poliennali del Tesoro, 9.50%,due 2/1/01 Italy 780,354
United Kingdom Treasury Bond, 10.00%,due 9/8/03 United Kingdom 718,265
France Obligations Assimilables du Tresor, 8.50%,
due 11/25/02 France 656,283
International Bank of Reconstruction & Development,
7.125%,due 4/12/05 Germany 633,634
=========================================================================================
<CAPTION>
10 Largest Purchases for the 12 months ended 12/31/96
- -----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF PURCHASE
=========================================================================================
<S> <C> <C>
Buoni Poliennali Del Tesoro, Due 8/1/9711/1/23 Italy $3,444,328
Australian Government, due 7/15/0010/15/07 Australia 2,874,402
United Kingdom Treasury Bonds,due 7/14/007/16/07 United Kingdom 2,705,747
Canadian Government, due 9/1/006/1/08 Canada 1,369,675
Kingdom of Denmark, due 11/15/0012/15/04 Denmark 942,963
Queensland Treasury Corp., due 6/14/059/14/07 Australia 770,982
Province of Ontario, due 9/27/05 Canada 745,868
New South Wales Treasury Corp., due 5/1/06 Australia 602,789
German Unity Fund, due 2/20/01 Germany 526,862
Swedish Government, due 5/5/032/9/05 Sweden 480,581
=========================================================================================
<CAPTION>
10 Largest Sales for the 12 months ended 12/31/96
- -----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF SALE
=========================================================================================
<S> <C> <C>
Australian Government, due 7/15/008/15/08 Australia $2,461,622
Buoni Poliennali del Tesoro, due 8/1/9711/1/23 Italy 2,118,381
Canadian Government, due 9/1/006/1/25 Canada 1,026,373
Treuhand-Obligationen, due 9/24/9811/25/99 Germany 975,063
New South Wales Treasury Corp., due 2/1/985/1/06 Australia 972,823
Bundesschatzanweisungen, due 2/20/971/4/24 Germany 830,321
Province of Ontario, due 1/10/0112/8/03 Canada 770,920
Queensland Treasury Corp., due 6/14/059/14/07 Australia 696,766
United Kingdom Treasury Bonds,due 7/14/007/16/07 United Kingdom 694,381
France Obligations Assimilables du Tresor,
due 11/12/9710/25/25 France 557,398
=========================================================================================
</TABLE>
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
======================
<S> <C> <C>
LONG-TERM GOVERNMENT BONDS (76.6%)+
AUSTRALIA (6.1%)
Australian Government
Series 803
9.50%, due 8/15/03 ......................... A $ 310,000 $ 275,365
Series 302
9.75%, due 3/15/02 ......................... 455,000 403,235
Series 206
10.00%, due 2/15/06 ........................ 840,000 781,414
New South Wales Treasury Corp.
Series 98
7.50%, due 2/1/98 .......................... 400,000 322,098
Queensland Treasury Corp.
Series 7
8.00%, due 9/14/07 ......................... 125,000 101,812
----------
1,883,924
----------
AUSTRIA (3.5%)
Republic of Austria
Series 94-3
5.75%, due 3/22/99 ......................... AS 2,100,000 201,582
Series 93-1
7.00%, due 1/20/03 ......................... 3,110,000 310,440
Series 95-1
7.50%, due 1/24/05 ......................... 5,440,000 557,574
----------
1,069,596
----------
BELGIUM (0.5%)
Kingdom of Belgium
Series 15
6.75%, due 5/25/97 ......................... BF 5,000,000 159,818
----------
CANADA (8.6%)
Canadian Government
Series A76
9.00%, due 6/1/25 .......................... C $ 25,000 22,458
9.75%, due 6/1/01 .......................... 645,000 549,508
Series H74
10.00%, due 6/1/08 ......................... 160,000 148,484
Series A33
11.50%, due 9/1/00 ......................... 550,000 484,845
Province of British Columbia
Series BCCD
8.00%, due 8/23/05 ......................... 640,000 513,862
Series EC-8
10.75%, due 2/19/01 ........................ 135,000 117,511
Province of Ontario
7.25%, due 9/27/05 ......................... 1,085,000 827,186
----------
2,663,854
----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================
<S> <C> <C>
DENMARK (6.7%)
Kingdom of Denmark
7.00%, due 12/15/04 ........................ DK 2,750,000 $ 485,908
7.00%, due 11/10/24 ........................ 835,000 134,191
8.00%, due 11/15/01 ........................ 2,220,000 417,739
9.00%, due 11/15/98 ........................ 2,480,000 457,834
9.00%, due 11/15/00 ........................ 2,940,000 567,924
----------
2,063,596
----------
FRANCE (8.7%)
France Bons du Tresor
Negociables
5.75%, due 11/12/98 ........................ FF 1,220,000 244,035
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05 ......................... 2,700,000 586,627
8.25%, due 2/27/04 ......................... 2,262,000 509,943
8.50%, due 3/28/00 ......................... 2,790,000 607,776
8.50%, due 11/25/02 ........................ 2,900,000 656,283
8.50%, due 12/26/12 ........................ 420,000 99,466
----------
2,704,130
----------
GERMANY (7.8%)
German Unity Fund
8.50%, due 2/20/01 ......................... DM 690,000 513,366
International Bank of
Reconstruction & Development
7.125%, due 4/12/05 (a) .................... 900,000 633,634
Republic of Deutschland
Series 94
6.25%, due 1/4/24 (a) ...................... 420,000 258,659
Treuhandanstalt
6.50%, due 4/23/03 ......................... 625,000 431,467
7.375%, due 12/2/02 (a) .................... 800,000 576,779
----------
2,413,905
----------
IRELAND (2.8%)
Irish Government
6.25%, due 4/1/99 (a) ...................... IP 95,000 161,673
8.25%, due 8/18/15 (a) ..................... 58,000 111,025
8.75%, due 7/27/97 (a) ..................... 95,000 163,185
8.75%, due 9/30/12 (a) ..................... 95,000 189,731
9.25%, due 7/11/03 (a) ..................... 125,000 245,097
----------
870,711
----------
ITALY (14.0%)
Buoni Poliennali del Tesoro
8.50%, due 8/1/97 .......................... IL 1,530,000,000 1,011,269
8.50%, due 4/1/99 .......................... 1,350,000,000 927,382
8.50%, due 1/1/04 .......................... 1,480,000,000 1,044,924
</TABLE>
- -----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=========================
<S> <C> <C>
LONG-TERM GOVERNMENT BONDS (Continued)
ITALY (Continued)
9.50%, due 2/1/01 ........................ IL 1,080,000,000 $ 780,354
10.00%, due 8/1/03 ....................... 760,000,000 572,592
----------
4,336,521
----------
NETHERLANDS (0.1%)
Netherlands Government
6.25%, due 2/15/97 ....................... NG 55,000 31,899
----------
SPAIN (4.5%)
Spanish Government
8.30%, due 12/15/98 ...................... SP 4,000,000 32,216
10.50%, due 10/30/03 ..................... 66,300,000 619,660
11.30%, due 1/15/02 ...................... 41,490,000 389,150
12.25%, due 3/25/00 ...................... 40,000,000 364,872
----------
1,405,898
----------
SWEDEN (5.8%)
Banque Nationale de Paris
Series EMTN
11.00%, due 11/4/99 ...................... SK 3,050,000 509,898
Swedish Government
Series 1035
6.00%, due 2/9/05 ........................ 800,000 113,541
Series 1034
9.00%, due 4/20/09 ....................... 2,700,000 465,071
Series 1033
10.25%, due 5/5/03 ....................... 3,000,000 534,699
Series 1030
13.00%, due 6/15/01 ...................... 900,000 169,943
----------
1,793,152
----------
UNITED KINGDOM (7.5%)
United Kingdom Treasury Bonds
8.50%, due 7/16/07 (a) ................... (POUND) 495,000 906,919
9.50%, due 4/18/05 (a) ................... 175,000 335,883
10.00%, due 2/26/01 (a) .................. 195,000 366,240
10.00%, due 9/8/03 (a) ................... 370,000 718,265
----------
2,327,307
----------
Total Long-Term Government Bonds
(Cost $21,968,036) ....................... 23,724,311
----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
========================
<S> <C> <C>
SHORT-TERM INVESTMENT (4.5%)
COMMERCIAL PAPER (4.5%)
UNITED STATES (4.5%) Ameritech Corp.
6.25%, due 1/2/97 ........................ $1,380,000 $ 1,379,760
-----------
Total Short-Term Investment
(Cost $1,379,760) ........................ 1,379,760
-----------
OPTIONS (0.1%)
UNITED STATES (0.1%)
U.S. Dollar Put/Deutsche Mark Call
Strike price DM 1.5150
Expires 5/16/97 .......................... $2,300,000 42,435
-----------
Total Options
(Cost $30,935) ........................... 42,435
-----------
Total Investments
(Cost $23,378,731) (b) ................... 81.2% 25,146,506(c)
Cash and Other Assets,
Less Liabilities ......................... 18.8 5,838,628
-----------
Net Assets ................................. 100.0% $30,985,134
===========
</TABLE>
- ----------
(a) Segregated as collateral for options and forward foreign currency
contracts.
(b) The cost for Federal income tax purposes is $23,382,142.
(c) At December 31, 1996 net unrealized appreciation for securities was
$1,764,364, based on cost for Federal income tax purposes. This consisted
of aggregate gross unrealized appreciation for all investments on which
there was an excess of market value over cost of $1,835,789 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $71,425.
(d) The following abbreviations are used in the above portfolio:
A$-Australian Dollar
AS-Austrian Schilling
BF-Belgian Franc
C$-Canadian Dollar
DK-Danish Krone
DM-Deutsche Mark
FF-French Franc
IP-Irish Punt
IL-Italian Lira
NG-Netherland Guilder
(POUND)-Pound Sterling
SP-Spanish Peseta
SK-Swedish Krona
$ -U.S. Dollar
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $23,378,731) .......... $25,146,506
Cash denominated in foreign currencies (identified cost $4,788,435) ........ 4,707,235
Cash ....................................................................... 42,630
Receivables:
Interest ................................................................. 816,707
Fund shares sold ......................................................... 158,880
Unrealized net appreciation on forward foreign currency contracts .......... 220,368
Unamortized organization expense ........................................... 26,910
Other assets ............................................................... 17
-----------
Total assets ............................................................ 31,119,253
-----------
LIABILITIES:
Payables:
Investment securities purchased .......................................... 30,935
NYLIFE Distributors ...................................................... 21,300
Fund shares redeemed ..................................................... 11,307
Transfer agent ........................................................... 7,019
Adviser .................................................................. 6,383
Custodian ................................................................ 4,416
Trustees ................................................................. 219
Accrued expenses ........................................................... 52,540
-----------
Total liabilities ....................................................... 134,119
-----------
Net assets ................................................................. $30,985,134
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A .................................................................. $ 10,930
Class B .................................................................. 17,330
Additional paid-in capital ................................................. 29,068,285
Accumulated distribution in excess of net investment income .............. (36,679)
Accumulated undistributed net realized gain on investments ................. 20,261
Net unrealized appreciation on investments ................................. 1,767,775
Net unrealized appreciation on translation of assets and liabilities in
foreign currencies and forward foreign currency contracts ................ 137,232
-----------
Net assets ................................................................. $30,985,134
===========
CLASS A
Net assets applicable to outstanding shares ................................ $11,965,194
===========
Shares of beneficial interest outstanding .................................. 1,092,984
===========
Net asset value per share outstanding ...................................... $ 10.95
Maximum sales charge (4.50% of offering price) ............................. 0.52
-----------
Maximum offering price per share outstanding ............................... $ 11.47
===========
CLASS B
Net assets applicable to outstanding shares ................................ $19,019,940
===========
Shares of beneficial interest outstanding .................................. 1,732,970
===========
Net asset value per share outstanding ...................................... $ 10.98
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest (a) ................................................................................ $1,882,598
----------
Expenses:
Advisory .................................................................................... 123,422
Distribution--Class B ....................................................................... 102,727
Shareholder communication ................................................................... 76,456
Administration .............................................................................. 68,567
Service ..................................................................................... 68,567
Transfer agent .............................................................................. 45,686
Custodian ................................................................................... 28,152
Registration ................................................................................ 25,726
Professional ................................................................................ 12,908
Recordkeeping ............................................................................... 12,511
Amortization of organization expense ........................................................ 11,689
Trustees .................................................................................... 832
Miscellaneous ............................................................................... 8,792
----------
Total expenses before reimbursement ........................................................ 586,035
Fees waived by Administrator and Adviser ...................................................... (82,400)
----------
Net expenses ............................................................................... 503,635
----------
Net investment income ......................................................................... 1,378,963
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ....................................................................... 467,595
Foreign currency transactions ............................................................... 1,128,390
----------
Net realized gain on investments and foreign currency transactions ............................ 1,595,985
----------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ....................................................................... 358,520
Translation of assets and liabilities in foreign currencies and forward foreign currency
contracts ................................................................................. 160,131
----------
Net unrealized gain on investments and foreign currencies ..................................... 518,651
----------
Net realized and unrealized gain on investments and foreign currency transactions ............. 2,114,636
----------
Net increase in net assets resulting from operations .......................................... $3,493,599
==========
</TABLE>
- ----------
(a) Interest recorded net of foreign withholding taxes of $37,600.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
----------- -----------
INCREASE IN NET ASSETS:
<S> <C> <C>
Operations:
Net investment income ............................................................ $ 1,378,963 $ 1,251,026
Net realized gain on investments ................................................. 467,595 375,199
Net realized gain on foreign currency transactions ............................... 1,128,390 231,524
Net change in unrealized appreciation on investments ............................. 358,520 1,599,712
Net change in unrealized appreciation on translation of assets and liabilities
in foreign currencies and forward foreign currency contracts .................... 160,131 7,928
----------- -----------
Net increase in net assets resulting from operations ............................. 3,493,599 3,465,389
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A ......................................................................... (794,237) (646,470)
Class B ......................................................................... (984,527) (598,457)
From net realized gain on investments and foreign currency transactions:
Class A ......................................................................... (162,643) (302,837)
Class B ......................................................................... (253,849) (303,886)
In excess of net realized gain on investments and foreign currency
transactions:
Class A ......................................................................... -- (413,406)
Class B ......................................................................... -- (382,704)
----------- -----------
Total dividends and distributions to shareholders ............................. (2,195,256) (2,647,760)
----------- -----------
Capital share transactions: Net proceeds from sale of shares:
Class A ......................................................................... 2,149,516 10,769,762
Class B ......................................................................... 7,816,122 6,263,522
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A ......................................................................... 251,550 209,585
Class B ......................................................................... 1,098,725 1,152,182
----------- -----------
11,315,913 18,395,051
Cost of shares redeemed:
Class A ......................................................................... (2,500,800) (30,768)
Class B ......................................................................... (3,834,311) (11,631,056)
----------- -----------
Increase in net assets derived from capital share transactions ................ 4,980,802 6,733,227
----------- -----------
Net increase in net assets .................................................... 6,279,145 7,550,856
NET ASSETS:
Beginning of year .................................................................. 24,705,989 17,155,133
----------- -----------
End of year ........................................................................ $30,985,134 $24,705,989
=========== ===========
Accumulated distribution in excess of net investment income ........................ $ (36,679) $ --
=========== ===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
--------------
Class A Class B Class A Class B September 13,*
------- ------- ------- -------- through
Year ended Year ended December 31,
December 31, 1996 December 31, 1995 1994
------------------- ------------------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period ................................. $ 10.43 $ 10.45 $ 9.90 $ 9.90 $ 10.00
------- ------- ------- ------- -------
Net investment income .................................................. 0.72 0.64 1.15 1.06 0.12
Net realized and unrealized gain (loss) on investments ................. 0.27 0.27 0.59 0.61 (0.08)
Net realized and unrealized gain (loss) on foreign currency transactions 0.41 0.42 0.07 0.07 (0.02)
------- ------- ------- ------- -------
Total from investment operations ....................................... 1.40 1.33 1.81 1.74 0.02
------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income ............................................. (0.73) (0.65) (0.61) (0.56) (0.12)
From net realized gain on investments and foreign currency transactions (0.15) (0.15) (0.28) (0.28) --
In excess of net realized gain on investments and foreign currency
transactions ......................................................... -- -- (0.39) (0.35) --
------- ------- ------- ------- -------
Total dividends and distributions ...................................... (0.88) (0.80) (1.28) (1.19) (0.12)
------- ------- ------- ------- -------
Net asset value at end of period ....................................... $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90
======= ======= ======= ======= =======
Total investment return (a) ............................................ 13.90% 13.13% 18.68% 17.96% 0.20%
Ratios (to average net assets)/Supplemental Data:
Net investment income ................................................ 5.4% 4.8% 5.6% 4.9% 4.8%+
Net expenses ......................................................... 1.5% 2.1% 1.5% 2.2% 2.8%+
Expenses (before waiver) ............................................. 1.8% 2.4% 1.8% 2.5% 3.1%+
Portfolio turnover rate ................................................ 59% 59% 103% 103% 4%
Net assets at end of period (in 000's) ................................. $11,965 $19,020 $11,494 $13,212 $17,155
</TABLE>
- ----------
* Commencement of Operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay International Bond Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek competitive overall return
commensurate with an acceptable level of risk by investing primarily in a
portfolio of non-U.S. (primarily government) debt securities.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, and (b) by appraising all other
securities and other assets, including debt securities for which prices are
supplied by a pricing agent but are not deemed by the Adviser to be
representative of market values, but excluding money market instruments with a
remaining maturity of sixty days or less and including restricted securities and
securities for which no market quotations are available, at fair value in
accordance with procedures approved by the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and value on
maturity date if their original term to maturity at purchase exceeded 60 days.
17
<PAGE>
MainStay International Bond Fund
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward contract is open, changes in the
value of the contract are recognized as unrealized gains or losses by "marking
to market" such contract on a daily basis to reflect the market value of the
contract at the end of each day's trading. When the forward contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract. The Fund enters into forward foreign currency exchange contracts in
order to hedge its foreign currency denominated investments and receivables and
payables against adverse movements in future foreign exchange rates.
The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract amount reflects the extent of the Fund's involvement
in these financial instruments. Risks arise from the possible movements in the
foreign exchange rates underlying these instruments. The unrealized appreciation
on forward contracts reflects the Fund's exposure at year end to credit loss in
the event of a counterparty's failure to perform its obligations.
Forward foreign currency contracts open at December 31, 1996:
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
Foreign Currency Sale Contracts ------ ---- ----- --------------
<S> <C> <C> <C> <C> <C>
Australian Dollar, expiring 2/24/973/3/97 ......... A$ 1,410,000 $ 1,136,903 $1,119,163 $ 17,740
Canadian Dollar, expiring 6/16/97 ................. C$ 980,000 730,253 722,165 8,088
Danish Krone, expiring 2/12/97 .................... DK 8,405,000 1,447,657 1,428,102 19,555
Deutsche Mark, expiring 1/6/976/20/97 ............. DM 24,832,355 16,489,697 16,211,715 277,982
French Franc, expiring 2/4/97 ..................... FF 1,350,000 263,987 260,219 3,768
Irish Punt, expiring 1/7/97 ....................... IP 480,000 768,589 812,362 (43,773)
Italian Lira, expiring 1/23/97 .................... IL 1,200,000,000 773,353 788,400 (15,047)
Pound Sterling, expiring 1/7/972/14/97 ........(pound) 438,000 683,678 749,391 (65,713)
Spanish Peseta, expiring 1/22/97 .................. SP 55,500,000 422,972 426,407 (3,435)
--------
199,165
--------
</TABLE>
18
<PAGE>
Notes to Financial Statements continued
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Foreign Currency Buy Contracts Amount Date Value (Depreciation)
- ------------------------------ ------ ---- ----- --------------
<S> <C> <C> <C> <C> <C>
Australian Dollar, expiring 1/7/97 ................ A$ 970,000 $ 767,270 $ 770,391 $ 3,121
Deutsche Mark, expiring 1/7/972/24/97 ............. DM 6,753,628 4,445,435 4,391,332 (54,103)
Pound Sterling, expiring 1/7/97 ...............(pound) 491,520 768,588 841,010 72,422
Swedish Krona, expiring 1/27/97 ................... SK 50,000 7,568 7,331 (237)
--------
21,203
--------
Net Appreciation .................................. $220,368
========
</TABLE>
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $54,000 and are being
amortized over 60 months beginning at the commencement of operations.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $363,122 and $2,620 have been reclassified
from accumulated undistributed net realized gain on foreign currency
transactions to accumulated distribution in excess of net investment income and
accumulated undistributed net realized gain on investments, respectively, due to
the tax treatment of foreign currency gains.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Discounts on securities
purchased for the Fund are accreted on the constant yield method over the life
of the respective securities, or, if applicable, over the period to the first
call date.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to
19
<PAGE>
MainStay International Bond Fund
separate classes of shares based upon their relative net asset value on the date
the income is earned or expenses and realized and unrealized gains and losses
are incurred.
Foreign Currency Investing. The books and records of the Fund are recorded in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the
mean between the buying and selling rates last quoted by any major U.S. bank at
the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the year. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, gains and losses
from certain foreign currency transactions are treated as ordinary income for
Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds or
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated
assets and liabilities at year end exchange rates are reflected in unrealized
foreign exchange gains.
There are certain risks involved in investing in foreign securities that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.
20
<PAGE>
Notes to Financial Statements continued
Foreign cash held at December 31, 1996:
<TABLE>
<CAPTION>
Currency Cost Value
- ----------------------------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
Australian Dollar A$ 417,915 $ 327,480 $ 331,950
Austrian Schilling AS 2,865,732 287,487 264,378
Belgian Franc BF 12,285,637 392,058 386,777
Canadian Dollar C$ 484,366 355,490 353,371
Danish Krone DK 1,153,026 197,889 195,464
Deutsche Mark DM 2,255,497 1,522,597 1,463,563
French Franc FF 1,130,655 219,719 217,484
Irish Punt IP 39,753 63,263 67,283
Italian Lira IL 364,311,769 239,447 239,717
Netherland Guilder NG 321,547 189,505 185,887
Pound Sterling (pound) 129,007 201,200 220,770
Spanish Peseta SP 51,505,996 405,205 395,978
Swedish Krona SK 2,626,133 387,095 384,613
---------- ----------
$4,788,435 $4,707,235
========== ==========
</TABLE>
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.25% and 0.15%, respectively, of the average daily net assets of the
Fund. The Adviser and Administrator each agreed that a portion of its fees,
$54,933 and $27,467, respectively, for the year ended December 31, 1996, would
not be imposed, pursuant to the applicable contracts, until such time as the
Fund reaches $50 million in net assets. Had the net assets reached $50 million,
the Adviser and Administrator would have been paid 0.45% and 0.25%,
respectively.
21
<PAGE>
MainStay International Bond Fund
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $54,586 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$27,332 for the year ended December 31, 1996.
22
<PAGE>
Notes to Financial Statement continued
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Capital. At December 31, 1996 NYLIFE Distributors held shares of Class A of the
Fund with a net asset value of $9,233,704, which represents 77.2% of the net
assets of Class A shares at year end.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $2,593.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $771 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$12,511.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $15,710 and $13,062, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
================= =================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ....................................................... 196 725 1,084 588
Shares issued in reinvestment of dividends and distributions ...... 23 101 20 110
--- --- ----- -----
219 826 1,104 698
Shares redeemed ................................................... 228 357 2 1,168
--- --- ----- -----
Net increase (decrease) ........................................... (9) 469 1,102 (470)
=== === ===== =====
</TABLE>
23
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay International Bond Fund
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
24
<PAGE>
This page intentionally left blank
25
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
26
<PAGE>
<TABLE>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
INTERNATIONAL BOND FUND [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
27
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
International Bond Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an
indirect wholly owned subsidiary of New York
Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
International Bond Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN10 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay International Equity Fund
Highlights 3
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Country--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 9
Top 10 Equity Holdings 10
10 Largest Purchases 10
10 Largest Sales 10
Portfolio of Investments 11
Financial Statements 18
Notes to Financial Statements 22
Report of Independent Accountants 29
The MainStay Funds 30
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay International Equity Fund Highlights
1996 MARKET HIGHLIGHTS
o International equity markets generally had positive performance, with The
Morgan Stanley Capital International EAFE Index+ returning 6.05% for the 12
months ended December 31, 1996
o An accommodative interest rate environment worldwide was good for
international corporate growth, and particularly good for interest-rate
sensitive stocks
o While Japan showed improving fundamentals, it provided the worst returns of
any major world market, losing about 5% for the year
o Spain, Norway, and the Netherlands provided excellent overall performance,
with Italy, France, Germany, and Hong Kong also providing positive returns
o A market reversal in June and July, led by declines in U.S. equities, left
returns in the second half of the year at more modest levels
1996 FUND HIGHLIGHTS
o One-year total returns of 9.78% and 9.05% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o The Fund outpaced The Morgan Stanley Capital International EAFE Index for
the 12 months ended 12/31/96
o The Fund underperformed the average Lipper++ international fund for the 12
months ended 12/31/96
o The portfolio benefited from investments in Spain and Italy, and energy
investments in Norway and the Netherlands, but was hurt by holdings in
Japan
o Selective currency hedging worked to the advantage of investors in the Fund
throughout the year
- ----------
+ See footnote on page 4 for more information on The Morgan Stanley Capital
International EAFE Index.
++ See footnote and table on page 9 for more information about Lipper
Analytical Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
International Morgan Stanley
Date Equity Fund EAFE Index
- --------------------------------------------------------------------------------
<S> <C> <C>
09/13/94 $ 9,450.00 $10,000
12/94 $ 9,232.65 $ 9,595
12/95 $ 9,717.81 $10,703
12/96 $10,668.60 $11,306
</TABLE>
[GRAPHIC] MainStay International Equity Fund
[GRAPHIC] Morgan Stanley EAFE Index*
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay
International Morgan Stanley
Date Equity Fund EAFE Index
- --------------------------------------------------------------------------------
<S> <C> <C>
09/13/94 $10,000.00 $10,000
12/94 $ 9,770.00 $ 9,595
12/95 $10,187.10 $10,703
12/96 $10,775.70 $11,306
</TABLE>
[GRAPHIC] MainStay International Equity Fund
[GRAPHIC] Morgan Stanley EAFE Index*
- ----------
The Class A graph assumes an initial investment of $10,000 made on 9/13/94
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (9/13/94)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 9/13/94. Returns reflect the Contingent Deferred Sales
Charge (CDSC) of 3.0%, as it would apply for the period shown. All results
include reinvestment of distributions at net asset value and the change in
share price for the stated period. Past performance is no guarantee of
future results.
* The Morgan Stanley Capital International Europe, Australia, Far East (Free)
Index--The EAFE Index--is an unmanaged, capitalization-weighted index
containing approximately 1,000 equity securities of companies located
outside the U.S.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Shigemi Takagi
INTERNATIONAL EQUITY FUND MANAGER
Shigemi Takagi
Throughout 1996, the international equity markets benefited from
accommodative interest rate policies in most major markets around the world. The
low interest rate environment helped act as a stimulus for corporate growth and
had a positive impact on interest-rate sensitive industries such as banking and
finance. The strengthening of economic fundamentals also led to gains in energy
stocks, which benefited from greater demand for fuel around the world.
In Europe, massive restructuring has begun, offering potential opportunities for
companies to increase their profitability and reduce their labor costs. A law
recently passed in Germany will allow employers to substantially reduce their
benefit costs, which could improve corporate earnings prospects there. In
France, corporate profit growth continues to be promising due to the lack of
wage cost increases caused by high unemployment rates and generally lower
production costs. All of this is good for industry in France and Germany and may
bode well for the future of European industry.
Although Asian markets faltered in July when the U.S. technology industry had a
severe setback, later in the year the situation stabilized and growth trends are
once again emerging. Japan appears as a notable exception. Despite improving
economic fundamentals, investors have remained bearish, resulting in an overall
market decline of about 5% for the year. While some banks closed during the
year, others did relatively well. Retailers were hurt by low returns on savings
and reduced consumer confidence. However, autos were good performers within the
weak Japanese market.
How did the MainStay International Equity Fund perform in this context?
For the 12 months ended December 31, 1996, the MainStay International Equity
Fund had total returns of 9.78% and 9.05% for Class A shares and Class B shares,
respectively, excluding all sales charges. These results lagged the average
Lipper+ international fund, which returned 11.78% for the same period, but were
well ahead of The Morgan Stanley Capital International EAFE Index,* which
returned only 6.05%.
[GRAPHIC]
Accommodative
interest rates
- --------------
When countries maintain low interest rates that allow businesses to borrow at
lower cost, they are said to be "accommodating" business in this regard. Low
interest rates tend to allow companies to raise more affordable capital for
expansion, and may stimulate corporate and economic growth.
Restructuring
- -------------
Any action designed to improve the overall financial structure, labor relations,
or productivity of a company. Restructuring may include such steps as changing
management, investing in new plants and equipment, engaging in mergers and
acquisitions, or taking other action to increase output or lower costs.
Bullish/Bearish
- ---------------
A bull market occurs when stock prices are rising, a bear market occurs when
stock prices decline. A bullish attitude therefore suggests a positive outlook,
while a bearish attitude represents a negative view of the market or the
opportunities it may present.
- ----------
+ See footnote and table on page 9 for more information about Lipper
Analytical Services, Inc.
5
<PAGE>
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Total
Return
Year-End %
- ---------------------------------------------------
<S> <C>
12/94 -2.30 Class B
12/95 5.25 Class A
12/95 4.27 Class B
12/96 9.78 Class A
12/96 9.05 Class B
</TABLE>
- ----------
See footnote * on page 9 for more information on performance.
What were the Fund's strongest investments during the year?
The Fund uses a country-first approach, seeking out the most promising markets
and then investing in a wide range of established companies in the markets we
feel may have positive prospects. In 1996, the Fund saw strong returns in Spain
and France, up about 50% and 29%, respectively, in local terms. A contributing
factor to France's strong returns were its interest rates which had a positive
impact on agriculture-related businesses that feed most of Europe. The Fund also
gained in the Netherlands (+38%) and Norway (+30%), where the Fund concentrated
in oil and energy-related issues.
Were those successes the result of strategic investing?
We believe strategy was ultimately responsible. We have held energy-related
positions in the Netherlands and Norway for some time, and recognized that the
improving economic fundamentals would increase demand for fuels. Oil prices
started the year at about $16 per barrel and ended around $23 per barrel, and
the rising prices were good for the Fund. In Spain, we increased the Fund's
holdings among utilities and banks, which profited from the accommodative
interest rate environment. All of these positions have made positive
contributions to the Fund throughout the year.
Were there any major market opportunities that you missed?
The Fund wasn't invested in Sweden, which was up 41% for the year--or Finland,
which was up 42%. Given how these markets had performed in 1995, we felt they
were fully valued. We were surprised at their growth this year and certainly
missed some opportunities in these markets.
What about the Far East?
The big story in the Far East was Japan. All the fundamentals were in place for
a market improvement. Interest rates were low and the environment was friendly
for business. But investors remained bearish. Since Japan was the weakest major
market, down about 5% in 1996, our position there definitely hurt Fund
performance. There were, however, some redeeming factors. While
[GRAPHIC]
Weighting
- ---------
The proportion of a portfolio allocated to a specific market sector or country,
i.e., a fund is said to be overweighted in a country when that portion of the
portfolio is larger than the country's total equities relative to the
international equity markets as a whole.
6
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Country Percentage
- -------------------------------------------------
<S> <C>
Japan 29.1%
France 10.5%
Germany 8.8%
United Kingdom 8.1%
Italy 6.6%
All Other 36.9%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
some Japanese banks closed during the year, we were invested in stronger banks
that survived the crisis. We also held auto stocks which did well on a relative
basis. In the fourth quarter, when we realized the market was not going to
respond to positive fundamentals, we reduced our weighting in Japan, which was
already lower than the overall weighting in the EAFE Index. This helped the
portfolio reduce risk and avoid some losses. We're continuing to reduce our
holdings in Japan, waiting for investor sentiment to turn more positive.
Were there other stories in the Far East?
Yes. In Hong Kong we increased the Fund's holdings in the second half of the
year when we saw opportunities to profit from this gateway for Chinese exports.
