<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay California Tax Free Fund Highlights 5
$10,000 Invested in the MainStay California
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification of Holdings--Top 5 9
Quality Breakdown 10
Returns & Lipper Rankings 13
Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 20
Report of Independent Accountants 25
The MainStay Funds 26
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay California Tax Free Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay California Tax Free Fund, and MacKay Shields Financial Corporation;
amend the Plan of Distribution for Class B shares; eliminate or revise certain
fundamental investment restrictions including eliminating certain state-imposed
fundamental investment restrictions, making certain fundamental investment
restrictions nonfundamental, and eliminating or revising fundamental
restrictions pertaining to borrowing money, industry concentration, and issuing
senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
California Tax Free Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --------- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 1,142,723 84,062 Passed
Nancy Maginnes Kissinger.................................................. 1,142,723 84,062 Passed
Donald E. Nickelson....................................................... 1,142,723 84,062 Passed
Richard S. Trutanic....................................................... 1,142,723 84,062 Passed
Harry G. Hohn............................................................. 1,142,723 84,062 Passed
Terry L. Lierman.......................................................... 1,142,723 84,062 Passed
Donald K. Ross............................................................ 1,142,723 84,062 Passed
Walter W. Ubl............................................................. 1,142,723 84,062 Passed
Alice T. Kane............................................................. 1,142,723 84,062 Passed
John B. McGuckian......................................................... 1,142,723 84,062 Passed
Stephen C. Roussin........................................................ 1,142,723 84,062 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 1,135,969.02 Against - 36,150.40 Abstain - 54,661.48 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay
Shields Financial Corporation
<S> <C> <C> <C>
For - 1,125,178.13 Against - 33,715.37 Abstain - 67,889.99 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 295,656.71 Against - 15,356.61 Abstain - 30,113.19 Broker Non-Vote - 0.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 1,076,239.43 Against - 37,253.88 Abstain - 95,085.49 Broker Non-Vote - 18,206.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- ------------ --------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation............................... 1,076,239.43 37,253.88 Passed
A2--Oil, Gas, or Mineral Lease Interests.................................. 1,076,239.43 37,253.88 Passed
A3--Real Estate Limited Partnership Interests............................. 1,076,239.43 37,253.88 Passed
B1--Illiquid Securities and Resale under Rule 144A........................ 1,076,239.43 37,253.88 Passed
B4--Short Sales and Margin Transactions................................... 1,076,239.43 37,253.88 Passed
B5--Purchases to Exercise Control or Management........................... 1,076,239.43 37,253.88 Passed
B6--Securities of Other Investment Companies.............................. 1,076,239.43 37,253.88 Passed
C2--Borrowing Money....................................................... 1,076,239.43 37,253.88 Passed
C3--Industry Concentration................................................ 1,076,239.43 37,253.88 Passed
C4--Issuing Senior Securities............................................. 1,076,239.43 37,253.88 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent
Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 1,174,082.22 Against - 6,526.69 Abstain - 46,173.29 Result - Passed
</TABLE>
4
<PAGE>
MainStay California Tax Free Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] In 1997, the municipal markets experienced their best year since 1993.
[ ] After interest rates rose at the end of March, low inflation caused yields
to decline throughout the rest of the year.
[ ] California continued to benefit from economic diversification and reduced
reliance on defense and real estate.
[ ] Turmoil in Southeast Asian markets caused a flight to quality, which
boosted Treasury and municipal bond performance, but may negatively impact
California companies that are closely tied to Asian markets.
[ ] There were no political or economic upsets in the California municipal
market during the year.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 7.90% and 7.63% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] High-coupon, short-call bonds helped boost income but detracted from total
return in a declining rate environment.
[ ] Having a slightly longer-than-neutral duration in late March had a negative
impact on performance, while lengthening duration through the second half
of 1997 helped the Fund capture much of its total return for the year.
[ ] Both share classes underperformed the average Lipper* California municipal
debt fund, which returned 9.15% for the year.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
California Tax Free Fund versus
Lehman Brothers Municipal Bond
Index and Inflation
CLASS A SHARES SEC Returns: 1-Year 3.04%, 5-Year 5.64%, since inception 6.11%
<TABLE>
<CAPTION>
MainStay
California Lehman Brothers
Year Tax Free Muncipal Bond
End Fund Index* Inflation+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $ 9,550 $10,000 $10,000
12/91 $ 9,748 $10,335 $10,051
12/92 $10,516 $11,247 $10,349
12/93 $11,852 $12,628 $10,632
12/94 $11,273 $11,975 $10,908
12/95 $12,984 $14,066 $11,192
12/96 $13,430 $14,689 $11,563
12/97 $11,758
</TABLE>
[GRAPHIC] MainStay California Tax Free Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 2.63%, 5-Year 6.14%, since inception 6.75%
<TABLE>
<CAPTION>
MainStay
California Lehman Brothers
Year Tax Free Muncipal Bond
End Fund Index* Inflation+
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $10,000 $10,000 $10,000
12/91 $10,207 $10,335 $10,051
12/92 $11,011 $11,247 $10,349
12/93 $12,410 $12,628 $10,632
12/94 $11,804 $11,975 $10,908
12/95 $13,564 $14,066 $11,192
12/96 $13,984 $14,689 $11,563
12/97 $15,050 $16,038 $11,758
</TABLE>
[GRAPHIC] MainStay California 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 do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of California Tax Free Fund Team
CALIFORNIA TAX FREE FUND TEAM
James Flood and Ravi Akhoury
Domestic bond markets, including municipal bonds, benefited from positive
interest rate changes over the course of 1997. Although the Federal Reserve
Board moved to raise interest rates 25 basis points at the end of March,
continued low inflation helped bring bond yields lower throughout the remainder
of the year. The resulting increase in bond prices made 1997 the best year for
California municipal bonds since 1993.
Although stock market gains drew money away from the municipal market through
the first half of the year, problems in Asian markets during the second half of
1997 caused just the reverse. As the Asian turmoil progressed, investors began
to reevaluate the risk parameters of their portfolios and look for high-quality
alternatives to equity investments. This flight to quality increased demand for
fixed-income securities, pushing prices even higher.
As yields declined, yield spreads narrowed, increasing the difficulty of
enhancing yields through maturity plays. Housing issues became less desirable as
yields declined and prepayment risk increased.
With more than 50% of the municipal market now in AAA-rated or insured credits,
competition for yield-enhancing securities has greatly increased.
In the state of California, there were no political upsets or issuer problems
that adversely affected the municipal market. The state's economy continued to
benefit from greater diversification across several industries and less
dependence on defense and real estate. Major metropolitan areas in the state
continued to see a thriving business environment, although problems in Asian
markets could hurt California businesses that depend on the output and
profitability of Southeast Asian companies.
Given this context, how did the MainStay California Tax Free Fund do in 1997?
For the year ended 12/31/97, the MainStay California Tax Free Fund returned
7.90% and 7.63% for Class A and Class B shares, respectively, excluding all
sales charges. Both share classes underperformed the average Lipper* California
municipal debt fund, which returned 9.15% for the year.
[GRAPHIC]
Basis Point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
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.
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[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.
Total return
- ------------
The performance of an investment with all income and capital gains reinvested.
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- -----------------------------------------------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.71
12/94 (4.88)
12/95 15.18
12/96 3.44
12/97 7.90
</TABLE>
See footnote * on page 13 for more information on performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS B SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- -----------------------------------------------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.71
12/94 (4.88)
12/95 14.91
12/96 3.10
12/97 7.63
</TABLE>
Returns reflect the historical performance of the Class A shares for periods
12/91 through 12/94. See footnote * on page 13 for more information on
performance.
What were the major contributors to the Fund's performance during the year?
Duration is the most important factor in municipal bond management. Believing
that inflation would remain low and economic growth modest, we lengthened the
duration of the Fund around the time that the Federal Reserve Board moved to
raise interest rates, which negatively impacted the Fund in the first half of
the year. We quickly retreated to a neutral position, but began to lengthen the
Fund's duration again as our previous assessment began to be fulfilled in the
second half of the year. As yields declined, we continued to lengthen the Fund's
duration in November and December, which helped the Fund capture most of its
total return for the year. Zero-coupon bonds and bonds with
8
<PAGE>
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Electric Utility 15.1%
Water Utility 11.8%
Special Tax 12.1%
Education 17.2%
Hospital/Nursing Home 11.8%
All Other 32.0%
</TABLE>
Actual percentages will vary over time.
5.00% coupons or less were among the Fund's longest-duration securities and did
very well.
Were there other factors that influenced performance?
Obviously, the larger economic picture had a major impact on the Fund and
California municipal bonds in general. The troubles in Asian markets benefited
the Fund by increasing demand for high-quality securities and helped to quell
any inflation concerns that may have been brewing. Since the full impact of the
Asian turmoil hasn't yet been seen, it may have more positive effects in the
municipal market in the future as inflation continues to slow in the months
ahead. While a number of California industries may be negatively impacted, a
continued decline in interest rates may make capital more accessible and provide
a cushion for companies with close Asian ties.
How did supply and demand affect the portfolio?
Supply and demand dynamics varied with market conditions. With the possible
exception of March and April, demand for equities was drawing money away from
municipal bonds in the first half of 1997, which had a negative impact on
performance. In the second half of the year, investors became increasingly
serious about risk and decided to pursue higher-quality bond investments, which
had a positive impact on demand and on the Fund. With a very limited supply of
BBB-rated municipal bonds, spreads between AAA and BBB bonds tend to be tighter
in California than elsewhere in the country. In the fourth quarter, new issuance
increased across the quality spectrum as more municipalities came to market
hoping to take advantage of lower rates.
Were you pursuing high quality in the Fund's investments throughout the year?
The overall quality rating of the Fund's investment portfolio remains AA, which
is high. But the Fund seeks a high level of tax-free income for residents of
California. Since the highest-rated securities offer the lowest yields, we need
to take a balanced approach to risk and return within the Fund's prospectus
guidelines.
[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.
9
<PAGE>
[GRAPHIC]
At year end, roughly 48% of the Fund's assets were invested in AAA-rated bonds,
23% were in AA-rated bonds, 18% were in bonds rated A, 6% were in bonds rated
BBB, and 5% were in bonds rated BB. As you can see from this mix, we have placed
less emphasis on single-A bonds. There are a couple of reasons for this. First,
with the increased issuance of insured bonds, over half the municipal securities
available in California are now rated AAA or insured credits. So there's less
available in the single-A category. More importantly, we need to assess whether
the increase in yield offered in these categories justifies the increase in
risk. With increasingly narrow spreads, and few single-A and BBB credits to
choose from, we have placed our emphasis where we believe both risk and return
characteristics will benefit shareholders the most.
Are there many attractive issues in the BBB category?
Unfortunately, no. And we're not the only Fund managers that are competing for
yield. The result has been increasing competition for lower-rated securities
with yield advantages, which has caused the opportunities to become fewer and
spreads to become so tight that we need to carefully evaluate both opportunity
and cost before we invest. Some managers find yield opportunities among below
investment-grade municipals, but the MainStay California Tax Free Fund may not
invest in these securities. BBB-rated hospital issues had a positive impact on
the Fund's investment portfolio and they continue to be among the Fund's more
productive securities.
Besides concentrating on higher-quality securities, what else did you do to
protect investors against risk?
The Fund used broad diversification by geographic location and types of
municipal securities to help reduce the impact of an upset in any one location
or market sector. At year end 1997, the Fund was invested from San Diego,
Escondido, Santa Cruz, and Sacramento, to Los Angeles, San Francisco, and South
Tahoe. In addition, the Fund's sector diversification included everything from
schools, power, and toll roads to hospitals, water, transportation, pollution
control, and community development bonds.
QUALITY BREAKDOWN AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
AAA 48.5%
AA 22.7%
A 17.9%
BBB 6.0%
BB 5.0%
Cash, Equivalents & Other Assets,
less Liabilities (0.1%)
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
10
<PAGE>
Were there other ways the Fund was diversified?
Yes, the Fund bought a variety of coupons and maturities to help reduce the
likelihood of a major impact if a certain coupon or maturity went out of favor.
What were some of the Fund's most significant purchases in 1997?
We bought a wide variety of securities for the Fund during the year, each
contributing proportionately to the overall performance of the Fund.
In April, we bought California Educational Facility 6.30% bonds due 2021 for the
Fund. This was an attractive BBB-rated credit that was well priced when we
bought it and a solid performer for the Fund. In July, the Fund purchased Los
Angeles Unified California School District 5.00% bonds due 2021 for their long
duration, and they proved to be among the Fund's best performers. In November,
the Fund bought some Metropolitan Water District bonds with the same coupon that
were also strong. And in October, the Fund bought Statewide Communities
Development Authority Revenue St. Joseph Health Systems Group 5 1/8% bonds due
2017, which also benefited from their long duration.
Which securities did you sell during the year?
In September, the Fund sold Southern California Public Power 4 7/8% bonds of
2020, which were long-duration issues. The sale negatively impacted the
portfolio when long-duration bonds continued to outperform later in the year.
The Fund also sold some Foothill Toll Road Revenue zero-coupon bonds due 2024 in
July. Although these, too, were long-duration bonds, we found the price quite
attractive.
Which bonds didn't perform well for the Fund?
The Fund held a number of high-coupon short-call bonds that helped provide
attractive yields and maintain the Fund's dividend in a declining rate
environment. But since the bonds were so close to their 1998 call dates, they
performed more like short-term securities, which detracted from performance,
particularly when bonds with greater call protection rallied. Among the names
that fell into this category were California State general obligation veterans
bonds, Northern California Power, Oakland California Revenue, Walnut California
Improvement Agency, and Long Beach California Harbor bonds. All of these bonds
had coupons of 7.15% or higher.
What can be done to protect against call risk?
We're continually looking at call risk as we evaluate securities for the Fund.
Generally, we seek to extend call protection as we purchase new bonds.
Why didn't you just sell the short-call bonds?
With municipal coupons of 7.15% and higher in a market where the averages were
considerably lower and already declining, it would be difficult to replace these
bonds. In most cases, we were willing to forego total return for the income
potential these securities offered. And while they underperformed, we believe
having them in the Fund was positive in helping maintain the dividend throughout
the year.
[GRAPHIC]
11
<PAGE>
[GRAPHIC]
Past performance is no guarantee of future results.
What could you have done better in 1997?
In hindsight, we could have made better duration moves in the second quarter,
held more zero-coupon and noncallable bonds, and had more BBB securities. But
given how things looked as we proceeded through the year, we're pleased with the
way we managed both risk and reward and feel that the Fund's performance was
competitive in a challenging year.
How was the Fund invested at year end?
As we noted, the Fund was broadly diversified, but we didn't emphasize housing
and utilities. We were concerned that utility deregulation could play havoc with
bond prices, and in a declining rate environment, we tried to avoid housing
issues which might have been subject to prepayment risk.
What's your outlook for the future?
We believe that declining inflation should be good for the bond markets, but
recognize that lower rates and tighter spreads make it more difficult to find
new opportunities. In this environment, we will continue to focus on quality,
while seeking appropriate and competitive yields. At year end, municipals
appeared to be inexpensive relative to Treasuries, and we believe California
municipal bonds may outperform government bonds in 1998.
Ravi Akhoury
James Flood
Portfolio Managers
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 7.90% 6.62% 6.89%
Class B 7.63% 6.45% 6.75%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 3.04% 5.64% 6.11%
Class B 2.63% 6.14% 6.75%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 89 out of 37 out of 34 out of
103 funds 51 funds 44 funds
Class B 96 out of n/a n/a
103 funds
Average Lipper
CA municipal
debt fund 9.15% 6.99% 7.36%
================================================================================
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $9.93 $0.4812 $0.1194
Class B $9.90 $0.4540 $0.1194
================================================================================
</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 certain fee waivers and/or expense limitations, without which total
return figures may have been lower. The fee waivers and/or expense
limitations are voluntary and may be terminated or revised at any time.
Class B shares, first offered to the public 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 .50%. Performance figures for this class include the
historical performance of the Class A shares from inception (10/1/91) up to
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
12/31/97. Class B shares were first offered to the public on 1/3/95; Class
A shares on 10/1/91.
[GRAPHIC]
13
<PAGE>
MainStay California Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (100.1%)+
CALIFORNIA (100.1%)
Anaheim California Public Financing
Authority, Lease Revenue
Project C
(zero coupon), due 9/1/22.................. $1,500,000 $ 418,125
Baldwin Park California Unified
School District
(zero coupon), due 8/1/17.................. 1,255,000 458,075
California Educational Facilities
Authority Revenue
Pooled College & University
Project B
6.30%, due 4/1/21.......................... 500,000 540,000
Stanford University, Series N
5.20%, due 12/1/27......................... 1,500,000 1,503,750
California Housing Finance Agency
Revenue, Home Mortgage
Series C
8.30%, due 8/1/19 (a)...................... 20,000 20,581
California Pollution Control Financing
Authority Revenue
San Diego Gas & Electric Co.
Series A
5.90%, due 6/1/14.......................... 400,000 443,500
California State General Obligation
Veterans, Series AW
7.70%, due 4/1/12 (a)...................... 880,000 905,054
California Statewide Communities
Development Authority
Lease Revenue, United Airlines
Series A
5.70%, due 10/1/33 (a)..................... 725,000 733,156
Revenue St. Joseph Health
Systems Group
5.125%, due 7/1/17......................... 1,000,000 997,500
California Statewide Community
Development Corp.
7.00%, due 9/1/09.......................... 260,000 284,700
Capistrano Unified School District
Community Facility, Special Tax
8.375%, due 10/1/20........................ 1,250,000 1,414,063
Eden Township Hospital District
Revenue
7.40%, due 11/1/19......................... 770,000 820,050
Escondido California Union High
School District
(zero coupon), due 11/1/12................. 1,350,000 648,000
Fontana Redevelopment Agency
Tax Allocation, Jurupa Hills
Project A
5.50%, due 10/1/27......................... 500,000 499,375
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/27.................. 1,000,000 202,500
Long Beach California
Harbor Revenue
Series A
7.25%, due 5/15/19 (a)(b).................. 1,000,000 1,031,970
Los Angeles California Harbor
Department Revenue
8.70%, due 9/1/15.......................... 540,000 580,500
Los Angeles County
Transportation Commission,
Sales Tax Revenue, Series A
7.40%, due 7/1/15.......................... 400,000 426,000
Los Angeles Unified School District
Series A
5.00%, due 7/1/21.......................... 1,750,000 1,719,375
Metropolitan Water District, Southern
California Waterworks Revenue
Series A
5.00%, due 7/1/26.......................... 700,000 682,500
Series C
5.00%, due 7/1/37.......................... 300,000 289,500
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24 (b)...................... 2,070,000 2,141,042
Oakland California Revenue
Series A
7.60%, due 8/1/21 (b)...................... 1,050,000 1,092,473
Palo Alto California Unified School
District, Series B
5.375%, due 8/1/18......................... 700,000 718,375
Sacramento Municipal
Utilities District Electric Revenue
Series L
5.125%, due 7/1/22......................... 300,000 297,000
Series K
5.25%, due 7/1/24.......................... 250,000 259,063
San Diego California Public Facilities
Financing Authority,
Sewer Revenue
Series B
5.25%, due 5/15/27......................... 1,000,000 1,001,250
San Diego County Water Authority
Revenue, Series A
4.75%, due 5/1/20.......................... 1,100,000 1,040,875
</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.