The result was positive for the Fund. Singapore, which is a major exporter of
electronic components and computer products, faced a downturn in midyear when
U.S. technology stocks faltered. While that had a negative impact on the Fund's
performance, we continued to hold the Fund's Singapore equities, which represent
a relatively small portion of the Fund's holdings. In the fourth quarter, orders
began to flow back to Singapore, so the situation appears to be improving. We're
pleased that our decision to hold these securities is bearing positive results
and look forward to improved prospects in 1997.
How has the portfolio responded to restructuring in Europe?
Restructuring is a positive factor for virtually any economy. We see it as a
force that could improve balance sheets, enhance productivity, and lower labor
costs through outsourcing to Eastern Europe and Asia. By adding to the Fund's
German and Dutch holdings in the fourth quarter, we sought to capitalize on the
restructuring trend and this has had a positive impact on the Fund's
performance.
What happened in the U.K.?
The stock market was up about 15%, which is good, but was modest in light of
markets like Spain, Finland, and Sweden that advanced more than 40% in 1996.
Since the Fund was underweighted in the U.K., its performance had a generally
positive, but not a substantial, impact on the Fund.
[GRAPHIC]
7
<PAGE>
[GRAPHIC]
How did you manage currency risk throughout the year?
Generally speaking, we used selective hedging to manage currency risk.
Throughout the year, this had a positive impact on performance.
Looking forward what do you see?
From a currency perspective, we continue to see the dollar strengthening against
other currencies over time. However, the dollar's protracted upward move might
have temporary setbacks. So we're carefully watching the situation.
Which markets do you like for 1997?
We anticipate that we'll be moving more into the core markets, such as Germany,
France, and the Netherlands, where we believe restructuring is likely to have
the greatest impact in the shortest amount of time. We believe exporting markets
are likely to continue to do well, but we are likely to place more emphasis in
Europe than in Asia, at least for the foreseeable future. As far as Japan is
concerned, until we see signs of a turnaround, we will continue to reduce the
Fund's positions. Overall, we'll continue to focus on developed markets and
established companies, seeking long-term growth of capital with an acceptable
level of risk.
Shigemi Takagi
Portfolio Manager
Currency management/hedging
- ---------------------------
The process of managing or "hedging" the risks associated with owning securities
denominated in different currencies, the relative values of which may change at
any time. There can be no assurance that currency hedging will be beneficial to
investors.
Investments in foreign securities may be subject to greater risks than domestic
investments. These risks include currency fluctuations, changes in U.S. or
foreign t ax or currency laws, and changes in monetary policies and economic and
political conditions in foreign countries.
PORTFOLIO COMPOSITION AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------
<S> <C>
Common Stocks 93.2%
Preferred Stocks 0.1%
Cash & Equivalents 6.7%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 9.78% n/a 5.40%
Class B 9.05% n/a 4.67%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 3.75% n/a 2.85%
Class B 4.05% n/a 3.43%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 194 out of n/a n/a
331 funds
Class B 209 out of n/a 155 out of
331 funds 222 funds
Average Lipper
international fund 11.78% 10.09% 6.51%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $10.48 $0.5206 $0.0280
Class B $10.38 $0.4600 $0.0280
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (9/13/94) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
12/31/96. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
Top 10 Equity Holdings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDING COUNTRY AMOUNT
================================================================================
<S> <C> <C>
Toyota Motor Corp. Japan $1,463,085
Ente Nazionale Idrocarburi S.p.A Italy 1,301,123
Singapore Telecommunications, Ltd. Singapore 1,108,793
Siemens AG Germany 1,096,126
Norsk Hydro ASA Norway 961,730
Allianz AG Holding Germany 908,436
Mitsubishi Heavy Industries, Ltd. Japan 895,615
Deutsche Telekom AG Germany 818,035
Hitachi Corp., Ltd. Japan 772,249
Bayer AG Germany 753,872
================================================================================
<CAPTION>
10 Largest Purchases for the 12 months ended 12/31/96
- --------------------------------------------------------------------------------
SECURITY COUNTRY AMOUNT OF PURCHASE
================================================================================
<S> <C> <C>
Singapore Telecommunications, Ltd. Singapore $1,138,620
Ente Nazionale Idrocarburi S.p.A Italy 1,122,504
Bank of Tokyo--Mitsubishi, Ltd. Japan 1,079,552
Siemens AG Germany 984,538
Kao Corp. Japan 860,833
Deutsche Telekom AG Germany 802,200
Allianz AG Holding Germany 712,999
Teijin, Ltd. Japan 687,838
Bayer AG Germany 614,415
Hitachi Corp., Ltd. Japan 564,628
================================================================================
<CAPTION>
10 Largest Sales for the 12 months ended 12/31/96
- --------------------------------------------------------------------------------
SECURITY COUNTRY AMOUNT OF SALE
================================================================================
<S> <C> <C>
BANK OF TOKYO--MITSUBISHI, LTD Japan $1,085,122
Dai--Ichi Kangyo Bank, Ltd. Japan 699,083
Kao Corp. Japan 519,306
Sun Hung Kai Properties, Ltd. Hong Kong 326,439
Seven--Eleven of Japan Co., Ltd. Japan 321,916
Hong Kong Telecommunications, Ltd. Hong Kong 309,997
Teijin, Ltd. Japan 306,645
Telecom Corp. of New Zealand Ltd. New Zealand 288,410
Reed International PLC United Kingdom 276,765
Tele Danmark AS Class B Denmark 271,465
================================================================================
</TABLE>
- ----------
Note: This breakdown is provided for infor-mational purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
COMMON STOCKS (93.2%)+
AUSTRALIA (4.8%)
Amcor, Ltd. (forest products
& paper) ........................................... 36,800 $ 236,459
Boral, Ltd. (building materials &
components) ........................................ 35,600 101,226
Brambles Industries, Ltd. ............................
(business & public services) ....................... 10,700 208,639
Broken Hill Proprietary Co., Ltd. ....................
(energy sources) ................................... 50,510 718,911
Coles Myer, Ltd. (merchandising) ..................... 35,468 145,924
CRA, Ltd. (metals-nonferrous) ........................ 9,568 150,089
CSR, Ltd. (multi-industry) ........................... 46,600 162,854
Foster's Brewing Group, Ltd. .........................
(beverages & tobacco) .............................. 74,080 150,038
Mount Isa Mines Holdings, Ltd. .......................
(metals-nonferrous) ................................ 52,300 73,110
National Australia Bank, Ltd. ........................
(banking) .......................................... 40,273 473,408
News Corp., Ltd. (broadcasting &
publishing) ........................................ 44,712 235,805
Pacific Dunlop, Ltd. .................................
(multi-industry) ................................... 25,800 65,574
Santos, Ltd. (energy sources) ........................ 37,500 151,901
Westpac Banking Corp., Ltd. ..........................
(banking) .......................................... 48,900 278,088
WMC, Ltd. (metals-nonferrous) ........................ 40,800 256,976
----------
3,409,002
----------
AUSTRIA (3.3%)
Austrian Airlines Oesterreichische
Luftverkehrs AG (transportation-
airlines) (a) ...................................... 450 68,499
Bank Austria AG (banking) ............................ 5,750 424,373
Creditanstalt-Bankverein
Stamm AG (banking) ................................. 3,050 206,250
EA-Generali AG (insurance) ........................... 950 280,455
Flughafen Wien AG (transportation-
airlines) .......................................... 2,200 112,034
Oesterreichische Brau-
Beteiligungs AG (beverages &
tobacco) ........................................... 1,950 132,225
OMV AG (energy sources) .............................. 2,850 321,034
Verbundgesellschaft-
Oesterreichische
Elektrizitatswirtschafts AG Class A
(utilities-electrical & gas) ....................... 3,550 265,443
Voest-Alpine Technologie AG
(machinery & engineering) .......................... 1,500 235,181
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
AUSTRIA (Continued)
Wienerberger Baustoffindustrie AG
(building materials &
components) ........................................ 1,320 $ 255,731
----------
2,301,225
----------
FRANCE (10.5%)
Alcatel Alsthom, SA (electrical &
electronics) ....................................... 3,527 282,771
AXA, SA (insurance) .................................. 5,228 331,857
Carrefour, SA (merchandising) ........................ 945 613,671
Compagnie de Saint Gobain, SA
(miscellaneous-materials &
commodities) ....................................... 2,363 333,627
Compagnie de Suez, SA (banking) ...................... 5,562 236,014
Compagnie Financiere de Paribas,
SA Class A (banking) ............................... 2,916 196,821
Compagnie Generale des Eaux, SA
(business & public services) ....................... 3,597 444,890
Elf Aquitaine, SA (energy sources) ................... 5,893 535,372
Eridania Beghin-Say, SA (food &
household products) ................................ 1,030 165,434
Groupe Danone, SA (food &
household products) ................................ 2,463 342,534
Havas, SA (business & public
services) .......................................... 2,799 195,977
Lafarge, SA (building materials &
components) ........................................ 2,250 134,730
L'Air Liquide, SA (chemicals) ........................ 3,731 581,315
L'Oreal, SA (health &
personal care) ..................................... 1,947 731,799
LVMH (Moet Hennessy Louis
Vuitton), SA (beverages &
tobacco) ........................................... 1,890 526,783
Lyonnaise des Eaux, SA
(multi-industry) ................................... 1,430 132,829
Michelin (CGDE), SA Class B
(tire & rubber) .................................... 2,769 149,189
Pernod-Ricard, SA
(beverages & tobacco) .............................. 980 54,101
Pinault-Printemps-Redoute, SA
(building materials &
components) ........................................ 570 225,643
PSA Peugeot, SA (automobiles) ........................ 520 58,414
Rhone-Poulenc, SA Class A
(chemicals) ........................................ 3,813 129,747
Schneider, SA (machinery &
engineering) ....................................... 2,987 137,837
Societe Generale, SA (banking) ....................... 2,970 320,494
Thomson CSF, SA (aerospace &
military technology) ............................... 4,791 155,100
Total, SA Class B (energy sources) ................... 4,474 363,170
----------
7,380,119
----------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
COMMON STOCKS (Continued)
GERMANY (8.8%)
Allianz AG Holding (insurance) ....................... 500 $ 908,436
BASF AG (chemicals) .................................. 17,550 675,074
Bayer AG (chemicals) ................................. 18,500 753,872
Daimler-Benz AG (automobiles)(a) ..................... 2,000 137,563
Deutsche Bank AG (banking) ........................... 4,950 230,941
Deutsche Telekom AG
(telecommunications)(a) ............................ 38,850 818,035
Dresdner Bank AG (banking) ........................... 20,450 611,731
Karstadt AG (merchandising) .......................... 50 16,871
Linde AG (machinery &
engineering) ....................................... 300 182,985
Mannesmann AG (machinery &
engineering) ....................................... 150 64,921
Muenchener Rueckversicherungs-
Gesellschaft AG (insurance) ........................ 54 134,727
Preussag AG (multi-industry) ......................... 50 11,307
RWE AG (utilities-electrical &
gas) ............................................... 1,500 63,461
Siemens AG (electrical &
electronics) ....................................... 23,300 1,096,126
Thyssen AG (metals-steel) ............................ 150 26,572
VEBA AG (utilities-electrical & gas) ................. 4,500 259,878
Viag AG (multi-industry) ............................. 300 117,578
Volkswagen AG (automobiles) .......................... 100 41,528
----------
6,151,606
----------
HONG KONG (4.0%)
Cheung Kong (Holdings), Ltd.
(real estate) ...................................... 55,000 488,851
China Light & Power Co., Ltd.
(utilities-electrical & gas) ....................... 51,000 226,814
Hang Seng Bank, Ltd. (banking) ....................... 32,800 398,605
Hong Kong Telecommunications,
Ltd. (telecommunications) .......................... 222,000 357,325
Hutchison Whampoa, Ltd.
(multi-industry) ................................... 63,000 494,799
Sun Hung Kai Properties, Ltd.
(real estate) ...................................... 42,000 514,482
Swire Pacific, Ltd. Class A
(multi-industry) ................................... 32,500 309,875
----------
2,790,751
----------
ITALY (6.6%) Assicurazioni Generali S.p.A
(insurance) ........................................ 31,515 596,185
Banca Commerciale Italiana S.p.A
(banking) .......................................... 75,000 136,206
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
ITALY (Continued)
Benetton Group S.p.A. (textiles &
apparel) ........................................... 9,500 $ 119,957
Credito Italiano S.p.A. (banking) .................... 38,000 41,657
Edison S.p.A. (energy sources) ....................... 11,000 69,485
Ente Nazionale Idrocarburi S.p.A
(energy sources) ................................... 254,000 1,301,123
Fiat S.p.A. (automobiles) ............................ 101,000 305,042
Fiat S.p.A. di Risp (automobiles) .................... 18,000 31,505
Istituto Bancario San Paolo
di Torino S.p.A. (banking) ......................... 32,500 198,880
Istituto Nazionale delle
Assicurazioni S.p.A. (insurance) ................... 89,000 115,718
Italgas S.p.A. (utilities-
electrical & gas) .................................. 14,000 58,358
Mediobanca S.p.A. (financial
services) .......................................... 23,500 126,565
Montedison S.p.A
(multi-industry) (a) ............................... 68,080 46,320
Olivetti Group S.p.A. (data
processing & reproduction) (a) ..................... 70,000 24,642
Parmalat Finanziaria S.p.A
(food & household products) ........................ 94,000 143,497
Pirelli S.p.A. (industrial
components) ........................................ 68,000 125,954
Riunione Adriatica di Sicurta S.p.A
(insurance) ........................................ 14,325 133,376
Sirti S.p.A. (telecommunications) .................... 9,500 57,509
Telecom Italia S.p.A
(telecommunications) ............................... 185,000 479,616
Telecom Italia S.p.A. di Risp
(telecommunications) ............................... 27,000 52,587
Telecom Italia Mobile S.p.A
(telecommunications) ............................... 178,000 449,171
Telecom Italia Mobile S.p.A
di Risp (telecommunications) ....................... 20,000 28,491
----------
4,641,844
----------
JAPAN (29.1%)
Ajinomoto Co., Inc. (food &
household products) (b) ............................ 10,000 101,657
Asahi Bank, Ltd. (banking) (b) ....................... 30,000 266,203
Asahi Chemical Industry Co., Ltd.
(chemicals) (b) .................................... 51,000 288,223
Asahi Glass Co., Ltd.
(miscellaneous-materials &
components) (b) .................................... 27,000 253,539
Bank of Tokyo-Mitsubishi, Ltd.
(banking) (b) ...................................... 1,000 18,522
Bridgestone Corp. (industrial
components) (b) .................................... 7,000 132,671
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
COMMON STOCKS (Continued)
JAPAN (Continued)
Canon, Inc. (recreation & other
consumer goods) (b) ................................ 23,000 $ 507,251
Chiba Bank, Ltd. (banking) (b) ....................... 4,000 27,223
Dai Nippon Printing Co., Ltd.
(business & public services) (b) ................... 14,000 244,838
Daiei, Inc. (merchandising) (b) ...................... 14,000 106,740
Daiwa House Industry Co., Ltd.
(construction & housing) (b) ....................... 10,000 128,364
Denso Corp. (industrial
components) ........................................ 3,000 72,108
Fanuc, Ltd. (electronic
components & instruments) (b) ...................... 4,000 127,847
Fuji Bank, Ltd. (banking) (b) ........................ 36,000 524,137
Fuji Photo Film, Ltd. (recreation &
other consumer goods) .............................. 4,000 131,637
Fujitsu, Ltd. (data processing &
reproduction) ...................................... 27,000 251,213
Furukawa Electric Co.
(industrial components) ............................ 33,000 156,078
Hankyu Corp.
(transportation-road & rail) ....................... 16,000 79,258
Hitachi Corp., Ltd.
(electrical & electronics) ......................... 83,000 772,249
Honda Motor Co., Ltd.
(automobiles) ...................................... 9,000 256,641
Industrial Bank of Japan, Ltd.
(banking) .......................................... 31,000 536,801
Ito-Yokado Co., Ltd.
(merchandising) .................................... 5,000 217,098
Itochu Corp. (wholesale &
international trade) ............................... 62,000 332,229
Japan Airlines Co. (transportation-
airlines) (a) ...................................... 24,000 127,157
Japan Energy Corp.
(energy sources) ................................... 52,000 141,114
Joyo Bank (banking) .................................. 8,000 48,106
Kajima Corp. (construction &
housing) ........................................... 9,000 64,199
Kansai Electric Power Co., Inc.
(utilities-electrical & gas) ....................... 7,000 144,732
Kao Corp. (food & household
products) .......................................... 32,000 372,168
Kawasaki Steel Corp.
(metals-steel) ..................................... 6,000 17,213
Kinki Nippon Railway Co., Ltd.
(transportation-road & rail) ....................... 23,000 143,259
Kirin Brewery Co., Ltd.
(beverages & tobacco) .............................. 30,000 294,633
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
JAPAN (Continued)
Komatsu, Ltd. (machinery &
engineering) ....................................... 27,000 $ 220,975
Kubota Corp. (machinery &
engineering) ....................................... 60,000 288,947
Marubeni Corp. (wholesale &
international trade) ............................... 58,000 248,836
Marui Co., Ltd. (merchandising) ...................... 10,000 180,053
Matsushita Electric Industrial Co.,
Ltd. (appliances & household
durables) .......................................... 15,000 244,235
Mitsubishi Chemical Corp.
(chemicals) ........................................ 34,000 109,841
Mitsubishi Corp. (multi-industry) .................... 24,000 248,112
Mitsubishi Electric Corp.
(electrical & electronics) ......................... 56,000 332,884
Mitsubishi Estate Co., Ltd.
(construction & housing) ........................... 9,000 92,267
Mitsubishi Heavy Industries, Ltd.
(machinery & engineering) .......................... 113,000 895,615
Mitsubishi Trust & Banking Co.
(financial services) ............................... 18,000 240,359
Mitsui Engineering &
Shipbuilding Co., Ltd.
(machinery & engineering) (a) ...................... 44,000 89,458
Mitsui Fudosan Co. (construction &
housing) ........................................... 17,000 169,888
Mitsui Marine & Fire Insurance Co.,
Ltd. (insurance) ................................... 11,000 59,039
Mitsui Trust & Banking Co.
(financial services) ............................... 7,000 54,576
Mitsukoshi, Ltd. (merchandising) ..................... 4,000 28,326
NEC Corp. (electrical & electronics) ................. 23,000 277,403
Nippon Express Co., Ltd.
(transportation-road & rail) ....................... 40,000 273,612
Nippon Paper Industries Co.
(forest products & paper) .......................... 13,000 60,477
Nippon Steel Corp. (metals-steel) .................... 145,000 427,218
Nippon Yusen Kabushiki Kaisha
(transportation-shipping) .......................... 5,000 22,571
Nissan Motor Co., Ltd.
(automobiles) ...................................... 54,000 312,621
NKK Corp. (metals-steel) (a) ......................... 96,000 215,857
Nomura Securities Co., Ltd.
(financial services) ............................... 34,000 509,663
Obayashi Corp. (construction &
housing) ........................................... 16,000 107,791
Oji Paper Co., Ltd. (forest
products & paper) .................................. 11,000 69,463
Osaka Gas Co. (utilities-
electrical & gas) .................................. 6,000 16,386
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
COMMON STOCKS (Continued)
JAPAN (Continued)
Sakura Bank, Ltd. (banking) .......................... 41,000 $ 292,462
Sankyo Co., Ltd. (health &
personal care) ..................................... 4,000 113,029
Sanyo Electric Co., Ltd. (appliances &
household durables) ................................ 19,000 78,569
Sekisui Chemical Co. (building
materials & components) ............................ 2,000 20,159
Sekisui House, Ltd. (construction &
housing) ........................................... 2,000 20,331
Sharp Corp. (appliances & household
durables) .......................................... 14,000 199,006
Shimizu Corp. (construction &
housing) ........................................... 9,000 67,068
Shiseido Co., Ltd. (health &
personal care) ..................................... 2,000 23,088
Shizuoka Bank, Ltd. (banking) ........................ 1,000 10,596
Sony Corp. (appliances & household
durables) .......................................... 6,000 392,327
Sumitomo Bank, Ltd. (banking) ........................ 41,000 589,869
Sumitomo Chemical Co.
(chemicals) ........................................ 6,000 23,726
Sumitomo Corp. (wholesale &
international trade) ............................... 8,000 62,924
Sumitomo Electric Industries
(industrial components) ............................ 17,000 237,257
Sumitomo Marine & Fire
Insurance Co. (insurance) .......................... 19,000 117,853
Sumitomo Metal Industries, Ltd.
(metals-steel) ..................................... 29,000 71,203
Sumitomo Metal Mining Co.
(metals-nonferrous) ................................ 14,000 94,196
Taisei Corp. (construction &
housing) ........................................... 47,000 242,943
Taisho Pharmaceutical Co.
(health & personal care) ........................... 1,000 23,519
Takeda Chemical Industries, Ltd.
(health & personal care) ........................... 19,000 397,755
Teijin, Ltd. (chemicals) ............................. 126,000 549,258
Tobu Railway Co., Ltd.
(transportation-road & rail) ......................... 44,000 214,927
Tohoku Electric Power (utilities-
electrical & gas) .................................. 2,000 39,629
Tokai Bank (banking) ................................. 24,000 250,180
Tokio Marine & Fire Insurance Co.
(insurance) ........................................ 23,000 215,978
Tokyo Dome Corp. (leisure &
tourism) ........................................... 7,000 121,816
Tokyo Electric Power Co., Inc.
(utilities-electrical & gas) ....................... 28,000 612,699
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
JAPAN (Continued)
Tokyo Gas Co., Ltd. (utilities-
electrical & gas) .................................. 37,000 $ 100,089
Tokyu Corp. (transportation-
road & rail) ....................................... 10,000 56,687
Toppan Printing Co., Ltd.
(business & public services) ....................... 39,000 487,178
Tostem Corp. (building materials &
components) ........................................ 3,000 82,704
Toto, Ltd. (building materials &
components) ........................................ 1,000 11,372
Toyoda Automatic Loom Works, Ltd.
(machinery & engineering) .......................... 1,000 18,695
Toyota Motor Corp. (automobiles) ..................... 51,000 1,463,085
Yamaichi Securities Co., Ltd.
(financial services) ............................... 36,000 159,722
Yamanouchi Pharmaceutical Co., Ltd.
(health & personal care) ........................... 5,000 102,519
Yamazaki Baking Co., Ltd.
(food & household products) ........................ 1,000 15,938
Yasuda Trust & Banking
(financial services) ............................... 42,000 177,659
----------
20,439,596
----------
MALAYSIA (3.0%)
AMMB Holdings Berhad
(financial services) ............................... 10,000 83,944
DCB Holdings Berhad
(financial services) ............................... 14,000 47,951
Edaran Otomobil Nasional Berhad
(automobiles) ...................................... 4,000 39,992
Golden Hope Plantations Berhad
(miscellaneous-materials &
commodities) ....................................... 74,000 125,995
Hume Industries Berhad (building
materials & components) ............................ 12,000 75,549
Malayan Banking Berhad
(banking) .......................................... 23,000 254,998
Malaysia International Shipping
Berhad Foreign Registered
(transportation-shipping) .......................... 24,000 71,273
Malaysian Resources Corp. Berhad
(real estate) ...................................... 19,000 74,856
Resorts World Berhad (leisure &
tourism) ........................................... 41,000 186,695
Rothmans of Pall Mall Berhad
(beverages & tobacco) .............................. 10,000 104,929
Sime Darby Berhad
(multi-industry) ................................... 69,000 271,846
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
COMMON STOCKS (Continued)
MALAYSIA (Continued)
Technology Resources Industries
Berhad (multi-industry) (a) ........................ 19,000 $ 37,466
Telekom Malaysia Berhad
(telecommunications) ............................... 28,000 249,455
Tenaga Nasional Berhad (utilities-
electrical & gas) .................................. 43,000 206,018
United Engineers, Ltd. (machinery &
engineering) ....................................... 25,000 225,697
YTL Corp. Berhad (multi-industry) .................... 7,000 37,695
----------
2,094,359
----------
NETHERLANDS (2.0%)
Elsevier NV (broadcasting &
publishing) ........................................ 6,200 104,663
ING Groep NV (insurance) ............................. 5,307 190,836
Koninklijke PTT Nederland NV
(forest products & paper) .......................... 3,465 132,011
Philips Electronics NV (appliances &
household durables) ................................ 2,500 101,171
Royal Dutch Petroleum Co.
(energy sources) ................................... 3,400 595,386
Unilever CVA NV (food & household
products) .......................................... 1,200 212,009
Wolters Kluwer CVA NV
(broadcasting & publishing) ........................ 503 66,738
----------
1,402,814
----------
NORWAY (2.5%)
Bergesen d.y. ASA Class A
(transportation-shipping) .......................... 7,500 183,231
Bergesen d.y. ASA Class B
(transportation-shipping) .......................... 1,400 33,326
Dyno Industrier ASA (chemicals) ...................... 1,200 30,445
Hafslund ASA Class A
(energy sources) ................................... 2,700 19,874
Hafslund ASA Class B
(energy sources) ................................... 1,700 11,634
Kvaerner ASA Class B (machinery &
engineering) ....................................... 1,100 47,718
Norsk Hydro ASA (energy sources) ..................... 17,800 961,730
Norske Skogindustrier ASA Class A
(forest products & paper) .......................... 3,400 113,416
Nycomed ASA Class A (health &
personal care) (a) ................................. 2,700 41,227
Nycomed ASA Class B (health &
personal care) (a) ................................. 1,700 26,091
Orkla ASA Class A (multi-industry) ................... 3,800 264,824
----------
1,733,516
----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
SINGAPORE (5.1%)
City Developments, Ltd.
(real estate) ...................................... 30,000 $ 270,228
DBS Land, Ltd. (real estate) ......................... 44,000 161,994
Development Bank of Singapore,
Ltd. Foreign Registered (banking) .................. 24,000 324,273
Fraser & Neave, Ltd. (beverages &
tobacco) ........................................... 17,200 177,064
Keppel Corp., Ltd. (machinery &
engineering) ....................................... 23,000 179,223
Oversea-Chinese Banking Corp., Ltd.
Foreign Registered (banking) ....................... 33,000 410,489
Singapore Airlines, Ltd. Foreign
Registered (transportation-
airlines) .......................................... 42,000 381,322
Singapore Press Holdings, Ltd.
Foreign Registered (broadcasting
& publishing) ...................................... 12,000 236,771
Singapore Telecommunications, Ltd.
(telecommunications) ............................... 470,000 1,108,793
United Overseas Bank, Ltd. Foreign
Registered (banking) ............................... 30,000 334,568
----------
3,584,725
----------
SPAIN (5.4%)
Acerinox, SA (metals-steel) .......................... 286 41,249
Autopistas Concesionares
Espanola, SA (business &
public services) ................................... 8,340 114,771
Banco de Bilbao Vizcaya, SA
Registered (banking) ............................... 7,060 380,484
Banco de Central Hispanoamericano,
SA (banking) ....................................... 1,810 46,408
Banco de Santander, SA (banking) ..................... 4,940 315,603
Corporacion Bancaria de Espana,
SA (banking) ....................................... 3,870 172,862
Corporacion Mapfre, SA
(insurance) ........................................ 590 35,879
Empresa Nacional de Electricidad,
SA (utilities-electrical & gas) .................... 8,750 621,575
Fomento de Construcciones y
Contratas, SA (construction &
housing) ........................................... 1,140 106,048
Gas Natural SDG, SA (utilities-
electrical & gas) .................................. 890 206,638
Iberdrola, SA (utilities-
electrical & gas) .................................. 36,930 522,409
Repsol, SA (energy sources) .......................... 13,060 500,018
Telefonica de Espana, SA
(telecommunications) ............................... 31,250 724,354
----------
3,788,298
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
COMMON STOCKS (Continued)
UNITED KINGDOM (8.1%)
Abbey National PLC (banking) ......................... 12,970 $ 169,796
Barclays PLC (banking) ............................... 18,467 316,184
Bass PLC (beverages & tobacco) ....................... 2,350 33,017
B.A.T. Industries PLC
(beverages & tobacco) .............................. 20,823 172,649
BOC Group PLC (chemicals) ............................ 1,850 27,654
Boots Co. PLC (merchandising) ........................ 2,603 26,838
British Airways PLC (transportation-
airlines) .......................................... 2,032 21,055
British Gas PLC (energy sources) ..................... 35,310 135,656
British Petroleum Co. PLC (energy
sources) ........................................... 44,047 528,020
British Telecommunications PLC
(telecommunications) ............................... 37,780 255,056
BTR PLC (multi-industry) ............................. 44,550 216,517
Cable & Wireless PLC
(telecommunications) ............................... 14,447 120,031
Commercial Union PLC (insurance) ..................... 2,046 23,932
EMI Group PLC (recreation & other
consumer goods) .................................... 1,640 38,730
General Electric Co. PLC (electrical &
electronics) ....................................... 27,656 180,792
GKN PLC (machinery & engineering) .................... 1,109 18,997
Glaxo Wellcome PLC (health &
personal care) ..................................... 25,948 420,958
Granada Group PLC (leisure &
tourism) ........................................... 6,370 93,912
Grand Metropolitan PLC
(multi-industry) ................................... 22,212 174,472
Great Universal Stores PLC (The)
(merchandising) .................................... 12,940 135,523
Guinness PLC (beverages &
tobacco) ........................................... 20,050 156,975
Hanson PLC (multi-industry) .......................... 62,835 87,637
HSBC Holdings PLC (financial
services) .......................................... 4,993 111,591
Imperial Chemical Industries PLC
(chemicals) ........................................ 1,150 15,124
Imperial Tobacco Group PLC
(beverages & tobacco) .............................. 6,283 40,535
Kingfisher PLC (merchandising) ....................... 1,597 17,259
Lloyds TSB Group PLC (banking) ....................... 41,236 303,792
Marks & Spencer PLC
(merchandising) .................................... 39,026 327,915
MEPC PLC (real estate) ............................... 980 7,262
National Power PLC (utilities-
electrical & gas) .................................. 11,860 99,248
</TABLE>
<TABLE>
<CAPTION>
Shares Value
===================
<S> <C> <C>
UNITED KINGDOM (Continued)
Peninsular & Oriental Steam
Navigation Co. Deferred Stock
(The) (transportation-shipping) .................... 8,611 $ 86,942
Prudential Corp. PLC (insurance) ..................... 18,880 158,800
Rank Group PLC (leisure &
tourism) ........................................... 9,710 72,366
Redland PLC (building materials &
components) ........................................ 1,915 12,011
Reed International PLC
(broadcasting & publishing) ........................ 15,650 295,002
Reuters Holdings PLC
(broadcasting & publishing) ........................ 10,840 139,407
RMC Group PLC (building
materials & components) ............................ 990 16,900
RTZ Corp. PLC Registered
(metals-nonferrous) ................................ 9,140 146,481
Sainsbury (J.) PLC (merchandising) ................... 12,315 81,770
Scottish Power PLC (utilities-
electrical & gas) .................................. 23,010 138,607
Thorn PLC (appliances & household
durables) (a) ...................................... 1,640 7,058
Unilever PLC (food & household
products) .......................................... 8,730 211,620
Vodafone Group PLC
(multi-industry) ................................... 5,287 22,302
----------
5,666,393
----------
Total Common Stocks
(Cost $63,850,627) ................................. 65,384,248
----------
PREFERRED STOCK (0.1%)
AUSTRIA (0.1%)
Creditanstalt-Bankverein Vorzug AG
(banking) .......................................... 1,550 71,498
----------
Total Preferred Stock
(Cost $90,929) ................................. 71,498
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
SHORT-TERM INVESTMENT (2.8%)
COMMERCIAL PAPER (2.8%)
UNITED STATES (2.8%) Ameritech Corp.
6.25%, due 1/2/97 ............................. $1,970,000 $1,969,657
------------
Total Short-Term Investment
(Cost $1,969,657) ............................. 1,969,657
------------
Total Investments
(Cost $65,911,213) (c) ........................ 96.1% 67,425,403(d)
Cash and Other Assets,
Less Liabilities .............................. 3.9 2,758,967
------------
Net Assets ...................................... 100.0% $70,184,370
=========== ============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Segregated as collateral for forward foreign currency contracts.
(c) The cost for Federal income tax purposes is $66,007,634.
(d) At December 31, 1996 net unrealized appreciation for securities was
$1,417,769, based on cost for Federal income tax purposes. This consisted
of aggregate gross unrealized appreciation for all investments on which
there was an excess of market value over cost of $6,901,143 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $5,483,374.
The table below sets forth the diversification of International Equity Fund
investments by industry.
<TABLE>
<CAPTION>
Value Percent +
================================================================================
<S> <C> <C>
COMMON STOCKS, PREFERRED STOCK
& SHORT-TERM INVESTMENT
Aerospace & Military Technology ...................... $ 155,100 0.2%
Appliances & Household Durables ...................... 1,022,368 1.5
Automobiles .......................................... 2,646,392 3.8
Banking .............................................. 9,418,524 13.4
Beverages & Tobacco .................................. 1,842,949 2.6
Broadcasting & Publishing ............................ 1,078,386 1.5
Building Materials & Components ...................... 936,024 1.3
Business & Public Services ........................... 1,696,294 2.4
Chemicals ............................................ 3,184,279 4.5
Construction & Housing ............................... 998,898 1.4
Data Processing & Reproduction ....................... 275,856 0.4
Electrical & Electronics ............................. 2,942,223 4.2
Electronic Components &
Instruments ........................................ 127,847 0.2
Energy Sources ....................................... 6,354,427 9.1
Financial Services ................................... 1,512,029 2.2
Food & Household Products ............................ 1,564,857 2.2
Forest Products & Paper .............................. 611,825 0.9
Health & Personal Care ............................... 1,879,983 2.7
Industrial Components ................................ 724,068 1.0
Insurance ............................................ 3,303,072 4.7
Leisure & Tourism .................................... 474,789 0.7
Machinery & Engineering .............................. 2,606,250 3.7
Merchandising ........................................ 1,897,988 2.7
Metals-Nonferrous .................................... 720,852 1.0
Metals-Steel ......................................... 799,312 1.1
Miscellaneous-Materials &
Commodities ........................................ 459,621 0.7
Miscellaneous-Materials &
Components ......................................... 253,539 0.4
Multi-Industry ....................................... 2,702,007 3.8
Real Estate .......................................... 1,517,673 2.2
Recreation & Other Consumer Goods .................... 677,619 1.0
Telecommunications ................................... 6,670,081 9.5
Textiles & Apparel ................................... 119,957 0.2
Tire & Rubber ........................................ 149,189 0.2
Transportation-Airlines .............................. 710,068 1.0
Transportation-Road & Rail ........................... 767,743 1.1
Transportation-Shipping .............................. 397,344 0.6
Utilities-Electrical & Gas ........................... 3,581,982 5.1
Wholesale & International Trade ...................... 643,988 0.9
----------- -----
67,425,403 96.1
Cash and Other Assets,
Less Liabilities ................................... 2,758,967 3.9
----------- -----
Net Assets ........................................... $70,184,370 100.0%
=========== =====
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value
(identified cost $65,911,213) .......................... $67,425,403
Cash denominated in foreign currencies
(identified cost $2,150,420) ........................... 2,327,459
Receivables:
Investment securities sold ............................. 2,084,720
Fund shares sold ....................................... 164,592
Dividends and interest ................................. 136,479
Unrealized net appreciation on forward foreign
currency contracts ..................................... 2,484,924
Unamortized organization expense ......................... 21,616
Other assets ............................................. 38,416
-----------
Total assets .......................................... 74,683,609
-----------
LIABILITIES:
Payables:
Investment securities purchased ........................ 3,927,776
Custodian .............................................. 315,072
NYLIFE Distributors .................................... 70,237
Fund shares redeemed ................................... 45,170
Adviser ................................................ 35,057
Transfer agent ......................................... 21,891
Trustees ............................................... 478
Accrued expenses ......................................... 83,558
-----------
Total liabilities ..................................... 4,499,239
-----------
Net assets ............................................... $70,184,370
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A ................................................ $ 16,680
Class B ................................................ 50,766
Additional paid-in capital ............................... 67,691,252
Accumulated distribution in excess of net
investment income ...................................... (1,268,552)
Accumulated distribution in excess of net realized
gain on investments .................................... (462,187)
Net unrealized appreciation on investments ............... 1,514,190
Net unrealized appreciation on translation of
assets and liabilities in foreign currencies
and forward foreign currency contracts ................. 2,642,221
-----------
Net assets ............................................... $70,184,370
===========
CLASS A
Net assets applicable to outstanding shares .............. $17,475,074
===========
Shares of beneficial interest outstanding ................ 1,667,969
===========
Net asset value per share outstanding .................... $ 10.48
Maximum sales charge (5.50% of offering price) ........... 0.61
-----------
Maximum offering price per share outstanding ............. $ 11.09
===========
CLASS B
Net assets applicable to outstanding shares .............. $52,709,296
===========
Shares of beneficial interest outstanding ................ 5,076,632
===========
Net asset value per share outstanding .................... $ 10.38
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .......................................... $ 916,842
Interest ............................................... 168,056
-----------
Total income .......................................... 1,084,898
-----------
Expenses:
Advisory ............................................... 342,100
Distribution--Class B .................................. 293,136
Administration ......................................... 228,066
Transfer agent ......................................... 142,931
Service ................................................ 142,541
Shareholder communication .............................. 120,116
Custodian .............................................. 68,023
Registration ........................................... 37,591
Recordkeeping .......................................... 22,075
Professional ........................................... 14,613
Amortization of organization expense ................... 11,211
Trustees ............................................... 1,623
Miscellaneous .......................................... 22,012
-----------
Total expenses ........................................ 1,446,038
-----------
Net investment loss ...................................... (361,140)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions .................................. (130,336)
Foreign currency transactions .......................... 2,153,275
-----------
Net realized gain on investments and foreign
currency transactions .................................. 2,022,939
-----------
Net change in unrealized appreciation on investments:
Security transactions .................................. 656,008
Translation of assets and liabilities in foreign
currencies and forward foreign currency contracts .... 2,501,469
-----------
Net unrealized gain on investments and
foreign currencies .................................... 3,157,477
-----------
Net realized and unrealized gain on investments and
foreign currency transactions .......................... 5,180,416
-----------
Net increase in net assets resulting from operations ..... $ 4,819,276
===========
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $131,024.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss ............................................................... $ (361,140) $ (187,373)
Net realized loss on investments ................................................... (130,336) (115,889)
Net realized gain on foreign currency transactions ................................. 2,153,275 1,119,827
Net change in unrealized appreciation on investments ............................... 656,008 1,026,063
Net change in unrealized appreciation on translation of assets and
liabilities in foreign currencies and forward foreign currency contracts .......... 2,501,469 89,231
----------- -----------
Net increase in net assets resulting from operations ............................... 4,819,276 1,931,859
----------- -----------
Dividends and distributions to shareholders: From net realized gain on foreign
currency transactions:
Class A ........................................................................... (844,610) (197,012)
Class B ........................................................................... (2,225,095) (357,222)
In excess of net realized gain on investments:
Class A ........................................................................... (45,418) (100,145)
Class B ........................................................................... (135,451) (181,583)
----------- -----------
Total dividends and distributions to shareholders ............................... (3,250,574) (835,962)
----------- -----------
Capital share transactions: Net proceeds from sale of shares:
Class A ........................................................................... 6,802,966 12,687,452
Class B ........................................................................... 33,209,658 16,939,110
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions:
Class A ........................................................................... 465,182 63,636
Class B ........................................................................... 2,239,545 519,055
----------- -----------
42,717,351 30,209,253
Cost of shares redeemed:
Class A ........................................................................... (3,191,297) (284,551)
Class B ........................................................................... (9,106,589) (13,373,866)
----------- -----------
Increase in net assets derived from capital share transactions .................. 30,419,465 16,550,836
----------- -----------
Net increase in net assets ...................................................... 31,988,167 17,646,733
NET ASSETS:
Beginning of year .................................................................... 38,196,203 20,549,470
----------- -----------
End of year .......................................................................... $70,184,370 $38,196,203
=========== ===========
Accumulated distribution in excess of net investment income/accumulated undistributed
net investment income .............................................................. $(1,268,552) $ 139,764
=========== ===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
==============
Class A Class B Class A Class B September 13,*
========= ======= ======== ======= through
Year ended Year ended December 31,
December 31, 1996 December 31, 1995 1994
=================== ==================== ==============
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period ........................... $10.05 $ 9.97 $ 9.77 $ 9.77 $ 10.00
Net investment income (loss) ..................................... 0.29 0.24 0.27 0.26 (0.04)
Net realized and unrealized gain (loss) on investments ........... 0.07 0.07 0.10 0.07 (0.16)
Net realized and unrealized gain (loss) on foreign
currency transactions .......................................... 0.62 0.59 0.14 0.09 (0.03)
------- ------- ------- ------- -------
Total from investment operations ................................. 0.98 0.90 0.51 0.42 (0.23)
------- ------- ------- ------- -------
Less dividends and distributions:
From net realized gain on foreign currency transactions .......... (0.52) (0.46) (0.15) (0.15) --
In excess of net realized gain on investments .................... (0.03) (0.03) (0.08) (0.07) --
------- ------- ------- ------- -------
Total dividends and distributions ................................ (0.55) (0.49) (0.23) (0.22) --
------- ------- ------- ------- -------
Net asset value at end of period ................................. $10.48 $10.38 $10.05 $ 9.97 $ 9.77
======= ======= ======= ======= =======
Total investment return (a) ...................................... 9.78% 9.05% 5.25% 4.27% (2.30%)
Ratios (to average net assets)/Supplemental Data:
Net investment loss ............................................ (0.1%) (0.8%) (0.2%) (1.0%) (1.6%)+
Expenses ....................................................... 2.0% 2.7% 2.2% 3.0% 3.9%+
Portfolio turnover rate .......................................... 19% 19% 25% 25% 9%
Average commission rate paid ..................................... $0.0374 $0.0374 (b) (b) (b)
Net assets at end of period (in 000's) ........................... $17,475 $52,709 $12,856 $25,341 $20,549
</TABLE>
- ---------
* Commencement of Operations.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay International Equity Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay International Equity Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to seek long-term growth of capital
commensurate with an acceptable level of risk by investing in a portfolio
consisting primarily of non-U.S. equity securities.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which mature
in 60 days or less are valued at amortized cost if
22
<PAGE>
Notes to Financial Statements
their term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and value on
maturity date if their original term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Currency Contracts. A forward currency contract is an agreement to buy
or sell currencies of different countries on a specified future date at a
specified rate. During the period the forward contract is open, changes in the
value of the contract are recognized as unrealized gains or losses by "marking
to market" such contract on a daily basis to reflect the market value of the
contract at the end of each day's trading. When the forward contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the Fund's basis in the
contract. The Fund enters into forward foreign currency exchange contracts in
order to hedge its foreign currency denominated investments and receivables and
payables against adverse movements in future foreign exchange rates.
The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract amount reflects the extent of the Fund's involvement
in these financial instruments. Risks arise from the possible movements in the
foreign exchange rates underlying these instruments. The unrealized appreciation
on forward contracts reflects the Fund's exposure at year end to credit loss in
the event of a counterparty's failure to perform its obligations.
Forward foreign currency contracts open at December 31, 1996:
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
------ ---- ----- --------------
<S> <C> <C> <C> <C> <C>
Foreign Currency Sale Contracts
- -------------------------------
Australian Dollar, expiring 3/3/97 .............. A$ 655,000 $ 529,895 $ 519,891 $ 10,004
Austrian Schilling, expiring 1/15/97 ............ AS 20,060,000 1,866,054 1,852,320 13,734
Deutsche Mark, expiring 1/6/97--6/20/97 ......... DM 27,663,680 18,363,894 18,047,146 316,748
French Franc, expiring 1/29/97--2/4/97 .......... FF 5,910,000 1,152,635 1,139,016 13,619
Italian Lira, expiring 1/23/97 .................. IL 4,386,000,000 2,826,605 2,881,602 (54,997)
Japanese Yen, expiring 1/6/97--7/7/97 ........... (Yen) 2,772,600,000 25,987,007 24,091,842 1,895,165
Spanish Peseta, expiring 1/22/97 ................ SP 170,500,000 1,302,067 1,309,952 (7,885)
----------
2,186,388
----------
</TABLE>
23
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Value on Unrealized
Contract Trade Current Appreciation/
Amount Date Value (Depreciation)
------ ---- ----- -----------------
<S> <C> <C> <C> <C> <C>
Foreign Currency Buy Contracts
- ------------------------------
Australian Dollar, expiring 1/7/97 .............. A$ 913,651 $ 721,320 $ 725,638 $ 4,318
Deutsche Mark, expiring 1/22/97--2/5/97 ......... DM 11,091,120 7,261,996 7,210,270 (51,726)
Japanese Yen, expiring 1/6/97--2/5/97 ........... (Yen) 1,288,386,370 11,193,763 11,137,169 (56,594)
Pound Sterling, expiring 1/7/97--1/15/97 ........ (Pound) 2,651,198 4,133,415 4,535,953 402,538
--------------
298,536
--------------
Net Appreciation ............................... $ 2,484,924
==============
</TABLE>
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $49,000 and are being
amortized over 60 months beginning at the commencement of operations.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $2,008,542 and $13,987 have been reclassified
from accumulated undistributed net realized gain on foreign currency
transactions and accumulated distribution in excess of net realized gain on
investments, respectively, to accumulated distribution in excess of net
investment income due to the tax treatment of foreign currency gains.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Discounts on securities purchased for the Fund are accreted on the constant
yield method over the life of the respective securities.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
24
<PAGE>
Notes to Financial Statements continued
Foreign Currency Investing. The books and records of the Fund are recorded in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the
mean between the buying and selling rates last quoted by any major U.S. bank at
the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the year. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, gains and losses
from certain foreign currency transactions are treated as ordinary income for
Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds or
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing such foreign currency denominated
assets and liabilities at year-end exchange rates are reflected in unrealized
foreign exchange gains.
There are certain risks involved in investing in foreign securities that are in
addition to the usual risks inherent in domestic instruments. These risks
include those resulting from future adverse political and economic developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.
25
<PAGE>
Mainstay International Equity Fund
Foreign cash held at December 31, 1996:
<TABLE>
<CAPTION>
Currency Cost Value
============================================ ========== =============
<S> <C> <C> <C> <C>
Australian Dollar A$ 531,393 $ 418,812 $ 422,085
Austrian Schilling AS 1,188 112 109
Belgian Franc BF 11,383 363 358
Danish Krone DK 2,509 425 425
Deutsche Mark DM 6,237 4,094 4,047
French Franc FF 9,821 1,888 1,889
Hong Kong Dollar HK 168,336 21,763 21,763
Italian Lira IL 9,562,080 6,306 6,292
Japanese Yen (Yen) 7,366,978 65,389 63,466
Malaysian Ringgit MK 31,702 12,647 12,553
Netherland Guilder NG 2,280 1,307 1,318
Norwegian Krone NK 6,490 1,014 1,016
Pound Sterling (Pound) 1,034,507 1,594,674 1,770,355
Singapore Dollar S$ 24,442 17,308 17,474
Spanish Peseta SP 560,463 4,318 4,309
---------- ----------
$2,150,420 $2,327,459
========= ==========
</TABLE>
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.60% and 0.40%, respectively, of the average daily net assets of the
Fund.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the
26
<PAGE>
Notes to Financial Statements continued
Adviser and the Administrator each will reduce their fee payable by the Fund by
50% of the amount of such excess up to the extent of their fees. The expenses of
the Fund did not exceed the most restrictive expense limitation for the year
ended December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $91,571 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$48,979 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
27
<PAGE>
MainStay International Equity Fund
Capital. At December 31, 1996 NYLIFE Distributors held shares of Class A of the
Fund with a net asset value of $8,543,337, which represents 48.9% of the net
assets of Class A shares at year end.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $10,618.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $1,338 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$22,075.
Note 4--Federal Income Tax:
The Fund intends to elect, to the extent provided by the regulations, to treat
$409,805 of qualifying capital losses that arose during the year as if they
arose on January 1, 1997. Additionally, the Fund utilized $28,036 of capital
loss carryforward during the current year.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $39,530 and $9,714, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
=====================================
Class A Class B Class A Class B
======= ======= ======= =======
<S> <C> <C> <C> <C>
Shares sold ............................ 644 3,197 1,304 1,761
Shares issued in reinvestment of
dividends and distributions .......... 45 217 6 52
------ ------ ------ ------
689 3,414 1,310 1,813
Shares redeemed ........................ 301 878 30 1,376
------ ------ ------ ------
Net increase ........................... 388 2,536 1,280 437
====== ====== ====== ======
</TABLE>
28
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay International Equity Fund
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
29
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
INTERNATIONAL EQUITY FUND graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
30
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of Fund] primarily from U.S. government
securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current yields and You prefer the higher return potential
International Bond Fund graph indicating competitive total return from non- of international bonds or want to add
risk/reward of Fund] U.S. bonds with an emphasis on diversification to your domestic
risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
31
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
International Equity Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer,
and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
International Equity Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN11 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Money Market Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Yields & Lipper Rankings 6
Portfolio of Investments 7
Financial Statements 9
Notes to Financial Statements 13
Report of Independent Accountants 16
The MainStay Funds 18
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Money Market Fund Highlights
1996 MARKET HIGHLIGHTS
o The money market experienced a fair amount of volatility during the year,
with alternating weak and strong quarters
o The Federal Reserve eased rates early in the year after which economic
forces caused rates to climb
o Overall, the money markets outperformed government bonds, mortgage-backed
securities, and high-grade corporate bonds during the year
1996 FUND HIGHLIGHTS
o For the 7-day period ended 12/31/96, the MainStay Money Market Fund
provided an effective yield of 5.01% and a current yield of 4.89% for both
Class A and Class B shares
o Class A shares outperformed the average Lipper+ peer fund over 1-year and
since-inception periods ended 12/31/96
o Class B shares outperformed the average Lipper peer fund over 1-, 5-,
10-year, and since-inception periods ended 12/31/96
o Strategic security selection and the use of innovative money market
instruments contributed to the Fund's strong performance in 1996
o During 1996, the Fund's track record exceeded 10 years
- ----------
+ See footnote and table on page 6 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
Short-end of the market
- -----------------------
The maturities on fixed-income securities may range from as short as overnight
to as long as 30-years or more. Money market funds generally invest in the
"short-end" of the market, which includes securities that mature within 13
months.
Easing/Tightening
- -----------------
When the Federal Reserve lowers interest rates on benchmark securities it is
said to be "easing" or making borrowing more affordable. When it raises interest
rates, it is said to be "tightening" or making borrowing more expensive.
Yield
- -----
The income per share (or current value of a security) paid to investors over a
specified period of time as a percentage of the cost of the security. Mutual
fund yields are expressed as a percent of the fund's current price per share.
- ----------
* See footnote and table on page 6 for additional information on Lipper
Analytical Services, Inc.
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Money Market Team
MONEY MARKET FUND TEAM
Ravi Akhoury, Frank Salem, and Jessica Terc
In the short-end of the markets, 1996 was a fairly volatile year. Shortly after
the Federal Reserve eased rates on January 31, 1996 economic forces caused rates
to climb.
The strength of the money markets alternated between weak and strong throughout
the year. While alternating strengths and weaknesses are nothing new, the shifts
are becoming more frequent, increasing volatility and investor risk.
Despite these concerns, however, the money markets managed to outperform other
major asset classes in 1996, including government bonds, mortgage-backed
securities, and high-grade corporate bonds. As a result, money market
instruments were able to make a positive contribution to diversified portfolios
during the year.
Given this context, how did the MainStay Money Market Fund do in 1996?
For the seven-day period ended December 31, 1996, the MainStay Money Market Fund
provided an effective yield of 5.01% and a current yield of 4.89% for both Class
A and Class B shares. For the 1-year and since-inception periods, Class A shares
outperformed the average Lipper* money market fund. Class B shares outperformed
the average Lipper peer fund over 1-, 5-, 10-year, and since-inception periods
ended 12/31/96.
How did you manage the Fund in 1996?
We have always sought as high a level of current income as is considered
consistent with the preservation of capital and liquidity. We try to add value
to the Fund by carefully managing the portfolio's average maturity in line with
where we feel the market is headed. In 1996, this was a helpful strategy,
allowing us to stay invested in short-term securities as rates were going up and
then capitalize on higher interest rates.
What has the average maturity of the Fund been in 1996?
The Fund has maintained an average maturity in a range from about 37 to 67 days
to maturity throughout the year. At times, we were positioned closely with the
market, and at times we were around ten to fifteen days longer than the average
money market fund. That was particularly
4
<PAGE>
true in the second and third quarters, when many funds were short, expecting
interest rates to rise. Since we didn't believe that would happen, the Fund
benefited by being longer than the market when rates stayed fairly constant.
How else did you seek to maximize yield for the Fund?
Some managers buy securities with lower credit quality to increase yield. But in
1996, we only purchased first-tier securities, or those in the highest rating
category, A1/P1, by major credit-rating agencies such as Moody's and Standard &
Poor's. Instead of purchasing or continuing to hold lower-quality securities,
our yield-enhancement strategy relied on finding nonstandard securities that
sometimes added 10 or 20 basis points to our yield. During 1996, we purchased
secured pooled receivables and floating-rate notes, which tended to do better
than standard commercial paper.
Were there other interesting securities in the portfolio?
We also bought some regular and callable Certificates of Deposit.+ While CDs
generally require a longer commitment, issuers are willing to pay a bit more for
the option to call them periodically. So these securities afforded the Fund
opportunities to provide attractive yields.
How can you tell if these securities can add value?
We do our homework. We have a quantitative research group that takes these
securities apart and looks at their volatility and where they trade in the
market. They analyze them for credit quality and structure and tell us whether
they may represent genuine value. Our extra research may put us ahead of some of
our competitors, who tend to be more comfortable with traditional commercial
paper.
Can the Fund's price fluctuate?
Investments in the Fund are neither insured nor guaranteed by the U.S.
government. While we seek to maintain a stable net asset value (NAV) of $1 per
share, there can be no assurance that we will succeed in doing so. Although past
performance is no guarantee of future results, the Fund has maintained a stable
net asset value for over 10 years.
What's your outlook for 1997?
In 1997, we believe inflation, the overall economic outlook, and Federal Reserve
action will continue to be the primary forces influencing the money market
securities. Of course, no one can predict the future. So we'll continue to
emphasize high quality, use these securities where appropriate, and carefully
manage maturities to seek the highest possible yield consistent with liquidity
and stability of principal.
Ravi Akhoury
Frank Salem
Jessica Terc
Portfolio Managers
- ----------
+ While CDs may be insured by the Federal Deposit Insurance Corporation, Fund
shares are not insured and their price and returns may fluctuate with
market conditions.
[GRAPHIC]
Average maturity
- ----------------
Maturity is the termination date of an obligation or the length of time a
fixed-income security is required to pay interest. Average maturity reflects the
average of the maturities of all fixed-income securities in a portfolio.
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its fixed-income securities--or a measure of the general credit risk of
securities in a fixed-income portfolio.
Basis points
- ------------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Liquidity
- ---------
The ability of a security to be readily traded or exchanged for cash. Generally
speaking, the larger an issuer's capitalization, the more liquid its securities
are likely to be.
5
<PAGE>
[GRAPHIC]
Yields & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
Fund SEC Yields*
- --------------------------------------------------------------------------------
7-day effective yield 7-day current yield
<S> <C> <C>
Class A 5.01% 4.89%
Class B 5.01% 4.89%
- --------------------------------------------------------------------------------
<CAPTION>
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
- --------------------------------------------------------------------------------
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 113 out of n/a n/a n/a
288 funds
Class B 113 out of 67 out of 53 out of 47 out of
288 funds 175 funds 106 funds 101 funds
Average Lipper
money market fund 4.80% 3.96% 5.52% 5.52%
- --------------------------------------------------------------------------------
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investments in the
MainStay Money Market Fund are neither insured nor guaranteed by the U.S.
government and there is no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share. Investment return and
principal value may fluctuate so that upon redemption, shares may be worth
more or less than their original cost. The administrator and adviser have
agreed to assume a portion of the expenses for the Money Market Fund; had
these expenses not been assumed, the average 7-day yield would have been
3.63%. Yield is based on the latest 7-day period ending 12/31/96. This
expense limitation may be terminated or revised at any time.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 12/31/96.
The Fund's Class A shares were first offered to the public on 1/3/95; Class
B shares on 5/1/86.
6
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
=============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (100.1%)+
BANK NOTES (8.5%)
American Express Centurion Bank
5.57%, due 9/12/97 (b)(c) ................... $ 2,000,000 $ 1,999,855
Bank of America-Illinois
5.82%, due 3/24/97 (c) ...................... 2,500,000 2,500,000
Boatmens Credit Card Bank
5.54%, due 8/8/97 (b)(c) .................... 11,000,000 10,998,733
First National Bank of Maryland
5.13%, due 2/26/97 (c) ...................... 4,000,000 4,000,148
Greenwood Trust Co.
5.45%, due 1/6/97 (c) ....................... 8,000,000 7,999,988
PNC Bank N.A.-Pittsburgh,
Pennsylvania
5.25%, due 2/6/97 (b)(c) .................... 4,000,000 3,999,751
-------------
31,498,475
-------------
CERTIFICATES OF DEPOSIT (9.3%)
Deutsche Bank
5.85%, due 11/19/97
(call date 2/19/97) (c) ..................... 10,000,000 10,000,000
Industrial Bank of Japan
5.61%, due 1/7/97 (c) ....................... 7,500,000 7,500,012
Sanwa Bank Ltd.
5.56%, due 2/11/97 (c) ...................... 6,000,000 6,000,067
5.85%, due 1/17/97 (c) ...................... 11,000,000 11,000,243
-------------
34,500,322
-------------
COMMERCIAL PAPER (71.1%)
Air Products & Chemicals Inc.
5.32%, due 1/17/97 .......................... 2,900,000 2,893,143
Banca CRT Financial Corp.
5.35%, due 1/7/97 ........................... 3,000,000 2,997,325
5.35%, due 1/14/97 .......................... 3,700,000 3,692,852
5.35%, due 1/21/97 .......................... 4,000,000 3,988,111
5.40%, due 2/18/97 .......................... 1,500,000 1,489,200
5.70%, due 3/3/97 ........................... 5,800,000 5,743,982
Bex America Finance Inc.
5.32%, due 2/3/97 ........................... 7,100,000 7,065,376
BIL North America Inc.
5.34%, due 1/24/97 .......................... 5,000,000 4,982,942
Block Financial Corp.
7.00%, due 1/2/97 ........................... 4,500,000 4,499,125
Caisse Centrale des
Banques Populaires
5.33%, due 1/10/97 (a) ...................... 12,100,000 12,083,877
China International Marine
Containers (Group) Ltd.
5.57%, due 1/9/97 ........................... 5,500,000 5,493,192
</TABLE>
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
=============================
<S> <C> <C>
COMMERCIAL PAPER (Continued)
Compagnie Bancaire USA
Finance Corp.
5.33%, due 1/10/97 .......................... $17,300,000 $ 17,276,948
Corporacion Andina de Fomento
5.38%, due 1/23/97 .......................... 10,000,000 9,967,122
Credito Italiano (DE) Inc.
5.39%, due 4/15/97 .......................... 8,000,000 7,875,431
Galicia Funding Corp.
5.59%, due 3/5/97 (a) ....................... 5,500,000 5,446,196
Garanti Funding Corp. II
5.40%, due 2/4/97 ........................... 5,000,000 4,974,500
Gotham Funding Corp.
5.40%, due 1/9/97 (a) ....................... 10,000,000 9,988,000
5.45%, due 2/27/97 (a) ...................... 6,000,000 5,948,225
International Securitization Corp.
6.00%, due 1/14/97 (a) ...................... 10,100,000 10,078,117
Kamehameha Schools-Bishop
Estate
5.38%, due 1/15/97 (a) ...................... 9,000,000 8,981,170
Kingdom of Sweden
5.65%, due 2/4/97 ........................... 12,000,000 11,935,967
Mayne Nickless Ltd.
5.35%, due 1/27/97 .......................... 2,000,000 1,992,272
Mid-States Corporate Federal
Credit Union
5.55%, due 1/16/97 .......................... 3,500,000 3,491,906
Minmetals Capital & Securities Inc.
5.39%, due 4/3/97 ........................... 13,000,000 12,820,932
Nationwide Building Society
5.33%, due 2/24/97 .......................... 13,100,000 12,995,266
Petroleo Brasileiro S.A.-Petrobras
5.42%, due 1/14/97 .......................... 8,000,000 7,984,342
Portland General Electric Co.
5.33%, due 2/5/97 ........................... 7,100,000 7,063,208
Preferred Receivables Funding
Corp.
5.33%, due 1/16/97 .......................... 6,290,000 6,276,031
Premium Funding Inc., Series E
5.50%, due 1/16/97 (a) ...................... 7,197,000 7,180,507
5.50%, due 1/17/97 (a) ...................... 4,150,000 4,139,856
San Paolo U.S. Financial Co.
5.41%, due 2/4/97 ........................... 2,900,000 2,885,183
5.42%, due 3/19/97 .......................... 13,500,000 13,343,497
Shell Deer Park Cogeneration Trust
5.52%, due 1/3/97 (a) ....................... 10,100,000 10,096,903
Societe Generale (Canada)
5.62%, due 1/22/97 .......................... 2,000,000 1,993,443
Toshiba Capital (Asia) Ltd.
5.50%, due 1/13/97 .......................... 4,200,000 4,192,300
Tri-Lateral Capital (USA) Inc.
5.55%, due 1/2/97 (a) ....................... 4,500,000 4,499,306
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
7
<PAGE>
MainStay Money Market Fund
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
=============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
COMMERCIAL PAPER (Continued)
UNIfunding Inc.
5.37%, due 2/12/97 .......................... $ 1,000,000 $ 993,735
5.44%, due 2/12/97 .......................... 3,000,000 2,980,960
5.65%, due 2/12/97 .......................... 3,100,000 3,079,566
Working Capital Management
Co. L.P.
5.65%, due 1/15/97 .......................... 6,000,000 5,986,817
Xerox Corp.
6.75%, due 1/2/97 ........................... 2,600,000 2,599,680
-------------
263,996,511
-------------
FEDERAL AGENCY (2.0%)
Federal Home Loan Bank
5.84%, due 11/24/97 (c) ..................... 7,500,000 7,500,000
-------------
MEDIUM-TERM NOTES (9.2%)
Abbey National Treasury
Services PLC
5.05%, due 3/3/97 (c) ....................... 9,200,000 9,198,596
Bankers Trust Corp.-New York
5.74%, due 2/14/97 (b)(c) ................... 3,500,000 3,500,000
Ford Motor Credit Corp.
5.81%, due 1/5/97 (b)(c) .................... 4,000,000 4,000,093
Household Bank FSB
5.72%, due 6/10/97 (b)(c) ................... 5,000,000 5,000,000
Huntington Bancshares
5.70%, due 3/14/97 (c) ...................... 4,000,000 4,000,199
Sony Capital Corp.
5.47%, due 8/29/97 (a)(b)(c) ................ 3,000,000 3,000,000
Southern California Edison Co.
5.90%, due 1/15/97 (c) ...................... 5,625,000 5,626,497
-------------
34,325,385
-------------
Total Short-Term Investments
(Amortized Cost $371,820,693) (d) ........... 100.1% 371,820,693
Liabilities in Excess of
Cash and Other Assets ....................... (0.1) (447,211)
----------- -------------
Net Assets 100.0% $371,373,482
=========== =============
</TABLE>
- ----------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at December 31, 1996.
(c) Coupon interest bearing security.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
The table below sets forth the diversification of Money Market Fund investments
by industry.