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
CALIFORNIA (Continued)
San Francisco State Building Authority
Lease Revenue, Civic Center
Complex A
5.25%, due 12/1/21......................... $1,000,000 $ 1,002,500
Santa Cruz County Public
Financing Authority Revenue
Tax Allocation, Series B
7.625%, due 9/1/21......................... 825,000 893,062
Simi Valley California Unified
School District, Refundable
& Capital Improvement Projects
5.25%, due 8/1/22.......................... 500,000 517,500
South Tahoe California Joint Power
Financing Authority Revenue
Project 1A
7.20%, due 10/1/23......................... 1,000,000 1,146,250
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09.......................... 750,000 784,365
-----------
Total Long-Term Municipal Bonds
(Cost $25,105,328)......................... 25,512,029
-----------
SHORT-TERM INVESTMENTS (3.5%)
California Health Facility Finance
Authority Revenue
Series C (c)
3.20%, due 7/1/22.......................... 700,000 700,000
California Statewide Communities
Development Authority Revenue
St. Joseph Health
Systems Group (c)
3.40%, due 7/1/24.......................... 200,000 200,000
-----------
Total Short-Term Investments
(Cost $900,000)............................ 900,000
-----------
Total Investments
(Cost $26,005,328) (d)..................... 103.6% 26,412,029(e)
Liabilities in Excess of Cash
and Other Assets........................... (3.6) (925,339)
---------- -----------
Net Assets.................................... 100.0% $25,486,690
========== ===========
</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 securities 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, 1997, net unrealized appreciation was $406,701, 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 $706,935 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $300,234.
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 as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $26,005,328)................................... $26,412,029
Cash............................................................................................... 139,855
Receivables:
Interest......................................................................................... 428,190
Investment securities sold....................................................................... 100,267
Fund shares sold................................................................................. 21,472
-----------
Total assets.................................................................................... 27,101,813
-----------
LIABILITIES:
Payables:
Investment securities purchased.................................................................. 1,556,882
MainStay Management.............................................................................. 10,202
NYLIFE Distributors.............................................................................. 6,886
Custodian........................................................................................ 4,200
Transfer agent................................................................................... 3,294
Trustees......................................................................................... 159
Accrued expenses................................................................................... 33,500
-----------
Total liabilities............................................................................... 1,615,123
-----------
Net assets......................................................................................... $25,486,690
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A.......................................................................................... $ 18,327
Class B.......................................................................................... 7,360
Additional paid-in capital......................................................................... 25,109,859
Accumulated distribution in excess of net investment income........................................ (784)
Accumulated net realized loss on investments....................................................... (54,773)
Net unrealized appreciation on investments......................................................... 406,701
-----------
Net assets......................................................................................... $25,486,690
===========
CLASS A
Net assets applicable to outstanding shares........................................................ $18,198,616
===========
Shares of beneficial interest outstanding.......................................................... 1,832,746
===========
Net asset value per share outstanding.............................................................. $ 9.93
Maximum sales charge (4.50% of offering price)..................................................... 0.47
-----------
Maximum offering price per share outstanding....................................................... $ 10.40
===========
CLASS B
Net assets applicable to outstanding shares........................................................ $ 7,288,074
===========
Shares of beneficial interest outstanding.......................................................... 735,963
===========
Net asset value and offering price per share outstanding........................................... $ 9.90
===========
</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 for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................................................... $1,434,535
----------
Expenses:
Service.......................................................................................... 58,548
Administration................................................................................... 47,267
Advisory......................................................................................... 47,267
Shareholder communication........................................................................ 35,935
Transfer agent................................................................................... 34,244
Management....................................................................................... 22,562
Professional..................................................................................... 22,465
Custodian........................................................................................ 18,249
Distribution--Class B............................................................................. 14,571
Registration..................................................................................... 1,668
Trustees......................................................................................... 550
Miscellaneous.................................................................................... 7,462
----------
Total expenses before reimbursement............................................................. 310,788
Expense reimbursement from Adviser and Administrator or Manager.................................... (5,177)
----------
Net expenses.................................................................................... 305,611
----------
Net investment income.............................................................................. 1,128,924
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions............................................................................ 471,035
Futures transactions............................................................................. (63,742)
----------
Net realized gain on investments................................................................... 407,293
----------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions............................................................................ 236,733
Futures transactions............................................................................. 844
----------
Net unrealized gain on investments................................................................. 237,577
----------
Net realized and unrealized gain on investments.................................................... 644,870
----------
Net increase in net assets resulting from operations............................................... $1,773,794
==========
</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,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income........................................................... $ 1,128,924 $ 1,111,565
Net realized gain (loss) on investments......................................... 407,293 (24,010)
Net change in unrealized appreciation (depreciation) on investments............. 237,577 (279,939)
----------- -----------
Net increase in net assets resulting from operations............................ 1,773,794 807,616
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A........................................................................ (847,841) (950,302)
Class B........................................................................ (285,056) (186,583)
From net realized gain on investments:
Class A........................................................................ (216,082) --
Class B........................................................................ (85,569) --
----------- -----------
Total dividends and distributions to shareholders............................ (1,434,548) (1,136,885)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A........................................................................ 2,581,223 1,110,752
Class B........................................................................ 2,238,857 3,213,809
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A........................................................................ 648,114 549,718
Class B........................................................................ 235,604 117,399
----------- -----------
5,703,798 4,991,678
Cost of shares redeemed:
Class A........................................................................ (3,369,454) (3,046,980)
Class B........................................................................ (374,371) (215,790)
----------- -----------
Increase in net assets derived from capital share transactions............... 1,959,973 1,728,908
----------- -----------
Net increase in net assets................................................... 2,299,219 1,399,639
NET ASSETS:
Beginning of year................................................................. 23,187,471 21,787,832
----------- -----------
End of year....................................................................... $25,486,690 $23,187,471
=========== ===========
Accumulated undistributed net investment income (excess distribution)............. $ (784) $ 3,129
=========== ===========
</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 A
----------------------------------
Class A Class B Class A Class B Class A Class B September 1
------- ------- ------- ------- ------- ------- through
Year ended Year ended Year ended December 31 Year ended August 31
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
------- ------ ------- ------ ------- ------ ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $ 9.78 $ 9.75 $ 9.95 $ 9.91 $ 9.10 $ 9.10 $ 9.57 $ 10.38 $ 9.90
------- ------ ------- ------ ------- ------ ------- ------- -------
Net investment income ......... 0.48 0.45 0.49 0.45 0.50 0.52 0.17 0.53 0.55
Net realized and
unrealized gain (loss)
on investments .............. 0.27 0.27 (0.16) (0.16) 0.85 0.81 (0.47) (0.51) 0.64
------- ------ ------- ------ ------- ------ ------- ------- -------
Total from investment
operations .................. 0.75 0.72 0.33 0.29 1.35 1.33 (0.30) 0.02 1.19
------- ------ ------- ------ ------- ------ ------- ------- -------
Less dividends and
distributions:
From net investment
income ...................... (0.48) (0.45) (0.50) (0.45) (0.50) (0.52) (0.17) (0.52) (0.59)
From net realized gain
on investments .............. (0.12) (0.12) -- -- -- -- -- (0.31) (0.12)
------- ------ ------- ------ ------- ------ ------- ------- -------
Total dividends and
distributions ............... (0.60) (0.57) (0.50) (0.45) (0.50) (0.52) (0.17) (0.83) (0.71)
------- ------ ------- ------ ------- ------ ------- ------- -------
Net asset value at end
of period ................... $ 9.93 $ 9.90 $ 9.78 $ 9.75 $ 9.95 $ 9.91 $ 9.10 $ 9.57 $ 10.38
======= ====== ======= ====== ======= ====== ======= ======= =======
Total investment return (a) ... 7.90% 7.63% 3.44% 3.10% 15.18% 14.91% (3.11%) 0.12% 12.58%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ................... 4.88% 4.63% 5.0% 4.7% 5.3% 5.1% 5.5%+ 5.4% 5.6%
Net expenses ............... 1.24% 1.49% 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99% 0.99%
Expenses (before
reimbursement) ........... 1.26% 1.51% 1.3% 1.6% 1.4% 1.7% 1.2%+ 1.1% 1.2%
Portfolio turnover rate ....... 108% 108% 79% 79% 107% 107% 24% 96% 154%
Net assets at end of
period (in 000's) .......... $18,199 $7,288 $18,098 $5,089 $19,825 $1,963 $16,667 $17,356 $14,603
</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 California Tax Free Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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 Sub-Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Sub-Adviser to be representative of market values at the regular close of
business of the 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 Sub-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.
20
<PAGE>
Notes to Financial Statements
Events affecting the values of certain portfolio investments that occur between
the close of trading on the principal market for such investments and the
regular close of the Exchange will not be reflected in the Fund's calculation of
net asset value unless the Sub-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 and
price, 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.
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 direct allocations of expenses can be made. The investment
income and expenses (other than expenses incurred under the Distribution Plan)
and realized and
21
<PAGE>
MainStay California Tax Free Fund
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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.50% of the average
daily net assets of the Fund. The Manager has voluntarily agreed to reimburse
the expenses of the Fund to the extent that operating expenses would exceed on
an annualized basis 1.24% and 1.49% of the average daily net assets of the Class
A and Class B shares, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.25% of
the average daily net assets of the Fund. To the extent the Manager has agreed
to reimburse expenses of the Fund, the Sub-Adviser has voluntarily agreed to do
so proportionately.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.25% of
the average daily net assets of the Fund and had voluntarily agreed to reimburse
the expenses for the Fund to the extent that operating expenses would exceed
1.24% and 1.49% of the average daily net assets of the Class A and Class B
shares, respectively. As described above, MainStay Management is currently paid
a fee at a rate equal to the aggregate of the advisory and administrative fee
rates in effect prior to October 27, 1997, and the expense reimbursements also
remain the same as prior to that date. For the period January 1, 1997, through
22
<PAGE>
Notes to Financial Statements continued
October 26, 1997, MacKay-Shields and NYLIFE Distributors each earned fees of
$47,267 and each reimbursed the Fund $2,589. For the period October 27, 1997,
through December 31, 1997, MainStay Management earned $22,562.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.25%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $6,958 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemptions of Class B shares of
$3,586 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$23,278 and $603, respectively.
23
<PAGE>
MainStay California Tax Free Fund
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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, 1997, NYLIFE Distributors and NYLIFE Securities, an
indirect wholly owned subsidiary of New York Life, beneficially held shares of
Class A with a net asset value of $2,692,244 and $99,300, respectively, which
represents 14.8% and 0.5%, respectively, of the Class A net assets at year end.
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $761 for the year ended December
31, 1997.
Note 4--Federal Income Tax:
The Fund utilized $161,199, 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 $54,773 of qualifying
capital losses that arose during the year as if they arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $27,131 and $24,996, respectively.
Note 6--Line of Credit:
The Fund and certain affiliated funds maintain a line of credit with the
Custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold......................................................... 262 229 114 334
Shares issued in reinvestment of dividends.......................... 66 24 57 12
---- --- ---- ---
328 253 171 346
Shares redeemed..................................................... (345) (39) (313) (22)
---- --- ---- ---
Net increase (decrease)............................................. (17) 214 (142) 324
==== === ==== ===
</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 California Tax Free Fund
(one of the fifteen funds constituting The MainStay Funds, hereafter referred to
as the "Fund") at December 31, 1997, 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, 1997 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, 1998
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
graph showing Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund risk/return of companies in expanding markets and are willing to accept a higher
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 showing the makeup and returns of the participate in the growth potential
risk/return S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph showing international stock markets with of international equities or want to
risk/return an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/return a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/return convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/return opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/return attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 showing consistent with safety of principal current income and safety of principal
risk/return primarily from U.S. government
of Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/return fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/return risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph showing preservation of capital, and competitive yields on cash you're plan-
risk/return liquidity, with free checkwriting** ning to spend or invest in the near future
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/return a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a California resident and want to
CALIFORNIA TAX FREE FUND graph showing from both federal and California keep more of what you earn by invest-
risk/return income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph showing from federal, New York State, and and want to keep more of what you earn
risk/return New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks high current income You're in a high federal income tax
Tax Free Bond Fund risk/return exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============--------------------------
California Tax Free Fund
-------------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved. MSAN04-02/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Capital Appreciation Fund
Highlights 5
$10,000 Invested in the MainStay
Capital Appreciation Fund versus S&P 500
and Inflation--Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Industry--Top 5 9
Portfolio Composition 11
Returns & Lipper Rankings 13
Top 10 Equity Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 17
Notes to Financial Statements 21
Report of Independent Accountants 26
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising
first quarter rise, the stock market took a disappointing turn in April. Before
long, however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* See page 6 for additional information on the S&P 500.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Capital Appreciation Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay Capital Appreciation Fund, and MacKay Shields Financial Corporation;
amend the Plan of Distribution for Class B shares; eliminate or revise certain
fundamental investment restrictions including eliminating certain state-imposed
fundamental investment restrictions and eliminating or revising fundamental
restrictions pertaining to issuer concentration, borrowing money, industry
concentration, and issuing senior securities; and ratify the selection of Price
Waterhouse LLP as independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
Capital Appreciation Fund is presented below.
PROPOSAL 1--Election of Trustees
<TABLE>
<CAPTION>
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 25,823,050 1,535,981 Passed
Nancy Maginnes Kissinger.................................................. 25,818,024 1,541,007 Passed
Donald E. Nickelson....................................................... 25,823,030 1,536,001 Passed
Richard S. Trutanic....................................................... 25,823,268 1,535,763 Passed
Harry G. Hohn............................................................. 25,824,457 1,534,574 Passed
Terry L. Lierman.......................................................... 25,824,107 1,534,924 Passed
Donald K. Ross............................................................ 25,823,248 1,535,783 Passed
Walter W. Ubl............................................................. 25,824,208 1,534,823 Passed
Alice T. Kane............................................................. 25,824,314 1,534,717 Passed
John B. McGuckian......................................................... 25,823,268 1,535,763 Passed
Stephen C. Roussin........................................................ 25,823,268 1,535,763 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 24,931,117.34 Against - 576,763.13 Abstain - 1,851,150.40 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 24,897,076.33 Against - 544,352.12 Abstain - 1,917,600.42 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 19,554,831.29 Against - 919,206.01 Abstain - 1,919,116.03 Broker Non-Vote - 2,248,397.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 22,096,286.20 Against - 730,609.17 Abstain - 2,048,578.49 Broker Non-Vote - 2,483,557.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 22,077,699.20 749,196.18 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 22,069,666.20 757,229.18 Passed
A3--Real Estate Limited Partnership Interests.............................. 22,066,516.20 760,379.18 Passed
C1--Issuer Concentration................................................... 22,082,884.20 744,011.18 Passed
C2--Borrowing Money........................................................ 22,070,994.20 755,901.18 Passed
C3--Industry Concentration................................................. 22,083,791.20 743,104.18 Passed
C4--Issuing Senior Securities.............................................. 22,065,456.20 761,439.18 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 25,368,850.43 Against - 274,154.06 Abstain - 1,716,024.37 Result - Passed
</TABLE>
4
<PAGE>
MainStay Capital Appreciation Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] Following the Federal Reserve Board's rate hike in March, the equity
markets, in general, benefited from low inflation and declining domestic
interest rates.
[ ] The Asian financial crisis precipitated a flight to quality which boosted
some of the largest capitalization issues and stocks with consistent
earnings.
[ ] Over the course of the year, stock market volatility increased
substantially, creating both opportunities and pitfalls.
[ ] Despite gains earlier in the year, energy and energy services stocks were
hurt in the fourth quarter by declining oil prices.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] For the year ended 12/31/97, the MainStay Capital Appreciation Fund
returned 24.10% and 23.45% for Class A and Class B shares, respectively,
excluding all sales charges.
[ ] Both share classes outperformed the average Lipper* capital appreciation
fund for the year, which returned 20.36%.
[ ] The Fund benefited from an overweighted position in the financial services
industry, which performed well through most of the year and provided
substantial returns.
[ ] Several of the Fund's technology holdings suffered from setbacks in Asian
economies, while purely domestic retail companies appeared to benefit.
[ ] The portfolio benefited from the flight to quality with several defensive
holdings that performed well for investors.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Capital Appreciation Fund versus
S&P 500 and Inflation
CLASS A SHARES SEC Returns: 1-Year 17.27%, 5-Year 16.33%, 10-Year 18.28%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Capital
Year Appreciation S&P
End Fund 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $ 9,450 $10,000 $10,000
12/88 $ 9,691 $11,656 $10,441
12/89 $12,216 $15,342 $10,925
12/90 $12,719 $14,866 $11,608
12/91 $21,414 $19,385 $11,954
12/92 $23,769 $20,861 $12,308
12/93 $27,100 $22,955 $12,645
12/94 $26,687 $23,258 $12,974
12/95 $36,237 $31,989 $13,311
12/96 $43,181 $39,327 $13,752
12/97 $53,587 $52,447 $13,984
</TABLE>
[GRAPHIC] MainStay Capital Appreciation Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 18.45%, 5-Year 17.08%, 10-Year 18.77%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Capital
Year Appreciation S&P
End Fund 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,000 $10,000 $10,000
12/88 $10,255 $11,656 $10,441
12/89 $12,927 $15,342 $10,925
12/90 $13,459 $14,866 $11,608
12/91 $22,660 $19,385 $11,954
12/92 $25,153 $20,861 $12,308
12/93 $28,677 $22,955 $12,645
12/94 $28,240 $23,258 $12,974
12/95 $38,154 $31,989 $13,311
12/96 $45,235 $39,327 $13,752
12/97 $55,843 $52,447 $13,984
</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 12/31/87
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 12/31/87 through
12/31/94. The Class B graph assumes an initial investment of $10,000 made
on 12/31/87. 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Capital Appreciation Fund Team
CAPITAL APPRECIATION FUND TEAM
Bob Centrella, Edmund Spelman, Rudolph Carryl,
and Eileen Cook
In late March, signs of rapid growth led the Federal Reserve Board to move to
raise interest rates by 25 basis points. Throughout the rest of the year,
however, the growth rate was more moderate and inflation remained at low levels,
which was generally positive for the stock market and particularly good for the
financial industry.