<TABLE>
<CAPTION>
Amortized
Cost Percent +
================================
<S> <C> <C>
SHORT-TERM INVESTMENTS
Banks # .................................. $259,606,353 69.9%
Chemicals ................................ 2,893,143 0.8
Computers & Office Equipment ............. 2,599,680 0.7
Conglomerates ............................ 4,992,272 1.4
Consumer Financial Services .............. 4,000,093 1.1
Education ................................ 8,981,170 2.4
Electrical Equipment ..................... 4,192,300 1.1
Federal Agency ........................... 7,500,000 2.0
Finance .................................. 42,333,107 11.4
Foreign Government ....................... 11,935,967 3.2
Utilities ................................ 10,096,903 2.7
Utilities-Electrical ..................... 7,063,208 1.9
Utilities-Telephone ...................... 5,626,497 1.5
------------ -----
371,820,693 100.1
Liabilities in Excess of
Cash and Other Assets .................. (447,211) (0.1)
------------ -----
Net Assets ............................... $371,373,482 100.0%
============ =====
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
# The Fund will invest more than 25% of the market value of its total assets
in the securities of banks and bank holding companies, including
certificates of deposit, bankers' acceptances and securities guaranteed by
banks and bank holding companies.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
8
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value (amortized cost $371,820,693) ....................... $ 371,820,693
Cash ................................................................................... 115,433
Receivables:
Interest ............................................................................. 1,278,382
Fund shares sold ..................................................................... 534,655
Adviser .............................................................................. 15,158
NYLIFE Distributors .................................................................. 9,813
Other assets ........................................................................... 224
-------------
Total assets ........................................................................ 373,774,358
-------------
LIABILITIES:
Payables:
Fund shares redeemed ................................................................. 533,018
Transfer agent ....................................................................... 170,000
Custodian ............................................................................ 6,989
Trustees ............................................................................. 2,722
Accrued expenses ....................................................................... 135,602
Dividend payable ....................................................................... 1,552,545
-------------
Total liabilities ................................................................... 2,400,876
-------------
Net assets ............................................................................. $ 371,373,482
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A .............................................................................. $ 538,903
Class B .............................................................................. 3,174,977
Additional paid-in capital ............................................................. 367,674,103
Accumulated net realized loss on investments ........................................... (14,501)
-------------
Net assets ............................................................................. $ 371,373,482
=============
CLASS A
Net assets applicable to outstanding shares ............................................ $ 53,890,270
=============
Shares of beneficial interest outstanding .............................................. 53,890,270
=============
Net asset value per share outstanding .................................................. $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares ............................................ $ 317,483,212
=============
Shares of beneficial interest outstanding .............................................. 317,497,716
=============
Net asset value per share outstanding .................................................. $ 1.00
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
9
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 19,510,896
------------
Expenses:
Transfer agent ............................................ 1,084,379
Administration ............................................ 870,226
Advisory .................................................. 870,226
Shareholder communication ................................. 312,098
Registration .............................................. 102,359
Recordkeeping ............................................. 62,593
Professional .............................................. 56,181
Custodian ................................................. 42,511
Trustees .................................................. 10,981
Miscellaneous ............................................. 8,793
------------
Total expenses before reimbursement ...................... 3,420,347
Expense reimbursement from Administrator and Adviser ........ (946,310)
------------
Net expenses ............................................. 2,474,037
------------
Net investment income ....................................... 17,036,859
------------
REALIZED LOSS ON INVESTMENTS:
Net realized loss on investments ............................ (1,158)
------------
Net increase in net assets resulting from operations ........ $ 17,035,701
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .................................................................. $ 17,036,859 $ 14,443,253
Net realized loss on investments ....................................................... (1,158) (4,137)
------------- -------------
Net increase in net assets resulting from operations ................................... 17,035,701 14,439,116
------------- -------------
Dividends to shareholders:
From net investment income:
Class A ............................................................................... (2,342,050) (1,363,704)
Class B ............................................................................... (14,694,809) (13,079,549)
------------- -------------
Total dividends to shareholders ..................................................... (17,036,859) (14,443,253)
------------- -------------
Capital share transactions: Net proceeds from sale of shares:
Class A ............................................................................... 119,892,722 88,180,222
Class B ............................................................................... 512,217,941 421,595,747
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ............................................................................... 2,188,847 1,157,312
Class B ............................................................................... 13,787,949 12,087,359
------------- -------------
648,087,459 523,020,640
Cost of shares redeemed:
Class A ............................................................................... (103,071,681) (54,457,152)
Class B ............................................................................... (488,364,222) (375,748,656)
------------- -------------
Increase in net assets derived from capital share transactions ...................... 56,651,556 92,814,832
------------- -------------
Net increase in net assets .......................................................... 56,650,398 92,810,695
NET ASSETS:
Beginning of year ........................................................................ 314,723,084 221,912,389
------------- -------------
End of year .............................................................................. $ 371,373,482 $ 314,723,084
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
-------------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Year ended Year ended December 31 ----------------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
------------------- ------------------- ----------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- -------- ------- -------- -------- -------- -------- --------
Net investment income ........... 0.05 0.05 0.05 0.05 0.02 0.03 0.03 0.04
------- -------- ------- -------- -------- -------- -------- --------
Less dividends from
net investment income ......... (0.05) (0.05) (0.05) (0.05) (0.02) (0.03) (0.03) (0.04)
------- -------- ------- -------- -------- -------- -------- --------
Net asset value at
end of period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======== ======== ======== ======== ========
Total investment return (a) ..... 4.91% 4.91% 5.51% 5.51% 1.54% 3.08% 2.71% 3.80%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ......... 4.8% 4.8% 5.4% 5.4% 4.6%+ 3.1% 2.7% 4.0%
Net expenses .................. 0.7% 0.7% 0.7% 0.7% 0.7%+ 0.7% 0.7% 0.7%
Expenses (before reimbursement) 1.0% 1.0% 0.9% 0.9% 0.9%+ 1.0% 0.9% 1.0%
Net assets at end of
period (in 000's) ............. $53,890 $317,483 $34,880 $279,843 $221,912 $192,477 $149,907 $182,567
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is not annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Money Market Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, and Class B shares each bear the same
voting (except for issues that relate solely to one class), dividend,
liquidation and other rights and conditions.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The Fund seeks to maintain a net asset value of $1.00
per share, although there is no assurance that it will be able to do so on a
continuous basis, and it has adopted certain investment, portfolio and dividend
and distribution policies designed to enable it to do so.
Securities Valuation. Securities are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between such cost and the value on
maturity date.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends are recorded on the
ex-dividend date. Dividends are declared daily and paid monthly. Income
dividends are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Interest income is accrued daily and discounts
on securities purchased for the Fund are accreted on the constant yield method
over the life of the respective securities.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses and realized and unrealized gains and
losses on investments of the Fund are allocated to separate classes of shares
based upon their relative net asset value on the date the income is earned or
expenses and realized and unrealized gains and losses are incurred.
13
<PAGE>
MainStay Money Market Fund
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the average daily net assets of 0.25% up to $300 million, 0.225% on
assets from $300 million to $700 million, 0.20% on assets from $700 million to
$1.0 billion and 0.175% on assets in excess of $1.0 billion.
The Adviser and Administrator have voluntarily agreed to assume the expenses of
the Fund to the extent that such expenses would exceed on an annualized basis
0.70% of the average daily net assets of the Fund. Such excess assumed for the
year ended December 31, 1996 was $946,310.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses and other extraordinary expenses) for
any fiscal year exceed the most restrictive limitation of certain state
securities commissions, the Adviser and the Administrator each will reduce their
fee payable by the Fund by 50% of the amount of such excess up to the extent of
their fees. The expenses of the Fund did not exceed the most restrictive expense
limitation for the year ended December 31, 1996.
Contingent Deferred Sales Charge. Even though the Fund does not assess a
contingent deferred sales charge upon redemption of Class B shares of the Fund,
the applicable contingent deferred sales charge will be assessed when shares are
redeemed from the Fund if the shareholder previously exchanged his or her
investment into the Fund from another Fund in the Trust. The Fund was advised
that NYLIFE Distributors received from shareholders the proceeds from contingent
deferred sales charges for the year ended December 31, 1996 in the amount of
$640,623.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
14
<PAGE>
Notes to Financial Statements continued
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $45,556.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $9,948 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$62,593.
Note 4--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .............................. 119,893 512,218 88,180 421,596
Shares issued in reinvestment
of dividends ........................... 2,189 13,788 1,157 12,087
------- ------- ------ -------
122,082 526,006 89,337 433,683
Shares redeemed .......................... 103,072 488,364 54,457 375,749
------- ------- ------ -------
Net increase ............................. 19,010 37,642 34,880 57,934
======= ======= ====== =======
</TABLE>
15
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Money Market Fund (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
16
<PAGE>
This page intentionally left blank
17
<PAGE>
The MainStay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating internation stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
18
<PAGE>
<TABLE>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
MONEY MARKET FUND graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that't double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
19
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Money Market Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A.Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Money Market Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN12 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay New York Tax Free Fund Highlights 3
$10,000 Invested in the MainStay New York
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification of Holdings--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 9
Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Accountants 21
The MainStay Funds 22
<PAGE>
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity
market. The bond market took a back seat while the financial community and
investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial
Average broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
2
<PAGE>
MainStay New York Tax Free Fund Highlights
1996 MARKET HIGHLIGHTS
o The New York municipal market had a comparatively uneventful year, with no
strong trends or clear direction
o The state's administration demonstrated greater fiscal prudence than the
previous administration, providing a positive backdrop for New York
municipal bonds
o Anticipation of Federal Reserve policies resulted in market turbulence
during the first half of 1996, with a modest recovery io the second half of
the year
o Strong performance in the equity markets drew money away from munoicipal
securities, weakening demand, while supply remained moderately higher than
in 1995
o Controversy over flat tax proposals receded into the background during this
election year, reducing investor concerns about the future prospects for
tax-exempt securities
1996 FUND HIGHLIGHTS
o One-year total returns of 3.06% aod 2.86% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes underperformed the average Lipper+ New York municipal
debt fund for the 12 monoths ended 12/31/96
o A neutral duration helped the Fund perform generally in line with the
market, while geographic and sector diversification helped manage risk
o Disciplined security selection assisted performance
- ----------
+ See footnote and table on page 9 for more information about Lipper
Analytical Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
New York Tax Free Fund versus
Lehman Brothers Municipal Bond
Index and Inflation
Class A Shares
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
New York Tax Municipal Bond
Year-end Free Fund Index* Inflation+
- -------- --------- -------------- ----------
<S> <C> <C> <C>
10/1/91 $ 9,550.00 $10,000 $10,000
12/91 $ 9,748.80 $10,335 $10,051
12/92 $10,627.60 $11,247 $10,349
12/93 $11,915.50 $12,628 $10,632
12/94 $11,353.20 $11,975 $10,908
12/95 $13,166.80 $14,066 $11,192
12/96 $13,569.30 $14,689 $11,563
</TABLE>
[GRAPHIC] MainStay New York Tax Free Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
New York Tax Municipal Bond
Year-end Free Fund Index* Inflation+
- -------- --------- -------------- ----------
<S> <C> <C> <C>
10/1/91 $10,000.00 $10,000 $10,000
12/91 $10,208.20 $10,335 $10,051
12/92 $11,128.40 $11,247 $10,349
12/93 $12,477.00 $12,628 $10,632
12/94 $11,888.20 $11,975 $10,908
12/95 $13,750.90 $14,066 $11,192
12/96 $14,003.40 $14,689 $11,563
</TABLE>
[GRAPHIC] MainStay New York Tax Free Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 10/1/91
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550. The Class B graph assumes
an initial investment of $10,000 made on 10/1/91 and includes the
historical performance of the Class A shares for periods from inception
(10/1/91) through 12/31/94. Returns shown reflect the Contingent Deferred
Sales Charge (CDSC) of 1%, as it would apply for the period shown. (The
$10,000 invested in the Lehman Brothers Municipal Bond Index begins on
9/30/91.) All results include reinvestment of distributions at net asset
value and the change in share price for the stated period. Past performance
is no guarantee of future results.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds, rated Baa or better
by Moody's, with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of James Flood and Ravi Akhoury
NEW YORK TAX FREE FUND TEAM
James Flood and Ravi Akhoury
Generally speaking, 1996 was an uneventful year in the New York municipal
bond markets. The fiscal prudence demonstrated by the state's administration
provided a positive backdrop for municipal bonds in the state, and there were no
major blow-ups, defaults, or political events to which municipal investors
needed to respond. As a result, general economic trends and supply and demand
factors were the primary forces driving the New York municipal market throughout
the year.
During the first half of 1996, New York municipal securities were less affected
by Federal Reserve policies than by the market's anticipation of how those
policies might change. As it happened, over the course of the year, the Fed only
adjusted rates once, and then by only 25 basis points.
As the economy began to pick up in the second and third quarters, interest rates
started to rise, which took a toll on municipal securities. On average, New York
municipal funds closed the first half with negative returns. Early in the fourth
quarter, however, the municipal market rallied as the economy showed signs of
slowing. The result was positive for most municipal investors, with the average
Lipper++ New York municipal debt fund providing a positive 3.15% total return
for the 12 months ended December 31, 1996.
In this context, how did the MainStay New York Tax Free Fund perform?
For the 12 months ended December 31, 1996, the MainStay New York Tax Free Fund
posted total returns of 3.06% and 2.86% for Class A and Class B shares,
respectively, excluding all sales charges. While the Fund generally attempts to
perform in line with the market, its results were below the total return of the
average Lipper New York municipal debt fund over the same period.
What factors primarily contributed to the Fund's underperformance?
We believe that duration is the single most important factor affecting the
performance of a municipal portfolio. Throughout the year, we tried to maintain
a relatively neutral duration for the Fund to keep from being blindsided by
changes in interest rates and market sentiment. While a longer duration can
offer more opportunity when the markets are favorable, it also presents greater
risk if the market declines.
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Duration
- ---------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.
- ----------
++ See footnote and chart on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Year-end Total Return %
- -------- --------------
<S> <C>
12/91 2.08
12/92 8.98
12/93 12.11
12/94 -4.71
12/95 15.97 Class A
12/95 15.67 Class B
12/96 3.06 Class A
12/96 2.86 Class B
</TABLE>
- ----------
Returns are for Class A shares unless otherwise noted. See footnote * on page 9
for more information on performance.
How did your duration strategy affect the Fund's performance?
We had mixed results over the course of the year. In the second quarter, we
extended the Fund's duration a bit beyond neutral and it had a negative impact.
But we made a prompt and disciplined return to a neutral duration when we saw
the strategy wasn't paying off. Later in the year, we extended the Fund's
duration once again, and when the market rallied in October and November, that
move had a positive impact on the Fund's performance. In fact, the Fund achieved
most of its gains during the fourth quarter.
What other strategic moves have you made in 1996?
The Fund seeks to provide a high level of current income free from regular
federal income tax and New York State and City personal income tax, consistent
with the preservation of capital. So our management strategies must take both
performance and quality into account. As the number of insured credits continues
to grow, opportunities to provide performance enhancements are becoming
increasingly scarce. As a result, we've tried to find uninsured issues with
attractive price, value, and quality characteristics.
Can you give us some examples?
With about half the portfolio in insured paper, the other half can be invested
in securities at various quality levels that may offer opportunities for a yield
advantage or capital appreciation. We bought some Battery Park City bonds in a
down market and the Fund benefited as the market picked up and perception of the
credit improved. We also bought New York City Industrial Development Agency
bonds for the Rockefeller Foundation. They were rated AAA--not because of credit
enhancement, but on their own merits. As it happened, demand for this type of
bond was strong and the bonds performed well for the Fund.
Were there other strong performers?
The Fund also benefited from the timing of certain purchases, which was a
positive side effect of the volatility that was experienced
[GRAPHIC]
Insured credits
- ----------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
6
<PAGE>
- --------------------------------------------------------------------------------
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
<S> <C>
Health 22.0%
Transportation 20.0%
Municipal Revenue/
Urban Development 16.7%
Education 8.6%
General Obligation - City 7.8%
All Other 24.9%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
- --------------------------------------------------------------------------------
during the year. We bought Nassau County General Obligation bonds at a good time
and saw some capital appreciation there, along with appropriate returns and
duration characteristics for the portfolio.
What else contributed to the Fund's performance?
Prerefundings can contribute to performance and we look for issues with
characteristics that may make them attractive prerefunding candidates. We held
New York City General Obligation bonds with various coupons and maturities that
were prerefunded. We also had a prerefunding in Local Government Assistance
Corporation bonds. Since prerefundings can shorten maturities and improve
quality, their overall impact is usually positive.
How do you seek to protect investors against risk in New York municipal bonds?
While state tax free bond funds in general tend to have natural constraints on
diversification, we seek to spread risk across a variety of municipal issuers,
sectors, geographic regions, maturities, coupons, and types of securities. That
way, if problems arise in any particular sector or if any particular coupon goes
out of favor, investors may have a measure of protection. In New York,
diversification is particularly difficult to achieve, since a smaller number of
issuers tend to occupy a larger share of the market. In fact, during 1996, the
Fund reduced its holdings of New York City bonds.
Why did you do that?
We didn't want too heavy an exposure in a single geographic area and we felt the
bonds were fully priced. The decision balanced price and risk management
considerations.
How did supply and demand affect the portfolio in 1996?
While the supply of New York municipal bonds was moderate, demand decreased as
investors poured money into the equity markets. The effect was negative for the
Fund and the municipal markets in general.
[GRAPHIC]
Prerefunding
- ------------
Returning principal prior to the initial date at which a bond can be called or
"refunded" (usually 10 years after issuance). In order to prerefund, the issuer
must return the par value of the bond and provide or guarantee interest payments
through the initial call date.
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
7
<PAGE>
[GRAPHIC]
A small portion of
income may be subject
to state and local taxes
and the Alternative
Minimum Tax. Capital
gains, if any, may also
be taxed.
Another difficulty for the market as a whole has been a reduction in the number
of municipal bond dealers, which has reduced the liquidity of municipal bonds
overall.
What's your outlook for 1997?
We think New York municipal bonds still represent value, particularly for New
York residents in high tax brackets. Barring any major upsets in 1997, we
believe interest rate movements, economic trends, and inflation concerns will
continue to be the major determinants of value. We'll continue to search for
opportunities and manage the Fund's duration and quality to seek attractive
current yields while preserving capital for the Fund's shareholders.
Ravi Akhoury
James Flood
Portfolio Managers
QUALITY BREAKDOWN AS OF 12/31/96
[GRAPHIC]
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percentage
<S> <C>
AAA 52.4%
AA 5.3%
A 22.5%
BBB 16.9%
Cash & Equivalents 2.9%
</TABLE>
- ----------
Note: Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 3.06% 6.84% 6.91%
Class B 2.86% 6.74% 6.82%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A -1.58% 5.86% 5.98%
Class B -2.14% 6.43% 6.67%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years Life of Fund
through 12/31/96
<S> <C> <C> <C>
Class A 58 out of 22 out of 26 out of
96 funds 44 funds 43 funds
Class B 70 out of n/a n/a
96 funds
Average Lipper NY
municipal debt fund 3.15% 6.73% 6.97%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $9.91 $0.5036 $0.0000
Class B $9.84 $0.4523 $0.0000
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect the assumption of certain Fund expenses by the Fund's Administrator
and Adviser. Had these expenses not been assumed, total return figures
would have been lower. This expense limitation may be terminated or revised
at any time.
Class B shares, first offered on 1/3/95, are sold with no initial sales
charge, but are subject to a maximum CDSC of up to 5% if shares are
redeemed during the first 6 years of purchase and an annual 12b-1 fee of up
to .50%. Performance figures for this class include the historical
performance of the respective Class A shares from inception (10/1/91)
through 12/31/94. Performance data for the two classes after this date vary
based on differences in their expense structures. Class A shares are sold
with a maximum initial sales charge of 4.5% and a 12b-1 fee of .25%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class A shares' initial offering through
12/31/96. Class B shares were first offered to the public on 1/3/95; Class
A shares on 10/1/91.
[GRAPHIC]
9
<PAGE>
MainStay New York Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===========================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (97.1%)+
NEW YORK (86.7%)
Battery Park City Authority Revenue
Series A
5.50%, due 11/1/26 ........................... $ 900,000 $ 883,125
Metropolitan Transportation
Authority Service Contract
Commuter Facilities Revenue
Series L
7.50%, due 7/1/17 ............................ 1,385,000 1,473,294
Monroe County Airport Authority
Greater Rochester International
Airport Revenue
7.25%, due 1/1/19 (a) ........................ 750,000 814,687
Municipal Assistance Corp.
New York City, Series 67
7.625%, due 7/1/08 (b) ....................... 800,000 874,000
Nassau County General Obligation
Series T
5.20%, due 9/1/15 ............................ 650,000 623,187
New York City Educational
Construction Fund Revenue
5.50%, due 4/1/26 ............................ 800,000 786,000
New York City General Obligation
Series C
7.20%, due 8/15/15 ........................... 355,000 378,075
7.50%, due 8/1/20 ............................ 300,000 336,375
Series F
8.20%, due 11/15/04 .......................... 170,000 192,312
New York City Industrial
Development Agency Civil Facility
Revenue, Rockefeller Foundation
Project
5.375%, due 7/1/23 (b) ....................... 1,000,000 973,750
New York City Trust
Cultural Resources Revenue
Botanical Garden
5.80%, due 7/1/26 ............................ 1,000,000 1,011,250
New York State Dormitory Authority
Revenue, Manhattanville
(zero coupon), due 7/1/19 .................... 2,175,000 614,437
(zero coupon), due 7/1/21 .................... 1,175,000 296,688
Park Ridge Housing Income Project
7.85%, due 2/1/29 (b) ........................ 800,000 858,000
New York State Energy Research &
Development Authority, Electric Co.
Facilities Revenue, Con Edison
Series A
7.75%, due 1/1/24 (a) ........................ 500,000 521,735
Project B
9.25% due 9/15/22 (a) ........................ 45,000 47,221
<CAPTION>
Principal
Amount Value
===========================
NEW YORK (Continued)
<S> <C> <C>
New York State Environmental
Facilities Corp. Pollution Control
Revenue State Water
Series A
4.65%, due 6/15/07 ........................... $ 395,000 $ 384,138
New York State Housing Finance
Agency Service Contract Obligation
Revenue, Series A
7.65%, due 3/15/05 ........................... 60,000 66,675
New York State Medical Care Facilities
Finance Agency Revenue
7.50%, due 2/15/21 ........................... 755,000 833,331
7.875%, due 8/15/20 .......................... 800,000 883,000
8.875%, due 8/15/07 .......................... 605,000 632,092
New York State Medical Care
Facilities Finance Agency Revenue
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 .......................... 1,035,000 1,112,625
New York State Urban Development
Corp. Revenue
5.50%, due 7/1/22 ............................ 900,000 855,000
Port Authority of New York &
New Jersey Consolidated Bonds
Series 104
5.125%, due 7/15/14 .......................... 500,000 484,375
Series 52
9.00%, due 11/1/24 ........................... 150,000 167,250
Triborough Bridge & Tunnel Authority
of New York, General Purpose Revenue
Series L
8.00%, due 1/1/07 ............................ 50,000 52,806
8.125%, due 1/1/12 ........................... 850,000 896,674
-----------
17,052,102
-----------
PUERTO RICO (10.4%)
Puerto Rico Commonwealth Aqueduct &
Sewer Authority Revenue
5.00%, due 7/1/15 ............................ 700,000 647,500
Puerto Rico Commonwealth Highway &
Transportation Authority Revenue
Series Y
5.50%, due 7/1/26 ............................ 900,000 868,500
Puerto Rico Municipal Financing Agency
Series A
8.25%, due 7/1/08 ............................ 500,000 536,875
-----------
2,052,875
-----------
Total Investments
(Cost $18,844,004) (c) ....................... 97.1% 19,104,977(d)
Cash and Other Assets, Less Liabilities ........ 2.9 566,865
----------- -----------
Net Assets ..................................... 100.0% $19,671,842
=========== ===========
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Contracts Unrealized
Long Appreciation
======================
<S> <C> <C>
FUTURES CONTRACTS (0.0%) (e)
Municipal Bond
March 1997 (30 year) ......................... 4 $ 1,125
----------
Total Futures Contracts
(Settlement Value $464,250) .................. $ 1,125(f)
==========
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Segregated or partially segregated as collateral for futures contracts.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At December 31, 1996 net unrealized appreciation was $260,973, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $406,042 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $145,069.
(e) Less than one tenth of a percent.
(f) Represents the difference between the value of the contracts at the time
they were opened and the value at December 31, 1996.
The notes to the financial statements are an integral part of, and should
be read in conjunction with, the financial statements.
11
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $18,844,004) .................. $ 19,104,977
Cash .............................................................................. 61,144
Receivables:
Investment securities sold ...................................................... 607,169
Interest ........................................................................ 485,225
Fund shares sold ................................................................ 13,007
Other assets ...................................................................... 12
------------
Total assets ................................................................... 20,271,534
------------
LIABILITIES:
Payables:
Investment securities purchased ................................................. 440,307
Fund shares redeemed ............................................................ 89,619
NYLIFE Distributors ............................................................. 9,886
Transfer agent .................................................................. 4,894
Adviser ......................................................................... 4,217
Custodian ....................................................................... 1,988
Trustees ........................................................................ 153
Accrued expenses .................................................................. 40,990
Variation margin payable on futures contracts ..................................... 7,638
------------
Total liabilities .............................................................. 599,692
------------
Net assets ........................................................................ $ 19,671,842
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ......................................................................... $ 15,706
Class B ......................................................................... 4,167
Additional paid-in capital ........................................................ 19,535,830
Accumulated undistributed net investment income ................................... 3,279
Accumulated net realized loss on investments ...................................... (149,238)
Unrealized appreciation on investments ............................................ 262,098
------------
Net assets ........................................................................ $ 19,671,842
============
CLASS A
Net assets applicable to outstanding shares ....................................... $ 15,571,948
============
Shares of beneficial interest outstanding ......................................... 1,570,554
============
Net asset value per share outstanding ............................................. $ 9.91
Maximum sales charge (4.50% of offering price) .................................... 0.47
------------
Maximum offering price per share outstanding ...................................... $ 10.38
============
CLASS B
Net assets applicable to outstanding shares ....................................... $ 4,099,894
============
Shares of beneficial interest outstanding ......................................... 416,659
============
Net asset value per share outstanding ............................................. $ 9.84
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest ............................................ $ 1,230,853
-----------
Expenses:
Administration ...................................... 49,368
Advisory ............................................ 49,368
Service ............................................. 49,368
Shareholder communication ........................... 47,912
Transfer agent ...................................... 32,735
Professional ........................................ 19,689
Custodian ........................................... 18,588
Distribution--Class B ............................... 7,037
Amortization of organization expense ................ 6,404
Registration ........................................ 2,232
Trustees ............................................ 513
Miscellaneous ....................................... 9,203
-----------
Total expenses before reimbursement ................ 292,417
Expense reimbursement from Adviser and Administrator .. (39,823)
-----------
Net expenses ....................................... 252,594
-----------
Net investment income ................................. 978,259
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ............................... 216,312
Futures transactions ................................ (38,283)
-----------
Net realized gain on investments ...................... 178,029
-----------
Net change in unrealized appreciation on investments:
Security transactions ............................... (554,466)
Futures transactions ................................ 1,125
-----------
Net unrealized loss on investments .................... (553,341)
-----------
Net realized and unrealized loss on investments ....... (375,312)
-----------
Net increase in net assets resulting from operations .. $ 602,947
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income .................................................... $ 978,259 $ 981,802
Net realized gain on investments ......................................... 178,029 426,130
Net change in unrealized appreciation
(depreciation) on investments .......................................... (553,341) 1,308,574
------------ ------------
Net increase in net assets resulting
from operations ......................................................... 602,947 2,716,506
------------ ------------
Dividends to shareholders:
From net investment income:
Class A ................................................................. (860,400) (936,551)
Class B ................................................................. (132,523) (46,485)
------------ ------------
Total dividends to shareholders ....................................... (992,923) (983,036)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................................. 714,259 933,639
Class B ................................................................. 2,775,763 1,529,472
Net asset value of shares issued to
shareholders in reinvestment of dividends:
Class A ................................................................. 326,939 363,729
Class B ................................................................. 87,529 29,496
------------ ------------
3,904,490 2,856,336
Cost of shares redeemed:
Class A ................................................................. (3,316,131) (1,843,250)
Class B ................................................................. (362,803) (15,993)
------------ ------------
Increase in net assets derived from
capital share transactions ........................................... 225,556 997,093
------------ ------------
Net increase (decrease) in net assets ................................. (164,420) 2,730,563
NET ASSETS:
Beginning of year .......................................................... 19,836,262 17,105,699
------------ ------------
End of year ................................................................ $ 19,671,842 $ 19,836,262
============ ============
Accumulated undistributed net investment income ............................ $ 3,279 $ 17,943
============ ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
====================================================
October 1,
Class A Class B Class A Class B September 1 Year ended 1991(a)
------- ------- ------- ------- through August 31 through
Year ended Year ended December 31 -------------------- August 31,
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
===================== ===================== ========== ======= ======= =========
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $10.12 $10.02 $9.20 $9.20 $9.58 $10.43 $9.95 $9.55
------- ------ ------- ------ ------- ------- ------- -------
Net investment income .. 0.50 0.45 0.52 0.59 0.19 0.56 0.60 0.49
Net realized and
unrealized gain (loss)
on investments ....... (0.21) (0.18) 0.91 0.82 (0.39) (0.59) 0.54 0.34
------- ------ ------- ------ ------- ------- ------- -------
Total from investment
operations ........... 0.29 0.27 1.43 1.41 (0.20) (0.03) 1.14 0.83
------- ------ ------- ------ ------- ------- ------- -------
Less dividends and
distributions:
From net investment
income ............... (0.50) (0.45) (0.51) (0.59) (0.18) (0.57) (0.65) (0.43)
From net realized gain
on investments ....... -- -- -- -- -- (0.25) (0.01) --
------- ------ ------- ------ ------- ------- ------- -------
Total dividends and
distributions ........ (0.50) (0.45) (0.51) (0.59) (0.18) (0.82) (0.66) (0.43)
------- ------ ------- ------ ------- ------- ------- -------
Net asset value at
end of period ........ $9.91 $9.84 $10.12 $10.02 $9.20 $9.58 $10.43 $9.95
======= ====== ======= ====== ======= ======= ======= =======
Total investment
return (b) ........... 3.06% 2.86% 15.97% 15.67% (2.11%) (0.35%) 11.88% 8.95%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income 5.0% 4.7% 5.4% 5.1% 6.1%+ 5.7% 6.0% 5.9%+
Net expenses ......... 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99% 0.98% 0.99%+
Expenses (before
reimbursement) ...... 1.4% 1.6% 1.4% 1.6% 1.2%+ 1.1% 1.2% 1.5%+
Portfolio turnover rate 114% 114% 114% 114% 39% 169% 131% 23%
Net assets at end of
period (in 000's) .... $15,572 $4,100 $18,248 $1,588 $17,106 $17,862 $15,665 $10,605
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay New York Tax Free Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay New York Tax Free Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares are offered at
net asset value per share plus an initial sales charge. Class B shares whose
distribution commenced on January 3, 1995, are offered without an initial sales
charge, although a declining contingent deferred sales charge may be imposed on
redemptions made within six years of purchase. Class A shares and Class B shares
bear the same voting (except for issues that relate solely to one class),
dividend, liquidation and other rights and conditions except that the Class B
shares are subject to higher distribution fee rates. Each class of shares bears
distribution and/or service fee payments under a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between market value on the
61st day prior to maturity and value on maturity date if their original term to
maturity at purchase exceeded 60 days.
16
<PAGE>
Notes to Financial Statements
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment would
be made.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund has entered into contracts for the future
delivery of debt securities in order to attempt to protect against the effects
of adverse changes in interest rates or to lengthen or shorten the average
maturity or duration of the Fund's portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
17
<PAGE>
MainStay New York Tax Free Fund
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration amounted to $43,769 for the Fund. Such costs were
amortized over 60 months beginning at the commencement of operations of the
Fund.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Concentration of Credit Risk. The Fund invests substantially all of its assets
in debt obligations issued by political subdivisions and authorities in the
State of New York and the Commonwealth of Puerto Rico. The issuer's ability to
meet its obligations may be affected by economic and political developments
within the State of New York and the Commonwealth of Puerto Rico.
Note 3--Fees and Related Party Policies:
Investment Advisory And Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.25% of the average daily net assets of the Fund.
The Adviser and the Administrator have voluntarily agreed to reimburse the
expenses for the Fund to the extent that operating expenses would exceed on an
annualized basis 1.24% and 1.49% for the Class A and Class B, shares
respectively, of the average daily net assets. The expense reimbursement to the
Fund for the year ended December 31, 1996 was $39,823.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to
18
<PAGE>
Notes to Financial Statements continued
the extent of their fees. The expenses of the Fund did not exceed the most
restrictive expense limitation for the year ended December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.25% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $22,774 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$2,810 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
19
<PAGE>
MainStay New York Tax Free Fund
Capital. At December 31, 1996, NYLIFE Securities and NYLIFE Distributors held
shares of Class A with a net asset value of $99,100 and $5,949,930,
respectively, which represents 0.6% and 38.2%, respectively, of the Class A net
assets at year end.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $458.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $605 for the year ended December
31, 1996.
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $148,114 are available to the extent provided by regulations to
offset future realized gains of the Fund through 2002. To the extent that these
loss carryforwards are used to offset future capital gains, it is probable that
the capital gains so offset will not be distributed to shareholders. The Fund
utilized $179,154 of capital loss carryforward during the current year.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $22,127 and $22,096, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
----------------------------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ..................................... 73 286 97 157
Shares issued in reinvestment of dividends ...... 33 9 38 3
--- --- --- ---
106 295 135 160
Shares redeemed ................................. 338 37 191 2
--- --- --- ---
Net increase (decrease) ......................... (232) 258 (56) 158
=== === === ===
</TABLE>
20
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay New York Tax Free Fund
(one of the thirteen funds constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1996 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
21
<PAGE>
The Mainstay Funds
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
22
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
NEW YORK TAX FREE FUND [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
23
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
New York Tax Free Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
New York Tax Free Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSAN13 (297)
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Tax Free Bond Fund Highlights 3
$10,000 Invested in the MainStay Tax
Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by State--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 9
Top 10 Holdings 10
Portfolio of Investments 11
Financial Statements 16
Notes to Financial Statements 20
Report of Independent Accountants 25
The MainStay Funds 26
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Tax Free Bond Fund Highlights
1996 MARKET HIGHLIGHTS
o The year was comparatively uneventful, with no strong trends or clear
direction in the municipal bond markets
o Anticipation of Federal Reserve policies resulted in market turbulence
during the first half of 1996, with a modest recovery in the second half of
the year
o Strong performance in the equity markets drew money away from municipal
securities, weakening demand, while supply remained moderately higher than
in 1995
o Controversy over flat tax proposals receded into the background during this
election year, reducing investor concerns about the future prospects for
tax-exempt securities
1996 FUND HIGHLIGHTS
o One-year total returns of 3.63% and 3.33% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes modestly outperformed the average Lipper+ general
municipal debt fund for the 12 months ended 12/31/96
o A neutral portfolio duration helped the Fund perform in line with the
market, while geographic and sector diversification helped manage risk
o During 1996, the Fund's track record exceeded 10 years
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Tax Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Lehman Brothers Mainstay Tax Free
Municipal Bond Index* Bond Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $ 9,550 $10,000
12/86 $10,826 $10,123.4 $10,193
12/87 $10,989 $10,181.9 $10,644
12/88 $12,106 $11,074.3 $11,113
12/89 $13,412 $11,891.3 $11,629
12/90 $14,390 $12,447.6 $12,355
12/91 $16,137 $13,803.2 $12,724
12/92 $17,560 $14,965 $13,100
12/93 $19,717 $16,520.5 $13,459
12/94 $18,697 $15,525.4 $13,809
12/95 $21,962 $17,854.7 $14,168
12/96 $22,935 $18,503.1 $14,637
</TABLE>
[GRAPHIC] MainStay Tax Free Bond Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Lehman Brothers Mainstay Tax Free
Municipal Bond Index* Bond Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $10,000 $10,000
12/86 $10,826 $10,600.4 $10,193
12/87 $10,989 $10,661.7 $10,644
12/88 $12,106 $11,596.1 $11,113
12/89 $13,412 $12,451.6 $11,629
12/90 $14,390 $13,034.1 $12,355
12/91 $16,137 $14,453.6 $12,724
12/92 $17,560 $15,670.1 $13,100
12/93 $19,717 $17,298.9 $13,459
12/94 $18,697 $16,257 $13,809
12/95 $21,962 $18,673.2 $14,168
12/96 $22,935 $19,295.8 $14,637
</TABLE>
[GRAPHIC] MainStay Tax Free Bond Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 4.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,550 and includes the historical
performance of the Class B shares for periods from inception (5/1/86) through
12/31/94. The Class B graph assumes an initial investment of $10,000 made on
5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge
(CDSC), as it would not apply for the period shown. All results include
reinvestment of distributions at net asset value and the change in share
price for the stated period. Past performance is no guarantee of future
results.
* The Lehman Brothers Municipal Bond Index (which does not have a sales charge)
includes approximately 15,000 municipal bonds, rated Baa or better by
Moody's, with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Tax Free Bond Fund Team
TAX FREE BOND FUND TEAM
James Flood and Ravi Akhoury
Generally speaking, 1996 was an uneventful year in the municipal markets. There
were no major blow-ups, defaults, or political events to which municipal
investors needed to respond. As a result, general economic trends and supply and
demand factors were the primary forces driving the municipal market throughout
the year.
During the first half of 1996, municipal securities were less affected by
Federal Reserve (Fed) policies than by the market's anticipation of how those
policies might change. As it happened, over the course of the year, the Fed only
adjusted rates once, and then by only 25 basis points.
As the economy began to pick up in the second and third quarters, interest rates
started to rise, which took a toll on municipal securities. On average,
municipal funds closed the first half with negative returns. Early in the fourth
quarter, however, the municipal market rallied as the economy showed signs of
slowing. The result was positive for most municipal investors, with the average
Lipper++ general municipal debt fund providing a positive 3.30% total return for
the 12 months ended December 31, 1996.
In this context, how did the MainStay Tax Free Bond Fund perform?
We think the Fund did well. For the 12 months ended December 31, 1996, the
MainStay Tax Free Bond Fund posted total returns of 3.63% and 3.33% for Class A
and Class B shares, respectively, excluding all sales charges. Both share
classes outperformed their average Lipper peer fund over the same period.
How did you seek to enhance the Fund's performance in an uneventful year?
We believe that duration is the single most important factor affecting the
performance of a municipal portfolio. Throughout the year, we tried to maintain
a relatively neutral portfolio duration, to keep from being blindsided by
changes in interest rates and market sentiment. While a longer duration offers
more opportunity when the markets are favorable, it also presents greater risk
if the market declines.
How has your duration strategy affected the Fund's performance?
Generally, the results were positive. In the second quarter, we extended the
Fund's duration a bit beyond neutral and it had a
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive, and which takes into account interest payments as well
as principal payments. Duration is a better gauge of interest-rate sensitivity
than average maturity alone.
- ----------
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
Insured credits
- ---------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
Treasury securities and municipal bonds--or between
- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<S> <C>
Year-end Total Return %
- -------- --------------
12/86 6.01
12/87 0.58
12/88 8.77
12/89 7.38
12/90 4.68
12/91 10.89
12/92 8.41
12/93 10.39
12/94 -6.02
12/95 15.00 Class A
12/95 14.86 Class B
12/96 3.63 Class A
12/96 3.33 Class B
Year-end
</TABLE>
- ----------
Returns are for Class B Shares unless otherwise noted. See footnote * on page 9
for more information on performance.
- --------------------------------------------------------------------------------
negative impact. But we made a prompt and disciplined return to a neutral
duration when we saw our strategy wasn't paying off. Later in the year, we
extended the Fund's duration once again, and when the market rallied in October
and November, that move had a positive impact on the Fund's performance.
What other strategic moves did you make in 1996?
The Fund seeks to provide a high level of current income free from regular
federal income tax, consistent with the preservation of capital. So our
management strategies must take both performance and quality into account. As
the number of insured credits continues to grow, opportunities to provide
performance enhancements are becoming increasingly scarce. As a result, we've
tried to find uninsured issues with attractive price, value, and quality
characteristics.
Can you give us an example?
We've identified potential opportunities among BBB-rated hospital issues, which
we've selectively purchased over time. We feel many of these issues offer
attractive risk/reward relationships. AAA-rated bonds may represent the highest
quality, but typically provide the lowest yields. While A-rated bonds are not
quite as strong from a quality standpoint, generally they offer higher yields.
During the year, however, the difference in yield, also known as the spread
between these securities dropped to as little as 10 to 15 basis points. The
Fund's investments took advantage of the wider spreads, or more significant
yield advantages, of BBB-rated issues. As a group, the Fund's BBB-rated hospital
bonds have done very well and have helped contribute positively to performance.
Why was that?
As spreads between AAAs and A-rated bonds narrowed, more and more investors
started looking for more yield among BBB issues, which made them more attractive
in the market. We currently believe that the higher yields of these bonds more
than compensates for their lower quality, and we're continuing to closely
monitor their performance.
6
<PAGE>
DIVERSIFICATION BY STATE--TOP 5 AS OF 12/31/96
[THE FOLLOWING WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percent
- ---------------------------------------------
<S> <C>
New York 18.4%
California 14.0%
Illinois 10.6%
Texas 8.7%
Colorado 6.8%
All Other 41.5%
- ---------------------------------------------
</TABLE>
- ----------
Note: Actual percentages will vary over time.
What was the strongest performing bond during the year?
Interestingly, it was one of the Fund's BBB hospital issues--a Bay County
Florida Medical Center bond that was prerefunded during the year. As a result,
it went from being a 23-year BBB hospital issue to an 8-year bond, backed by
government securities. The shorter maturity and higher quality definitely helped
the portfolio.
Were there other prerefundings in the portfolio?
Yes. Various New York City General Obligation bonds were prerefunded,
which helped performance. We also benefited when a New York Local Government
Assistance Corporation bond was prerefunded.
Are there other purchases that had a positive impact on the Fund's performance?
Yes. In September, we purchased an insured Denver Airport issue that offered a
high current coupon and a short duration. It has done well, performing closely
in line with the market. We also purchased a Foothill-Eastern Transportation
zero coupon bond for a California toll road that's under construction. The bond
is rated BBB and provides an attractive yield. Not only did this issue help the
Fund maintain an appropriate duration, we feel it may appreciate in price as the
project nears completion.
What other new purchases helped the portfolio?
Another bond that's done well is an Arapahoe County Highway bond, a Colorado
issue we bought in July and November. We felt it represented good value and its
performance has had a positive impact on the portfolio. We also purchased some
North Carolina Water and Sewer bonds when the market was near a low. We felt the
bonds represented strong relative value, and when the market rose, they did very
well.
Would you say the Fund is diversified by state and by type of issuer?
Yes we would. We bought bonds across the country in 1996, with issuers ranging
from airports and education to urban development, and just about everything in
[GRAPHIC]
Prerefunding
- ------------
Returning principal prior to the initial date at which a bond can be called or
"refunded" (usually 10 years after issuance). In order to prerefund, the issuer
must return the par value of the bond and provide or guarantee interest payments
through the initial call date.
7
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
A small portion of income may be subject to state and local taxes and the
Alternative Minimum Tax Capital gains, if any, may also be taxed.
- --------------------------------------------------------------------------------
between. We also try to diversify by coupon and maturity so that a weakness in
any single segment of the market won't have an overwhelming effect on the
portfolio.
What securities did you sell during 1996?
We had a number of municipal bonds with 4.75% coupons, but found they weren't
performing the way we felt they should. Although these bonds generally perform
well under different interest rate scenarios, we felt demand for this particular
coupon was declining so we decided to reduce our exposure in that area. Even
though the bonds had weakened a bit, we believe the decision was a positive one
in terms of controlling risk.
How did supply and demand affect the portfolio in 1996?
While the supply of municipal bonds was moderate, demand decreased as investors
poured money into the equity markets. The effect was negative for the Fund and
the municipal markets in general. Another difficulty for the market as a whole
has been a reduction in the number of municipal bond dealers, which has reduced
the liquidity of municipal bonds overall.
What's your outlook for 1997?
We think municipal bonds still represent value, particularly for tax-conscious
investors. Barring any major upsets in 1997, we believe interest rate movements,
economic trends, and inflation concerns will continue to be the major
determinants of value. We'll continue to search for opportunities and manage our
duration and quality to seek attractive current yields while preserving capital
for our shareholders.
Ravi Akhoury
James Flood
Portfolio Managers
QUALITY BREAKDOWN AS OF 12/31/96
[THE FOLLOWING WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percent
- -----------------------------------------------
<S> <C>
AAA 51.9%
AA 5.9%
A 10.8%
BBB 29.6%
Cash & Equivalents 1.8%
- -----------------------------------------------
</TABLE>
- ----------
Note: Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 3.63% 6.04% 6.22% 6.39%
Class B 3.33% 5.95% 6.17% 6.35%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A -1.03% 5.06% 5.73% 5.93%
Class B -1.67% 5.63% 6.17% 6.35%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years 10 years Life of Fund
through 12/31/96
<S> <C> <C> <C> <C>
Class A 87 out of n/a n/a n/a
225 funds
Class B 119 out of 92 out of 60 out of 54 out of
225 funds 103 funds 64 funds 57 funds
Average Lipper
general municipal
debt fund 3.30% 6.78% 7.18% 7.78%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $9.84 $0.5262 $0.0000
Class B $9.84 $0.5086 $0.0000
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are sold
with no initial sales charge, but are subject to a maximum CDSC of up to 5%
if shares are redeemed during the first 6 years of purchase and an annual
12b-1 fee of up to .50%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
Lipper averages listed above are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 12/31/96. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed. Short-term
securities are excluded. See Portfolio of Investments for specific type of
security held.
Top 10 Holdings as of 12/31/96
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
HOLDING AMOUNT
===================================================================================
<S> <C>
Denver Colorado City & County Airport Revenue,
Series D, 7.75%, due 11/15/21 $17,422,256
Arapahoe County (Colorado) Capital Improvement
Trust Fund Highway Revenue, 7.00%, due 8/31/26 17,344,688
Michigan State Hospital Finance Authority Revenue,
Genesys Health Systems, Series A, 7.50%, due 10/1/27 16,437,262
Georgia Municipal Electric Authority Power Revenue,
8.00%, due 1/1/15 15,565,117
Los Angeles County (California) Metropolitan Transportation Authority
Sales Tax Revenue, 5.00%, due 7/1/25 14,516,250
Texas Water Resources Finance Authority Revenue,
7.625%, due 8/15/08 12,812,756
Illinois Development Finance Authority, Pollution Control Revenue,
Illinois Power Co., Series A, 8.30%, due 4/1/17 10,675,000
Detroit Michigan Sewer Disposal Revenue, Series A, 5.00%, due 7/1/25 9,864,281
Charlotte (North Carolina) General Obligation Water & Sewer,
5.60%, due 5/1/21 9,757,344
New York State Urban Development Corp. Revenue, Correctional
Capital Facilities, Series A, 5.25%, due 1/1/21 9,037,500
===================================================================================
</TABLE>
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (98.0%)+
ALABAMA (0.8%)
Birmingham Alabama Airport
Authority Revenue, Series A
7.375%, due 7/1/10 (a) $ 3,600,000 $ 3,937,500
-----------
CALIFORNIA (14.0%)
Clovis California Unified School
District, Series D
(zero coupon), due 8/1/10 4,700,000 2,244,250
(zero coupon), due 8/1/11 1,000,000 448,750
East Bay Municipal Utilities
District, Water System Revenue
5.00%, due 6/1/26 6,000,000 5,505,000
Eden Township Hospital
District Revenue
7.40%, due 11/1/19 5,300,000 5,571,625
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/24 6,255,000 1,149,356
(zero coupon), due 1/1/27 56,105,000 8,415,750
(zero coupon), due 1/1/28 23,540,000 3,325,025
5.00%, due 1/1/35 4,150,000 3,522,312
Irvine California Unified School District
Special Tax Community Facilities
Series A
8.10%, due 11/15/13 250,000 272,813
Los Angeles County Metropolitan
Transportation Authority Sales Tax
Revenue, Series A
5.00%, due 7/1/25 15,800,000 14,516,250
Los Angeles County Transport
Commission Sales Tax Revenue
Series A
7.40%, due 7/1/15 600,000 646,500
8.00%, due 7/1/16 600,000 625,290
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24 7,100,000 7,446,125
Oakland California Revenue, Series A
7.60%, due 8/1/21 5,500,000 5,885,000
Riverside California Hospital
Revenue, Riverside Community
Hospital, Series A
6.75%, due 11/1/15 1,000,000 1,007,500
Santa Cruz County Public Financing
Authority Revenue
Tax Allocation, Series B
7.625%, due 9/1/21 175,000 194,469
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
CALIFORNIA (Continued)
South Coast Air Quality Management
District Building Corp., California
Revenue, Series B
(zero coupon), due 8/1/06 $ 2,700,000 $ 1,663,875
(zero coupon), due 8/1/07 3,400,000 1,959,250
Southern California Public Power
Authority Project Revenue
Mead-Adelanto, Series A
4.875%, due 7/1/20 5,000,000 4,462,500
Mead-Phoenix, Series A
4.875%, due 7/1/20 2,500,000 2,231,250
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09 385,000 412,913
----------
71,505,803
----------
COLORADO (6.8%)
Arapahoe County Capital Improvement
Trust Fund Highway Revenue
7.00%, due 8/31/26 15,750,000 17,344,688
Denver Colorado City & County
Airport Revenue, Series D
7.75%, due 11/15/21 15,435,000 17,422,256
----------
34,766,944
----------
DISTRICT OF COLUMBIA (1.7%)
District of Columbia Revenue
Georgetown University, Series A
7.40%, due 4/1/18 5,380,000 5,763,325
7.40%, due 4/1/18 2,815,000 3,047,238
----------
8,810,563
----------
FLORIDA (3.6%)
Bay County Florida Hospital System
Revenue, Bay Medical Center Project
8.00%, due 10/1/19 4,000,000 4,845,000
Dade County Florida
5.125%, due 10/1/21 3,500,000 3,307,500
Florida State Board of Education
Capital Outlay
Series A
5.00%, due 6/1/24 4,740,000 4,325,250
Orange County Health Facilities
Authority Revenue, Pooled
Hospital Loan Program, Series B
7.875%, due 12/1/25 5,965,000 6,172,761
----------
18,650,511
----------
</TABLE>
- ------------
+ Percentage indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statement
11
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
GEORGIA (3.0%)
Georgia Municipal Electric Authority
Power Revenue, Series A
8.00%, due 1/1/15 (b) $14,745,000 $15,565,117
-----------
ILLINOIS (10.6%)
Chicago Illinois Gas Supply Revenue
Peoples Gas, Light & Coke Co.
Series A
8.10%, due 5/1/20 (a) 2,000,000 2,212,500
Chicago Illinois General Obligation
Series B
5.125%, due 1/1/25 7,000,000 6,370,000
Chicago Illinois Park District
General Obligation
5.60%, due 1/1/21 1,400,000 1,358,000
Illinois Development Finance
Authority Pollution Control
Revenue, Illinois Power Co.
Series C
7.625%, due 12/1/16 (a) 3,500,000 3,636,920
Series A
8.30%, due 4/1/17 (b) 10,000,000 10,675,000
Illinois Health Facilities Authority
Revenue, Glenoaks Hospital
Series E
9.50%, due 11/15/19 890,000 1,020,163
Hinsdale Hospital, Series A
9.00%, due 11/15/15 6,265,000 7,063,787
Series B
9.00%, due 11/15/15 1,870,000 2,110,762
Series C
9.50%, due 11/15/19 5,675,000 6,504,969
Proctor Community Hospital
7.375%, due 1/1/23 3,700,000 3,778,625
Sherman Hospital Project
6.75%, due 8/1/21 2,675,000 2,848,875
Illinois Health Facilities Authority
Revenue, Methodist Medical Center
8.00%, due 10/1/14 1,000,000 1,005,960
Illinois Regional Transportation
Authority, Series C
7.10%, due 6/1/25 1,500,000 1,691,250
Kankakee Illinois Sewer Revenue
7.00%, due 5/1/16 2,000,000 2,195,000
Southwestern Illinois Development
Authority, Medical Facilities
Revenue, Anderson Hospital
Project, Series A
7.00%, due 8/15/12 2,000,000 2,070,000
-----------
54,541,811
-----------
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
INDIANA (1.3%)
Indiana Health Facility Financing
Authority Hospital Revenue
Clarion Health Partners Inc.
Series A
6.00%, due 2/15/21 $ 4,000,000 $ 4,005,000
Jackson County Schneck
Memorial Hospital
7.50%, due 2/15/12 2,600,000 2,762,500
-----------
6,767,500
-----------
LOUISIANA (2.7%)
Louisiana Public Facilities
Authority Hospital Revenue
Pendleton Memorial Methodist
6.75%, due 6/1/22 8,470,000 8,554,700
Louisiana State Offshore Terminal
Authority, Deepwater Port Revenue
Series E
7.60%, due 9/1/10 4,730,000 5,197,087
-----------
13,751,787
-----------
MASSACHUSETTS (1.7%)
Massachusetts State General
Obligation, Series D
6.00%, due 7/1/12 315,000 320,119
Massachusetts State Health &
Educational Facilities Authority
Revenue
Harvard University Series P
5.375%, due 11/1/32 3,190,000 3,046,450
Medical Center of Central
Massachusetts
7.10%, due 7/1/21 2,500,000 2,740,625
University Hospital, Series C
7.25%, due 7/1/19 (b) 2,500,000 2,734,375
-----------
8,841,569
-----------
MICHIGAN (6.3%)
Brandon School District of Michigan
5.75%, due 5/1/20 1,350,000 1,365,188
Detroit Michigan Sewer Disposal
Revenue, Series A
5.00%, due 7/1/25 10,825,000 9,864,281
Michigan State Hospital Finance
Authority Revenue
Genesys Health Systems, Series A
7.50%, due 10/1/27 15,255,000 16,437,262
Pontiac Osteopathic Hospital
Series A
6.00%, due 2/1/24 5,000,000 4,768,750
-----------
32,435,481
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statement
12
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
MINNESOTA (0.6%)
Minneapolis & Saint Paul Minnesota
Metropolitan Airport Commission
Series 7
7.80%, due 1/1/13 $2,750,000 $2,956,250
----------
MISSISSIPPI (1.2%)
Mississippi State General Obligation
Series C
4.75%, due 12/01/15 6,355,000 5,886,319
----------
NEVADA (1.4%)
Clark County Airport Improvement
Revenue
8.125%, due 7/01/18 6,500,000 6,971,250
----------
NEW HAMPSHIRE (0.9%)
New Hampshire Higher Educational &
Health Facilities Authority Revenue
Saint Anselm College
5.75%, due 7/1/26 4,560,000 4,548,600
----------
NEW JERSEY (0.6%)
New Jersey Health Care Facilities
Financing Authority Revenue
Zurbrugg Memorial Hospital
Series C
8.50%, due 7/1/12 3,165,000 3,272,578
----------
NEW YORK (18.4%)
Battery Park City Authority
Revenue, Series A
5.25%, due 11/1/17 1,000,000 926,250
5.50%, due 11/1/26 100,000 98,125
Metropolitan Transportation
Authority, Service Contract
Commuter Facilities Revenue
Series 5
7.00%, due 7/1/12 2,265,000 2,434,875
Series L
7.50%, due 7/1/17 4,925,000 5,238,969
Monroe County Airport Authority
Greater Rochester International
Airport Revenue
7.25%, due 1/1/19 (a) (b) 5,800,000 6,300,250
Municipal Assistance Corp.
New York City, Series 67
7.625%, due 7/1/08 3,660,000 3,998,550
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
NEW YORK (Continued)
Nassau County
General Obligation
Series T
5.20%, due 9/1/15 $ 600,000 $ 575,250
New York City Educational
Construction Fund Revenue
5.50%, due 4/1/26 3,200,000 3,144,000
New York City General Obligation
Series B
7.00%, due 6/1/15 5,320,000 5,586,000
Series C
7.20%, due 8/15/15 1,065,000 1,134,225
Series A
7.75%, due 8/15/07 2,000,000 2,252,500
7.75%, due 8/15/15 180,000 200,250
7.75%, due 8/15/16 125,000 139,062
Series D
8.00%, due 8/1/04 1,170,000 1,323,668
Series F
8.20%, due 11/15/04 1,560,000 1,795,944
New York City Trust Cultural
Resources Revenue
Botanical Garden
5.80%, due 7/1/26 2,000,000 2,022,500
New York State Dormitory Authority
Revenue, Cornell University
Series A
7.375%, due 7/1/30 2,880,000 3,160,800
Park Ridge Housing Inc. Project
7.85%, due 2/1/29 1,400,000 1,501,500
State University Education Facilities
Series A
7.50%, due 5/15/13 4,250,000 4,988,437
Series B
7.50%, due 5/15/11 4,250,000 4,967,188
New York State Energy Research &
Development Authority Electric Co.
Facilities Revenue
Con Edison, Series A
7.75%, 1/1/24 (b) 8,425,000 8,791,235
New York State Environmental
Facilities Corp. Pollution Control
Revenue, State Water
Series A
4.65%, due 6/15/07 1,400,000 1,361,500
7.50%, due 6/15/12 3,050,000 3,358,813
Series B
5.20%, due 5/15/14 3,000,000 2,917,500
New York State Local Government
Assistance Corp.
Series A
5.375%, due 4/1/19 1,000,000 961,250
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statement
13
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
New York State Medical Care
Facilities Finance Agency Revenue
7.50%, due 2/15/21 $ 600,000 $ 662,250
7.875%, due 8/15/20 1,215,000 1,341,056
8.875%, 8/15/07 400,000 417,912
Hospital & Nursing Home
Series A
8.00%, due 2/15/28 3,000,000 3,217,500
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 3,875,000 4,165,625
New York State Urban
Development Corp. Revenue
5.50%, due 7/1/22 2,825,000 2,683,750
State Facilities
5.70%, due 4/1/20 3,000,000 2,940,000
New York State Urban
Development Corp. Revenue
Correctional Capital Facilities
Series A
5.25%, due 1/1/21 10,000,000 9,037,500
Port Authority New York & New
Jersey Consolidated Bonds
Series 104
5.125%, 7/15/14 500,000 484,375
Triborough Bridge & Tunnel
Authority of New York
General Purpose Revenue
Series B
5.20%, due 1/1/27 300,000 283,125
----------
94,411,734
----------
NORTH CAROLINA (3.1%)
Charlotte General Obligation
Water & Sewer
5.60%, due 5/1/20 5,980,000 6,054,750
5.60%, due 5/1/21 9,625,000 9,757,344
----------
15,812,094
----------
OHIO (0.9%)
Ohio State Air Quality Development
Authority Revenue, Pollution
Control, Cleveland County Project
8.00%, due 12/1/13 2,000,000 2,332,500
Ohio State Turnpike
Commission Revenue
Series A
5.70%, due 2/15/17 2,000,000 2,025,000
---------
4,357,500
---------
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
PENNSYLVANIA (3.4%)
Allegheny County Airport Revenue
Greater Pittsburgh International
Airport, Series C
8.25%, due 1/1/16 $ 4,800,000 $ 5,061,120
Allegheny County, Pennsylvania
Hospital Development Authority
Revenue, Saint Margaret Memorial
Hospital, Project A
9.80%, due 7/1/10 (b) 1,500,000 1,527,000
Emmaus Pennsylvania General
Authority Revenue, Series E
7.90%, due 5/15/18 6,450,000 6,917,625
Pottsville Hospital Authority
Revenue, Warne Clinic
7.00%, due 7/1/14 4,000,000 4,105,000
----------
17,610,745
----------
PUERTO RICO (0.1%)
Puerto Rico Commonwealth
Aqueduct & Sewer
Authority Revenue
5.00%, due 7/1/15 300,000 277,500
Puerto Rico Commonwealth
Highway & Transportation
Authority Revenue
Series Y
5.50%, due 7/1/26 100,000 96,500
----------
374,000
----------
TEXAS (8.7%)
Arlington Texas Independent
School District
4.75%, due 2/15/22 7,335,000 6,473,138
Brazos River Authority Texas Revenue
Houston Lighting & Power
Co. Project
Series B
7.20%, due 12/1/18 740,000 799,200
Series C
8.10%, due 5/1/19 2,050,000 2,185,813
Series A
8.25%, due 5/1/19 2,500,000 2,659,375
Keller Texas Independent
School District
Series A
5.40%, due 8/15/23 6,925,000 6,708,593
Matagorda County Texas Navigation
District 1, Pollution Control
Revenue
Central Power & Light Co. Project
7.50%, due 12/15/14 3,150,000 3,461,063
Houston Lighting & Power Co.
Series E
7.20%, due 12/1/18 (b) 6,470,000 7,011,862
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statement
14
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
=============================
<C> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
TEXAS (Continued)
Tarrant County Texas Junior College
District
4.625%, due 2/15/15 $ 3,000,000 $ 2,692,500
Texas Water Resources Finance
Authority Revenue
7.625%, due 8/15/08 (b) 11,905,000 12,812,756
-----------
44,804,300
-----------
UTAH (3.4%)
Intermountain Power Agency of Utah
Power Supply Revenue
Series A
5.00%, due 7/1/21 3,400,000 3,034,500
Series F
5.00%, due 7/1/13 4,450,000 4,110,687
Series B
7.20%, due 7/1/19 3,475,000 3,591,482
Series D
8.625%, due 7/1/21 (b) 6,530,000 6,818,234
-----------
17,554,903
-----------
VIRGINIA (0.5%)
Capital Region Airport Commission
Revenue, Richmond
International Airport
Project, Series A
5.625%, due 7/1/25 2,650,000 2,643,375
-----------
WASHINGTON (1.5%)
Washington State Public Power
Supply System Revenue
Nuclear Project 2, Series A
5.625%, due 7/1/10 5,000,000 5,012,500
Nuclear Project 1, Series B
5.70%, due 7/1/10 2,500,000 2,503,125
-----------
7,515,625
-----------
WEST VIRGINIA (0.8%)
West Virginia School Building
Authority Revenue, Series B
6.75%, due 7/1/17 1,000,000 1,068,750
West Virginia State Building
Commission Lease Revenue, West
Virginia Regional Jail & Correction
Series A
7.00%, due 7/1/15 3,000,000 3,262,500
-----------
4,331,250
-----------
Total Long Term Municipal Bonds
(Cost $497,931,828) 502,625,109
-----------
<CAPTION>
Principal
Amount Value
=============================
<S> <C> <C>
SHORT-TERM INVESTMENT (0.2%)
ALASKA (0.2%)
Valdez Alaska Marine Terminal
Revenue, Exxon Pipeline Co.
Project, Series C
5.10%, due 12/1/33 (c) $ 800,000 $ 800,000
------------
Total Short-Term Investment
(Cost $800,000) 800,000 800,000
------------
Total Investments
(Cost $498,731,828) (d) 98.2% 503,425,109(e)
Cash and Other Assets,
Less Liabilities 1.8 9,291,793
------------ ------------
Net Assets 100.0% $512,716,902
============ ============
<CAPTION>
Contracts Unrealized
Long Appreciation
================================
<S> <C> <C>
FUTURES CONTRACTS (0.0%)(f)
Municipal Bond
March 1997 (30 year) 174 $48,937
-------
Total Futures Contracts
(Settlement Value $20,194,875) $48,937(g)
=======
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Segregated as collateral for futures contracts.
(c) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(e) At December 31, 1996 net unrealized appreciation was $4,693,281, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $10,482,933 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $5,789,652.
(f) Less than one tenth of a percent.