Volatility increased as the year progressed, with the Dow Jones Industrial
Average* dropping 554.26 points or 7.18% on October 27, 1997, then recording its
largest single-day gain in history the next day. In the third and fourth
quarters, weakening currencies and other financial problems in Asian markets
took a severe toll on many technology stocks. This however, stimulated increased
interest in purely domestic issues and high-quality defensive names with
consistent earnings, including health care and pharmaceutical stocks.
Late in the year, declining oil prices hurt energy-related stocks, despite their
earlier gains. Overall, however, the stock market had another outstanding year,
with the S&P 500 Index+ up more than 33%.
Given this context, how did the MainStay Capital Appreciation Fund do in 1997?
For the year ended 12/31/97, the MainStay Capital Appreciation Fund returned
24.10% and 23.45% for Class A and Class B shares, respectively, excluding all
sales charges. That placed both share classes ahead of the average Lipper++
capital appreciation fund, which returned 20.36% for the year.
Which areas contributed most significantly to the Fund's performance?
One of our decisions during the year was to keep the Fund overweighted in the
financial sector. You may recall that this sector had a sudden setback when
interest rates increased at the end of the first quarter. We, however, felt the
individual stocks the Fund held were strong, and many were stellar performers
for the year, particularly as long-term interest rates declined in the third and
fourth quarters.
Can you provide some examples of financial stocks that performed well?
Sure. Travelers was up 79% for the year and had a significant impact on the
Fund.
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
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.
- ----------
* A price-weighted average of 30 actively traded blue chip stocks, primarily
industrials, but also including financial, leisure, and other
service-oriented firms.
+ See footnote and table on page 6 for more information on the S&P 500.
++ See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year Return
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
12/96 19.16
12/97 24.10
</TABLE>
Returns reflect the historical performance of the Class B shares for the periods
12/86 through 12/94. See footnote * on page 13 for more information on
performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS B SHARES
<TABLE>
<CAPTION>
Total
Year Return
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 35.11
12/96 18.56
12/97 23.45
</TABLE>
See footnote * on page 13 for more information on performance.
SunAmerica was up 45% for the year, MGIC was up 76%, and AIG rose 51%.
Although each stock had a different weighting in the Fund's portfolio, all were
strong contributors to the Fund's overall performance. In addition, we purchased
Norwest in July, which was up 27% by the end of the year--an impressive gain in
a short period.
Why did financial stocks do so well?
Lower interest rates are generally good for financial issues. But, when
investors started to look beyond rates and focus on company fundamentals, they
found very attractive price-to-earnings ratios and growth rates. Generally, we
look for dependable companies in terms of earnings--so when the
8
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Financial Services 14.7%
Retail 11.8%
Drugs 8.3%
Computer Software 7.0%
Technology 6.5%
All Other 51.7%
</TABLE>
Actual percentages will vary over time.
Asian difficulties caused a flight to quality, the Fund's financial stocks
provided strong returns. One negative performer was Green Tree Financial, which
was down 31% for the year, after their accounting practices were questioned.
How was the Fund affected by the fallout in Asia?
In a variety of ways. The Fund was overweighted in technology stocks, many of
which have close ties with Asian markets, which were hit relatively hard. Since
many other investors were also heavily weighted in technology, they needed to
find alternatives, and many may have turned to high-quality, dependable stocks,
such as pharmaceuticals, strong health care companies, solid domestic financial
issues, and other large-capitalization companies. That turned out to be a
positive for the Fund.
How hard was the Fund hit in the technology area?
As Asian difficulties developed, investors became considerably more concerned
about technology stocks. This negative investor psychology led us to sell a
number of stocks that had formerly looked attractive. Since the market was
relatively forgiving of bigger names, we continued to hold Oracle, but it lost
19.8%. Intel, which had previously been a strong performer, returned just 7% in
a market that was up 33%, so we reduced the Fund's position. When we saw
declining interest in technology companies selling commodity-type products such
as microchips and hard disks, the Fund also sold Seagate, a disk-drive
manufacturer, and Lam Research, a company that makes microchip-testing
equipment. Given the further declines these stocks experienced, the decision to
sell was a positive step in containing risk. The Fund held 3Com, a networking
company that had problems integrating its acquisitions. The stock was down 52%
for the year and had the worst overall impact on the Fund of any of its
holdings. Of course, not all technology stocks were negative stories. Computer
Associates, which was up 60% for the year, was one of the Fund's largest
holdings, and was among the leading contributors to the Fund's performance.
Also, two other
[GRAPHIC]
Flight to quality
- -----------------
When investors in general move to improve the credit quality and liquidity of
the securities they own either because of credit concerns or international
crisis.
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.
9
<PAGE>
[GRAPHIC]
Defensive issues
- ----------------
Stocks chosen for their reliability of earnings, growth, and positive
performance.
software companies, Microsoft and Compuware, contributed positively to the
Fund's performance.
Which stocks did you feel benefited from the difficulties in Asia?
Actually, there were several. Although we pick stocks one by one, the
pharmaceuticals as a group did very well. One reason was that as difficulties
arose in Asia, many investors were attracted to high-quality pharmaceutical and
health care companies that they believed had dependable earnings prospects. The
Fund owned Schering-Plough, which was up 95% for the year and had a very
positive impact on the Fund's investment portfolio. The Fund purchased Eli Lilly
during the year, and the stock benefited from dependable growth and strong new
product flow, gaining over 75%. Since Eli Lilly was a sizeable holding, it had a
very positive impact on performance. The Fund also had success with other health
care related stocks, such as Guidant and Medtronic, both of which produce
devices used in cardiovascular care. These two stocks recorded substantial gains
and ranked among the top contributors to the Fund's performance.
Were there other areas that may have performed well as a result of the Asian
difficulties?
Yes. Purely domestic retailers did well. The Fund held Home Depot, which was up
76% for the year, and Kohl's, a specialty retailer largely in the Midwest that
gained 69%. In addition, we added CVS, another entirely domestic retailer, to
the Fund's portfolio in the third quarter. The stock performed well throughout
the end of the year.
How was the Fund affected by the volatility of the stock market in 1997?
The Fund held a number of defensive issues that may have benefited from the
market's volatility. Merck was a major new purchase, with relatively steady
earnings-per-share growth. The Fund bought the stock in the second quarter and
it did very well. Other defensive holdings, like Johnson & Johnson, Eli Lilly,
and Schering-Plough also helped the Fund weather the market volatility, as
investors sought out stocks that had a more consistent growth profile.
With oil prices declining late in the year, how was the Fund affected?
The impact was generally negative. Diamond Offshore, Halliburton, and ENSCO
International are offshore drilling and oil services companies the Fund bought
during the year. All three declined in price after purchase and hurt the
portfolio's overall performance. The Fund continued to hold the stocks, however,
because they appear to have strong earning potential for 1998. Of course, we'll
reevaluate that decision as conditions warrant. Basically, though, we believe
that buying energy stocks late in the cycle was one of our weaker decisions
during 1997.
Besides technology stocks, did you have other major sales during the year?
Yes. The Fund sold Amgen, a leading biotechnology stock, because its
fundamentals weakened. Earnings per share slowed and the sale was basically a
neutral move for the Fund. Black & Decker appeared to be an attractive buy, but
just a few weeks later, its earnings estimates were reduced and the Fund sold
the stock, which had a
10
<PAGE>
negative impact on performance. NIKE, on the other hand, was a stock we sold
based on reduced earnings and weaker fundamentals. But given the performance
after the sale, we believe it was a good move for the Fund. The Fund also sold
Triton, a stock with oil reserves in Columbia and natural gas holdings in
Thailand. Although the Fund sold the stock at a loss, the sale protected
investors from even bigger losses as the stock continued to decline.
Were there other significant sales?
Yes. We saw medical costs rising rapidly for Humana. Although a new president
stepped in and tried to improve the company's profitabilty, we did not see an
improvement and later sold the stock. That turned out to be a wise decision
given the stock's subsequent performance. Although the Fund didn't sell Aetna
until year end, it was also an underperformer, losing 65% for the year, due to
problems with rapidily rising costs. We based our decision to sell Columbia/HCA
on its involvement in a federal investigation, and the Fund sold the stock at
around the purchase price, with a neutral impact for the Fund.
It sounds like it was a year of ups and downs.
Yes, it was. That's why we use a bottom-up approach, evaluating securities on
their individual merits and seeking stocks with strong growth potential. But as
you can see, shifting economic, market, and industry factors can have a dramatic
impact, even on stocks with strong fundamentals. This year Tyco International, a
diversified industrial company that exceeded earnings expectations, was one of
the Fund's strongest performers as investors looked for quality and strength. On
the other hand, Danka Business Systems, which distributes copiers and fax
machines, suffered a setback integrating a recent acquisition and earnings
visibility seemed to have disappeared. The stock which we sold in December, was
down 62% for the year, and had a negative impact on performance.
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Common Stocks 92.5%
Cash, Equivalents & Other Assets, less Liabilities 7.5%
</TABLE>
Actual percentages will vary over time.
[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.
11
<PAGE>
[GRAPHIC]
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Past performance is no guarantee of future results.
How was the Fund weighted at year end?
As we mentioned earlier, the Fund was overweighted in financials, which was
positive for performance. The Fund remained slightly overweighted in technology,
which hurt the Fund in 1997. It was underweighted in energy, which helped
performance and underweighted in utilities, which was essentially neutral for
performance. Being underweighted in consumer staples and communications also
hurt the Fund, particularly with the strength of megacapitalization stocks like
AT&T. Being underweighted in capital goods helped the Fund and being somewhat
underweighted in basic materials was good for the Fund on a relative basis.
What do you foresee for 1998?
We believe the catalysts that moved the market in 1997 may still be in place. We
also believe moderate growth, low inflation, and low interest rates may
continue, and may support the long-term case for a bull market. Nevertheless,
the market is much more cautious, and for good reason. We feel that the Asian
situation may slow economic growth in the United States and demand for exports
may decline. While that may be negative for corporate earnings, it may have a
beneficial impact on inflation. If foreign influence on domestic stocks is
stronger than we anticipate, however, the bull market may well be challenged.
Nevertheless, we will continue to seek to identify stocks that offer long-term
growth potential, with dividend income, if any, as an incidental consideration.
Edmund Spelman
Rudolph Carryl
Portfolio Managers
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Fund average annual total returns*
==========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 24.10% 17.65% 18.95% 15.44%
Class B 23.45% 17.29% 18.77% 15.29%
==========================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------
Fund SEC returns*
==========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 17.27% 16.33% 18.28% 14.88%
Class B 18.45% 17.08% 18.77% 15.29%
==========================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
==========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 110 out of n/a n/a n/a
231 funds
Class B 118 out of 30 out of 6 out of 7 out of
231 funds 79 funds 55 funds 43 funds
Average Lipper
capital appreciation
fund 20.36% 15.17% 14.47% 11.44%
==========================================================================================
<CAPTION>
- ------------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
==========================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $36.60 $0.0000 $1.2755
Class B $36.02 $0.0000 $1.2755
==========================================================================================
</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 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
12/31/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
[GRAPHIC]
13
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 12/31/97
- ----------------------------------------------------------------------------------------
HOLDING AMOUNT
========================================================================================
<S> <C>
Cendant Corp. $70,892,553
Tyco International Ltd. 70,847,262
Computer Associates International, Inc. 56,512,113
SunAmerica Inc. 56,430,000
Lilly (Eli) & Co. 55,031,600
Travelers Group Inc. 53,875,000
Schering-Plough Corp. 52,240,912
Medtronic, Inc. 44,884,125
Safeway Inc. 44,395,175
MGIC Investment Corp. 42,506,800
========================================================================================
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
========================================================================================
<S> <C>
Lilly (Eli) & Co. $38,154,129
Merck & Co., Inc. 33,206,604
Washington Mutual Inc. 29,070,322
Norwest Corp. 27,866,343
Gillette Co. 26,984,553
CVS Corp. 26,110,234
Monsanto Co. 25,033,194
Tyco International Ltd. 24,095,844
ENSCO International Inc. 24,020,363
Adaptec, Inc. 23,750,941
========================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
========================================================================================
<S> <C>
First USA, Inc. $32,819,530
NIKE, Inc. Class B 32,644,975
Amgen Inc. 25,626,734
Tidewater Inc. 20,674,824
Wells Fargo & Co. 20,317,396
Cendant Corp. 19,807,535
Lowe's Cos., Inc. 19,520,856
Schwab (Charles) Corp. 19,084,209
Seagate Technology 18,493,662
Lear Seating Corp. 17,631,563
========================================================================================
</TABLE>
[GRAPHIC]
- -----------
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.
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Shares Value
======================================
<S> <C> <C>
COMMON STOCKS (92.5%)+
AUTO PARTS (0.2%)
Lear Seating Corp. (a)...................... 72,325 $ 3,435,438
--------------
BANKS (4.1%)
NationsBank Corp. .......................... 503,000 30,588,688
Norwest Corp. .............................. 893,600 34,515,300
Washington Mutual Inc....................... 322,600 20,585,912
--------------
85,689,900
--------------
BUILDINGS (0.8%)
Oakwood Homes Corp. ........................ 518,200 17,197,762
--------------
COMPUTER SOFTWARE (7.0%)
Computer Associates
International, Inc. ..................... 1,068,787 56,512,113
Compuware Corp. (a)......................... 964,800 30,873,600
Microsoft Corp. (a)......................... 268,500 34,703,625
Oracle Corp. (a)............................ 1,041,000 23,227,312
--------------
145,316,650
--------------
COMPUTERS & OFFICE EQUIPMENT (2.8%)
Hewlett-Packard Co.......................... 394,000 24,625,000
Sun Microsystems (a)........................ 842,000 33,574,750
--------------
58,199,750
--------------
CONSUMER DURABLES (1.5%)
Harley-Davidson, Inc........................ 1,145,200 31,349,850
--------------
CONSUMER SERVICES (4.5%)
Cendant Corp. (a)........................... 2,062,328 70,892,553
Service Corp. International................. 649,000 23,972,438
--------------
94,864,991
--------------
COSMETICS (1.5%)
Gillette Co. ............................... 301,600 30,291,950
--------------
DRUGS (8.3%)
Elan Corp. PLC ADR (a)(b)................... 567,400 29,043,788
Lilly (Eli) & Co............................ 790,400 55,031,600
Merck & Co., Inc............................ 343,900 36,539,375
Schering-Plough Corp........................ 840,900 52,240,912
--------------
172,855,675
--------------
ENERGY (0.4%)
Abacan Resource Corp. (a)................... 1,650,000 2,578,125
British Petroleum Co., PLC
ADR (b).................................. 67,034 5,341,772
--------------
7,919,897
--------------
FINANCIAL SERVICES (14.7%)
Associates First Capital Corp.
Class A.................................. 453,000 32,219,625
Equifax Inc................................. 716,200 25,380,338
Fannie Mae.................................. 529,000 30,186,062
Green Tree Financial Corp................... 941,700 24,660,769
Household International, Inc................ 325,000 41,457,812
MGIC Investment Corp........................ 639,200 42,506,800
SunAmerica Inc.............................. 1,320,000 56,430,000
Travelers Group Inc......................... 1,000,000 53,875,000
--------------
306,716,406
--------------
HEALTH CARE (5.3%)
Cardinal Health Inc......................... 310,000 23,288,750
HEALTHSOUTH Corp. (a)....................... 1,245,000 34,548,750
Tenet Healthcare Corp. (a).................. 898,750 29,771,094
United Healthcare Corp...................... 448,800 22,299,750
--------------
109,908,344
--------------
INDUSTRIAL (4.7%)
Illinois Tool Works Inc. ................... 451,400 27,140,425
Tyco International Ltd. .................... 1,572,200 70,847,262
--------------
97,987,687
--------------
INSURANCE (3.2%)
American International
Group, Inc............................... 372,075 40,463,156
Conseco, Inc. .............................. 554,600 25,199,638
--------------
65,662,794
--------------
LEISURE (0.8%)
Mirage Resorts Inc. (a)..................... 711,600 16,188,900
--------------
MATERIALS/PROCESSING (1.0%)
Monsanto Co................................. 521,200 21,890,400
--------------
MEDICAL EQUIPMENT (5.7%)
Guidant Corp................................ 627,300 39,049,425
Johnson & Johnson........................... 534,884 35,235,483
Medtronic, Inc.............................. 858,000 44,884,125
--------------
119,169,033
--------------
</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.
15
<PAGE>
MainStay Capital Appreciation Fund
<TABLE>
<CAPTION>
Shares Value
======================================
<S> <C> <C>
COMMON STOCKS (Continued)
OIL SERVICES (2.2%)
Diamond Offshore Drilling, Inc.............. 342,700 $ 16,492,437
ENSCO International Inc..................... 579,800 19,423,300
Halliburton Co.............................. 208,000 10,803,000
--------------
46,718,737
--------------
POLLUTION CONTROL (0.9%)
USA Waste Services Inc. (a)................. 471,900 18,522,075
--------------
RETAIL (11.8%)
Bed Bath & Beyond, Inc (a).................. 590,400 22,730,400
CVS Corp. .................................. 463,200 29,673,750
Dollar General Corp......................... 668,750 24,242,188
Home Depot, Inc. (The)...................... 669,350 39,407,981
Kohl's Corp. (a)............................ 539,100 36,726,188
Kroger Co. (a).............................. 679,000 25,080,562
Safeway Inc. (a)............................ 701,900 44,395,175
Staples, Inc. (a)........................... 858,500 23,823,375
--------------
246,079,619
--------------
TECHNOLOGY (6.5%)
Adaptec, Inc. (a)........................... 564,100 20,942,213
Cisco Systems, Inc. (a)..................... 700,500 39,052,875
Intel Corp.................................. 501,300 35,216,325
Linear Technology Corp...................... 300,000 17,287,500
3Com Corp. (a).............................. 649,900 22,705,881
--------------
135,204,794
--------------
TELECOMMUNICATION EQUIPMENT (2.0%)
Lucent Technologies Inc..................... 523,100 41,782,613
--------------
TELECOMMUNICATION SERVICES (1.6%)
WorldCom, Inc. (a).......................... 1,141,280 34,523,720
--------------
TOYS (1.0%)
Mattel, Inc................................. 575,000 21,418,750
--------------
Total Common Stocks
(Cost $1,180,149,557).................... 1,928,895,735
--------------
<CAPTION>
Principal
Amount Value
======================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.8%)
COMMERCIAL PAPER (7.8%)
American Express Credit Corp.