(g) Represents the difference between the value of the contracts at the time
they were opened and the value at December 31, 1996.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $498,731,828) ..... $ 503,425,109
Cash .................................................................. 57,074
Receivables:
Interest ............................................................ 10,561,232
Fund shares sold .................................................... 67,094
Other assets .......................................................... 353
-------------
Total assets ....................................................... 514,110,862
-------------
LIABILITIES:
Payables:
Fund shares redeemed ................................................ 543,008
NYLIFE Distributors ................................................. 333,379
Adviser ............................................................. 130,778
Transfer agent ...................................................... 39,220
Custodian ........................................................... 8,495
Trustees ............................................................ 3,763
Accrued expenses ...................................................... 100,018
Variation margin payable on futures contracts ......................... 235,299
-------------
Total liabilities .................................................. 1,393,960
-------------
Net assets ............................................................ $ 512,716,902
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 16,762
Class B ............................................................. 504,209
Additional paid-in capital ............................................ 523,246,413
Accumulated distributions in excess of net investment income .......... (245)
Accumulated net realized loss on investments .......................... (15,792,455)
Net unrealized appreciation on investments ............................ 4,742,218
-------------
Net assets ............................................................ $ 512,716,902
=============
CLASS A
Net assets applicable to outstanding shares ........................... $ 16,486,256
=============
Shares of beneficial interest outstanding ............................. 1,676,249
=============
Net asset value per share outstanding ................................. $ 9.84
Maximum sales charge (4.50% of offering price) ........................ 0.46
-------------
Maximum offering price per share outstanding .......................... $ 10.30
=============
CLASS B
Net assets applicable to outstanding shares ........................... $ 496,230,646
=============
Shares of beneficial interest outstanding ............................. 50,420,942
=============
Net asset value per share outstanding ................................. $ 9.84
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Interest .......................................... $ 33,650,181
------------
Expenses:
Administration .................................... 1,579,820
Advisory .......................................... 1,579,820
Service ........................................... 1,316,517
Distribution--Class B ............................. 1,084,391
Transfer agent .................................... 270,792
Shareholder communication ......................... 175,429
Recordkeeping ..................................... 80,430
Professional ...................................... 71,164
Custodian ......................................... 52,434
Registration ...................................... 33,651
Trustees .......................................... 13,583
Miscellaneous ..................................... 40,941
------------
Total expenses ................................... 6,298,972
------------
Net investment income ............................... 27,351,209
------------
REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ............................. 2,593,131
Futures transactions .............................. (125,212)
------------
Net realized gain on investments .................... 2,467,919
------------
Net change in unrealized appreciation on investments:
Security transactions ............................. (13,380,089)
Futures transactions .............................. 48,937
------------
Net unrealized loss on investments .................. (13,331,152)
------------
Net realized and unrealized loss on investments ..... (10,863,233)
------------
Net increase in net assets resulting from operations $ 16,487,976
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ........................................................ $ 27,351,209 $ 28,098,025
Net realized gain on investments ............................................. 2,467,919 3,237,252
Net change in unrealized appreciation (depreciation) on investments .......... (13,331,152) 42,963,850
------------- -------------
Net increase in net assets resulting from operations ......................... 16,487,976 74,299,127
------------- -------------
Dividends to shareholders:
From net investment income:
Class A ..................................................................... (738,853) (420,574)
Class B ..................................................................... (26,567,311) (27,677,470)
------------- -------------
Total dividends to shareholders ........................................... (27,306,164) (28,098,044)
------------- ------------
Capital share transactions: Net proceeds from sale of shares:
Class A ..................................................................... 10,869,272 9,868,992
Class B ..................................................................... 41,870,887 57,450,885
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ..................................................................... 551,381 364,579
Class B ..................................................................... 16,676,585 17,430,060
------------- -------------
69,968,125 85,114,516
Cost of shares redeemed:
Class A ..................................................................... (4,558,162) (1,090,878)
Class B ..................................................................... (94,941,242) (90,939,204)
------------- -------------
Decrease in net assets derived from capital share transactions ............ (29,531,279) (6,915,566)
------------- -------------
Net increase (decrease) in net assets ..................................... (40,349,467) 39,285,517
NET ASSETS:
Beginning of year .............................................................. 553,066,369 513,780,852
------------- -------------
End of year .................................................................... $ 512,716,902 $ 553,066,369
============= =============
Accumulated distributions in excess of net investment income ................... $ (245) $ (45,290)
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
-------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Year ended Year ended December 31 ---------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
----------------- ----------------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .................... $10.02 $10.03 $9.20 $9.20 $9.71 $10.39 $10.21 $9.82
------ ------ ----- ----- ----- ------ ------ -----
Net investment income .................. 0.54 0.51 0.52 0.51 0.17 0.51 0.57 0.59
Net realized and
unrealized gain (loss)
on investments ......................... (0.19) (0.19) 0.83 0.83 (0.51) (0.58) 0.47 0.40
------ ------ ----- ----- ----- ------ ------ -----
Total from investment
operations ............................. 0.35 0.32 1.35 1.34 (0.34) (0.07) 1.04 0.99
------ ------ ----- ----- ----- ------ ------ -----
Less dividends and
distributions:
From net investment
income ................................. (0.53) (0.51) (0.53) (0.51) (0.17) (0.53) (0.60) (0.60)
From net realized gain
on investments ......................... -- -- -- -- -- (0.08) (0.26) --
------ ------ ----- ----- ----- ------ ------ -----
Total dividends and
distributions .......................... (0.53) (0.51) (0.53) (0.51) (0.17) (0.61) (0.86) (0.60)
------ ------ ----- ----- ----- ------ ------ -----
Net asset value at
end of period .......................... $9.84 $9.84 $10.02 $10.03 $9.20 $9.71 $10.39 $10.21
Total investment
return (a) ............................. 3.63% 3.33% 15.00% 14.86% (3.53%) (0.69%) 10.81% 10.42%
Ratios (to average net
assets)/Supplemental
Data:
Net investment income ............... 5.4% 5.2% 5.5% 5.2% 5.6%+ 5.4% 5.6% 5.9%
Expenses ............................ 1.0% 1.2% 1.0% 1.2% 1.2%+ 1.2% 1.2% 1.3%
Portfolio turnover rate ................ 95% 95% 110% 110% 37% 92% 138% 97%
Net assets at end
of period (in 000's) $16,486 $496,231 $9,752 $543,314 $513,781 $552,156 $476,761 $292,936
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
MainStay Tax Free Bond Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Tax Free Bond Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to provide a high level of current income
free from regular Federal income tax, consistent with preservation of capital.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising debt securities at prices supplied by a pricing
agent selected by the Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Adviser to be representative of market values at the regular close of
business of the New York Stock Exchange, (b) by appraising options and futures
contracts at the last sale price on the market where such options or futures are
principally traded, and (c) by appraising all other securities and other assets,
including debt securities for which prices are supplied by a pricing agent but
are not deemed by the Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of sixty days or
less and including restricted securities and securities for which no market
quotations are available, at fair value in accordance with procedures approved
by the Trustees. Short-term securities which mature in more than 60 days are
valued at current market quotations. Short-term securities which mature in 60
days or less are valued at amortized cost if their term to maturity at purchase
was 60 days or less, or by amortizing the difference between
20
<PAGE>
Notes to Financial Statements
market value on the 61st day prior to maturity and value on maturity date if
their original term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities and the regular
close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Adviser believes that the particular
event would materially affect net asset value, in which case an adjustment would
be made.
Futures Contracts. A futures contract is an agreement to purchase or sell a
specified quantity of an underlying instrument at a specified future date, or to
make or receive a cash payment based on the value of a securities index. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" such
contract on a daily basis to reflect the market value of the contract at the end
of each day's trading. The Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in the value of the contract. Such
receipts or payments are known as "variation margin". When the futures contract
is closed, the Fund records a realized gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and the Fund's
basis in the contract. The Fund has entered into contracts for the future
delivery of debt securities in order to attempt to protect against the effects
of adverse changes in interest rates or to lengthen or shorten the average
maturity or duration of the Fund's portfolio.
The use of futures contracts involves, to varying degrees, elements of market
risk. Risks arise from the possible imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets, and
the possible inability of counterparties to meet the terms of their contracts.
However, the Fund's activities in futures contracts are conducted through
regulated exchanges which minimize counterparty credit risks.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income or excise tax provision is
required.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
21
<PAGE>
MainStay Tax Free Bond Fund
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of 0.30% of the average daily net assets of the Fund.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the
22
<PAGE>
Notes to Financial Statements continued
Fund's Class B shares are subject to the payment of a monthly distribution fee,
which is an expense of the Class B shares of the Fund, at the annual rate of
0.25% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charges on sales of
Class A Fund shares retained by NYLIFE Distributors was $51,345 for the
year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$605,386 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $9,124.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $16,662 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Trust by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$80,430.
23
<PAGE>
MainStay Tax Free Bond Fund
Note 4--Federal Income Tax:
At December 31, 1996, for Federal income tax purposes, capital loss
carryforwards of $15,743,517 are available to the extent provided by regulations
to offset future realized gains through 2003. To the extent that these loss
carryforwards are used to offset future capital gains, it is probable that the
capital gains so offset will not be distributed to shareholders. The Fund
utilized $2,516,857 of capital loss carryforward during the current year.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $489,837 and $507,884, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
------------------ -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .................................................. 1,114 4,283 1,047 5,918
Shares issued in reinvestment of dividends ................... 56 1,707 38 1,794
----- ----- ----- -----
1,170 5,990 1,085 7,712
Shares redeemed .............................................. 467 9,724 112 9,416
----- ----- ----- -----
Net increase (decrease) ...................................... 703 (3,734) 973 (1,704)
===== ===== ===== =====
</TABLE>
24
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Tax Free Bond Fund (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
25
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH FUNDS
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares
are redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed
by the U.S. government and its agencies, the share price of the Fund is
not guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed
by the U.S. government and there is no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
26
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph indicating consistent with safety of principal current income and safety of principal
risk/reward of Fund] primarily from U.S. government
securities.(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD [Horizontal bar An aggressive high yield bond You want to maximize current income
CORPORATE BOND FUND graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
TAX FREE BOND FUND graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
27
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Tax Free Bond Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive Officer,
and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechart Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Adminstrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay Tax
Free Bond Fund. It may be given to others only when preceded or accompanied by
an effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN14 (297)
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Total Return Fund Highlights 3
$10,000 Invested in the MainStay
Total Return Fund versus S&P 500 and
Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 9
Top 10 Equity Holdings 10
Top 10 Bond Holdings 10
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Financial Statements 18
Notes to Financial Statements 22
Report of Independent Accountants 27
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Total Return Fund Highlights
- --------------------------------------------------------------------------------
1996 MARKET HIGHLIGHTS
================================================================================
o The year was marked by a strong, but volatile equity market with a severe
downturn in June and July and a strong recovery in the second half
o Strong equity sectors included financials, technology, and energy
o Health care and consumer stocks had mixed results throughout the year
o The bond market was relatively weak, with wandering yields and interest rates
o Government bonds underperformed corporate and mortgage-backed securities
================================================================================
- --------------------------------------------------------------------------------
1996 FUND HIGHLIGHTS
================================================================================
o One-year total returns of 13.22% and 12.73% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o Both share classes underperformed the average Lipper+ balanced fund
o The Fund benefited from overweighting in financial and technology issues and
strong performances in selected health care and consumer stocks
o Strong performance among yankee bonds and selected vintage mortgage-backed
securities helped boost performance in the fixed-income portion of the
portfolio
================================================================================
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Total Return Fund versus
S&P 500 and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Total
Year-end S&P 500 Return Fund Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,761 $ 9,497.25 $10,017
12/88 12,543 10,223.40 10,459
12/89 16,509 11,756.10 10,944
12/90 15,997 12,350.80 11,628
12/91 20,861 16,900.50 11,975
12/92 22,448 17,512.20 12,329
12/93 24,702 19,350.50 12,667
12/94 25,028 18,884.50 12,996
12/95 34,423 24,297.40 13,334
12/96 39,327 27,510.10 13,752
</TABLE>
[GRAPHIC] MainStay Total Return Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
MainStay Total
Year-end S&P 500 Return Fund Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,761 $10,050.00 $10,017
12/88 12,543 10,818.40 10,459
12/89 16,509 12,440.30 10,944
12/90 15,997 13,069.60 11,628
12/91 20,861 17,884.10 11,975
12/92 22,448 18,531.40 12,329
12/93 24,702 20,476.70 12,667
12/94 25,028 19,983.60 12,996
12/95 34,423 25,571.40 13,334
12/96 39,327 28,827.60 13,752
</TABLE>
[GRAPHIC] MainStay Total Return Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 12/28/87
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (12/28/87)
through 12/31/94. The Class B graph assumes an initial investment of $10,000
made on 12/28/87. Returns shown do not reflect the Contingent Deferred Sales
Charge (CDSC), as it would not apply for the period shown. All results include
reinvestment of distributions at net asset value and the change in share price
for the stated period. Past performance is no guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 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 gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
[GRAPHIC]
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Total Return Fund Team
TOTAL RETURN FUND TEAM
Edmund Spelman, Rudy Carryl, Eileen Cook,
Christopher Harms, and Ravi Akhoury
In 1996, the stock market provided positive, but highly volatile performance.
After a strong first quarter, stocks took a sharp downturn in June and July,
followed by a general resurgence throughout the second half. In the fourth
quarter, however, investors shifted their focus from growth equities to larger
value stocks with relatively predictable earnings prospects.
Winning sectors included financials, technology, and energy stocks. While some
consumer and health care stocks were stellar performers, in general, the market
for these securities was weak. Indeed, most of the advances in the stock market
were among a relatively limited number of larger, more familiar names.
Rising interest rates in the second quarter led most bond sectors to close the
first half with negative returns. Rates declined somewhat in the second half,
but rose again in December, leaving bond investors with disappointingly low
returns. Certain sectors, however, including yankee bonds and seasoned
mortgage-backed securities, provided attractive yield advantages. The average
Lipper++ balanced fund provided a total return of 13.76% for the 12 months ended
12/31/96.
Given this context, how did the MainStay Total Return Fund do in 1996?
For the 12 months ended December 31, 1996, the MainStay Total Return Fund posted
total returns of 13.22% and 12.73% for Class A and Class B shares, respectively,
excluding all sales charges. Both share classes underperformed the average
Lipper balanced fund over the same period.
What was the primary reason for the Fund's underperformance?
Although the performance of the Fund's stock holdings was strong, weaknesses in
the bond portion of the portfolio contributed to the Fund's underperformance for
the year. Although the Fund's duration strategy was conservative, being long in
the first quarter as interest rates rose, and short in the third quarter, when
they declined, had a negative impact on the Fund's performance. Fortunately, the
Fund was relatively well positioned in the second and fourth quarters, which
benefited the bond portion of the portfolio. With interest rates rising then
[GRAPHIC]
Duration
- --------
A measure of average maturity, which adjusts for the time value of the payments
investors will receive and which takes into account interest payments as well as
principal payments. Duration is a better gauge of interest-rate sensitivity than
average maturity alone.
- ----------
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Year-End Total Return %
- -------- -----------------------
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 -2.41
12/95 28.66 Class A
12/95 27.96 Class B
12/96 13.22 Class A
12/96 12.73 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote* on page 9
for more information on performance.
- --------------------------------------------------------------------------------
falling during the year, and negative total returns for most bond sectors in the
first half, we're pleased the Fund performed as close as it did to the average
peer fund.
What were the strengths in the equity portion of the portfolio?
As a result of our bottom-up investment approach, based on individual security
selection, we were overweighted in financial stocks all year. This benefited the
portfolio with names like SunAmerica, up 91%,* Green Tree Financial, up 46%, and
First USA and Travelers Group, which contributed 52% and 49%, respectively, to
our positive performance. In technology stocks, we identified the earnings
growth potential of Intel, 3Com, Microsoft, and Computer Associates
International. Intel increased 131%, and 3Com was up 57%. Microsoft had a strong
year and Computer Associates International did well, despite some negative news
about its European earnings at year end. Another networking company, Cisco
Systems, realized much of the potential we'd identified and gained 24% for our
shareholders.
Did you have any disappointments in these sectors?
Yes. We sold Bank of New York and Barnett Banks in the third quarter, only to
watch them rise to all-time highs in the fourth. While we sold Micron Technology
and Motorola because of pricing weaknesses in semiconductors, we held Lam
Research, which was a major disappointment, down 39% for the year.
What other stocks did well?
We bought Nike in the first quarter based on strong fundamentals that have
continued to improve. The stock returned 54% for the Fund. Safeway also showed
strong growth characteristics and returned 44%. HFS, a diversified hotel
franchiser, condominium time share, real estate, and rental car company, was up
49%. We bought Tyco International, a diversified manufacturer, in the third
quarter based on its strong fundamentals and it gained 30% for the Fund.
Finally, the Fund owned WorldCom, the nation's fourth largest long distance
company, when it bought MFS Communications. While investor concerns
[GRAPHIC]
Bottom-up
investing
- ---------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is greater than the sector's general relationship to the market as a whole.
Auction
- -------
The competitive bidding process through which Treasury securities are sold.
- ----------
* Returns reflect performance during the period securities were held in the
Fund.
6
<PAGE>
- --------------------------------------------------------------------------------
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Sector Percentage
- --------------------------------------------------------
<S> <C>
U.S. Government Obligations & Agencies 18.2%
Finance 8.4%
Technology 7.1%
Retail 7.0%
Commercial Mortgage Loans 5.1%
All Other 54.2%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
- --------------------------------------------------------------------------------
caused the price to dip, we continued to hold the stock based on its long-range
earnings potential and were rewarded by the end of the year.
What happened in the health care industry?
We saw mixed results there. HMOs were hit relatively hard, with United
Healthcare and Humana both losing 30% as a result of higher costs, low
utilization, and slow premium growth. Other health care and medical products
companies, including Johnson & Johnson, Schering-Plough, Medtronic, and Guidant,
all provided strong performance for the Fund. While Mylan Laboratories was down
29% for the year, we sold it earlier in the year to limit the loss to the Fund.
Besides interest rates, what affected the bond portion of the portfolio?
A number of factors. The introduction of new auctions for 10- and 30-year
Treasuries shifted the supply dynamics in that market. We sold new issues and
bought older ones, believing that oversupply of new issues would help reduce
demand. Our decision had a positive effect. Also, we reduced the Fund's exposure
to Treasuries in favor of mortgage-backed securities, and corporates, including
yankee bonds, all of which helped benefit the Fund.
Why did you choose yankee bonds?
To enhance the potential yield we could offer our shareholders. Few investors
are well researched on yankee bonds, and by doing our homework and overweighting
the portfolio in yankee bonds, we were able to make selective purchases at
attractive valuation levels, which helped to benefit our shareholders.
What other bonds did you buy during the year?
We also purchased selective seasoned mortgage issues that had attractive
origination years. This strategy helped add value to the portfolio in the second
and third quarters. We also invested in some nonstandard loans in the fourth
quarter, including home equity loans and manufactured housing paper. We also
[GRAPHIC]
Mortgage-backed securities
- --------------------------
Securities representing interests in "pools" of mortgages in which principal and
interest payments by the holders of underlying fixed- or adjustable-rate
mortgages are, in effect, "passed through" to investors (net of fees paid to the
issuer or guarantor of the securities).
Yankee bonds
- ------------
Dollar-denominated bonds issued in the United States by foreign banks and
corporations, usually when conditions in the U.S. are more favorable than other
markets, including the issuer's domestic market overseas.
7
<PAGE>
invested in low-balance mortgages, which may have lower prepayments and offer
yield advantages. Late in the year, we added Fannie Mae noncallable
multiple-family project bonds and Ginnie Mae adjustable rate mortgage paper that
was trading at a discount to its potential yield. We believe all of these
investments added value to the portfolio during the year.
What's your outlook for the future?
It's positive. If the U.S. economy can maintain moderate growth and reasonable
interest rates, it should be good for stocks and bonds. We're continuing to look
for opportunities wherever they may be found, provided they fall within the
risk-management guidelines we've outlined for the Fund. Whatever happens, we
will continue to seek current income consistent with reasonable opportunity for
future growth of capital and income.
Ravi Akhoury
Rudy Carryl
Edmund Spelman
Portfolio Managers
[GRAPHIC]
PORTFOLIO COMPOSITION AS OF 12/31/96
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Sector Percentage
- --------------------------------------------------------
<S> <C>
[GRAPHIC] Common Stocks 60.8%
[GRAPHIC] Bonds 37.0%
[GRAPHIC] Cash & Equivalents 2.2%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 13.22% 10.23% 12.59%
Class B 12.73% 10.02% 12.46%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 7.00% 8.99% 11.88%
Class B 7.73% 9.74% 12.46%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/96
================================================================================
1 year 5 years Life of Fund through 12/31/96
<S> <C> <C> <C>
Class A 145 out of n/a n/a
272 funds
Class B 166 out of 46 out of 21 out of
272 funds 72 funds 45 funds
Average Lipper
balanced fund 13.76% 10.73% 12.15%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $20.09 $0.3692 $0.5091
Class B $20.10 $0.2734 $0.5091
================================================================================
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show the
percentage change for each of the required periods. All returns assume capital
gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a maximum
initial sales charge of 5.5% and an annual 12b-1 fee of .25%. Performance
figures for this class include the historical performance of the Class B
shares for periods from inception (12/28/87) up to 12/31/94. Performance data
for the two classes after this date vary based on differences in their expense
structures. Class B shares of the Fund are sold with no initial sales charge,
but are subject to a maximum CDSC of up to 5% if shares are redeemed during
the first 6 years of purchase and an annual 12b-1 fee of up to 1%.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales charges.
Lipper averages listed above are not class specific. Life of Fund return is
from the period of the Class B shares' initial offering through 12/31/96. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 12/28/87.
[GRAPHIC]
9
<PAGE>
Top 10 Equity Holdings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDING AMOUNT
================================================================================
<S> <C>
3Com Corp. $24,287,125
SunAmerica, Inc. 23,722,875
HFS, Inc. 19,663,725
Green Tree Financial Corp. 19,467,000
Medtronic, Inc. 16,660,000
Computer Associates International, Inc. 16,628,938
Intel Corp. 16,275,531
Travelers Group, Inc. 15,729,924
Oracle Corp. 14,215,875
Nike, Inc. Class B 13,479,600
================================================================================
</TABLE>
Top 10 Bond Holdings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDING AMOUNT
================================================================================
<S> <C>
Government National Mortgage Association I (Mortgage Pass-
Through Security) 8.00%, due 12/15/23 $23,701,146
Federal National Mortgage Association (Mortgage Pass-Through
Security) 7.00%, due 8/1/11 15,540,155
United States Treasury Bond 6.50%, due 11/15/26 11,982,034
United States Treasury Bond 8.875%, due 8/15/17 10,760,714
Federal National Mortgage Association (Mortgage Pass-Through
Security) 6.00%, due 1/23/27 8,432,625
Federal Depository Insurance Corp. Series 1996-C1 Class 1A 6.75%,
due 7/25/26 8,020,865
United States Treasury Note 6.375%, due 3/31/01 7,651,072
Asset Securitization Corp. Series 1996-MD6 Class A1B 6.88%,
due 11/13/26 6,676,999
Independent National Mortgage Corp. Series 1996-D Class A2
7.00%, due 5/25/26 6,675,947
Federal National Mortgage Association (Mortgage Pass-Through
Security) 9.00%, due 6/1/26 6,078,684
================================================================================
</TABLE>
[GRAPHIC]
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. A shareholder owns shares of the Fund but does not
own a direct interest in any of the specific securities listed. Short-term
securities are excluded. See Portfolio of Investments for specific type of
security held.
10
<PAGE>
10 Largest Purchases for the 12 months ended 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
United States Treasury Notes,
due 2/15/96 - 2/15/06 $495,870,444
Government National Mortgage Association I and II
due 12/15/17 - 6/15/26 303,117,025
Federal Home Loan Mortgage Corporation,
due 6/26/96 - 5/1/26 170,204,536
Federal National Mortgage Association
due 7/25/98 - 1/14/27 167,132,008
United States Treasury Bonds,
due 2/15/15 - 11/15/26 162,648,128
Residential Accredit Loans, Inc. and
Residential Asset Securitization
Trust, due 6/25/26 - 9/25/26 19,537,011
Tennessee Valley Authority, due 4/1/36
- 7/15/43 15,902,378
Columbia Republic, due 2/15/03 - 10/7/16 15,670,903
Asset Securitization Corp.,due 10/13/26 - 2/14/29 13,879,016
Green Tree Financial
Corp.,due 9/15/27 - 11/15/28 12,184,125
================================================================================
</TABLE>
10 Largest Sales for the 12 months ended 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
United States Treasury Notes,
due 2/15/96 - 2/15/06 $598,334,414
Government National Mortgage Association I and II,
due 1/20/23 - 6/15/26 288,767,936
Federal Home Loan Mortgage Corporation,
due 10/6/04 - 5/1/26 161,346,937
United States Treasury Bonds,
due 2/15/15 - 8/15/26 159,155,838
Federal National Mortgage Association,
due 7/25/98 - 12/1/24 118,918,070
Residential Asset Securitization Trust
and Residential Funding Mortgage
Securities I,due 4/25/09 - 9/25/26 12,214,869
Tennessee Valley Authority,
due 4/1/36 - 7/15/43 11,363,923
Ford Capital BV, Ford Credit
Auto Lease Trust, Ford Credit Grantor
Trust, and Ford Motor Co.,
due 8/15/98 - 10/1/08 10,432,681
BCH Cayman Islands, due 6/15/04 - 7/15/06 9,386,271
Province of Quebec, due 2/9/24 - 7/22/26 8,951,301
================================================================================
</TABLE>
[GRAPHIC]
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed above. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
11
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
LONG-TERM BONDS (37.0%)+
ASSET-BACKED SECURITIES (10.5%)
AIRPLANE LEASES (0.6%)
Aircraft Lease Portfolio Securitization
Series 1996-1 Class C
6.975%, due 6/15/06
(call date 1/15/97) (c)(e) .................... $ 4,537,499 $ 4,538,905
Airplane Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19
(call date 1/1/97) ............................ 1,575,000 1,630,125
---------------
6,169,030
---------------
COMMERCIAL MORTGAGE LOANS (5.1%)
Asset Securitization Corp.
Series 1996-MD6 Class A1B
6.88%, due 11/13/26 ........................... 6,650,000 6,676,999
Series 1996-D2 Class A1
6.92%, due 2/14/29 ............................ 3,605,152 3,601,763
Series 1996-D3 Class A1C
7.40%, due 10/13/26 ........................... 3,400,000 3,481,804
Blackrock Capital Finance L.P.
Series 1996-C2 Class A
7.641%, due 11/15/26 (c) ...................... 2,607,428 2,641,663
Donaldson Lufkin & Jenrette
Mortgage Acceptance Corp.
Series 1996-CF2 Class A1A
6.86%, due 11/12/21 (c) ....................... 4,395,966 4,416,584
Federal Depository Insurance Corp.
Series 1996-C1 Class 1A
6.75%, due 7/25/26 ............................ 8,045,000 8,020,865
General Motors Acceptance Corp.
Commercial Mortgage Securities Inc.
Series 1996-C1 Class A2A
6.79%, due 9/15/03 ............................ 4,243,402 4,250,021
Merrill Lynch Mortgage Investors, Inc.
Series 1996-C2 Class A1
6.69%, due 11/21/28 ........................... 3,307,939 3,311,048
Series 1996-C1 Class A1
7.15%, due 4/25/28 ............................ 3,668,857 3,728,476
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class A2A
7.35%, due 7/15/05 ............................ 3,129,971 3,198,924
Nomura Asset Securities Corp.
Series 1996-MD5 Class A1B
7.12%, due 4/13/36 ............................ 4,000,000 4,040,000
Structured Asset Securities Corp.
Series 1996-CFL Class A1B
5.751%, due 2/25/28 ........................... 2,144,128 2,130,063
Series 1996-2 Class A1
7.00%, due 8/25/26 ............................ 3,671,000 3,693,356
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
COMMERCIAL MORTGAGE LOANS (Continued)
Wells Fargo Capital Markets
Apartment Financing
Series APT Class 1
6.56%, due 12/29/05 (c) ....................... $ 3,325,000 $ 3,296,937
---------------
56,488,503
---------------
CREDIT CARD RECEIVABLES (0.3%)
Standard Credit Card Master Trust
Series 1995-4 Class A
5.60%, due 2/15/00 (e) ........................ 3,630,000 3,631,125
---------------
EQUIPMENT LOANS (1.0%)
Case Equipment Loan Trust
Series 1995-B Class A3
6.15%, due 9/15/02 ............................ 4,200,000 4,209,198
Newcourt Receivables Asset Trust
Series 1996-3 Class A
6.24%, due 12/20/04 ........................... 3,024,562 3,017,001
Series 1996-2 Class A
6.87%, due 6/20/04 ............................ 3,538,942 3,566,050
---------------
10,792,249
---------------
HOME EQUITY LOANS (1.1%)
Green Tree Financial Corp.
Series 1996-10 Class A6
7.30%, due 11/15/28 ........................... 3,902,000 3,832,505
Series 1996-6 Class A6
7.95%, due 9/15/27 ............................ 5,437,000 5,581,407
Series 1996-8 Class A7
8.05%, due 10/15/27 ........................... 2,850,000 2,930,171
---------------
12,344,083
---------------
RESIDENTIAL MORTGAGE LOANS (2.4%)
Bear Stearns Mortgage Securities Inc.
Series 1996-5 Class A2
10.00%, due 9/25/27 ........................... 3,665,149 3,813,477
Series 1996-4 Class AI2
10.50%, due 9/25/27 ........................... 3,427,100 3,594,171
Capstead Securities Corp. IV
Series 1992-1 Class G
8.75%, due 1/25/20 ............................ 4,164,000 4,244,698
Independent National Mortgage Corp. ............
Series 1996-D Class A2
7.00%, due 5/25/26 ............................ 6,700,000 6,675,947
Residential Accredit Loans, Inc. ...............
Series 1996-QS4 Class AI2
11.00%, due 8/25/26 ........................... 3,686,347 3,860,306
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
ASSET-BACKED SECURITIES (Continued)
RESIDENTIAL MORTGAGE LOANS (Continued)
Residential Asset
Securitization Trust
Series 1996-A2 Class A3
9.00%, due 6/25/26 ............................ $ 2,366,419 $ 2,422,622
Series 1996-A6 Class A10
9.00%, due 9/25/26 ............................ 1,716,372 1,748,554
---------------
26,359,775
---------------
Total Asset-Backed Securities
(Cost $115,491,395) 115,784,765
---------------
BRADY BOND (0.5%)
EURO BOND (0.5%)
Poland-Global Registered
Series RSTA
3.25%, due 10/27/24
(call date 4/27/97) (e) ....................... 9,265,000 5,813,787
---------------
Total Brady Bond
(Cost $5,210,165) ............................. 5,813,787
---------------
CORPORATE BONDS (5.6%)
BANKS (2.7%)
BankBoston Capital Trust I Guaranteed
8.25%, due 12/15/26
(call date 12/15/06) (c) ...................... 5,425,000 5,503,446
Bank Hawaii Honolulu
Series A
8.25%, due 12/15/26
(call date 12/15/06) (c) ...................... 3,625,000 3,620,723
Capital One Bank
Medium-Term Senior Bank Notes
7.15%, due 9/15/06
(put date 9/15/99) ............................ 3,150,000 3,211,992
First USA Bank
Wilmington, Delaware
Deposit Notes
6.25%, due 10/9/98 ............................ 3,250,000 3,244,247
Midland Bank PLC
Series 3M Seasoned
5.725%, due 6/29/49
(call date 6/17/97) (e)(h) .................... 2,900,000 2,508,500
Regions Financial Corp.
7.75%, due 9/15/24
(put date 7/15/04) ............................ 5,520,000 5,909,160
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
BANKS (Continued)
Southtrust Bank
Birmingham, Alabama NA
Medium-Term Notes
7.69%, due 5/15/25
(put date 5/15/05) ............................ $ 2,750,000 $ 2,932,517
Standard Chartered PLC
Series 4 Seasoned
6.088%, due 1/29/49
(call date 7/14/97) (e)(h) .................... 3,200,000 2,668,000
---------------
29,598,585
---------------
BROKERAGE (0.9%)
Lehman Brothers Holdings Inc.
7.375%, due 5/15/07
(put date 5/15/00) ............................ 2,545,000 2,623,462
Merrill Lynch & Co., Inc.
Medium-Term Notes Series B
6.65%, due 1/15/99 ............................ 3,985,000 4,016,442
Paine Webber Group Inc.
7.75%, due 9/1/02 ............................. 1,000,000 1,032,540
Salomon Inc.
6.70%, due 12/1/98 ............................ 2,170,000 2,182,152
---------------
9,854,596
---------------
FINANCE (1.6%)
Aetna Services Inc.
6.97%, due 8/15/36
(put date 6/15/04) ............................ 2,925,000 2,979,931
American Re Corp.
7.45%, due 12/15/26
(call date 1/1/97) (c) ........................ 2,850,000 2,846,438
Associates Corp. North America
7.75%, due 2/15/05
(put date 2/15/00) ............................ 5,125,000 5,440,700
Crestar Capital Trust I Guaranteed
8.16%, due 12/15/26
(call date 12/15/06) (c) ...................... 3,775,000 3,757,975
Travelers/Aetna Property
& Casualty Corp.
6.75%, due 9/1/99 ............................. 3,000,000 3,030,060
---------------
18,055,104
---------------
RETAIL (0.4%)
Sears Roebuck Acceptance Corp.
Medium-Term Notes Series 1
5.82%, due 12/7/98 ............................ 4,000,000 3,978,280
---------------
Total Corporate Bonds
(Cost $61,438,609) ............................ 61,486,565
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL AGENCIES (17.1%)
FEDERAL AGENCY (0.5%)
Tennessee Valley Authority
5.98%, due 4/1/36
(put date 4/1/98) ............................. $ 5,835,000 $ 5,913,889
---------------
FEDERAL HOME LOAN MORTGAGE
CORPORATION GOLD (MORTGAGE
PASS-THROUGH SECURITY) (0.3%)
7.00%, due 12/1/01 ............................ 2,893,000 2,922,827
---------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (COLLATERALIZED
MORTGAGE OBLIGATION) (0.3%)
Series 1996-M7 Class A
6.521%, due 9/17/04 ........................... 3,599,594 3,589,479
---------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (7.1%)
6.00%, due 11/1/23 ............................ 5,522,638 5,156,763
6.00%, due 1/23/27 ARM TBA (b)(g) ............. 8,475,000 8,432,625
6.47%, due 12/1/01 ............................ 3,465,000 3,443,517
6.515%, due 12/1/03 ........................... 1,125,000 1,112,479
6.52%, due 12/1/03 ............................ 1,850,000 1,829,909
6.525%, due 12/1/03 ........................... 2,878,000 2,847,493
6.545%, due 1/14/27 ........................... 2,615,000 2,554,201
6.595%, due 1/31/03 TBA (b) ................... 3,025,000 3,004,339
6.625%, due 1/25/06 TBA (b) ................... 2,293,000 2,252,139
6.87%, due 1/24/11 TBA (b) .................... 4,220,000 4,215,147
7.00%, due 8/1/11 - 1/1/24 .................... 21,097,992 20,973,183
9.00%, due 1/5/05 - 8/1/26 .................... 20,824,836 21,974,872
---------------
77,796,667
---------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE PASS-
THROUGH SECURITIES) (4.2%)
6.50%, due 4/15/23 - 12/15/23 ................. 5,273,509 5,055,976
7.50%, due 11/15/25 - 12/15/25 ................ 8,216,968 8,223,377
8.00%, due 12/15/23 ........................... 23,098,506 23,701,146
9.50%, due 12/15/17 - 5/15/22 ................. 8,329,048 9,071,327
---------------
46,051,826
---------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE PASS-
THROUGH SECURITIES) (0.9%)
6.50%, due 1/20/23 - 2/20/23
ARM (g) ....................................... 6,307,21 6,431,664
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE PASS-
THROUGH SECURITIES) (Continued)
7.00%, due 11/20/21 - 11/20/22
ARM (g) ....................................... $ 3,561,372 $ 3,636,011
---------------
10,067,675
---------------
UNITED STATES TREASURY
BONDS (2.6%)
6.25%, due 8/15/23 ............................ 4,836,000 4,533,750
6.50%, due 11/15/26 ........................... 12,209,000 11,982,034
8.875%, due 8/15/17 (d) ....................... 8,712,000 10,760,714
11.25%, due 2/15/15 ........................... 860,000 1,269,979
---------------
28,546,477
---------------
UNITED STATES TREASURY
NOTES (1.2%)
6.375%, due 3/31/01 ........................... 7,600,000 7,651,072
6.50%, due 5/15/05 ............................ 1,000,000 1,006,720
7.875%, due 11/15/04 .......................... 839,000 915,559
8.125%, due 2/15/98 ........................... 2,970,000 3,047,042
---------------
12,620,393
---------------
Total U.S. Government &
Federal Agencies
(Cost $186,668,513) ........................... 187,509,233
---------------
YANKEE BONDS (3.3%)
City of Naples
7.52%, due 7/15/06 ............................ 3,785,000 3,914,825
Columbia Republic
7.25%, due 2/15/03 ............................ 1,920,000 1,859,232
8.66%, due 10/7/16 (c) ........................ 5,800,000 6,057,752
Enersis SA
7.40%, due 12/1/16 ............................ 2,675,000 2,660,876
Guangdong International
Trust & Investment Corp.
8.75%, due 10/24/16 (c) ....................... 5,550,000 5,718,442
Hero Asian BVI Ltd.
9.11%, due 10/15/01 (c) ....................... 1,920,000 2,009,549
Hydro-Quebec
Series IO
8.05%, due 7/7/24
(put date 5/7/06) ............................. 3,350,000 3,681,617
Mexico-United Mexican States
7.563%, due 8/6/01
(call date 2/6/97) (c)(e) ..................... 3,000,000 3,007,500
Thai Farmers Bank PLC
8.25%, due 8/21/16 (c) ........................ 2,450,000 2,519,899
Wharf Capital International 1994 Ltd.
8.875%, due 11/1/04 ........................... 4,140,000 4,438,825
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Value
==================
<S> <C> <C>
YANKEE BONDS (Continued)
Total Yankee Bonds
(Cost $35,237,825) ............................ $ 35,868,517
---------------
Total Long-Term Bonds
(Cost $404,046,507) ........................... 406,462,867
---------------
Shares
=================
COMMON STOCKS (60.8%)
AUTO PARTS (0.5%)
Lear Seating Corp. (a) ......................... 175,000 5,971,875
---------------
BANKS (1.7%)
NationsBank Corp. .............................. 83,000 8,113,250
Wells Fargo & Co. .............................. 38,866 10,484,103
---------------
18,597,353
---------------
BROKERAGE (0.7%)
Schwab (Charles) Corp. ......................... 233,500 7,472,000
---------------
BUILDINGS (0.8%)
Oakwood Homes Corp. ............................ 405,800 9,282,675
---------------
COMMERCIAL SERVICES (0.8%)
Service Corp. International .................... 334,000 9,352,000
---------------
COMPUTER SERVICES (0.4%)
Sabre Group Holdings Inc. ...................... 174,000 4,850,250
---------------
COMPUTERS & OFFICE EQUIPMENT (4.9%)
Alco Standard Corp. ............................ 258,700 13,355,388
CompUSA, Inc. (a) .............................. 126,000 2,598,750
Danka Business Systems PLC ADR (f) ............. 193,000 6,827,375
Electronic Data Systems Corp. .................. 102,500 4,433,125
Hewlett-Packard Co. ............................ 186,000 9,346,500
Seagate Technology, Inc. (a) ................... 160,400 6,335,800
Sun Microsystems, Inc. (a) ..................... 422,000 10,840,125
---------------
53,737,063
---------------
CONSUMER DURABLES (0.9%)
Black & Decker Corp. ........................... 86,300 2,599,788
Harley-Davidson, Inc. .......................... 152,500 7,167,500
---------------
9,767,288
---------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
======================================
<S> <C> <C>
CONSUMER FINANCIAL SERVICES (0.8%)
First Data Corp. ............................... 234,00 $ 8,541,000
---------------
CONSUMER SERVICES (0.5%)
CUC International, Inc. (a) .................... 267,750 6,359,063
---------------
DRUGS (4.2%)
Amgen, Inc. (a) ................................ 244,000 13,267,500
Elan Corp. PLC ADR (a)(f) ...................... 276,000 9,177,000
Genzyme Corp. (a) .............................. 70,900 1,542,075
Pharmacia & Upjohn, Inc. ....................... 160,700 6,367,737
Schering-Plough Corp. .......................... 155,000 10,036,250
Teva Pharmaceutical Industries
Ltd. ADR (f) .................................. 124,000 6,231,000
---------------
46,621,562
---------------
ELECTRONICS (1.0%)
Harman International
Industries, Inc. .............................. 88,000 4,895,000
Vishay Intertechnology, Inc. (a) ............... 238,635 5,578,093
---------------
10,473,093
---------------
FINANCE (6.8%)
Equifax, Inc. .................................. 139,000 4,256,875
Federal National Mortgage
Association ................................... 290,000 10,802,500
Green Tree Financial Corp. ..................... 504,000 19,467,000
Household International, Inc. .................. 141,400 13,044,150
MGIC Investment Corp. .......................... 140,500 10,678,000
Travelers Group, Inc. .......................... 346,665 15,729,924
---------------
73,978,449
---------------
FINANCIAL SERVICES (3.4%)
Associates First Capital Corp. ................. 47,000 2,073,875
First USA, Inc. ................................ 336,000 11,634,000
SunAmerica, Inc. ............................... 534,600 23,722,875
---------------
37,430,750
---------------
FOOD (0.2%)
Richfood Holdings, Inc. ........................ 83,600 2,027,300
---------------
HEALTH CARE (2.8%)
Columbia/HCA Healthcare Corp. .................. 274,164 11,172,183
HealthCare COMPARE Corp. (a) ................... 140,000 5,932,500
Pacificare Health Systems,
Inc. Class B (a) .............................. 61,400 5,234,350
United Healthcare Corp. ........................ 190,500 8,572,500
---------------
30,911,533
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Shares Value
======================================
<S> <C> <C>
COMMON STOCKS (Continued)
HOSPITAL MANAGEMENT & SERVICES (1.4%)
HEALTHSOUTH Corp. (a) .......................... 236,000 $ 9,115,500
OrNda HealthCorp (a) ........................... 217,000 6,347,250
---------------
15,462,750
---------------
INDUSTRIAL (0.9%)
Tyco International Ltd. ........................ 177,300 9,374,737
---------------
INSURANCE (1.2%)
American International Group, Inc. ............. 121,000 13,098,250
---------------
LEISURE (0.6%)
Mirage Resorts, Inc. (a) ....................... 284,400 6,150,150
---------------
MEDICAL EQUIPMENT (3.8%)
Guidant Corp. .................................. 186,000 10,602,000
Heartport, Inc. ................................ 71,000 1,624,125
Johnson & Johnson .............................. 260,188 12,944,353
Medtronic, Inc. ................................ 245,000 16,660,000
---------------
41,830,478
---------------
OIL & GAS EXPLORATION (0.7%)
Triton Energy Ltd. (a) ......................... 147,600 7,158,600
---------------
OIL SERVICES (0.8%)
Tidewater, Inc. ................................ 194,000 8,778,500
---------------
RESTAURANTS & LODGING (1.8%)
HFS, Inc. (a) .................................. 329,100 19,663,725
---------------
RETAIL (6.6%)
AutoZone, Inc. (a) ............................. 223,400 6,143,500
Bed, Bath & Beyond, Inc. (a) ................... 150,000 3,637,500
Home Depot, Inc. (The) ......................... 153,500 7,694,188
Kohl's Corp. (a) ............................... 234,000 9,184,500
Kroger Co. (The) (a) ........................... 179,000 8,323,500
Lowe's Companies, Inc. ......................... 252,000 8,946,000
Nike, Inc. Class B ............................. 225,600 13,479,600
Safeway, Inc. (a) .............................. 283,60 12,123,900
Staples, Inc. (a) .............................. 165,300 2,985,731
---------------
72,518,419
---------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
======================================
<S> <C> <C>
SOFTWARE (2.3%)
Computer Associates
International, Inc. ........................... 334,250 $ 16,628,938
Microsoft Corp. (a) ............................ 108,000 8,923,500
---------------
25,552,438
---------------
TECHNOLOGY (7.1%)
Cisco Systems, Inc. (a) ........................ 171,500 10,911,687
Intel Corp. .................................... 124,300 16,275,531
Lam Research Corp. (a) ......................... 134,500 3,782,813
Linear Technology Corp. ........................ 198,000 8,687,250
Oracle Corp. (a) ............................... 340,500 14,215,875
3Com Corp. (a) ................................. 331,000 24,287,125
---------------
78,160,281
---------------
TELECOMMUNICATION SERVICES (1.6%)
Lucent Technologies, Inc. ...................... 100,000 4,625,000
WorldCom, Inc. (a) ............................. 497,728 12,972,036
---------------
17,597,036
---------------
TEXTILE & APPAREL (0.7%)
Nine West Group, Inc. (a) ...................... 164,200 7,614,775
---------------
TURNKEY & SOFTWARE SYSTEMS (0.9%)
Sterling Commerce, Inc. ........................ 174,389 6,147,212
Sterling Software, Inc. (a) .................... 109,500 3,462,938
---------------
9,610,150
---------------
Total Common Stocks
(Cost $391,034,590) ........................... 667,943,543
---------------
Principal
Amount
=================
SHORT-TERM INVESTMENTS (2.5%)
COMMERCIAL PAPER (1.4%)
American Express Credit Corp.
6.55%, due 1/2/97 ............................. $ 15,285,000 15,285,000
---------------
Total Commercial Paper
(Cost $15,285,000) ............................ 15,285,000
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
FEDERAL AGENCY (1.1%)
Federal Home Loan Bank
Discount Corp.
6.40%, due 1/14/97 (d) ........................ $ 12,700,000 $ 12,669,393
---------------
Total Federal Agency
(Cost $12,681,318) ............................ 12,669,393
---------------
Total Short-Term Investments
(Cost $27,966,318) ............................ 27,954,393
---------------
Total Investments
(Cost $823,047,415) (i) ....................... 100.3% 1,102,360,803(j)
Liabilities in Excess of
Cash and Other Assets ......................... (0.3) (3,507,715)
--------------- ---------------
Net Assets ..................................... 100.0% $ 1,098,853,088
============== ===============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and
maturity date will be determined upon settlement.
(c) May be sold to institutional investors only.
(d) Segregated or partially segregated as collateral for TBA.
(e) Floating rate. Rate shown is the rate in effect at December 31, 1996.
(f) ADR--American Depository Receipt.
(g) ARM--Adjustable Rate Mortgage. Resets annually.
(h) Seasoned--a euro bond that trades in U.S. dollars and must be held for at
least 40 days before it can be sold.
(i) The cost for Federal income tax purposes is $823,107,070.
(j) At December 31, 1996 net unrealized appreciation was $279,253,733, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $286,278,451 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $7,024,718.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value
(identified cost $823,047,415) .............................. $1,102,360,803
Cash ......................................................... 4,177
Receivables:
Investment securities sold .................................. 16,403,942
Dividends and interest ...................................... 4,168,226
Fund shares sold ............................................ 1,132,604
Other assets ................................................. 449
--------------
Total assets ............................................... 1,124,070,201
--------------
LIABILITIES:
Payables:
Investment securities purchased ............................. 22,536,379
Fund shares redeemed ........................................ 1,044,055
NYLIFE Distributors ......................................... 942,374
Adviser ..................................................... 288,088
Transfer agent .............................................. 150,581
Custodian ................................................... 20,889
Trustees .................................................... 7,723
Accrued expenses ............................................. 227,024
--------------
Total liabilities .......................................... 25,217,113
--------------
Net assets ................................................... $1,098,853,088
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding
(par value of $.01 per share)
unlimited number of shares authorized:
Class A ..................................................... $ 34,335
Class B ..................................................... 512,472
Additional paid-in capital ................................... 815,027,064
Accumulated undistributed net realized gain on investments ... 3,965,829
Net unrealized appreciation on investments ................... 279,313,388
--------------
Net assets ................................................... $1,098,853,088
==============
CLASS A
Net assets applicable to outstanding shares .................. $ 68,975,380
==============
Shares of beneficial interest outstanding .................... 3,433,467
==============
Net asset value per share outstanding ........................ $ 20.09
Maximum sales charge (5.50% of offering price) ............... 1.17
--------------
Maximum offering price per share outstanding ................. $ 21.26
==============
CLASS B
Net assets applicable to outstanding shares .................. $1,029,877,708
==============
Shares of beneficial interest outstanding .................... 51,247,218
==============
Net asset value per share outstanding ........................ $ 20.10
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................... $ 3,285,718
Interest .................................................... 26,617,725
------------
Total income ............................................... 29,903,443
------------
Expenses:
Distribution--Class B ....................................... 4,682,227
Administration .............................................. 3,087,111
Advisory .................................................... 3,087,111
Service ..................................................... 2,489,259
Transfer agent .............................................. 1,325,135
Shareholder communication ................................... 409,168
Recordkeeping ............................................... 126,154
Custodian ................................................... 116,698
Professional ................................................ 113,936
Registration ................................................ 101,809
Trustees .................................................... 30,889
Miscellaneous ............................................... 23,883
------------
Total expenses ............................................. 15,593,380
------------
Net investment income ........................................ 14,310,063
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 27,774,121
Net change in unrealized appreciation on investments ......... 78,230,207
------------
Net realized and unrealized gain on investments .............. 106,004,328
------------
Net increase in net assets resulting from operations ......... $120,314,391
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $15,097.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
--------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ...................................... $ 14,310,063 $ 15,094,150
Net realized gain on investments ........................... 27,774,121 21,992,458
Net change in unrealized appreciation on investments ....... 78,230,207 147,650,614
--------------- -------------
Net increase in net assets resulting from operations ....... 120,314,391 184,737,222
--------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A ................................................... (997,501) (256,021)
Class B ................................................... (13,385,811) (14,721,467)
From net realized gain on investments:
Class A ................................................... (1,702,480) --
Class B ................................................... (25,348,019) --
--------------- -------------
Total dividends and distributions to shareholders ........ (41,433,811) (14,977,488)
--------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................... 63,597,398 18,317,094
Class B ................................................... 191,433,792 129,891,503
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions:
Class A ................................................... 2,679,639 252,728
Class B ................................................... 37,951,434 14,355,622
--------------- -------------
295,662,263 162,816,947
Cost of shares redeemed:
Class A ................................................... (20,159,616) (1,287,141)
Class B ................................................... (135,617,553) (99,927,014)
--------------- -------------
Increase in net assets derived from
capital share transactions .............................. 139,885,094 61,602,792
--------------- -------------
Net increase in net assets ............................... 218,765,674 231,362,526
NET ASSETS:
Beginning of year ........................................... 880,087,414 648,724,888
--------------- -------------
End of year ................................................. $ 1,098,853,088 $ 880,087,414
=============== =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
----------------------------------------------
Class A Class B Class A Class B September 1
------- ------- ------- ------- through Year ended August 31
Year ended Year ended December 31 ------------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
-------------------- ------------------ --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period ...................... $18.53 $18.53 $14.76 $14.76 $15.28 $15.42 $13.37 $13.89
------ ------ ------ ------ ------ ------ ------ ------
Net investment income ........... 0.37 0.27 0.42 0.33 0.11 0.38 0.33 0.22
Net realized and unrealized
gain (loss) on investments ..... 2.07 2.08 3.77 3.77 (0.52) (0.02) 2.31 0.32
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 2.44 2.35 4.19 4.10 (0.41) 0.36 2.64 0.54
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ...... (0.37) (0.27) (0.42) (0.33) (0.11) (0.37) (0.36) (0.23)
From net realized gain
on investments ................. (0.51) (0.51) -- -- -- (0.13) (0.23) (0.83)
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (0.88) (0.78) (0.42) (0.33) (0.11) (0.50) (0.59) (1.06)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $20.09 $20.10 $18.53 $18.53 $14.76 $15.28 $15.42 $13.37
====== ====== ====== ====== ====== ====== ====== ======
Total investment return(a) ...... 13.22% 12.73% 28.66% 27.96% (2.65%) 2.41% 20.09% 3.96%
Ratios (to average net assets)
/ Supplemental Data:
Net investment income .......... 1.9% 1.4% 2.5% 2.0% 2.5%+ 2.5% 2.4% 1.7%
Expenses ....................... 1.1% 1.6% 1.1% 1.7% 1.7%+ 1.7% 1.8% 2.0%
Portfolio turnover rate ......... 173% 173% 228% 228% 74% 273% 340% 316%
Average commission rate paid .... $0.0599 $0.0599(b) (b) (b) (b) (b) (b) (b)
Net assets at end of
period (in 000's) .............. $68,975 $1,029,878 $19,206 $ 860,881 $648,725 $639,619 $486,959 $292,002
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay Total Return Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Total Return Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distributions commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to realize current income consistent with
reasonable opportunity for future growth of capital and income.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined(a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange, (e) by appraising debt securities at prices
supplied by a pricing agent selected by the Adviser, whose prices reflect
broker/dealer supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser to be representative of market values at
the regular close of
22
<PAGE>
Notes to Financial Statements
business of the New York Stock Exchange and (f) by appraising all other
securities and other assets, including debt securities for which prices are
supplied by a pricing agent but are not deemed by the Adviser to be
representative of market values, but excluding money market instruments with a
remaining maturity of sixty days or less and including restricted securities and
securities for which no market quotations are available, at fair value in
accordance with procedures approved by the Trustees. Short-term securities which
mature in more than 60 days are valued at current market quotations. Short-term
securities which mature in 60 days or less are valued at amortized cost if their
term to maturity at purchase was 60 days or less, or by amortizing the
difference between market value on the 61st day prior to maturity and value on
maturity date if their original term to maturity at purchase exceeded 60 days.
Mortgage Dollar Rolls. The Fund enters into mortgage dollar roll transactions
("MDRs") for which it sells mortgage backed securities ("MBS") from its
portfolio to a counterparty from whom it simultaneously agrees to buy a similar
security on a delayed delivery basis. The MDR transactions of the Fund are
classified as purchase and sale transactions. The securities sold in connection
with the MDR are removed from the portfolio and a realized gain or loss is
recognized. The securities the Fund has agreed to acquire are included at market
value in the portfolio of investments and liability for such purchase
commitments is included as payables for investments purchased. The Fund
maintains a segregated account with its custodian containing securities from its
portfolio having a value not less than the repurchase price, including accrued
interest. MDR transactions involve certain risks, including the risk that the
MBS returned to the Fund at the end of the roll, while substantially similar,
could be inferior to what was initially sold to the counterparty.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $73,249 and $1,994 have been reclassified from
accumulated distribution in excess of net investment income and accumulated
undistributed net realized gain on investments, respectively, to additional
paid-in capital.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. Dividend
income is recognized on the ex-dividend date and interest income is accrued
daily except when collection is not expected. Discounts on securities purchased
for the Fund are accreted on the constant yield method over the life of the
respective securities or, if applicable, over the period to the first call date.
23
<PAGE>
MainStay Total Return Fund
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from these estimates.
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and facilities furnished at an annual
rate of 0.32% of the average daily net assets of the Fund. The Adviser and
Administrator have voluntarily agreed to reduce their combined fees to 0.60% on
assets in excess of $500 million.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
24
<PAGE>
Notes to Financial Statements continued
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFEDistributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on shares of
Class A Fund shares retained by NYLIFE Distributors was $334,470 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$745,382 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFESecurities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $63,915.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $28,256 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$126,154.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996, purchases and sales of U.S. Government
securities, other than short-term securities, were $1,227,470 and $1,282,655,
respectively. Purchases and sales of securities, other than U.S. Government
securities, securities subject to repurchase transactions and short-term
securities, were $554,778 and $392,476, respectively.
25
<PAGE>
MainStay Total Return Fund
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .............................. 3,241 9,841 1,098 7,677
Shares issued in reinvestment of
dividends and distributions ............. 170 1,889 14 837
----- ----- ----- -----
3,411 11,730 1,112 8,514
Shares redeemed .......................... 1,015 6,942 75 6,008
----- ----- ----- -----
Net increase ............................. 2,396 4,788 1,037 2,506
===== ===== ===== =====
</TABLE>
26
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Total Return Fund (one of
the thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
27
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
TOTAL RETURN FUND graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
Value Fund graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
28
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An aggressive high yield bond You want to maximize current income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
29
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Total Return Fund
- -------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of
New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Total Return Fund. It may be given to others only when preceded or accompanied
by an effective MainStay Funds prospectus. This report does not offer to sell
any securities or solicit orders to buy them.
(C)1997. All rights reserved. MSAN15 (297)
[GRAPHIC]
<PAGE>
Table of Contents
Chairperson's Letter 2
MainStay Value Fund Highlights 3
$10,000 Invested in the MainStay
Value Fund versus S&P 500 and
Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 9
Top 10 Equity Holdings 10
10 Largest Purchases 10
10 Largest Sales 10
Portfolio of Investments 11
Financial Statements 14
Notes to Financial Statements 18
Report of Independent Accountants 22
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
Chairperson's Letter
The undisputed story of 1996 was the remarkable momentum of the equity market.
The bond market took a back seat while the financial community and investors
watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average
broke 6,600. Exciting new companies entered the markets and received
overwhelming public support. New trends--the Internet, for one--gave rise to new
waves of optimism. Assets in mutual funds have surpassed all the gold in both
Fort Knox and the New York Federal Reserve combined.
Good, strong performance is important, but we shouldn't lose sight of what must
be consistent in any climate: the philosophy, the strategies, the education, and
the communication between the mutual fund company, the Registered
Representatives, and the investors. It shouldn't be assumed that the market will
continue at this pace. It is important to remember that mutual fund investing
isn't about timing markets, it's about setting realistic goals and plotting a
long-term course to help get there.
That's where MainStay(R) comes in. It's a name that stands for staying the
course. We know you depend on us to remain steadfast in our vigilance, to do the
research, make prudent choices, and provide timely, accurate, and useful
information. However, staying steady doesn't mean standing pat. So we continue
to work at creating materials that go beyond providing information, to providing
understanding. For example, our simplified prospectus is unlike any other in the
industry, and we've been complimented in the press for our series of educational
brochures, such as Navigating through the Star Ratings and What is the S&P 500
and what can it tell me about my investments?
We at MainStay have a responsibility to help you, our investors, stay informed
and in a position to make intelligent decisions at the right times. With all the
high-tech changes, your Registered Representative is still one of the most
valuable resources in the industry. Take advantage of yours. Seek his or her
perspective and assistance this year, not just on the markets, but on your
individual situation. Keep sight of your core requirements and risk tolerances,
and be aware of how your lifestyle and goals may change.
No one can promise 1997 will be a repeat of 1996 because the market is ever
changing. But we at MainStay can promise to continue managing Funds to seek
downside protection as well as upside performance. We'll be with you, from the
home office to your Registered Representative, to help you stay the course
toward your investment horizons.
Wishing you all the best,
/s/ Alice T. Kane
Alice T. Kane
January 1997
- ----------
* As measured by the S&P 500, an unmanaged index considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500
Composite Stock Price Index" and "S&P 500" are registered trademarks of
Standard & Poor's.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Value Fund Highlights
- --------------------------------------------------------------------------------
1996 MARKET HIGHLIGHTS
================================================================================
o A variety of factors converged to make 1996 a good year for value stocks
o Acquisition activity reached record levels during the year
o Value stocks showed rapid recovery in the fourth quarter and outpaced
growth equities for the year
================================================================================
- --------------------------------------------------------------------------------
1996 FUND HIGHLIGHTS
================================================================================
o One-year total returns of 21.84% and 21.11% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/96
o A stock market downturn in the July-August time frame highlighted the risk
control dynamics of our investment philosophy, which helped the Fund (both
share classes) outperform the average Lipper+ growth and income fund
o The Fund identified value and free cash flow in a number of companies that
also attracted acquirers, resulting in significant stock appreciation
o The Fund's focus on financial services and tobacco and energy-related
business benefited the portfolio
o During the year, the Fund's track record exceeded ten years
================================================================================
- ----------
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Value Fund versus S&P 500
and Inflation
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
S&P MainStay
500 Value Fund Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $ 9,450.0 $10,000
12/86 10,518 8,551.31 10,193
12/87 11,070 8,331.4 10,644
12/88 12,903 9,673.68 11,113
12/89 16,983 11,741.8 11,629
12/90 16,457 11,031.8 12,355
12/91 21,460 15,583.0 12,724
12/92 23,093 18,625.1 13,100
12/93 25,412 21,148.2 13,459
12/94 25,747 21,102.1 13,809
12/95 35,412 27,166.1 14,168
12/96 43,536 33,099.0 14,637
</TABLE>
[GRAPHIC] MainStay Value Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
S&P MainStay
500 Value Fund Inflation
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/86 $10,000 $10,000.0 $10,000
12/86 10,518 9,049.0 10,193
12/87 11,070 8,816.3 10,644
12/88 12,903 10,236.7 11,113
12/89 16,983 12,425.2 11,629
12/90 16,457 11,673.9 12,355
12/91 21,460 16,490.0 12,724
12/92 23,093 19,709.1 13,100
12/93 25,412 22,379.1 13,459
12/94 25,747 22,330.3 13,809
12/95 35,412 28,585.5 14,168
12/96 43,536 34,620.0 14,637
</TABLE>
[GRAPHIC] MainStay Value Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 5/1/86
reflecting the effect of the 5.5% maximum up-front sales charge, thereby
reducing the amount of the investment to $9,450 and includes the historical
performance of the Class B shares for periods from inception (5/1/86)
through 12/31/94. The Class B graph assumes an initial investment of
$10,000 made on 5/1/86. Returns shown do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not apply for the period shown.
All results include reinvestment of distributions at net asset value and
the change in share price for the stated period. Past performance is no
guarantee of future results.
* "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are
registered trademarks of Standard & Poor's. The S&P 500 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 gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Value Fund Team
VALUE FUND TEAM
Denis Laplaige, Jeffrey Simon, Matthew Shefler,
Mark Spellman, Michael Sheridan, and Judy Secunda
For the first nine months of 1996, slow economic growth favored the growth
equity discipline. A severe market downturn in July, however, brought value
stocks to attractive levels, marking a significant turning point for the value
market. When the economy picked up in the fourth quarter, value stocks were
poised for rapid advances and value stocks generally outperformed growth
equities through the end of the year.
Low valuations among companies with strong fundamentals and free cash flow also
triggered a record level of merger and acquisition activity during 1996. This
was very beneficial for value investors, who seek companies that are generally
undervalued by the marketplace and often make attractive acquisition candidates.
While stock market returns for 1996 were more than twice the average annual
total return for the previous 70 years,++ as of 12/31/96, the advances were
primarily concentrated in a small number of issues. Certain stocks in the Dow
Jones Industrial Average(ss.) accounted for more of its gains than others,
thereby making individual security selection a key factor in determining
performance. For the year, the average Lipper|| growth and income fund provided
a total return of 20.78%.
Given this context, how did the MainStay Value Fund do in 1996?
The Fund had a strong year. For the 12 months ended December 31, 1996, the
MainStay Value Fund returned 21.84% and 21.11% for Class A and Class B shares,
respectively, excluding all sales charges. Both share classes outperformed the
average Lipper growth and income fund, which returned 20.78% for the same
period.
What were the primary reasons for the Fund's outperformance?
Our bottom-up approach to value investing is based on individual security
selection and emphasizes companies with low price to earnings ratios and free
cash flow. By staying true to our disciplines, we were able to ride out the ups
and downs of the market and achieve excellent returns.
In addition, this year a surprising number of companies that were selected for
their fundamental value also attracted the attention of acquirers, which helped
the Fund's stocks appreciate significantly--and in many cases, we kept the
acquirer's
[GRAPHIC]
Bottom-up investing
- -------------------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
- ----------
++ Source: Ibbotson Associates, Chicago.
ss. The Dow Jones Industrial Average is a price-weighted average based on the
price-only performance of 30 blue chip stocks.
|| See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
- --------------------------------------------------------------------------------
Correction
- ----------
A shift in security prices which brings them more in line with historically
appropriate levels.
[GRAPHIC]
- --------------------------------------------------------------------------------
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year-End Total Return %
- --------------------------------------------------------------------------------
<S> <C>
12/86 -9.51
12/87 -2.57
12/88 16.11
12/89 21.38
12/90 -6.05
12/91 41.26
12/92 19.52
12/93 13.55
12/94 -0.22
12/95 28.74 Class A
12/95 28.01 Class B
12/96 21.84 Class A
12/96 21.11 Class B
</TABLE>
- ----------
Returns are for Class B shares unless otherwise noted. See footnote + on page 9
for more information on performance.
- --------------------------------------------------------------------------------
securities in our portfolio after the transaction was completed.
Can you give us some examples?
In the first quarter, U.S. Healthcare was taken over by Aetna, which was
positive for the portfolio. After the acquisition, we held Aetna's securities in
the portfolio. First Interstate was a bank acquired by Wells Fargo & Co., and we
also held Wells Fargo & Co. stock in the portfolio.
In the second quarter, we saw strong fundamentals and free cash flow in Vigoro,
a fertilizer company, and Varity, an auto-related company. Consolidation efforts
by those industries brought high premiums for these stocks. In the third
quarter, Boatmen's Bancshares was purchased by NationsBank, and later in the
quarter, Conrail received a bid from CSX Corp., which escalated into a bidding
war with Norfolk Southern. In the fourth quarter, Long Island Lighting received
a bid from Brooklyn Union Gas. All of these transactions proved to be highly
positive for our shareholders.
Did everything in the portfolio do that well?
No, we had our share of disappointments in 1996. In the second quarter we bought
AT&T, and shortly afterward, AT&T's president resigned and the company's
earnings prospects weakened. We sold the stock in the third quarter at a 10%
loss. As it happens, that was a good decision, since the stock went down even
further. In financial services, we bought Torchmark and Providian after the
market correction. When these stocks didn't participate in the uptrend that
followed, we revisited our decision and decided to reallocate these funds.