6.15%, due 1/2/98........................ $30,000,000 $ 30,000,000
Ford Motor Credit Co.
6.15%, due 1/5/98........................ 50,000,000 50,000,000
General Electric Capital Corp.
5.90%, due 1/8/98........................ 21,073,000 21,073,000
Prudential Funding Corp.
5.77%, due 1/7/98........................ 48,860,000 48,860,000
6.08%, due 1/6/98........................ 14,066,000 14,066,000
--------------
Total Short-Term Investments
(Cost $163,999,000)...................... 163,999,000
--------------
Total Investments
(Cost $1,344,148,557) (c) 100.3% 2,092,894,735(d)
Liabilities in Excess of Cash
and Other Assets (0.3) (6,939,142)
---------- --------------
Net Assets.................................. 100.0% $2,085,955,593
========== ==============
</TABLE>
- -----------
(a) Non-income producing security.
(b) ADR--American Depository Receipt.
(c) The cost for Federal income tax purposes is $1,344,157,181.
(d) At December 31, 1997, net unrealized appreciation was $748,737,554, 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 $764,128,431 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $15,390,877.
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 Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,344,148,557) .............................................. $2,092,894,735
Receivables:
Investment securities sold ..................................................................................... 18,230,109
Fund shares sold ............................................................................................... 5,644,923
Dividends and interest ......................................................................................... 782,037
--------------
Total assets .................................................................................................. 2,117,551,804
--------------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................ 23,732,533
Fund shares redeemed ........................................................................................... 4,512,340
NYLIFE Distributors ............................................................................................ 1,595,165
MainStay Management ............................................................................................ 958,766
Transfer agent ................................................................................................. 429,087
Custodian ...................................................................................................... 18,531
Trustees ....................................................................................................... 12,965
Accrued expenses ................................................................................................. 336,824
--------------
Total liabilities ............................................................................................. 31,596,211
--------------
Net assets ....................................................................................................... $2,085,955,593
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ........................................................................................................ $ 59,099
Class B ........................................................................................................ 518,991
Additional paid-in capital ....................................................................................... 1,318,267,469
Accumulated net realized gain on investments ..................................................................... 18,363,856
Net unrealized appreciation on investments ....................................................................... 748,746,178
--------------
Net assets ....................................................................................................... $2,085,955,593
==============
CLASS A
Net assets applicable to outstanding shares ...................................................................... $ 216,292,033
==============
Shares of beneficial interest outstanding ........................................................................ 5,909,894
==============
Net asset value and offering price per share outstanding ......................................................... $ 36.60
Maximum sales charge (5.50% of offering price) ................................................................... 2.13
--------------
Maximum offering price per share outstanding ..................................................................... $ 38.73
==============
CLASS B
Net assets applicable to outstanding shares ...................................................................... $1,869,663,560
==============
Shares of beneficial interest outstanding ........................................................................ 51,899,084
==============
Net asset value and offering price per share outstanding ......................................................... $ 36.02
==============
</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 Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................. $ 8,763,821
Interest .................................................. 2,165,564
-------------
Total income ............................................. 10,929,385
-------------
Expenses:
Distribution--Class B ..................................... 8,423,411
Service ................................................... 4,487,573
Administration ............................................ 3,934,494
Advisory .................................................. 3,934,494
Transfer agent ............................................ 3,485,448
Management ................................................ 1,996,154
Shareholder communication ................................. 866,294
Recordkeeping ............................................. 206,334
Registration .............................................. 173,301
Custodian ................................................. 170,510
Professional .............................................. 137,223
Trustees .................................................. 48,452
Miscellaneous ............................................. 60,315
-------------
Total expenses ........................................... 27,924,003
-------------
Net investment loss ......................................... (16,994,618)
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 96,408,190
Net change in unrealized appreciation on investments ........ 290,211,529
-------------
Net realized and unrealized gain on investments ............. 386,619,719
-------------
Net increase in net assets resulting from operations ........ $ 369,625,101
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $31,798.
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 Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .............................................................. $ (16,994,618) $ (9,072,781)
Net realized gain on investments ................................................. 96,408,190 14,861,333
Net change in unrealized appreciation on investments ............................. 290,211,529 192,853,116
--------------- ---------------
Net increase in net assets resulting from operations ............................. 369,625,101 198,641,668
--------------- ---------------
Distributions to shareholders:
From net realized gain on investments:
Class A ......................................................................... (7,157,066) (1,257,189)
Class B ......................................................................... (63,640,592) (13,410,507)
--------------- ---------------
Total distributions to shareholders ........................................... (70,797,658) (14,667,696)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ......................................................................... 226,767,009 116,509,514
Class B ......................................................................... 525,712,343 543,777,410
Net asset value of shares issued to shareholders in reinvestment of distributions:
Class A ......................................................................... 6,842,740 1,189,334
Class B ......................................................................... 62,561,489 13,188,752
--------------- ---------------
821,883,581 674,665,010
Cost of shares redeemed:
Class A ......................................................................... (173,693,435) (48,276,296)
Class B ......................................................................... (330,598,281) (241,481,230)
--------------- ---------------
Increase in net assets derived from capital share transactions ................ 317,591,865 384,907,484
--------------- ---------------
Net increase in net assets .................................................... 616,419,308 568,881,456
NET ASSETS:
Beginning of year .................................................................. 1,469,536,285 900,654,829
--------------- ---------------
End of year ........................................................................ $ 2,085,955,593 $ 1,469,536,285
=============== ===============
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
19
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
--------------------------------
Class A Class B Class A Class B Class A Class B September 1
-------- ---------- -------- ---------- -------- -------- through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
--------------------- --------------------- ------------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $30.56 $30.25 $25.90 $25.77 $19.11 $19.11 $19.93 $19.47 $14.14
-------- ---------- -------- ---------- ------- -------- -------- -------- --------
Net investment
income (loss) (a) ...... (0.16) (0.34) (0.08) (0.22) 0.03 (0.08) (0.03) (0.12) (0.12)
Net realized and
unrealized gain (loss)
on investments .......... 7.48 7.39 5.05 5.01 6.81 6.79 (0.65) 1.13 5.64
-------- ---------- -------- ---------- ------- -------- -------- -------- --------
Total from investment
operations .............. 7.32 7.05 4.97 4.79 6.84 6.71 (0.68) 1.01 5.52
-------- ---------- -------- ---------- ------- -------- -------- -------- --------
Less distributions:
From net realized gain
on investments ......... (1.28) (1.28) (0.31) (0.31) (0.05) (0.05) (0.14) (0.55) (0.19)
-------- ---------- -------- ---------- ------- -------- -------- -------- --------
Net asset value at
end of period ........... $36.60 $36.02 $30.56 $30.25 $25.90 $25.77 $19.11 $19.93 $19.47
======== ========== ======== ========== ======= ======== ======== ======== ========
Total investment
return (b) .............. 24.10% 23.45% 19.16% 18.56% 35.79% 35.11% (3.40%) 5.36% 39.25%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ...... (0.48%) (1.00%) (0.3%) (0.8%) 0.2% (0.4%) (0.5%)+ (0.6%) (0.7%)
Expenses ............. 1.09% 1.61% 1.1% 1.6% 1.1% 1.7% 1.8%+ 1.8% 1.8%
Portfolio turnover rate ... 35% 35% 16% 16% 29% 29% 11% 31% 73%
Average commission
rate paid ............... $ 0.0592 $ 0.0592 $ 0.0599 $ 0.0599 (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's) ....... $216,292 $1,869,664 $126,958 $1,342,578 $44,434 $856,221 $499,133 $472,497 $279,300
</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.
20
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the 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
21
<PAGE>
MainStay Capital Appreciation Fund
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.
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 $16,994,618 have been reclassified from
accumulated net investment loss to additional paid-in capital, due to net
investment loss incurred by the Fund in 1997.
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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
22
<PAGE>
Notes to Financial Statements continued
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.72% on assets up to $200 million, 0.65% on assets from
$200 million to $500 million and 0.50% on assets in excess of $500 million.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.36% of
the average daily net assets of the Fund 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.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of the New York Life, acted as administrator. MacKay-Shields
and NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.36%
of the average daily net assets of the Fund up to $200 million, 0.325% on assets
from $200 million to $500 million and 0.25% on assets in excess of $500 million.
As described above, MainStay Management is currently paid a fee at a rate equal
to the aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997. For the period January 1, 1997, through October 26, 1997,
MacKay-Shields and NYLIFE Distributors each earned fees of $3,934,494. For the
period October 27, 1997, through December 31, 1997, MainStay Management earned
$1,996,154.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
23
<PAGE>
MainStay Capital Appreciation Fund
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $201,562 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$1,485,899 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$2,047,191 and $148,900, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $55,774 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $41,466 and $164,868 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $743,507 and $617,767,
respectively.
24
<PAGE>
Notes to Financial Statements continued
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------ -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold......................................................... 6,499 15,460 4,064 19,254
Shares issued in reinvestment of distributions...................... 194 1,803 39 431
------ ------ ------ ------
6,693 17,263 4,103 19,685
Shares redeemed..................................................... (4,938) (9,753) (1,664) (8,528)
------ ------ ------ ------
Net increase........................................................ 1,755 7,510 2,439 11,157
====== ====== ====== ======
</TABLE>
25
<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 fifteen funds constituting The MainStay Funds, hereafter referred to
as the "Fund") at December 31, 1997, 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, 1997 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, 1998
26
<PAGE>
This page intentionally left blank
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
graph showing Invests primarily in common stocks You want your investments to grow
CAPITAL APPRECIATION FUND risk/return of companies in expanding markets and are willing to accept a higher
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 showing the makeup and returns of the participate in the growth potential
risk/return S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph showing international stock markets with of international equities or want to
risk/return an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/return a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/return convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/return opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/return attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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>
[horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph showing consistent with safety of principal current income and safety of principal
risk/return primarily from U.S. government
of Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/return fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/return risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph showing preservation of capital, and competitive yields on cash you're plan-
risk/return liquidity, with free checkwriting** ning to spend or invest in the near future
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/return a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph showing from both federal and California keep more of what you earn by invest-
risk/return income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph showing from federal, New York State, and and want to keep more of what you earn
risk/return New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks high current income You're in a high federal income tax
Tax Free Bond Fund risk/return exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============--------------------------
Capital Appreciation Fund
-------------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN05-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Convertible Fund Highlights 5
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500 and
Inflation--Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Industry--Top 5 9
Portfolio Composition 10
Returns & Lipper Rankings 15
Top 10 Holdings 16
10 Largest Purchases 16
10 Largest Sales 16
Portfolio of Investments 17
Financial Statements 28
Notes to Financial Statements 32
Report of Independent Accountants 39
The MainStay Funds 40
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* See page 6 for additional information on the S&P 500.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Convertible Fund, and MainStay Management, Inc.; approve a Subadvisory
Agreement between MainStay Management, Inc., on behalf of the MainStay
Convertible Fund, and MacKay Shields Financial Corporation; amend the Plan of
Distribution for Class B shares; eliminate or revise certain fundamental
investment restrictions including eliminating certain state-imposed fundamental
investment restrictions and eliminating or revising fundamental restrictions
pertaining to issuer concentration, borrowing money, industry concentration, and
issuing senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
Convertible Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 34,012,134 1,298,543 Passed
Nancy Maginnes Kissinger.................................................. 33,995,613 1,315,064 Passed
Donald E. Nickelson....................................................... 34,016,574 1,294,103 Passed
Richard S. Trutanic....................................................... 34,021,506 1,289,171 Passed
Harry G. Hohn............................................................. 34,016,019 1,294,658 Passed
Terry L. Lierman.......................................................... 34,013,994 1,296,683 Passed
Donald K. Ross............................................................ 34,015,130 1,295,547 Passed
Walter W. Ubl............................................................. 34,020,603 1,290,074 Passed
Alice T. Kane............................................................. 34,016,245 1,294,432 Passed
John B. McGuckian......................................................... 34,021,075 1,289,602 Passed
Stephen C. Roussin........................................................ 34,017,538 1,293,139 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 33,044,804.88 Against - 721,187.24 Abstain - 1,544,681.51 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 32,949,303.85 Against - 721,918.24 Abstain - 1,639,452.54 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 22,698,297.62 Against - 901,427.02 Abstain - 1,621,085.04 Broker Non-Vote - 8,116,150.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 24,123,316.38 Against - 1,006,110.43 Abstain - 1,899,981.82 Broker Non-Vote - 8,281,269.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 24,106,182.37 1,023,244.44 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 24,082,831.36 1,046,595.45 Passed
A3--Real Estate Limited Partnership Interests.............................. 24,066,641.36 1,062,785.45 Passed
C1--Issuer Concentration................................................... 24,105,543.37 1,023,883.44 Passed
C2--Borrowing Money........................................................ 24,086,116.36 1,043,310.45 Passed
C3--Industry Concentration................................................. 24,097,717.37 1,031,709.44 Passed
C4--Issuing Senior Securities.............................................. 24,071,510.36 1,057,916.45 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 33,745,322.11 Against - 281,035.09 Abstain - 1,284,317.42 Result - Passed
</TABLE>
4
<PAGE>
MainStay Convertible Fund
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] Overall, the U.S. economy continued to benefit from low inflation, moderate
growth, and declining interest rates.
[ ] Difficulties in Southeast Asian markets increased volatility and risk in
the stock and convertible markets in the third and fourth quarters of the
year.
[ ] Oil and gold prices declined substantially and some other commodities were
negatively impacted by the troubles in Asian markets.
[ ] The stock market focused primarily on the largest-capitalization issues,
making security selection among smaller issues a key performance
determinant.
[ ] Throughout the year, demand for convertibles far outstripped supply, and
bullish market sentiment led many investors to focus on profit
opportunities resulting from volatility rather than basic fundamentals and
credit analysis.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year returns of 11.36% and 10.67% for Class A and Class B shares,
respectively, excluding all sales charges.
[ ] Both share classes underperformed the average Lipper* convertible
securities fund, which returned 17.61% for the year ended 12/31/97.
[ ] The Fund's risk-averse approach negatively impacted performance in a market
where many investors were willing to accept higher levels of risk for
higher returns.
[ ] Individual security selection and fundamental analysis helped the Fund
identify many positive situations and profit opportunities.
[ ] Gold and energy holdings hurt performance as the prices of commodities
declined.
[ ] In June 1997, the Fund was closed to new investors.
================================================================================
- ----------
* See footnote and table on page 15 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-Year 5.24%, 5-Year 12.38%, 10-Year 12.65%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay
Year S&P Convertible
End 500* Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 10,000 9,450 10,000
12/88 11,656 10,374 10,441
12/89 15,342 11,074 10,925
12/90 14,866 10,332 11,608
12/91 19,385 15,340 11,954
12/92 20,861 17,351 12,308
12/93 22,955 21,596 12,645
12/94 23,258 21,306 12,974
12/95 31,989 26,360 13,311
12/96 39,327 29,557 13,752
12/97 52,447 32,916 13,984
</TABLE>
[GRAPHIC] MainStay Convertible Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 5.67%, 5-Year 13.00%, 10-Year 13.08%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay
Year S&P Convertible
End 500* Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 10,000 10,000 10,000
12/88 11,656 10,978 10,441
12/89 15,342 11,718 10,925
12/90 14,866 10,933 11,608
12/91 19,385 16,233 11,954
12/92 20,861 18,360 12,308
12/93 22,955 22,853 12,645
12/94 23,258 22,540 12,974
12/95 31,989 27,737 13,311
12/96 39,327 30,897 13,752
12/97 52,447 34,195 13,984
</TABLE>
[GRAPHIC] MainStay Convertible Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 12/31/87
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 12/31/87 through 12/31/94.
The Class B graph assumes an initial investment of $10,000 made on 12/31/87.
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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Convertible Fund Team
CONVERTIBLE FUND TEAM
Thomas Wynn, Neil Feinberg, and Denis Laplaige
Despite high volatility and extreme investor uncertainty, 1997 was a very
positive year for the convertible market as a whole. The stock market's gains
were dominated by the largest-capitalization issues, sometimes known as the
"nifty fifty." Smaller-capitalization stocks had widely divergent performance,
emphasizing the need for careful and sound security selection.
Demand for convertibles far outstripped the supply in the first half of 1997,
and in the second half of the year, many market participants used volatility to
their advantage by buying convertibles and short selling stocks in an effort to
profit from wide market swings. This created an artificial demand for
convertibles, as Asian financial difficulties shifted the fundamental outlook
for many companies. The market's preoccupation with profit reduced the focus on
basic fundamentals and credit concerns, but resulted in high total returns for
the convertible market as a whole.
The strength of the U.S. dollar and financial problems in Asia had a telling
effect on many commodity-based companies. Gold prices declined substantially,
taking a heavy toll on companies engaged in mining precious metals. Declining
oil prices had a negative impact on drilling, oil services, and energy
companies.
Early in the year, concerns about rising inflation led the Federal Reserve Board
to take action to contain it. As economic growth slowed, inflation and interest
rates both declined for the remainder of the year, causing a rally in bonds and
helping stimulate positive performance among stocks and convertible securities.
Given this context, how did the MainStay Convertible Fund perform in 1997?
The MainStay Convertible Fund returned 11.36% and 10.67% for Class A and Class B
shares, respectively, excluding all sales charges for the year ended 12/31/97.
Both share classes underperformed the average Lipper* convertible securities
fund, which returned 17.61% for the year ended 12/31/97.
Why did the Fund underperform its peers?
The market was artificially inflated by strong demand and meager supply of
[GRAPHIC]
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
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.
Short sale
- ----------
Selling a security or commodity futures contract not owned by the seller. The
technique may be used to take advantage of anticipated price declines or to
protect profit in a long position.