Although the transactions were relatively neutral, we missed some opportunities
since the financial services sector advanced 35%. Another disappointment was
Hanson PLC, which was a breakup candidate. Often, companies realize value by
dividing into separate units. But in this case, the European economy went down
and each component lost earning power.
6
<PAGE>
[GRAPHIC]
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Banks 8.5%
Chemicals 8.3%
Insurance 6.2%
Food, Beverages, & Tobacco 6.0%
Health Care 5.3%
All Other 65.7%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
Were there other stocks you sold?
Yes, we had some positive sales. For example, IBM went up 68%, Gateway went up
119%, and Intel went up 25% for the year ended 12/31/96, resulting in a gain for
the Fund.
If the stocks were rising so fast, why did you sell them?
Part of our value discipline is to sell stocks when their value has been
realized. Even if a stock is shooting for the moon, we won't hold it if we feel
it is approaching or has reached its fair market value.
How did your portfolio perform during the market downturn in July?
Generally, we seek to perform with or ahead of the market as it rises, and
significantly better than the market when it declines. During the correction in
July, value stocks were definitely hurt, but the Fund's portfolio performed
according to our disciplines and outperformed the market. Since our objective is
to own undervalued issues in the Fund's portfolio, the decline in values
presented new opportunities. In fact, it made the Fund's positions even more
attractive. As we had hoped, many of the Fund's stocks showed remarkable
advances during the recovery later in the year. So our decision to hold was very
positive for investors.
Why did you concentrate on consumer cyclicals?
We were anticipating an upturn in the economy. While we had to weather a
downturn to get there, our endurance paid off. When the economy picks up,
consumers go out and buy things. That's good for retailers like Sears, Federated
Department Stores, and J.C. Penney. It's also good for companies that make the
products consumers buy, like Fruit of the Loom, Reebok International, and
General Motors.
[GRAPHIC]
Recovery
- --------
A market recovery refers to a rise in security prices that were formerly
depressed. An economic recovery refers to a general improvement in formerly weak
fundamentals underlying a country's gross domestic product, which may include
factory output, sales, productivity, employment, and relative currency values.
7
<PAGE>
[GRAPHIC]
- ----------
* Returns reflect performance during the period securities were held in the
Fund.
Were there other areas that did well?
Yes, it was a good year for energy, and Parker & Parsley is a stock we own that
was up 68% for the year. Railroads also provided positive returns, with Union
Pacific up 34%* and Conrail, which is in the takeover process, up 46%. Financial
stocks also did well. We found value in Travelers Group (+47%), Allstate (+43%),
Bankers Trust (+37%), and with the takeovers at Boatmen's Bancshares and First
Interstate. Unfortunately, we reduced our exposure to financials during the
year, which negatively impacted the Fund's performance. If rates rise and
financials return to lower levels, we may look for buying opportunities in 1997.
What else do you see ahead for 1997?
Right now, our proprietary research is pointing in more conservative directions,
with utilities showing unusual value characteristics. This may signal a return
to more typical stock performance, or the possibility of higher volatility.
We'll continue to use our stock selection process to identify attractive value
candidates, and we're hoping that the downturn in 1996 has signaled that value
investing will be in favor for an extended period. Whatever the markets bring,
we'll continue to pursue the Fund's objective, seeking to realize maximum
long-term total return from a combination of capital growth and income.
Denis Laplaige
Jeffrey Simon
Portfolio Managers
[GRAPHIC]
PORTFOLIO COMPOSITION AS OF 12/31/96
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Common Stocks 93.1%
Preferred Stocks 0.8%
Cash & Equivalents 6.1%
</TABLE>
- ----------
Note: Actual percentages will vary over time.
8
<PAGE>
Returns & Lipper Rankings as of 12/31/96
Fund average annual total returns+
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1 year 5 years 10 years Life of Fund
through 12/31/96
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A 21.84% 16.26% 14.49% 12.45%
Class B 21.11% 15.99% 14.36% 12.33%
====================================================================================================================================
<CAPTION>
Fund SEC returns+
- ------------------------------------------------------------------------------------------------------------------------------------
1 year 5 years 10 years Life of Fund
through 12/31/96
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A 15.14% 14.95% 13.85% 11.86%
Class B 16.11% 15.77% 14.36% 12.33%
====================================================================================================================================
<CAPTION>
Fund Lipper++ rankings & Lipper category returns as of 12/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
1 year 5 years 10 years Life of Fund
through 12/31/96
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A 184 out of n/a n/a n/a
522 funds
Class B 232 out of 41 out of 30 out of 68 out of
522 funds 212 funds 123 funds 115 funds
Average Lipper
growth and
income fund 20.78% 13.87% 13.13% 12.30%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/96
================================================================================
NAV 12/31/96 Income Capital Gains
<S> <C> <C> <C>
Class A $20.34 $0.3017 $1.5741
Class B $20.32 $0.2002 $1.5741
================================================================================
</TABLE>
- ----------
+ Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested.
Class A shares, first offered to the public on 1/3/95, are sold with a
maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (5/1/86) up to 12/31/94.
Performance data for the two classes after this date vary based on
differences in their expense structures. Class B shares of the Fund are
sold with no initial sales charge, but are subject to a maximum CDSC of up
to 5% if shares are redeemed during the first 6 years of purchase and an
annual 12b-1 fee of up to 1%.
++ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Its rankings are based on total returns with capital gains and
dividends reinvested. Results do not reflect any deduction of sales
charges. Lipper averages listed above are not class specific. Life of Fund
return is from the period of the Class B shares' initial offering through
12/31/96. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
- ----------
Note: This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
Top 10 Equity Holdings as of 12/31/96
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
HOLDING AMOUNT
================================================================================
<S> <C>
Philip Morris Cos., Inc. $27,739,538
Xerox Corp. 27,075,563
Aetna Inc. 26,528,000
Allstate Corp. 24,810,434
Chubb Corp. 24,617,500
IMC Global Inc. 24,414,000
International Business Machines Corp. 23,631,500
RJRNabisco Holdings Corp. 21,729,400
Goodyear Tire & Rubber Co. 21,423,375
Wells Fargo &Co. 20,501,000
================================================================================
<CAPTION>
10 Largest Purchases for the 12 months ended 12/31/96
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
Xerox Corp. $23,698,534
AT&T Corp. 22,382,789
Tenneco Inc. 20,946,992
Ford Motor Co. 19,230,701
Wells Fargo &Co. 17,645,785
Elf Aquitaine ADR 15,813,700
Hanson PLC ADR 15,112,041
Dow Chemical Co. 15,023,923
Mark IV Industries, Inc. 14,059,161
Echlin Inc. 13,498,717
================================================================================
<CAPTION>
10 Largest Sales for the 12 months ended 12/31/96
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
AT&T Corp. $17,368,456
British Petroleum Co., PLC ADR 14,579,379
U.S. Healthcare Inc. 13,980,811
International Business Machines Corp. 13,945,250
First Bank System, Inc. 13,078,309
Tupperware Corp. 12,321,553
Eastman Kodak Co. 12,134,322
Sears, Roebuck &Co. 10,961,922
First Interstate Bancorp. 10,869,254
Loral Corp. 10,341,077
================================================================================
</TABLE>
10
<PAGE>
Portfolio of Investments December 31, 1996
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMMON STOCKS (93.1%)+
AEROSPACE/DEFENSE ELECTRONICS (3.3%)
Coltec Industries Inc. (a) ................. 520,000 $ 9,815,000
Gulfstream Aerospace Corp. (a) ............. 180,000 4,365,000
Litton Industries, Inc. (a) ................ 225,800 10,753,725
Lockheed Martin Corp. ...................... 61,187 5,598,610
McDonnell Douglas Corp. .................... 61,300 3,923,200
Newport News Shipbuilding Inc. (a) ......... 81,760 1,226,400
---------------
35,681,935
---------------
AUTO MANUFACTURING (3.2%)
Ford Motor Co. ............................. 598,700 19,083,562
General Motors Corp. ....................... 283,800 15,821,850
---------------
34,905,412
---------------
AUTO PARTS (2.5%)
Echlin Inc. ................................ 411,400 13,010,525
Mark IV Industries, Inc. ................... 618,900 14,002,613
---------------
27,013,138
---------------
BANKS (8.5%)
Bankers Trust New York Corp. ............... 158,000 13,627,500
Boatmen's Bancshares, Inc. ................. 287,500 18,543,750
Chase Manhattan Corp. ...................... 153,000 13,655,250
National City Corp. ........................ 215,400 9,666,075
PNC Bank Corp. ............................. 439,000 16,517,375
Wells Fargo & Co. .......................... 76,000 20,501,000
---------------
92,510,950
---------------
BUILDING MATERIALS (2.3%)
Armstrong World Industries, Inc. ........... 220,200 15,303,900
Masco Corp. ................................ 264,900 9,536,400
---------------
24,840,300
---------------
CAPITAL GOODS (3.5%)
Case Corp. ................................. 211,600 11,532,200
Xerox Corp. ................................ 514,500 27,075,563
---------------
38,607,763
---------------
CHEMICALS (8.3%)
Agrium Inc. ................................ 759,800 10,447,250
Dow Chemical Co. ........................... 187,500 14,695,313
FMC Corp. (a) .............................. 153,600 10,771,200
<CAPTION>
Shares Value
==============================
<S> <C> <C>
CHEMICALS (Continued)
Georgia Gulf Corp. ......................... 378,200 $ 10,164,125
IMC Global Inc. ............................ 624,000 24,414,000
International Specialty
Products Inc. (a) ........................ 145,700 1,784,825
Lyondell Petrochemical Co. ................. 355,000 7,810,000
PPG Industries, Inc. ....................... 187,400 10,517,825
---------------
90,604,538
---------------
COMPUTERS & OFFICE EQUIPMENT (0.6%)
Gateway 2000, Inc. (a) ..................... 117,000 6,266,813
---------------
CONGLOMERATES (2.3%)
Hanson PLC ADR (b) ......................... 906,900 6,121,575
Tenneco Inc. ............................... 418,800 18,898,350
---------------
25,019,925
---------------
DOMESTIC OIL (3.9%)
Amerada Hess Corp. ......................... 92,100 5,330,287
Noble Affiliates, Inc. ..................... 185,500 8,880,812
Parker & Parsley
Petroleum Co. ............................ 259,000 9,518,250
Unocal Corp. ............................... 456,500 18,545,313
---------------
42,274,662
---------------
ENERGY (5.3%)
Coastal Corp. .............................. 308,300 15,068,163
MAPCO Inc. ................................. 493,400 16,775,600
PanEnergy Corp. ............................ 360,300 16,213,500
Seagull Energy Corp. (a) ................... 435,300 9,576,600
---------------
57,633,863
---------------
FINANCE (1.6%)
Travelers Group Inc. ....................... 383,857 17,417,511
---------------
FOOD (2.0%)
Archer-Daniels-Midland Co. ................. 415,617 9,143,574
IBP, Inc. .................................. 508,700 12,335,975
---------------
21,479,549
---------------
FOOD, BEVERAGES & TOBACCO (6.0%)
American Brands, Inc. ...................... 322,100 15,984,212
Philip Morris Cos. Inc. .................... 246,300 27,739,538
RJR Nabisco Holdings Corp. ................. 639,100 21,729,400
---------------
65,453,150
---------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Value Fund
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMMON STOCKS (Continued)
HEALTH CARE (5.3%)
Aetna Inc. ................................. 331,600 $ 26,528,000
FHP International Corp. (a) ................ 52,100 1,934,212
Humana Inc. (a) ............................ 859,000 16,428,375
WellPoint Health Networks Inc. (a) ......... 383,700 13,189,688
---------------
58,080,275
---------------
HOUSEHOLD PRODUCTS (0.4%)
Premark International, Inc. ................ 218,200 4,854,950
---------------
INSURANCE (6.2%)
Allstate Corp. (The) ....................... 428,690 24,810,434
American International
Group, Inc. .............................. 168,150 18,202,237
Chubb Corp. ................................ 458,000 24,617,500
---------------
67,630,171
---------------
INTERNATIONAL OIL (3.1%)
Elf Aquitaine ADR (b) ...................... 385,700 17,452,925
Occidental Petroleum Corp. ................. 696,800 16,287,700
---------------
33,740,625
---------------
OIL SERVICES (0.5%)
Union Pacific
Resources Group, Inc. ...................... 182,601 5,341,079
---------------
PAPER & FOREST PRODUCTS (3.9%)
Bowater Inc. ............................... 310,100 11,667,513
Chesapeake Corp. ........................... 255,900 8,028,862
Rayonier Inc. .............................. 216,950 8,325,456
Stone Container Corp. ...................... 508,600 7,565,425
Temple-Inland Inc. ......................... 139,400 7,545,025
---------------
43,132,281
---------------
RAILROADS (4.0%)
Conrail Inc. ............................... 162,512 16,190,258
Illinois Central Corp. ..................... 462,450 14,798,400
Union Pacific Corp. ........................ 215,600 12,962,950
---------------
43,951,608
---------------
RETAIL (4.5%)
Dillard Department Stores,
Inc. Class A ............................. 236,000 7,286,500
Federated Department Stores,
Inc. (a) ................................. 348,000 11,875,500
<CAPTION>
Shares Value
==============================
<S> <C> <C>
RETAIL (Continued)
Kroger Co. (a) ............................. 332,700 $ 15,470,550
Penney (J.C.) Co. Inc. ..................... 311,000 15,161,250
---------------
49,793,800
---------------
TECHNOLOGY (2.2%)
International Business Machines
Corp. .................................... 156,500 23,631,500
---------------
TEXTILE & APPAREL (2.8%)
Burlington Industries, Inc. (a) ............ 459,700 5,056,700
Fruit of the Loom, Inc. Class A (a) ........ 304,800 11,544,300
Reebok International Ltd. .................. 324,900 13,645,800
---------------
30,246,800
---------------
TIRE & RUBBER (1.9%)
Goodyear Tire & Rubber Co. (The) ........... 417,000 21,423,375
---------------
TRANSPORTATION (1.1%)
Arkansas Best Corp. ........................ 338,000 1,478,750
CSX Corp. .................................. 254,000 10,731,500
---------------
12,210,250
---------------
UTILITIES-ELECTRIC (3.9%)
Entergy Corp. .............................. 252,600 7,009,650
Long Island Lighting Co. ................... 721,800 15,969,825
Niagara Mohawk Power Corp. (a) ............. 622,800 6,150,150
Unicom Corp. ............................... 519,400 14,088,725
---------------
43,218,350
---------------
Total Common Stocks
(Cost $823,856,059) ...................... 1,016,964,573
---------------
PREFERRED STOCKS (0.8%)
DOMESTIC OILS (0.1%)
Parker & Parsley Capital LLC
6.25% (c) ................................ 27,000 1,788,750
---------------
INTERNATIONAL OIL (0.7%)
Occidental Petroleum Corp.
$3.875 (c) ............................... 130,000 7,410,000
---------------
Total Preferred Stocks
(Cost $8,393,375) ........................ 9,198,750
---------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (5.8%)
COMMERCIAL PAPER (5.8%)
American Express Credit Corp.
5.80%, due 1/6/97 ........................ $21,922,000 $ 21,922,000
American General Finance Corp. .............
5.90%, due 1/2/97 ........................ 18,906,000 18,906,000
Prudential Funding Corp. ...................
6.10%, due 1/3/97 ........................ 22,899,000 22,899,000
---------------
Total Short-Term Investments
(Cost $63,727,000) ....................... 63,727,000
---------------
Total Investments
(Cost $895,976,434) (d) .................... 99.7% 1,089,890,323(e)
Cash and Other Assets,
Less Liabilities ........................... 0.3 2,676,219
----------- ---------------
Net Assets ................................. 100.0% $ 1,092,566,542
=========== ===============
</TABLE>
- ----------
(a) Non-income producing securities.
(b) ADRAmerican Depository Receipt.
(c) May be sold to institutional investors only.
(d) The cost for Federal income tax purposes is $896,252,559.
(e) At December 31, 1996 net unrealized appreciation was $193,637,764, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $206,952,635 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $13,314,871.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
<S> <C>
ASSETS:
Investment in securities, at value
(identified cost $895,976,434) ................................ $1,089,890,323
Cash ........................................................... 404
Receivables:
Dividends and interest ....................................... 2,811,793
Fund shares sold ............................................. 2,029,992
Investment securities sold ................................... 1,203,000
Other assets ................................................... 545
--------------
Total assets ................................................ 1,095,936,057
--------------
LIABILITIES:
Payables:
Fund shares redeemed ......................................... 1,424,048
NYLIFE Distributors .......................................... 918,546
Investment securities purchased .............................. 471,354
Adviser ...................................................... 263,864
Transfer agent ............................................... 42,153
Custodian .................................................... 12,503
Trustees ..................................................... 6,987
Accrued expenses ............................................... 230,060
--------------
Total liabilities ........................................... 3,369,515
--------------
Net assets ..................................................... $1,092,566,542
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A ...................................................... $ 36,025
Class B ...................................................... 501,517
Additional paid-in capital ..................................... 877,593,751
Accumulated undistributed net investment income ................ 115,020
Accumulated undistributed net realized gain on investments ..... 20,406,340
Net unrealized appreciation on investments ..................... 193,913,889
--------------
Net assets ..................................................... $1,092,566,542
==============
CLASS A
Net assets applicable to outstanding shares .................... $ 73,259,108
==============
Shares of beneficial interest outstanding ...................... 3,602,507
==============
Net asset value per share outstanding .......................... $ 20.34
Maximum sales charge (5.50% of offering price) ................. 1.18
--------------
Maximum offering price per share outstanding ................... $ 21.52
==============
CLASS B
Net assets applicable to outstanding shares .................... $1,019,307,434
==============
Shares of beneficial interest outstanding ...................... 50,151,718
==============
Net asset value per share outstanding .......................... $ 20.32
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .............................................. $ 19,442,972
Interest ................................................... 4,409,424
------------
Total income .............................................. 23,852,396
------------
Expenses:
Distribution--Class B ...................................... 4,480,907
Administration ............................................. 2,682,642
Advisory ................................................... 2,682,642
Service .................................................... 2,237,645
Transfer agent ............................................. 1,212,713
Shareholder communication .................................. 347,242
Registration ............................................... 153,821
Recordkeeping .............................................. 116,985
Professional ............................................... 103,477
Custodian .................................................. 89,592
Trustees ................................................... 28,566
Miscellaneous .............................................. 14,553
------------
Total expenses ............................................ 14,150,785
------------
Net investment income ........................................ 9,701,611
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 92,855,281
Net change in unrealized appreciation on investments ......... 75,689,305
------------
Net realized and unrealized gain on investments .............. 168,544,586
------------
Net increase in net assets resulting from operations ......... $178,246,197
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $109,965.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ...................................................................... $ 9,701,611 $ 5,378,686
Net realized gain on investments ........................................................... 92,855,281 16,635,456
Net change in unrealized appreciation on investments ....................................... 75,689,305 123,032,869
--------------- ---------------
Net increase in net assets resulting from operations ....................................... 178,246,197 145,047,011
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ................................................................................... (748,274) (267,440)
Class B ................................................................................... (8,838,317) (6,780,394)
From net realized gain on investments:
Class A ................................................................................... (5,171,720) (426,799)
Class B ................................................................................... (73,072,126) (12,055,583)
--------------- ---------------
Total dividends and distributions to shareholders ....................................... (87,830,437) (19,530,216)
--------------- ---------------
Capital share transactions: Net proceeds from sale of shares:
Class A ................................................................................... 54,270,033 23,330,370
Class B ................................................................................... 263,788,646 181,653,393
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A ................................................................................... 5,840,804 685,112
Class B ................................................................................... 80,291,437 18,480,553
--------------- ---------------
404,190,920 224,149,428
Cost of shares redeemed:
Class A ................................................................................... (16,170,142) (1,267,040)
Class B ................................................................................... (119,967,686) (86,666,292)
--------------- ---------------
Increase in net assets derived from capital share transactions .......................... 268,053,092 136,216,096
--------------- ---------------
Net increase in net assets .............................................................. 358,468,852 261,732,891
NET ASSETS:
Beginning of year ............................................................................ 734,097,690 472,364,799
--------------- ---------------
End of year .................................................................................. $ 1,092,566,542 $ 734,097,690
=============== ===============
Accumulated undistributed net investment income .............................................. $ 115,020 $ --
=============== ===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
---------------------------------------------
Class A Class B Class A Class B September 1
------- ------- -------- ------- through Year ended August 31
Year ended Year ended December 31 ------------------------------
December 31, 1996 December 31, 1995 1994* 1994 1993 1992
---------------------- ---------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........... $18.25 $18.25 $14.66 $14.66 $16.30 $15.90 $13.82 $13.27
------ ------ ------ ------ ------ ------ ------ ------
Net investment income ........... 0.30 0.20 0.29 0.19 0.04 0.06 0.07 0.12
Net realized and unrealized gain
(loss) on investments ......... 3.66 3.64 3.91 3.91 (1.03) 1.04 3.40 1.64
------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .................... 3.96 3.84 4.20 4.10 (0.99) 1.10 3.47 1.76
------ ------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ...... (0.30) (0.20) (0.29) (0.19) (0.03) (0.06) (0.10) (0.09)
From net realized gain on
investments ................... (1.57) (1.57) (0.32) (0.32) (0.62) (0.64) (1.29) (1.12)
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions ................. (1.87) (1.77) (0.61) (0.51) (0.65) (0.70) (1.39) (1.21)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of period $20.34 $20.32 $18.25 $18.25 $14.66 $16.30 $15.90 $13.82
====== ====== ====== ====== ====== ====== ====== ======
Total investment return (a) ..... 21.84% 21.11% 28.74% 28.01% (6.03%) 7.26% 26.58% 14.82%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ........ 1.6% 1.1% 1.5% 0.9% 0.8%+ 0.5% 0.5% 0.8%
Expenses ..................... 1.1% 1.6% 1.2% 1.8% 1.8%+ 1.9% 1.9% 1.9%
Portfolio turnover rate ......... 47% 47% 48% 48% 11% 53% 77% 145%
Average commission rate paid .... $0.0595 $0.0595 (b) (b) (b) (b) (b) (b)
Net assets at end of
period (in 000's) ............. $73,259 $1,019,307 $25,258 $708,840 $472,365 $449,789 $226,524 $77,877
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Value Fund
Note 1--Organization and Business:
The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business
Trust. The Trust is registered under the Investment Company Act of 1940, as
amended, (the "Act") as an open-end management investment company and is
comprised of thirteen portfolios. These financial statements and notes relate
only to MainStay Value Fund (the "Fund").
The Fund currently offers two classes of shares. Class A shares, whose
distribution commenced on January 3, 1995, are offered at net asset value per
share plus an initial sales charge. Class B shares are offered without an
initial sales charge, although a declining contingent deferred sales charge may
be imposed on redemptions made within six years of purchase. Class A shares and
Class B shares bear the same voting (except for issues that relate solely to one
class), dividend, liquidation and other rights and conditions except that the
Class B shares are subject to higher distribution fee rates. Each class of
shares bears distribution and/or service fee payments under a distribution plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940.
The Fund's investment objective is to realize maximum long-term total return
from a combination of capital growth and income.
Note 2--Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Fund:
Valuation of Fund Shares. The net asset value per share of each class of shares
is calculated on each day the New York Stock Exchange (the "Exchange") is open
for trading as of the close of regular trading on the Exchange. The net asset
value per share of each class of shares is determined by taking the assets
attributable to a class of shares, subtracting the liabilities attributable to
that class, and dividing the result by the outstanding shares of that class.
Securities Valuation. Portfolio securities of the Fund are stated at value
determined (a) by appraising common and preferred stocks which are traded on the
New York Stock Exchange at the last sale price on that day or, if no sale
occurs, at the mean between the closing bid and asked prices, (b) by appraising
common and preferred stocks traded on other United States national securities
exchanges or foreign securities exchanges as nearly as possible in the manner
described in (a) by reference to their principal exchange, including the
National Association of Securities Dealers National Market System, (c) by
appraising over-the-counter securities quoted on the National Association of
Securities Dealers NASDAQ system (but not listed on the National Market System)
at the bid price supplied through such system, (d) by appraising
over-the-counter securities not quoted on the NASDAQ system at prices supplied
by the pricing agent or brokers selected by the Adviser, if these prices are
deemed to be representative of market values at the regular close of business of
the New York Stock Exchange. Short-term securities which mature in more than 60
days are valued at current market quotations. Short-term securities which mature
in 60 days or less are valued at amortized cost if their term to maturity at
purchase was 60 days or less, or by amortizing the difference between market
value
18
<PAGE>
Notes to Financial Statements
on the 61st day prior to maturity and value on maturity date if their original
term to maturity at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the New York
Stock Exchange will not be reflected in the Fund's calculation of net asset
value unless the Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Federal Income Taxes. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when allocations of direct expenses can otherwise fairly be
made. The investment income and expenses (other than expenses incurred under the
Distribution Plan) and realized and unrealized gains and losses on investments
of the Fund are allocated to separate classes of shares based upon their
relative net asset value on the date the income is earned or expenses and
realized and unrealized gains and losses are incurred.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
19
<PAGE>
MainStay Value Fund
Note 3--Fees and Related Party Policies:
Investment Advisory and Administration Fees. MacKay-Shields Financial
Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an
Investment Advisory Agreement. MacKay-Shields is a registered investment adviser
and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New
York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect
wholly-owned subsidiary of New York Life, is the Administrator for the Fund.
The Trust, on behalf of the Fund, pays the Adviser and Administrator each a
monthly fee for the services performed and the facilities furnished at an annual
rate of the Fund's average daily net assets of 0.36% on assets up to $200
million, 0.325% on assets from $200 million to $500 million and 0.25% on assets
in excess of $500 million.
The Investment Advisory and Administration Agreements for the Fund also provide
that in the event the expenses of the Fund (including the fees for the Adviser
and Administrator, but excluding interest, taxes, organization expenses,
litigation and indemnification expenses, distribution fees and other
extraordinary expenses) for any fiscal year exceed the most restrictive
limitation of certain state securities commissions, the Adviser and the
Administrator each will reduce their fee payable by the Fund by 50% of the
amount of such excess up to the extent of their fees. The expenses of the Fund
did not exceed the most restrictive expense limitation for the year ended
December 31, 1996.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The
Fund, with respect to each class of shares, has adopted a Distribution Plan (the
"Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act.
Pursuant to the Class A Plan, the Distributor receives payments from the Fund at
an annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares, which is an expense of the Class A shares of the Fund for distribution
or service activities as designated by the Distributor. Pursuant to the Class B
Plan, the Fund's Class B shares are subject to the payment of a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestment of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B shares
exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge has been imposed or upon which such charge has been
waived; or (b) the average daily net assets of the Fund's Class B shares.
The Distribution Plan provides that the Class B shares of the Fund also incur a
service fee at the annual rate of 0.25% of the average daily net asset value of
the Class B shares of the Fund. Service fee as shown on the statement of
operations represents the fees for both Class A shares and Class B shares.
The Plan provides that the distribution fee is payable to NYLIFE Distributors
regardless of the amounts actually expended by NYLIFE Distributors for
distribution of the Fund's shares and service activities.
20
<PAGE>
Notes to Financial Statements continued
NYLIFE Distributors anticipates that its actual distribution expenditures will
substantially exceed the distribution fee received by it during the initial
years of the operation of the Plan and that in later years its expenditures may
be less than the distribution fee.
Sales Charges. The Fund was advised that the amount of sales charge on sales of
Class A Fund shares retained by NYLIFE Distributors was $574,807 for the year
ended December 31, 1996. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$712,915 for the year ended December 31, 1996.
Trustees Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee
of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus
reimbursement for travel and out-of-pocket expenses. The Trust allocates this
expense in proportion to the net assets of the respective Funds.
Other. The Trust has an agreement with NYLIFE Distributors to provide certain
transfer agency services for the Fund. Fees for these services for the year
ended December 31, 1996 were $74,914.
Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $23,872 for the year ended December
31, 1996.
Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are
charged to the Fund. The fee for the year ended December 31, 1996 amounted to
$116,985.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1996 purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $575,831 and $386,992, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
------------------- -------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ..................................................... 2,750 13,467 1,421 10,815
Shares issued in reinvestment of dividends and distributions .... 287 3,942 38 1,028
------ ------ ------ ------
3,037 17,409 1,459 11,843
Shares redeemed ................................................. 818 6,103 75 5,223
------ ------ ------ ------
Net increase .................................................... 2,219 11,306 1,384 6,620
====== ====== ====== ======
</TABLE>
21
<PAGE>
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Value Fund (one of the
thirteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 19, 1997
22
<PAGE>
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23
<PAGE>
THE MAINSTAY FUNDS
GROWTH FUNDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[Horizontal bar Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund graph indicating of companies in expanding markets and are willing to accept a higher
risk/reward of Fund] with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph indicating the makeup and returns of the participate in the growth potential
risk/reward of Fund] S&P 500* of stocks+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return
International Equity Fund graph indicating international stock markets with of international equities or want to
risk/reward of Fund] an emphasis on risk control add diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Balances current income with growth You seek a combination of income and
Total Return Fund graph indicating opportunities by investing in stocks, growth potential and want to manage
risk/reward of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks undervalued stocks with You seek to maximize total return from
VALUE FUND graph indicating attractive dividends and a stimulus securities which may have more poten-
risk/reward of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund graph indicating a special blend of long-term growth may offer growth potential if converted
risk/reward of Fund] potential and dividend income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. The MainStay Funds are neither
sponsored by nor affiliated with Standard & Poor's.
+ The original investment is guaranteed provided it is held for 10 years
with all dividend and capital gain distributions reinvested. If shares are
redeemed prior to or after the guarantee date, the investor loses the
benefit of the guarantee with respect to those shares.
++ Investments in foreign securities may be subject to greater risks than
domestic investments. These risks include currency fluctuations, changes
in U.S. or foreign tax or currency laws, and changes in monetary policies
and economic and political conditions in foreign countries.
(ss.) While individual securities owned by the Government Fund are guaranteed by
the U.S. government and its agencies, the share price of the Fund is not
guaranteed and will fluctuate with market conditions.
|| Certain of the Fund's investments may be speculative.
# Investments in the Money Market Fund are neither insured nor guaranteed by
the U.S. government and there is no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share; investment
returns will vary with market conditions.
** A small portion of the Fund's income may be subject to state and local
taxes and the Alternative Minimum Tax. Capital gains, if any, may also be
taxed.
24
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks a high level of current income You are seeking to combine high
Government Fund [Horizontal bar consistent with safety of principal current income and safety of principal
graph indicating primarily from U.S. government
risk/reward of Fund] securities(ss.)
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield [Horizontal bar An Aggressive High Yield Bond You Want To Maximize Current Income
Corporate Bond Fund graph indicating fund that is actively managed for and can accept the higher risk of
risk/reward of Fund] maximum current income|| securities with high yield potential
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current yields and You prefer the higher return potential
International Bond Fund [Horizontal bar competitive total return from non- of international bonds or want to add
graph indicating U.S. bonds with an emphasis on diversification to your domestic
risk/reward of Fund] risk control investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating stability of principal, and liquidity, competitive yields on cash you're plan-
risk/reward of Fund] with free checkwriting# ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income that's You're in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal bracket or want to pay less of your
risk/reward of Fund] income tax** investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a California resident and want to
California Tax Free Fund [Horizontal bar from both federal and California keep more of what you earn by invest-
graph indicating income taxes consistent with ing for income that's double tax free**
risk/reward of Fund] preservation of capital**
- ------------------------------------------------------------------------------------------------------------------------------------
Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to keep more of what you earn
graph indicating New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital** free**
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A word about risk and reward
The "thermometers" in the tables above show how much risk the investor must
assume and the related return potential. Generally speaking, investments with
higher return potential also carry higher risks. So, the longer the indicator
bar, the higher the risk and reward potential of the Fund.
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send any money. Shares
must be offered in the investor's state of residence.
25
<PAGE>
- --------------------------------------------------------------------------------
MAINSTAY
Value Fund
- --------------------------------------------------------------------------------
1996 Annual Report
December 31, 1996
[LOGO] MainStay(R)
Funds
Officers & Trustees
Alice T. Kane Chairperson and Trustee
Walter W. Ubl President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
[LOGO] MainStay(R) Funds
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
http://www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Value Fund. It may be given to others only when preceded or accompanied by an
effective MainStay Funds prospectus. This report does not offer to sell any
securities or solicit orders to buy them.
(C)1997. All rights reserved.
[GRAPHIC] MSAN16 (297)