- ----------
* See footnote and table on page 15 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[GRAPHIC]
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART 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
12/96 12.13
12/97 11.36
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/86 through 12/94. See footnote * on page 15 for more information on
performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART 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 23.02
12/96 11.39
12/97 10.67
</TABLE>
See footnote * on page 15 for more information on performance.
convertibles throughout the year, particularly during the first half of 1997. In
the second half of the year, much of the demand resulted from investors seeking
to profit from the overall volatility of the market rather than the fundamental
characteristics of the securities they owned.
As conservative, risk-averse managers, we follow a strict investment process
that requires fundamental analysis and focuses on both the risk and return sides
of the investment equation. We chose not to participate in many of the
convertibles that proved to be strong performers during the
8
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Computer & Office Equipment 10.8%
Retail 6.8%
Publishing 5.0%
Software 4.9%
Insurance 4.4%
All Other 68.1%
</TABLE>
Actual percentages will vary over time. This chart does not include short
positions in common stock.
year because they offered insufficient downside protection for investors. In a
year when the stock market rose over 33%, many convertibles tended to perform
like equities. But generally when securities reach that point, our investment
disciplines tell us to reduce or close out the Fund's position. In that way, we
seek to provide a measure of downside protection if the market should swing in
the opposite direction. Unfortunately, it also meant that the Fund missed some
opportunities on the upside.
With a strong U.S. dollar, we felt that multinational companies would feel the
impact sooner than they did. So the Fund stayed largely with domestic holdings
and missed some of the increases in multinational names. In addition, when Asian
problems developed in the third and fourth quarters of 1997, we felt that energy
would be relatively insulated from those problems. But, with warm weather, oil
prices declined to less than $18 a barrel, which negatively impacted the Fund's
holdings in Chevron and Apache convertibles and Texaco common stock. Together,
these factors had a negative impact on the Fund's performance.
What do you look for in convertible securities?
Our approach starts with the underlying stock and the fundamental forces that
could affect its price. In assessing the convertibles we take into account a
variety of investment considerations, including credit risk, projected interest
return, and the premium for the convertible security relative to the underlying
common stock. Naturally we're attracted to issues that we believe offer more
upside potential than downside risk.
Can you give us an example of how you applied that strategy to the management of
the Fund?
Certainly. We bought Samsung convertibles for the Fund at 500 basis points over
Treasuries with a very small conversion premium. The company's debt carried an
investment grade rating and the stock was
[GRAPHIC]
Conversion
premium
- ----------
The amount by which the price of a convertible exceeds the market price of the
underlying stock. If a stock is trading at $50 and the bond convertible at $45
is trading at $50, the premium is $5. When the premium is high, the bond trades
like an income security, when it is low, it trades like a stock.
9
<PAGE>
[GRAPHIC]
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Convertible Bonds 47.1%
Convertible Preferred Stocks 27.0%
Common Stocks 19.2%
Preferred Stocks 0.7%
Purchased Put Options 0.6%
Corporate Bonds 0.4%
Cash, Equivalents & Other Assets, less Liabilities 5.0%
</TABLE>
Actual percentages will vary over time. This chart does not include short
positions in common stock.
selling 50% off its high for the year, so we saw upside potential, with enough
income from the convertibles to make them desirable regardless of where the
stock moved. We felt the securities offered substantial upside potential with
limited downside risk. As the convertibles rose in price, their underlying risk
increased. Seeing weakness in the semiconductor market we decided to sell the
Fund's position. Our decision helped the Fund earn a profit and get out of an
Asian-based security long before its price declined.
Are there other good examples of how your process worked?
Yes. Mail-Well is a specialty envelope company that owns Mailboxes Etc. The
company offered a new convertible issue rated B+, with a 5.00% coupon and a
short 5-year maturity. The coupon and short maturity provided the downside
protection we seek. As the stock price rose from $30 to $40, the price of the
convertible increased from 100 to 120 cents on the dollar. The Fund continues to
hold the securities, although we did sell some at a profit, which had a positive
impact on the Fund's performance in 1997.
Unisys is another holding that did very well. The Fund held two Unisys
convertibles during the year. As the company underwent positive management
changes, its stock price increased about 150%. As the stock price rose, both of
the convertibles reached their conversion price and were converted into
equities. The stock the Fund received is currently its largest equity holding.
In this case, it was our decision not to sell that benefited the Fund and we
believe Unisys is well positioned for strong performance in 1998.
You've talked about when to buy and when to hold. What about when to sell?
There are many reasons to sell. If a position causes the Fund to exceed what we
believe to be prudent diversification guidelines with respect to an issue or
industry we may trim back. We may also sell if a security performs poorly or if
it performs well enough to
10
<PAGE>
reach what we believe to be an appropriate price target to sell. Host Marriott
is a top-tier hotel chain that includes the Ritz Carlton Hotels. At the
beginning of the year, their convertible preferred was a substantial holding for
the Fund. We had bought the convertibles when the stock was at $12 or $13, and
as it moved over $20, we felt it was a good time to sell. We sold at attractive
prices and our timing was also good, since the stock has since declined. The
overall effect was positive for the Fund's investment portfolio.
The Home Shopping Network was another issue that performed very well, met our
target price, and was then sold at a profit. Although the company has done very
well since we sold, the convertibles again moved into the range where they began
to perform like equities, with less downside protection, so the Fund sold the
convertibles at a substantial gain, which of course was positive for investors.
Were all of your decisions so positive?
Unfortunately, not all of them were. The Fund bought convertibles from Coeur
d'Alene, a gold and silver mining company, in October. The securities had a
7.25% coupon and a 7-year maturity and were attractively priced when we bought
them. Given the heavy toll gold stocks had already taken, we thought there was
strong upside potential, particularly since the company is half in silver, which
has a wide variety of industrial uses. Unfortunately, as the Asian crisis
unfolded, gold stocks continued to tumble and the Fund lost about 20% on its
Coeur d'Alene investment. Nevertheless, we remain bullish on silver and believe
that when the market recognizes that Coeur d'Alene is also a silver company, it
may lead the pack when precious metals recover.
Did the Fund own any other gold securities during the year?
Yes. The Fund also purchased Barrick Gold Corp. from October through December as
gold prices continued to decline. Since this is a top-tier gold company, we
believe that it will perform well whether gold goes up or down. If gold
continues to decline, smaller gold miners may go bankrupt, giving Barrick Gold
Corp. opportunities to acquire assets at inexpensive prices. If gold goes up,
investors should turn to the top-tier companies first, and Barrick Gold Corp. is
one of the best there is. Despite its dismal performance for the year, we think
it's a solid holding for the Fund going forward.
What else did you buy for the Fund during the year?
ESC Medical was a small Israeli growth company selling laser hair removal
products and other medical devices. They approached us with an overnight
offering--or a security that calls for evaluation and a decision by the
following morning. Believing the size of the offering would negatively impact
the stock price and the convertible was not priced attractively, we initially
declined. A few weeks later, however, we felt the convertible was appropriately
priced relative to the common stock, offered sufficient downside protection, and
could perform well for the Fund. The Fund took a sizable posi-
[GRAPHIC]
Bullish/Bearish
- ---------------
A bull market occurs when security prices are rising, a bear market occurs when
security 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.
11
<PAGE>
[GRAPHIC]
tion in ESC Medical and sold a portion of it as the price advanced.
Boston Chicken zero-coupon bonds didn't do so well. Although the market may
expect a default, we see the company as a potential acquisition candidate with a
strong brand franchise. We also liked the fact that management is now working to
rectify difficulties and improve the company's fundamentals. The Fund bought the
bonds in the fourth quarter at 20 cents on the dollar, and they declined to 15
cents on the dollar. Although we recognize significant downside risk here, we
also feel there's strong upside potential if the company is acquired or turns
itself around.
Another purchase worth mentioning was Newell, an investment-grade consumer
products company that specializes in turnarounds and corporate integration. They
were offering a 5.25% convertible preferred that we bought for the Fund in
December, largely as a defensive move to help manage risk. Given the fallout in
Southeast Asia, investors are turning to more dependable names, and we think
Newell will be among them. While the purchase was too recent to have much effect
on performance, at year end, Newell represented the Fund's second largest
holding.
Aside from those you've already mentioned, were there other significant sales
during 1997?
We bought Bethlehem Steel convertibles for the Fund earlier in the year,
perceiving modest upside potential, but very limited downside risk, given the
security's very high yield. The stock moved up from $8 to $12, and the
convertibles rose from $37 to $45. We chose to sell the securities because we
believed the company's fundamentals were declining and they planned to add debt
in a new acquisition. Despite these fundamental shifts, as interest rates
declined, investors searching for yield continued to push prices to high levels.
We believe this was a case of investors ignoring fundamentals for the sake of
returns and we were glad to get out of the bonds.
Were there other securities you bought and sold for the Fund?
Yes. We bought Med Partners for the Fund, which organizes physicians in
bargaining with HMOs, but the company received a bid from PhyCor, which was
negatively viewed by the market. We evaluated the risks and potential rewards of
the deal and felt that the Fund would be better off in PhyCor than Med Partners.
So we sold the Fund's position in Med Partners and purchased PhyCor. We felt if
the Fund held Med Partners, it would have 50% downside risk with only 15% upside
potential. With PhyCor calling the shots in the merger, we felt there would be
more upside potential with considerably lower downside risk. Although the impact
was essentially neutral for the Fund, we viewed it as a positive in managing the
Fund's risk profile.
What were the Fund's worst performers in 1997?
In addition to Boston Chicken and the Fund's gold holdings, the Fund also was
impacted negatively by Cityscape, an aggressive subprime mortgage lending
12
<PAGE>
company. It suffered as interest rates dropped and prepayments increased. The
Fund's Cityscape holdings had a negative impact on performance.
The Fund also owned Applied Magnetics, which had significant gains at the
beginning of the year, but suffered when an acquisition target launched a
negative publicity campaign. Later in the year, the fundamentals of the
disk-drive market deteriorated. The common stock went from $60 to $10. Although
we had hedged the Fund's convertible position by selling the stock short, which
helped us avoid some of the downside risk, Applied Magnetics took a substantial
toll on the Fund's performance.
Did the Fund have any exposure to Southeast Asian markets?
Yes, but it was relatively small. As mentioned, we sold the Fund's position in
Samsung before the Korean market fell. The Fund had some yen exposure during the
year, but it sold its holdings in second-tier Japanese banks and now holds only
the Bank of Tokyo-Mitsubishi. Although we couldn't predict it, keeping the
Fund's exposure to Southeast Asia minimal turned out to be a very wise decision,
particularly since there are a lot of Southeast Asian convertibles available.
Were there other profitable decisions you made for the Fund in 1997?
Putting money into utilities was a successful move, although our timing may have
been a little early, given the decline in oil prices in the fourth quarter. We
saw convertibles and high-yield securities becoming overpriced, while utilities
looked very attractive. They had price-to-earnings ratios about half the market
level and were paying sizeable dividends. So we increased the Fund's utility
holdings, overweighting it in utility securities.
The Fund also bought Cooper Industries convertibles. Despite the risk of the
bonds being called, we saw minimal downside and the Fund participated handsomely
on the upside. The stock price rose, the bonds converted at about $43 and we
were able to sell the Fund's position at an average price of $50, which was
positive for the Fund. This was another example of a low-risk security that
proved highly beneficial for the Fund.
Where was the Fund over- or underweighted?
At year end, the Fund was overweighted in energy and slightly overweighted in
technology. It was underweighted in media, which is a large portion of the
market, but we perceive the valuations and risks to be much too high. The Fund
was underweighted in international securities and at year end had no holdings in
any of the Southeast Asian emerging markets.
What is the overall quality of the Fund's investment portfolio?
At year end, the overall quality of the Fund's investment portfolio was BB+,
which was relatively high given the overall makeup of the convertible market. Of
course, the Fund holds securities across a wide range of quality ratings.
[GRAPHIC]
13
<PAGE>
[GRAPHIC]
Certain of the Fund's investments have speculative characteristics.
Past performance is no guarantee of future results.
Why was the MainStay Convertible Fund closed to new investors?
In April, the Fund's Board of Trustees made the decision to close the
Convertible Fund to new investors largely due to supply and demand dynamics.
Currently the Fund represents about 1% of the convertible market, and the
decision to close the Fund will help it maintain liquidity without forcing it to
purchase overvalued securities with new cash flows. If the convertible market
should expand or significant opportunities arise in the future, the Fund's Board
of Trustees may elect to reopen the Fund if they deem it appropriate to do so.
What is your outlook going forward?
We believe that despite low oil prices, valuations are currently attractive
among energy stocks and we may seek out selected opportunities among utilities
with strong fundamentals. Whatever develops in the convertible market, we will
continue to view protection of principal as a key concern as we seek capital
appreciation along with current income.
Denis Laplaige
Neil Feinberg
Thomas Wynn
Portfolio Managers
14
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fund average annual total returns*
=====================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 11.36% 13.66% 13.29% 10.52%
Class B 10.67% 13.24% 13.08% 10.35%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund SEC returns*
=====================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 5.24% 12.38% 12.65% 9.99%
Class B 5.67% 13.00% 13.08% 10.35%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
=====================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 48 out of n/a n/a n/a
51 funds
Class B 49 out of 10 out of 7 out of 4 out of
51 funds 23 funds 14 funds 8 funds
Average Lipper
convertible
securities fund 17.61% 12.40% 12.88% 9.48%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
=====================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $13.53 $0.6030 $1.2204
Class B $13.52 $0.5115 $1.2204
=====================================================================================
</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 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
12/31/97. Class A shares were first offered to the public on 1/3/95; Class
B shares on 5/1/86.
[GRAPHIC]
15
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 12/31/97
- -----------------------------------------------------------------------------------------------
HOLDING AMOUNT
===============================================================================================
<S> <C>
Microsoft Corp., $2.196, Series A $43,814,062
Newell Financial Trust I, 5.25% 24,900,250
Mail-Well, Inc., 5.00%, due 11/1/02 21,087,500
International Paper Co., 5.25% 20,551,300
RPM, Inc. of Ohio, (zero coupon), due 9/30/12 18,788,875
Unisys Corp. 18,241,430
Hollinger, Inc., Series U.S., (zero coupon), due 10/5/13 16,716,575
Pennzoil Co., Series U.S., 4.75%, due 10/1/03 16,292,500
DSC Communications Corp., 7.00%, due 8/1/04 14,100,000
Loral Space & Communications Ltd., 6.00%, Series C 13,468,500
===============================================================================================
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- -----------------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
===============================================================================================
<S> <C>
DSC Communications Corp., 7.00%, due 8/1/04 and Common Stock $49,354,044
QUALCOMM Financial Trust, 5.75% Preferred Stock and Common Stock 39,889,768
Standard & Poor's 500 Depository Receipts Common Stock 39,577,487
Applied Magnetics Corp., 7.00%, due 3/15/06 and Common Stock 33,133,811
CUC International, Inc., 3.00%, due 2/15/02 and Cendant Corp. Common Stock 32,067,214
Boston Chicken, Inc., (zero coupon), due 6/1/15, 4.50%, due 2/1/04
7.75%, due 5/1/04 and Common Stock 31,755,382
Mail-Well, Inc., 5.00%, due 11/1/02 and Common Stock 29,184,250
Alza Corp., (zero coupon), due 7/14/14, 5.00%, due 5/1/06 and Common Stock 26,472,772
Time Warner, Inc., (zero coupon), due 12/17/12, (zero coupon), due 6/22/13
and Common Stock 25,913,301
Federal-Mogul Financial Trust, 7.00% Preferred Stock 24,450,000
===============================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- -----------------------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
===============================================================================================
<S> <C>
QUALCOMM Financial Trust, 5.75% Preferred Stock and Common Stock $38,738,224
Cooper Industries, Inc., 7.05%, due 1/1/15, 6.00% Preferred Stock
and Common Stock 38,300,946
Standard & Poor's 500 Depository Receipts Common Stock 36,744,122
DSC Communications Corp., 7.00%, due 8/1/04 and Common Stock 35,904,502
Applied Magnetics Corp., 7.00%, due 3/15/06 and Common Stock 33,881,240
Chubb Corp. Common Stock 31,416,488
Alza Corp., (zero coupon), due 7/14/14, 5.00%, due 5/1/06 and Common Stock 30,104,708
CUC International, Inc., 3.00%, due 2/15/02 and Cendant Corp. Common Stock 28,666,217
Unisys Corp., 8.25%, due 3/15/06, 8.25%, due 8/1/20 and Common Stock 24,371,586
Berkshire Hathaway, Inc., 1.00%, due 12/2/01 23,233,617
===============================================================================================
</TABLE>
[GRAPHIC]
- ----------
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.
16
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
CONVERTIBLE SECURITIES (74.1%)+
BONDS (47.1%)
ADVERTISING (0.5%)
Interpublic Group of Companies
Inc. (The)
1.80%, due 9/16/04 (c)..................... $ 4,550,000 $ 3,685,500
Omnicom Group, Inc.
2.25%, due 1/6/13 (c)...................... 1,250,000 1,306,250
-------------
4,991,750
-------------
AUTO PARTS (1.7%)
Mark IV Industries, Inc.
4.75%, due 11/1/04 (c)..................... 4,150,000 3,838,750
MascoTech, Inc.
4.50%, due 12/15/03 (e).................... 13,000,000 11,245,000
-------------
15,083,750
-------------
BANKS (1.1%)
Mitsubishi Bank Limited
International Finance
(Bermuda) Trust
3.00%, due 11/30/02........................ 8,700,000 9,026,250
STB Cayman Capital Ltd.
0.50%, due 10/1/07 (c)(z).................. (Y)100,000,000 574,889
-------------
9,601,139
-------------
CELLULAR TELEPHONE (0.4%)
United States Cellular Corp.
(zero coupon),
due 6/15/15 (a)(aa)........................ $ 9,350,000 3,354,312
-------------
CHEMICALS (2.2%)
Indian Petrochemicals Corp.
2.50%, due 3/11/02 (c)..................... 1,000,000 950,000
RPM, Inc. of Ohio
(zero coupon),
due 9/30/12 (a)(aa)........................ 38,150,000 18,788,875
-------------
19,738,875
-------------
COMPUTER NETWORKING (0.3%)
System Software Associates, Inc.
7.00%, due 9/15/02......................... 3,000,000 2,565,000
-------------
COMPUTERS & OFFICE EQUIPMENT (6.6%)
Apple Computer, Inc.
6.00%, due 6/1/01 (e)...................... 16,100,000 12,397,000
Applied Magnetics Corp.
7.00%, due 3/15/06......................... 8,075,000 6,177,375
Comverse Technology, Inc.
5.75%, due 10/1/06......................... 4,550,000 4,823,000
HMT Technology Corp.
5.75%, due 1/15/04 (c)..................... 2,500,000 2,187,500
5.75%, due 1/15/04......................... 5,500,000 4,702,500
InaCom Corp.
4.50%, due 11/1/04......................... 4,000,000 3,820,000
6.00%, due 6/15/06 (c)..................... 4,500,000 6,007,500
Quantum Corp.
5.00%, due 3/1/03 (c)...................... 1,200,000 2,181,000
7.00%, due 8/1/04.......................... 1,400,000 1,295,000
Safeguard Scientifics, Inc.
6.00%, due 2/1/06 (c)(e)................... 5,775,000 6,352,500
U.S. Office Products Co.
5.50%, due 5/15/03......................... 7,000,000 6,580,000
Vantive Corp.
4.75%, due 9/1/02 (c)...................... 3,350,000 3,132,250
-------------
59,655,625
-------------
CONSTRUCTION & ENGINEERING (0.0%) (b)
Empresas ICA Controladora S.A.
Series U.S.
5.00%, due 3/15/04 (p)..................... 400,000 318,000
-------------
DRUGS (0.2%)
Dura Pharmaceuticals, Inc.
3.50%, due 7/15/02......................... 1,000,000 1,112,500
Fuisz Technologies, Ltd.
7.00%, due 10/15/04 (c).................... 1,200,000 1,074,000
-------------
2,186,500
-------------
ELECTRICAL EQUIPMENT (0.9%)
California Microwave, Inc.
5.25%, due 12/15/03........................ 2,281,000 2,024,388
Credence Systems Corp.
5.25%, due 9/15/02 (c)..................... 2,450,000 2,058,000
Kent Electronics Corp.
4.50%, due 9/1/04.......................... 5,000,000 4,025,000
-------------
8,107,388
-------------
ENERGY (2.5%)
Apache Corp.
6.00%, due 1/15/02 (o)..................... 1,600,000 1,828,000
6.00%, due 1/15/02 (c)..................... 4,175,000 4,769,937
Pennzoil Co.
Series U.S.
4.75%, due 10/1/03 (e)..................... 12,250,000 16,292,500
-------------
22,890,437
-------------
</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>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
BONDS (Continued)
FINANCIAL SERVICES (0.0%) (b)
Cityscape Financial Corp.
6.00%, due 5/1/06 (o)...................... $ 1,500,000 $ 41,250
6.00%, due 5/1/06 (c)...................... 3,125,000 85,938
6.00%, due 5/1/06.......................... 6,950,000 191,125
-------------
318,313
-------------
FOOD, BEVERAGES & TOBACCO (0.8%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12.......................... 1,700,000 1,708,500
Grand Metropolitan, PLC
6.50%, due 1/31/00 (c)..................... 4,150,000 5,488,375
-------------
7,196,875
-------------
GAS UTILITIES (0.9%)
Consolidated Natural Gas Co.
7.25%, due 12/15/15........................ 6,875,000 7,906,250
-------------
HEALTH CARE (2.1%)
Concentra Managed Care, Inc.
6.00%, due 12/15/01 (c).................... 1,000,000 1,315,000
Integrated Health Services, Inc.
5.75%, due 1/1/01.......................... 5,000,000 5,375,000
6.00%, due 1/1/03.......................... 5,000,000 5,350,000
NovaCare, Inc.
5.50%, due 1/15/00......................... 750,000 703,125
PhyCor, Inc.
4.50%, due 2/15/03......................... 1,475,000 1,416,000
Tenet Healthcare Corp.
6.00%, due 12/1/05......................... 5,000,000 4,775,000
-------------
18,934,125
-------------
INSURANCE (2.3%)
Fidelity National Financial, Inc.
(zero coupon)
due 2/15/09 (a)(e)(aa)..................... 10,773,000 8,564,535
Fremont General Corp.
(zero coupon)
due 10/12/13 (a)(aa)....................... 3,085,000 3,231,538
Italy Province (Republic of)
5.00%, due 6/28/01 (r)..................... 7,500,000 9,262,500
-------------
21,058,573
-------------
LEISURE (0.8%)
Family Golf Centers, Inc.
5.75%, due 10/15/04 (c).................... 6,650,000 6,849,500
-------------
MEDIA (1.2%)
Time Warner, Inc.
(zero coupon), due 6/22/13 (aa)............ 22,000,000 11,027,500
-------------
MEDICAL EQUIPMENT (1.6%)
ESC Medical Systems Ltd.
6.00%, due 9/1/02 (c)...................... 8,500,000 8,967,500
Phoenix Shannon, PLC ADR
9.50%, due 11/1/00
(c)(f)(g)(h)............................... 2,500,000 250,000
Thermedics, Inc.
(zero coupon), due 6/1/03 (o).............. 2,000,000 1,460,000
Thermo Cardiosystems, Inc.
4.75%, due 5/15/04 (c)..................... 3,000,000 3,150,000
Uromed Corp.
6.00%, due 10/15/03 (c).................... 1,250,000 650,000
-------------
14,477,500
-------------
OIL SERVICES (0.7%)
Loews Corp.
3.125%, due 9/15/07........................ 6,200,000 6,130,250
-------------
PAPER & FOREST PRODUCTS (0.3%)
Thermo Fibertek, Inc.
4.50%, due 7/15/04 (c)..................... 3,000,000 3,120,000
-------------
POLLUTION & RELATED (0.2%)
WMX Technologies, Inc.
2.00%, due 1/24/05......................... 2,000,000 1,690,000
-------------
PUBLISHING (4.2%)
Hollinger, Inc.
Series U.S.
(zero coupon)
due 10/5/13 (a)(e)(p)...................... 42,590,000 16,716,575
Mail-Well, Inc.
5.00%, due 11/1/02......................... 17,500,000 21,087,500
-------------
37,804,075
-------------
RESTAURANTS & LODGING (1.1%)
Boston Chicken, Inc.
(zero coupon), due 6/1/15.................. 29,600,000 4,588,000
4.50%, due 2/1/04.......................... 5,600,000 2,744,000
Fine Host Corp.
5.00%, due 11/1/04 (c)(d).................. 5,775,000 2,714,250
-------------
10,046,250
-------------
</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>
Principal
Amount Value
=====================================
<S> <C> <C>
BONDS (Continued)
RETAIL (5.8%)
Costco Companies, Inc.
(zero coupon)
due 8/19/17 (a)(c)......................... $ 11,500,000 $ 6,526,250
Home Depot, Inc.
3.25%, due 10/1/01 (e)..................... 9,500,000 12,540,000
Home Shopping Network, Inc.
5.875%, due 3/1/06 (c)..................... 3,000,000 5,793,750
5.875%, due 3/1/06......................... 1,000,000 1,931,250
Homebase, Inc.
5.25%, due 11/1/04 (c)..................... 2,300,000 2,231,000
Michaels Stores, Inc.
6.75%, due 1/15/03 (e)(aa)................. 11,010,000 10,789,800
Rite Aid Corp.
5.25%, due 9/15/02 (c)..................... 4,500,000 4,848,750
Saks Holdings, Inc.
5.50%, due 9/15/06......................... 9,025,000 7,671,250
-------------
52,332,050
-------------
SEMICONDUCTOR EQUIPMENT (0.3%)
Lam Research Corp.
5.00%, due 9/1/02 (c)...................... 3,500,000 2,905,000
-------------
SEMICONDUCTORS (2.0%)
C-Cube Microsystems, Inc.
5.875%, due 11/1/05........................ 3,500,000 2,800,000
Cypress Semiconductor Corp.
6.00%, due 10/1/02 (c)..................... 4,325,000 3,643,812
Level One Communications, Inc.
4.00%, due 9/1/04 (c)...................... 1,250,000 1,193,750
Micron Technology, Inc.
7.00%, due 7/1/04.......................... 6,000,000 5,460,000
S3, Incorporated
5.75%, due 10/1/03......................... 8,500,000 5,142,500
-------------
18,240,062
-------------
SPECIALIZED SERVICES (1.2%)
CORESTAFF, Inc.
2.94%, due 8/15/04......................... 5,500,000 4,606,250
CUC International, Inc.
3.00%, due 2/15/02 (c)..................... 4,750,000 5,842,500
-------------
10,448,750
-------------
STEEL, ALUMINUM & OTHER METALS (1.8%)
Coeur d'Alene Mines Corp.
7.25%, due 10/31/05 (c).................... 11,800,000 8,968,000
Inco Ltd.
5.75%, due 7/1/04 (p)...................... 7,700,000 7,295,750
-------------
16,263,750
-------------
TECHNOLOGY (0.4%)
Thermo Electron Corp.
4.25%, due 1/1/03 (c)...................... 1,000,000 1,265,000
4.25%, due 1/1/03.......................... 2,000,000 2,530,000
-------------
3,795,000
-------------
TELECOMMUNICATION EQUIPMENT (1.8%)
DSC Communications Corp.
7.00%, due 8/1/04 (c)...................... 15,000,000 14,100,000
World Access, Inc.
4.50%, due 10/1/02 (c)..................... 2,850,000 2,451,000
-------------
16,551,000
-------------
TELECOMMUNICATION SERVICES (1.2%)
Gilat Satellite Networks Ltd.
6.50%, due 6/3/04 (c)...................... 750,000 699,375
Rogers Communications, Inc.
2.00%, due 11/26/05 (p).................... 500,000 297,500
Tel-Save Holdings, Inc.
4.50%, due 9/15/02 (c)..................... 7,000,000 6,667,500
4.50%, due 9/15/02......................... 2,000,000 1,905,000
5.00%, due 12/15/04 (c).................... 1,250,000 1,209,375
-------------
10,778,750
-------------
Total Convertible Bonds
(Cost $428,217,461)........................ 426,366,349
-------------
<CAPTION>
Shares
=============
<S> <C> <C>
PREFERRED STOCKS (27.0%)
AUTO PARTS (1.1%)
Federal-Mogul Financial Trust
7.00% (c).................................. 200,000 10,200,000
-------------
BANKS (0.8%)
Banc One Corp.
$3.50, Series C............................ 22,500 2,365,313
Fuji International Finance Trust
0.25% (a)(c)(l)............................ 148 1,323,264
Union Planters Corp.
8.00%, Series E............................ 45,800 3,915,900
-------------
7,604,477
-------------
BUILDING MATERIALS (0.6%)
Owens Corning Capital LLC
6.50% (c).................................. 110,000 5,225,000
-------------
</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 Convertible Fund
<TABLE>
<CAPTION>
Shares Value
=======================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
CABLE (1.5%)
Cablevision Systems Corp.
8.50%, Series I (a)(e)(j1)................. 96,700 $ 3,722,950
United International Holdings, Inc.
4.00%, Series A (a)(u)..................... 53,641 7,509,740
US West, Inc.
4.50%, Series D............................ 32,700 2,017,181
-------------
13,249,871
-------------
CAPITAL GOODS (0.3%)
Cooper Industries, Inc.
6.00% (e).................................. 134,500 2,454,625
-------------
CASINOS (0.4%)
Station Casinos, Inc.
7.00% (a).................................. 79,700 3,267,700
-------------
CHEMICALS (0.1%)
Merrill Lynch & Co., Inc.
6.25% (m1)................................. 35,600 1,228,200
-------------
COMPUTERS & OFFICE EQUIPMENT (0.8%)
Vanstar Financing Trust
6.75%...................................... 195,000 7,215,000
-------------
CONGLOMERATES (0.4%)
Corning Delaware L.P.
6.00% (e).................................. 54,500 3,358,562
-------------
CONSUMER STAPLES (2.7%)
Newell Financial Trust I
5.25% (c).................................. 483,500 24,900,250
-------------
CONTAINERS (0.2%)
Crown Cork & Seal Co., Inc.
4.50% (s).................................. 40,000 1,880,000
-------------
DOMESTIC OIL & GAS (0.3%)
Enron Corp.
6.25%...................................... 124,100 2,559,563
-------------
DOMESTIC OILS (0.5%)
Occidental Petroleum Corp.
$3.875, Series 1993 (c).................... 65,000 4,095,000
-------------
DRUGS (0.0%) (b)
ICN Pharmaceuticals, Inc.
Series B (c)(q)............................ 125 125,000
-------------
ENERGY (0.5%)
EVI, Inc.
5.00% (a)(c)............................... 101,000 4,494,500
-------------
FOOD, BEVERAGES & TOBACCO (0.7%)
Chiquita Brands International, Inc.
$2.875, Series A........................... 48,500 2,482,594
$3.75, Series B............................ 57,000 3,505,500
-------------
5,988,094
-------------
HOUSEHOLD PRODUCTS (0.3%)
AJL PEPS
$1.44 (i).................................. 277,200 3,049,200
-------------
INSURANCE (1.7%)
Conseco Financing Trust IV
7.00%, Series F............................ 95,000 4,868,750
Merrill Lynch & Co., Inc.
7.25% (e)(m2).............................. 154,800 10,913,400
-------------
15,782,150
-------------
MEDIA (1.9%)
Houston Industries, Inc.
7.00% (e).................................. 175,000 9,985,938
SFX Broadcasting, Inc.
6.50%, Series D............................ 58,000 5,140,250
Sinclair Broadcast Group, Inc.
6.00%...................................... 30,000 1,740,000
-------------
16,866,188
-------------
OIL SERVICES (0.2%)
Lomak Petroleum, Inc.
5.75% (c).................................. 45,000 2,182,500
-------------
PAPER & FOREST PRODUCTS (2.7%)
Fort James Corp.
$3.50, Series L (j2)....................... 70,000 3,902,500
International Paper Co.
5.25% (e).................................. 439,600 20,551,300
-------------
24,453,800
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
POLLUTION & RELATED (0.1%)
Automatic Commission Exchangeable
Security Trust II
6.50% (t).................................. 50,000 $ 1,175,000
-------------
REAL ESTATE (0.2%)
Security Capital Pacific Trust
$1.75, Series A............................ 46,700 1,529,425
-------------
RESTAURANTS & LODGING (0.9%)
Apple South, Inc.
3.50%, Series A (a)........................ 50,000 2,681,250
Host Marriott Finance Trust
6.75%...................................... 94,000 5,569,500
-------------
8,250,750
-------------
SOFTWARE (4.8%)
Microsoft Corp.
$2.196, Series A (a)(e).................... 487,500 43,814,062
-------------
STEEL, ALUMINUM & OTHER METALS (1.0%)
Bethlehem Steel Corp.
$3.50 (c).................................. 197,250 7,890,000
WHX Corp.
6.50%, Series A............................ 17,400 796,050
-------------
8,686,050
-------------
TELECOMMUNICATION EQUIPMENT (1.8%)
Loral Space & Communications Ltd.
6.00%, Series C............................ 219,000 13,468,500
QUALCOMM Financial Trust
5.75%...................................... 71,000 3,266,000
-------------
16,734,500
-------------
TELECOMMUNICATION SERVICES (0.4%)
Metromedia International Group
7.25%...................................... 76,000 3,439,000
-------------
TRANSPORTATION (0.1%)
Arkansas Best Corp.
$2.875, Series A........................... 24,000 984,000
-------------
Total Preferred Stocks
(Cost $231,854,574)........................ 244,792,467
-------------
Total Convertible Securities
(Cost $660,072,035)........................ 671,158,816
-------------
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
CORPORATE BONDS (0.4%)
BUILDINGS (0.0%) (b)
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(d)(g)(h)................... $ 18,799 $ 5,264
-------------
COMPUTERS & OFFICE EQUIPMENT (0.1%)
Businessland, Inc.
5.50%, due 3/1/07.......................... 1,965,000 1,296,900
-------------
INSURANCE (0.3%)
Statesman Group, Inc.
6.25%, due 5/1/03.......................... 2,750,000 2,832,500
-------------
Total Corporate Bonds
(Cost $4,029,958).......................... 4,134,664
-------------
<CAPTION>
Shares
=============
<S> <C> <C>
COMMON STOCKS (19.2%)
AEROSPACE (0.2%)
Wyman-Gordon Co. (a).......................... 73,000 1,432,625
-------------
AUTO MANUFACTURING (0.1%)
Ford Motor Co................................. 22,900 1,114,944
-------------
AUTO PARTS (0.1%)
Mark IV Industries, Inc. ..................... 55,000 1,203,125
-------------
BIOTECHNOLOGY (0.3%)
Aviron, Inc. (a).............................. 108,700 2,948,487
-------------
BUILDING MATERIALS (0.0%) (b)
Owens Corning (a)............................. 11,000 375,375
-------------
CABLE (0.2%)
Cox Communications, Inc.
Class A (a)................................ 40,000 1,602,500
-------------
CASINOS (0.1%)
Aztar Corp. (a)............................... 111,500 696,875
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)
CHEMICALS (0.7%)
Agrium, Inc. ................................. 110,400 $ 1,345,500
IMC Global, Inc. ............................. 51,900 1,699,725
Lyondell Petrochemical Co. ................... 69,916 1,852,774
Monsanto Co. ................................. 41,000 1,722,000
-------------
6,619,999
-------------
COMPUTER NETWORKING (0.9%)
Bay Networks, Inc. (a)........................ 308,500 7,886,031
-------------
COMPUTERS & OFFICE EQUIPMENT (3.3%)
Applied Magnetics Corp. (a)................... 44,700 497,287
Autodesk, Inc. ............................... 25,100 928,700
Compuware Corp. (a)........................... 65,000 2,080,000
Comverse Technology, Inc. (a)................. 3,000 117,000
IMNET Systems, Inc. (a)....................... 35,100 570,375
InaCom Corp. (a).............................. 39,200 1,100,050
Legato Systems, Inc. (a)...................... 48,500 2,134,000
National Data Corp............................ 25,000 903,125
SunGard Data Systems, Inc. (a)................ 50,000 1,550,000
Transaction Systems Architects, Inc.
Class A (a)................................ 50,000 1,900,000
Unisys Corp. (a).............................. 1,314,698 18,241,430
3DO Company, (The) (a)........................ 71,000 155,313
-------------
30,177,280
-------------
CONGLOMERATES (0.1%)
Corning, Inc. ................................ 20,000 742,500
-------------
DOMESTIC OIL & GAS (0.5%)
Apache Corp. ................................. 84,000 2,945,250
Enron Oil & Gas Co. .......................... 30,325 642,511
Noble Afffiliates, Inc. ...................... 26,600 937,650
-------------
4,525,411
-------------
DOMESTIC OILS (2.1%)
Comstock Resources, Inc. (a).................. 163,000 1,945,813
Forcenergy, Inc. (a).......................... 126,700 3,317,956
Nuevo Energy Co. (a).......................... 82,800 3,374,100
Phillips Petroleum Co......................... 50,000 2,431,250
Pioneer Natural Resources Co.................. 54,634 1,580,971
Santa Fe Energy Resources, Inc. (a)........... 250,000 2,812,500
Texaco, Inc................................... 58,743 3,194,151
-------------
18,656,741
-------------
DRUGS (0.4%)
Alza Corp. (a)................................ 27,000 858,938
HEALTHSOUTH Corp. (a)......................... 48,747 1,352,729
ICN Pharmaceuticals, Inc...................... 16,980 828,836
-------------
3,040,503
-------------
ELECTRIC UTILITIES (0.9%)
Long Island Lighting Co....................... 104,900 3,160,112
PECO Energy Co................................ 46,000 1,115,500
Wisconsin Energy Corp......................... 127,100 3,654,125
-------------
7,929,737
-------------
ELECTRICAL EQUIPMENT (0.3%)
Alcatel Alsthom S.A. (CGE) ADR (f)............ 40,000 1,012,500
Premisys Communications, Inc. (a)............. 38,500 1,005,812
-------------
2,018,312
-------------
ENERGY (0.6%)
Abacan Resource Corp. (a)..................... 330,500 516,406
Chesapeake Energy Corp. ...................... 55,000 415,938
OGE Energy Corp. ............................. 36,500 1,996,094
Triton Energy Ltd. (a)........................ 90,000 2,626,875
-------------
5,555,313
-------------
FINANCE (0.3%)
Standard & Poor's 500
Depository Receipts (k).................... 28,000 2,714,250
-------------
FINANCIAL SERVICES (0.3%)
Cityscape Financial Corp. (a)................. 61,000 30,500
Insignia Financial Group, Inc.
Class A (a)................................ 99,900 2,297,700
SunAmerica, Inc............................... 15,000 641,250
-------------
2,969,450
-------------
FOOD, BEVERAGES & TOBACCO (0.5%)
Chiquita Brands International, Inc............ 60,000 978,750
International Multifoods Corp................. 56,400 1,596,825
Quaker Oats Co................................ 22,500 1,186,875
RJR Nabisco Holdings Corp..................... 16,500 618,750
-------------
4,381,200
-------------
GAS UTILITIES (0.0%)(b)
Arcus Group (a)(d)(g)......................... 29,712 59,424
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)
HEALTH CARE (0.5%)
Foundation Health Systems, Inc.
Class A (a)................................ 37,500 $ 839,063
Integrated Health Services, Inc. ............. 23,258 725,359
Renal Treatment Centers, Inc. (a)............. 71,100 2,568,487
-------------
4,132,909
-------------
HOUSEHOLD PRODUCTS (0.1%)
Amway Japan Ltd. ADR (f)...................... 50,000 462,500
-------------
INSURANCE (0.1%)
Fidelity National Financial, Inc. ............ 30,800 958,650
-------------
INTERNATIONAL OILS (0.0%) (b)
Tarragon Oil & Gas Ltd. (a)(y)................ 53,500 418,699
-------------
LEISURE (0.0%) (b)
Family Golf Centers, Inc. (a)................. 10,100 316,887
-------------
MACHINERY (0.1%)
Helix Technology Corp......................... 69,200 1,349,400
-------------
MEDICAL EQUIPMENT (0.0%)(b)
Isolyser Co., Inc. (a)........................ 35,800 83,908
-------------
MINING (0.6%)
Barrick Gold Corp. ........................... 165,500 3,082,438
Battle Mountain Gold Co. ..................... 292,800 1,720,200
Homestake Mining Co. ......................... 72,500 643,437
TVX Gold, Inc. (a)............................ 25,000 84,375
-------------
5,530,450
-------------
NATURAL GAS PIPELINES (0.4%)
Consolidated Natural Gas Co................... 61,300 3,708,650
-------------
NON-DEFENSE ELECTRONICS (0.1%)
Electronics for Imaging, Inc. (a)............. 52,900 879,462
-------------
PAPER & FOREST PRODUCTS (0.6%)
Bowater, Inc.................................. 86,000 3,821,625
Repap Enterprises, Inc. (a)................... 9,294,809 1,169,077
-------------
4,990,702
-------------
POLLUTION & RELATED (0.1%)
Browning-Ferris Industries, Inc. ............. 31,500 1,165,500
U.S. Filter Corp. (a)......................... 1,000 29,938
-------------
1,195,438
-------------
PUBLISHING (0.8%)
Hollinger International, Inc. ................ 72,000 1,008,000
Mail-Well, Inc. (a)........................... 87,600 3,547,800
World Color Press, Inc. (a)................... 95,900 2,547,344
-------------
7,103,144
-------------
REAL ESTATE (0.1%)
Meditrust Corp. (v)........................... 30,040 1,100,215
-------------
RECREATION & ENTERTAINMENT (0.2%)
Alliance Gaming Corp. (a)..................... 393,144 1,916,577
-------------
RESTAURANTS & LODGING (0.5%)
Apple South, Inc. ............................ 285,800 3,751,125
Buffets, Inc. (a)............................. 88,000 825,000
-------------
4,576,125
-------------
RETAIL (1.0%)
BJ's Wholesale Club, Inc. (a)................. 133,846 4,199,418
Fingerhut Companies, Inc. .................... 31,500 673,313
General Nutrition Companies,
Inc. (a)................................... 13,100 445,400
Home Depot, Inc. (The)........................ 40,000 2,355,000
Homebase, Inc. (a)............................ 57,146 450,025
Jones Apparel Group, Inc. (a)................. 25,000 1,075,000
-------------
9,198,156
-------------
SEMICONDUCTOR EQUIPMENT (0.2%)
Integrated Process Equipment
Corp. (a).................................. 16,100 253,575
LTX Corp. (a)................................. 189,900 842,681
Teradyne, Inc. (a)............................ 32,500 1,040,000
-------------
2,136,256
-------------
SEMICONDUCTORS (0.1%)
Alliance Semiconductor Corp. (a).............. 8,000 36,500
Micron Technology, Inc. ...................... 25,000 650,000
S3, Incorporated (a).......................... 55,900 279,500
-------------
966,000
-------------
SOFTWARE (0.1%)
Microsoft Corp. (a)........................... 4,000 517,000
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)
SPECIALIZED SERVICES (0.4%)
AccuStaff, Inc. (a)........................... 19,000 $ 437,000
Catalina Marketing Corp. (a).................. 40,000 1,850,000
CORESTAFF, Inc. (a)........................... 45,200 1,197,800
-------------
3,484,800
-------------
STEEL, ALUMINUM & OTHER METALS (0.3%)
British Steel PLC ADR (f)..................... 35,400 758,887
Coeur d'Alene Mines Corp...................... 9,200 82,800
Kaiser Aluminum Corp. (a)..................... 38,700 341,044
Newmont Mining Corp. ......................... 15,000 440,625
Reynolds Metals Co............................ 15,500 930,000
-------------
2,553,356
-------------
TELECOMMUNICATION EQUIPMENT (0.1%)
DSC Communications Corp. (a).................. 20,000 480,000
World Access, Inc. (a)........................ 30,000 716,250
-------------
1,196,250
-------------
TELECOMMUNICATION SERVICES (0.7%)
CIENA Corp. (a)............................... 25,000 1,528,125
Premiere Technologies, Inc. (a)............... 132,900 3,671,363
Rogers Communications, Inc.
Class B (a)(y)............................. 108,000 520,718
SmarTalk Teleservices, Inc. (a)............... 17,500 398,125
-------------
6,118,331
-------------
TEXTILE & APPAREL (0.1%)
Burlington Industries, Inc. (a)............... 96,200 1,328,763
-------------
UTILITIES (0.1%)
El Paso Electric Co. (a)...................... 100,000 731,250
-------------
Total Common Stocks
(Cost $178,967,088)........................ 173,603,960
-------------
PREFERRED STOCK (0.7%)
MINING (0.7%)
Freeport-McMoRan
Copper & Gold, Inc.
Series Silver (e)(j3)(n)................... 330,000 6,393,750
-------------
Total Preferred Stock
(Cost $5,626,500).......................... 6,393,750
-------------
<CAPTION>
Number of
Contracts
================
<S> <C>
PURCHASED PUT OPTIONS (0.6%)
AEROSPACE (0.1%)
Wyman-Gordon Co.
Expire January 1998
Strike Price $32.00........................... 900 $ 1,113,750
-------------
ENERGY (0.2%)
Apache Corp.
Expire January 1998
Strike Price $50.00........................... 1,000 1,493,800
-------------
GAS UTILITIES (0.2%)
Consolidated Natural Gas Co.
Expire January 1998
Strike Price $75.00........................... 1,000 1,450,000
-------------
STEEL, ALUMINUM & OTHER METALS (0.1%)
Coeur d'Alene Mines Corp.
Expire January 1998
Strike Price $18.00........................... 1,000 906,300
-------------
Total Purchased Put Options
(Cost $4,755,450).......................... 4,963,850
-------------
<CAPTION>
Principal
Amount Value
=====================================
<S> <C> <C>
SHORT-TERM INVESTMENT (0.2%)
COMMERCIAL PAPER (0.2%)
American Express Credit Corp.
6.55%, due 1/2/98.......................... $ 1,700,000 1,700,000
-------------
Total Short-Term Investment
(Cost $1,700,000).......................... 1,700,000
-------------
Total Investments
(Cost $855,151,031) (w).................... 95.2% 861,955,040(x)
Cash and Other Assets,
Less Liabilities........................... 4.8 43,830,104
----------- -------------
Net Assets.................................... 100.0% $ 905,785,144
=========== =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
SHORT POSITIONS (-16.6%)
COMMON STOCKS (-16.6%)
ADVERTISING (-0.2%)
Interpublic Group of Companies
Inc. (The)................................. (37,000) $ (1,843,063)
-------------
AEROSPACE (-0.1%)
Wyman-Gordon Co. ............................. (70,900) (1,391,412)
-------------
AUTO PARTS (-0.4%)
MascoTech, Inc. .............................. (203,800) (3,744,825)
-------------
BANKS (-0.7%)
Banc One Corp. ............................... (43,400) (2,357,163)
Union Planters Corp. ......................... (55,800) (3,790,912)
-------------
(6,148,075)
-------------
BUILDING MATERIALS (-0.4%)
Owens Corning ................................ (117,100) (3,996,037)
-------------
CABLE (-0.3%)
Cablevision Systems Corp.
Class A.................................... (11,800) (1,129,850)
Cox Communications, Inc.
Class A.................................... (40,000) (1,602,500)
-------------
(2,732,350)
-------------
CASINOS (-0.1%)
Station Casinos, Inc. ........................ (110,000) (1,120,625)
-------------
CELLULAR TELEPHONE (-0.1%)
United States Cellular Corp. ................. (19,400) (601,400)
-------------
CHEMICALS (-0.0%) (b)
RPM, Inc. of Ohio............................. (26,125) (398,406)
-------------
COMPUTERS & OFFICE EQUIPMENT (-2.4%)
Apple Computer, Inc. ......................... (237,600) (3,118,500)
Applied Magnetics Corp. ...................... (382,800) (4,258,650)
HMT Technology Corp. ......................... (33,600) (436,800)
InaCom Corp. ................................. (214,400) (6,016,600)
Quantum Corp. ................................ (127,440) (2,556,765)
Safeguard Scientifics, Inc. .................. (89,000) (2,792,375)
SunGard Data Systems, Inc. ................... (35,000) (1,085,000)
U.S. Office Products Co. ..................... (60,000) (1,177,500)
Vanstar Corp. ................................ (18,500) (209,281)
-------------
(21,651,471)
-------------
CONGLOMERATES (-0.3%)
Corning, Inc. ................................ (76,600) (2,843,775)
-------------
CONTAINERS (-0.1%)
Crown Cork & Seal Co., Inc. .................. (20,000) (1,002,500)
-------------
DOMESTIC OIL & GAS (-0.1%)
Enron Oil & Gas Co. .......................... (30,325) (642,511)
-------------
DOMESTIC OILS (-0.3%)
Occidental Petroleum Corp. ................... (78,400) (2,298,100)
-------------
DRUGS (-0.1%)
Alza Corp. ................................... (27,000) (858,937)
-------------
ELECTRICAL EQUIPMENT (-0.1%)
California Microwave, Inc. ................... (24,500) (474,688)
-------------
ENERGY (-0.4%)
Chevron Corp. ................................ (42,075) (3,239,775)
-------------
FINANCIAL SERVICES (-0.2%)
Cityscape Financial Corp. .................... (78,000) (39,000)
SunAmerica, Inc. ............................. (31,000) (1,325,250)
-------------
(1,364,250)
-------------
FOOD, BEVERAGES & TOBACCO (-0.8%)
Chiquita Brands
International, Inc. ....................... (67,000) (1,092,938)
Chock Full O' Nuts Corp. ..................... (8,100) (56,700)
Diageo PLC ADR (f)............................ (122,300) (4,632,112)
Quaker Oats Co. .............................. (22,500) (1,186,875)
-------------
(6,968,625)
-------------
HEALTH CARE (-0.1%)
Integrated Health Services, Inc. ............. (25,000) (779,688)
NovaCare, Inc. ............................... (5,000) (65,312)
-------------
(845,000)
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
=====================================
<S> <C> <C>
COMMON STOCKS (Continued)
HOUSEHOLD PRODUCTS (-0.3%)
Amway Japan Ltd. (z).......................... (97,400) $ (1,872,717)
Amway Japan Ltd. ADR (f)...................... (73,977) (684,287)
-------------
(2,557,004)
-------------
INDUSTRIAL (-0.0%) (b)
Concentra Managed Care, Inc. ................. (900) (30,375)
-------------
INSURANCE (-1.2%)
Fidelity National Financial, Inc. ............ (231,000) (7,189,875)
Fremont General Corp. ........................ (59,500) (3,257,625)
-------------
(10,447,500)
-------------
MEDIA (-1.4%)
HSN, Inc. .................................... (99,600) (5,129,400)
Time Warner, Inc. ............................ (117,900) (7,309,800)
-------------
(12,439,200)
-------------
MEDICAL EQUIPMENT (-0.0%) (b)
ESC Medical Systems Ltd. ..................... (7,000) (271,250)
Uromed Corp. ................................. (15,800) (55,795)
-------------
(327,045)
-------------
MINING (-0.0%) (b)
Inco Ltd. .................................... (600) (10,200)
-------------
NATURAL GAS PIPELINES (-0.1%)
Consolidated Natural Gas Co. ................. (16,900) (1,022,450)
-------------
OIL SERVICES (-0.3%)
EVI, Inc. .................................... (46,000) (2,380,500)
-------------
PAPER & FOREST PRODUCTS (-0.7%)
Fort James Corp. ............................. (32,193) (1,231,382)
International Paper Co. ...................... (123,200) (5,313,000)
-------------
(6,544,382)
-------------
POLLUTION & RELATED (-0.1%)
Browning-Ferris Industries, Inc. ............. (31,500) (1,165,500)
U.S. Filter Corp. ............................ (1,000) (29,938)
-------------
(1,195,438)
-------------
PUBLISHING (-1.4%)
Mail-Well, Inc. .............................. (318,200) (12,887,100)
-------------
REAL ESTATE (-0.1%)
Security Capital Pacific Trust ............... (21,139) (512,621)
-------------
RETAIL (-2.0%)
Costco Companies, Inc. ....................... (62,403) (2,784,734)
Home Depot, Inc. ............................. (161,750) (9,523,031)
Homebase, Inc. ............................... (35,000) (275,625)
Michaels Stores, Inc. ........................ (132,300) (3,869,775)
Saks Holdings, Inc. .......................... (90,000) (1,861,875)
-------------
(18,315,040)
-------------
SEMICONDUCTORS (-0.2%)
Micron Technology, Inc. ...................... (50,000) (1,300,000)
S3, Incorporated ............................. (108,700) (543,500)
-------------
(1,843,500)
-------------
SOFTWARE (-0.9%)
Microsoft Corp. .............................. (65,800) (8,504,650)
-------------
SPECIALIZED SERVICES (-0.1%)
Cendant Corp. ................................ (39,000) (1,335,750)
-------------
TELECOMMUNICATION EQUIPMENT (-0.6%)
DSC Communications Corp. ..................... (67,200) (1,612,800)
QUALCOMM, Inc. ............................... (45,200) (2,282,600)
World Access, Inc. ........................... (60,000) (1,432,500)
-------------
(5,327,900)
-------------
TELECOMMUNICATION SERVICES (-0.0%) (b)
Premiere Technologies, Inc. .................. (3,000) (82,875)
-------------
Total Common Stocks
(Proceeds $148,984,662).................... (149,929,355)
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Number of
Contracts Value
=====================================
<S> <C> <C>
WRITTEN CALL OPTION (0.0%) (b)
COMPUTERS & OFFICE EQUIPMENT (0.0%) (b)
Applied Magnetics Corp.
Expire January 1998
Strike Price $17.50........................... (100) $ (625)
-------------
Total Written Call Option
(Proceeds $34,699)......................... (625)
-------------
Total Short Positions
(Proceeds $149,019,361).................... $(149,929,980)
=============
</TABLE>
- ----------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Fair valued security. Aggregate at 0.30% of net assets.
(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 Shares--each share represents one-tenth of a share of Series I
convertible preferred stock.
(j2) Depository Shares--each share represents one-fourth of a share of Series L
$14.00 convertible preferred stock.
(j3) Depository Shares--each share represents 0.025 shares of a share of silver
denominated preferred stock.
(k) Each receipt represents approximately one-tenth the value of the S&P 500
Index.
(l) 148 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.
(m1) STRYPES--Structured Yield Product Exchangeable for IMC Global, Inc. common
stock.
(m2) STRYPES--Structured Yield Product Exchangeable for SunAmerica, Inc. common
stock.
(n) Dividend equals U.S. dollar equivalent of 0.04125 oz. of silver per share.
(o) Euro-dollar bond.
(p) Yankee bond.
(q) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(r) Convertible into Inamed Corp. at a conversion ratio of 2,924.7693 per 5,000
shares of Italy Province (Republic of).
(s) 40,000 units--each unit reflects 0.75 shares of common stock, plus 0.25
shares of preferred stock.
(t) Convertible into Republic Industries, Inc.
(u) Restricted security.
(v) Paired common stock shares of Meditrust Corp. and Meditrust Operating Co.
under the same management that are sold as a unit.
(w) The cost for Federal income tax purposes is $858,970,026.
(x) At December 31, 1997, net unrealized appreciation was $3,818,995, 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 $104,674,658 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $100,855,663.
(y) Canadian security.
(z) Japanese security.
(aa) LYON - Liquid Yield Option Note: callable, zero coupon securities priced at
a deep discount from par. They include a "put" feature that enables holders
to redeem them at a specific date, at a specific price. Put prices reflect
fixed interest rates, and therefore increase over time.
(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.
27
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $855,151,031) ............................................... $ 861,955,040
Cash ............................................................................................................ 3,884,159
Deposit with broker for securities sold short ................................................................... 149,019,361
Receivables:
Investment securities sold .................................................................................... 35,829,845
Dividends and interest ........................................................................................ 18,954,197
Fund shares sold .............................................................................................. 231,086
Unrealized appreciation on forward foreign currency contracts ................................................... 1,049,531
---------------
Total assets ................................................................................................. 1,070,923,219
---------------
LIABILITIES:
Securities sold short (proceeds $149,019,361) ................................................................... 149,929,980
Payables:
Investment securities purchased ............................................................................... 9,951,036
Fund shares redeemed .......................................................................................... 3,406,695
NYLIFE Distributors ........................................................................................... 732,241
MainStay Management ........................................................................................... 566,922
Transfer agent ................................................................................................ 171,194
Dividends on securities sold short ............................................................................ 139,220
Custodian ..................................................................................................... 11,000
Trustees ...................................................................................................... 6,303
Accrued expenses ................................................................................................ 223,484
---------------
Total liabilities ............................................................................................ 165,138,075
---------------
Net assets ...................................................................................................... $ 905,785,144
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ....................................................................................................... $ 47,490
Class B ....................................................................................................... 622,310
Additional paid-in capital ...................................................................................... 897,589,501
Accumulated undistributed net investment income ................................................................. 538,389
Accumulated undistributed net realized gain on investments ...................................................... 44,533
Net unrealized appreciation on investments ...................................................................... 6,804,009
Net unrealized depreciation on securities sold short ............................................................ (910,619)
Net unrealized appreciation on forward foreign currency contracts ............................................... 1,049,531
---------------
Net assets ...................................................................................................... $ 905,785,144
===============
CLASS A
Net assets applicable to outstanding shares ..................................................................... $ 64,245,587
===============
Shares of beneficial interest outstanding ....................................................................... 4,748,983
===============
Net asset value per share outstanding ........................................................................... $ 13.53
Maximum sales charge (5.50% of offering price) .................................................................. 0.79
---------------
Maximum offering price per share outstanding .................................................................... $ 14.32
===============
CLASS B
Net assets applicable to outstanding shares ..................................................................... $ 841,539,557
===============
Shares of beneficial interest outstanding ....................................................................... 62,231,047
===============
Net asset value and offering price per share outstanding ........................................................ $ 13.52
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
28
<PAGE>
Statement of Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................................................................. $ 15,128,244
Interest .................................................................................................. 36,032,265
------------
Total income ............................................................................................. 51,160,509
------------
Expenses:
Distribution--Class B ..................................................................................... 5,354,850
Administration ............................................................................................ 2,710,393
Advisory .................................................................................................. 2,710,393
Service ................................................................................................... 2,302,610
Transfer agent ............................................................................................ 1,516,545
Dividends on securities sold short ........................................................................ 1,378,619
Management ................................................................................................ 1,210,730
Interest expense on securities sold short ................................................................. 552,745
Shareholder communication ................................................................................. 491,457
Professional .............................................................................................. 133,944
Recordkeeping ............................................................................................. 129,927
Custodian ................................................................................................. 125,652
Registration .............................................................................................. 66,516
Trustees .................................................................................................. 25,122
Miscellaneous ............................................................................................. 39,805
------------
Total expenses ........................................................................................... 18,749,308
------------
Net investment income ....................................................................................... 32,411,201
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ..................................................................................... 75,766,771
Securities sold short ..................................................................................... (6,578,078)
Foreign currency transactions ............................................................................. 1,087,917
------------
Net realized gain on investments and foreign currency transactions .......................................... 70,276,610
------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ..................................................................................... (20,895,179)
Securities sold short ..................................................................................... 12,260,878
Forward foreign currency contracts ........................................................................ 637,775
------------
Net unrealized loss on investments and foreign currencies ................................................... (7,996,526)
------------
Net realized and unrealized gain on investments and foreign currency transactions ........................... 62,280,084
------------
Net increase in net assets resulting from operations ........................................................ $ 94,691,285
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $6,552.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
29
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 32,411,201 $ 26,085,604
Net realized gain on investments ............................................................... 75,766,771 43,583,816
Net realized loss on short sale transactions ................................................... (6,578,078) (4,786,612)
Net realized gain on foreign currency transactions ............................................. 1,087,917 750,486
Net change in unrealized appreciation on security transactions ................................. (20,895,179) 13,120,801
Net change in unrealized depreciation on securities sold short ................................. 12,260,878 (8,782,317)
Net change in unrealized appreciation on forward foreign currency contracts .................... 637,775 262,408
------------- -------------
Net increase in net assets resulting from operations ........................................... 94,691,285 70,234,186
------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (2,668,900) (2,097,940)
Class B ....................................................................................... (30,007,599) (26,160,372)
From net realized gain on investments:
Class A ....................................................................................... (5,382,678) (2,448,253)
Class B ....................................................................................... (70,065,339) (34,512,908)
------------- -------------
Total dividends and distributions to shareholders ........................................... (108,124,516) (65,219,473)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................................... 15,235,444 36,576,622
Class B ....................................................................................... 123,016,962 390,110,257
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 7,544,470 4,131,694
Class B ....................................................................................... 89,693,078 54,652,050
------------- -------------
235,489,954 485,470,623
Cost of shares redeemed:
Class A ....................................................................................... (14,025,978) (11,095,108)
Class B ....................................................................................... (156,109,349) (79,823,414)
------------- -------------
Increase in net assets derived from capital share transactions .............................. 65,354,627 394,552,101
------------- -------------
Net increase in net assets .................................................................. 51,921,396 399,566,814
NET ASSETS:
Beginning of year ................................................................................ 853,863,748 454,296,934
------------- -------------
End of year ...................................................................................... $ 905,785,144 $ 853,863,748
============= =============
Accumulated undistributed net investment income (excess distribution) ............................ $ 538,389 $ (263,608)
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
30
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
---------------------------------
Class A Class B Class A Class B Class A Class B September 1
------- ------- ------- ------- ------- ------- through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
------------------ ------------------- -------------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $13.81 $13.80 $13.45 $13.45 $11.67 $11.67 $12.83 $13.92 $11.46
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income ..... 0.60 0.51 0.57 0.48 0.59 0.51 0.19 0.50 0.92
Net realized and unrealized
gain (loss) on
investments ............. 0.91 0.91 1.02 1.02 2.14 2.14 (0.71) 0.70 2.45
Net realized and unrealized
gain (loss) on foreign
currency transactions ... 0.03 0.03 0.02 0.02 (0.00)(b) (0.00)(b) -- (0.01) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .............. 1.54 1.45 1.61 1.52 2.73 2.65 (0.52) 1.19 3.37
------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income .................. (0.60) (0.51) (0.62) (0.54) (0.55) (0.47) (0.21) (0.49) (0.42)
From net realized gain
on investments .......... (1.22) (1.22) (0.63) (0.63) (0.40) (0.40) (0.43) (1.79) (0.49)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions ........... (1.82) (1.73) (1.25) (1.17) (0.95) (0.87) (0.64) (2.28) (0.91)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end of
period .................. $13.53 $13.52 $13.81 $13.80 $13.45 $13.45 $11.67 $12.83 $13.92
====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment return (a) 11.36% 10.67% 12.13% 11.39% 23.72% 23.02% (4.09%) 8.95% 30.80%
Ratios (to average net
assets)/ Supplemental
Data:
Net investment
income ............... 4.10% 3.47% 4.4% 3.8% 4.9% 4.3% 4.8%+ 3.5% 3.4%
Expenses ............... 1.45% 2.08% 1.5% 2.1% 1.5% 2.1% 1.9%+ 1.9% 1.9%
Portfolio turnover rate ... 273% 273% 296% 296% 243% 243% 77% 269% 370%
Average commission rate
paid .................... $0.0461 $ 0.0461 $0.0468 $ 0.0468 (c) (c) (c) (c) (c)
Net assets at end of
period (in 000's) ...... $64,246 $841,540 $56,621 $797,243 $26,836 $427,461 $180,304 $160,407 $58,943
</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.
31
<PAGE>
MainStay Convertible Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are deemed by the Sub-Adviser to be
representative of market values at the regular close of business of the
Exchange, (f) by appraising options and futures contracts at the last sale price
on the market
32
<PAGE>
Notes to Financial Statements
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 Sub-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 Exchange will
not be reflected in the Fund's calculation of net asset value unless the
Sub-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 period end to credit loss in the event of a counterparty's failure
to perform its obligations.
33
<PAGE>
MainStay Convertible Fund
Forward foreign currency contract open at December 31, 1997:
<TABLE>
<CAPTION>
Contract Amount Contract Amount Unrealized
Sold Purchased Appreciation
--------------- --------------- ------------
<S> <C> <C> <C>
Foreign Currency Sale Contract
------------------------------
Japanese Yen vs. US$, expiring 2/19/98 (Y)1,400,000,000 $11,895,658 $1,049,531
==========
</TABLE>
- ----------
(Y) Japanese Yen.
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.
Purchased and Written Options. The Fund may write covered call and put options
on its portfolio securities. Premiums are received and are recorded as
liabilities. The liabilities are subsequently adjusted to reflect the current
value of the options written. Premiums received from writing options which
expire are treated as realized gains. Premiums received from writing options
which are exercised or are canceled in closing purchase transactions are added
to the proceeds or netted against the amount paid on the transaction to
determine the realized gain or loss. By writing a covered call option, a Fund
foregoes in exchange for the premium the opportunity for capital appreciation
above the exercise price should the market price of the underlying security
increase. By writing a covered put option, a Fund, in exchange for the premium,
accepts the risk of a decline in the market value of the underlying security
below the exercise price.
The Fund may purchase call and put options on its portfolio securities. The Fund
may purchase call options to protect against an increase in the price of the
security it anticipates purchasing. The Fund may purchase put options on its
securities to protect against a decline in the value of the security or to close
out covered written put positions. Risks may arise from an imperfect correlation
between the change in market value of the securities held by the Fund and the
prices of options relating to the securties purchased or sold by the Fund and
from the possible lack of a liquid secondary market for an option. The maximum
exposure to loss for any purchased option is limited to the premium initially
paid for the option.
34
<PAGE>
Notes to Financial Statements continued
Purchased option activity for the year ended December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
--------- -----------
<S> <C> <C>
Options outstanding at December 31, 1996 ........................................... -- $ --
Options--assigned .................................................................. (8,050) (3,896,413)
Options--purchased ................................................................. 11,950 8,651,863
------- -----------
Options outstanding at December 31, 1997 ........................................... 3,900 $ 4,755,450
======= ===========
</TABLE>
Written option activity for the year ended December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
--------- -----------
<S> <C> <C>
Options outstanding at December 31, 1996 ........................................... -- $ --
Options--expired ................................................................... 7,550 7,550
Options--written ................................................................... (7,650) (42,249)
------- -----------
Options outstanding at December 31, 1997 ........................................... (100) $ (34,699)
======= ===========
</TABLE>
Restricted Security. 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.
Restricted security held at December 31, 1997:
<TABLE>
<CAPTION>
Percent
Acquisition 12/31/97 of
Security Date Shares Cost Value Net Assets
- -------- ---- ------ ---- ----- ----------
<S> <C> <C> <C> <C> <C>
United International Holdings, Inc.
4.00%, Series A
Convertible Preferred Stock.................... 8/1/97 53,641 $7,307,261 $7,509,740 0.8%
========== ========== ===
</TABLE>
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 difference of $1,067,295 has been reclassified from
accumulated net realized gain on investments to accumulated 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.
35
<PAGE>
MainStay Convertible Fund
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. Premiums
on securities purchased are not amortized for this fund.
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 direct allocations of expenses can 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 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.72%.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.36% of
the average daily net assets of the Fund.
36
<PAGE>
Notes to Financial Statements continued
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.36% of
the average daily net assets of the Fund. MainStay Management is currently paid
a fee at a rate equal to the aggregate of the advisory and administrative fee
rates in effect prior to October 27, 1997. For the period January 1, 1997,
through October 26, 1997, MacKay-Shields and NYLIFE Distributors each earned
fees of $2,710,393. For the period October 27, 1997, through December 31, 1997,
MainStay Management earned $1,210,730.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $39,646 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$1,466,588 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS
37
<PAGE>
MainStay Convertible Fund
acted as transfer, dividend disbursing and shareholder servicing agent and
NYLIFE Distributors was paid by the Fund for providing certain transfer agency
functions. Transfer agent expense paid to MSS and NYLIFE Distributors for the
year ended December 31, 1997, amounted to $899,527 and $66,511, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $30,081 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $21,595 and $108,332 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Deposit with Broker:
Cash deposited with broker in the amount of $149,019,361 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, 1997, purchases and sales of U.S. Government
securities were $123,899 and $133,995, respectively. Purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $1,759,906 and
$1,758,530, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------ -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold......................................................... 1,070 8,666 2,602 27,714
Shares issued in reinvestment of dividends and distributions........ 551 6,561 297 3,935
----- ------- ----- ------
1,621 15,227 2,899 31,649
Shares redeemed..................................................... (973) (10,777) (793) (5,658)
----- ------- ----- ------
Net increase........................................................ 648 4,450 2,106 25,991
===== ======= ===== ======
</TABLE>
38
<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 fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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 25, 1998
39
<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 with the protection of a
principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[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 Invests in convertible securities for You want income from securities that
CONVERTIBLE FUND(ss.) graph indicating a special blend of capital may offer growth potential if converted
risk/reward of fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph indicating return from common stocks, have undervalued and you want to
risk/reward of fund] convertible securities, and high-yield manage risk through multimarket
corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[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
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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.
40
<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 primarily from U.S. government
fund] securities #
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph indicating An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/reward of fund that is actively managed for and can accept the higher risk of
fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph indicating non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward of risk control diversification to your domestic
fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating preservation of capital, and competitive yields on cash you're plan-
risk/reward of liquidity, with free checkwriting** ning to spend or invest in the near future
fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph indicating tive overall return by investing in higher income and overall return by
risk/reward of a diversified portfolio of domestic investing in multiple bond market
fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free+++
fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks high current income You are in a high federal income tax
Tax Free Bond Fund risk/reward of exempt from regular federal income tax bracket or want to pay less of your
fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
41
<PAGE>
===============
MAINSTAY
===============-----------------
Convertible Fund
----------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN06-02/98
1
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Equity Index Fund Highlights 5
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Industry--Top 5 10
Returns & Lipper Rankings 11
Top 10 Equity Holdings 12
Portfolio of Investments 13
Financial Statements 22
Notes to Financial Statements 26
Report of Independent Accountants 31
The MainStay Funds 32
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* See page 6 for additional information on the S&P 500.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Equity Index Fund, and MainStay Management, Inc.; approve a Subadvisory
Agreement between MainStay Management, Inc., on behalf of the MainStay Equity
Index Fund, and Monitor Capital Advisors, Inc.; eliminate or revise certain
fundamental investment restrictions including eliminating certain state-imposed
fundamental investment restrictions, making certain fundamental investment
restrictions nonfundamental, and eliminating or revising fundamental
restrictions pertaining to borrowing money, industry concentration, issuing
senior securities, and certain options and futures transactions; and ratify the
selection of Price Waterhouse LLP as independent certified public accountants of
the Trust.
A summary of the proposals and the voting by shareholders of the MainStay Equity
Index Fund is presented below.
PROPOSAL 1--Election of Trustees
<TABLE>
<CAPTION>
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 6,188,622 213,356 Passed
Nancy Maginnes Kissinger.................................................. 6,190,556 211,422 Passed
Donald E. Nickelson....................................................... 6,190,904 211,075 Passed
Richard S. Trutanic....................................................... 6,190,803 211,176 Passed
Harry G. Hohn............................................................. 6,190,861 211,118 Passed
Terry L. Lierman.......................................................... 6,191,186 210,792 Passed
Donald K. Ross............................................................ 6,191,103 210,875 Passed
Walter W. Ubl............................................................. 6,191,186 210,792 Passed
Alice T. Kane............................................................. 6,190,904 211,075 Passed
John B. McGuckian......................................................... 6,190,904 211,075 Passed
Stephen C. Roussin........................................................ 6,190,904 211,075 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 6,063,906.34 Against - 90,586.50 Abstain - 247,484.59 Result - Passed
<CAPTION>
PROPOSAL 3B--Approval of Subadvisory Agreement between the Manager and Monitor Capital Advisors, Inc.
<S> <C> <C> <C>
For - 6,039,423.09 Against - 90,011.61 Abstain - 272,542.73 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 4,411,650.62 Against - 157,655.01 Abstain - 296,722.81 Broker Non-Vote - 1,535,950.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 4,411,137.82 158,167.81 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 4,411,234.97 158,070.65 Passed
A3--Real Estate Limited Partnership Interests.............................. 4,406,719.92 162,585.71 Passed
A4--Companies with Limited Operating History............................... 4,410,173.31 159,132.31 Passed
A5--Ownership of Beneficial Interests...................................... 4,404,697.76 164,607.87 Passed
B1--Illiquid Securities and Resale under Rule 144A......................... 4,411,234.97 158,070.65 Passed
B2--Securities of Other Investment Companies............................... 4,410,081.17 159,224.46 Passed
B3--Purchases to Exercise Control or Management............................ 4,405,800.48 163,505.14 Passed
C2--Borrowing Money........................................................ 4,411,109.77 158,195.85 Passed
C3--Industry Concentration................................................. 4,407,047.43 162,258.20 Passed
C4--Issuing Senior Securities.............................................. 4,411,202.92 158,102.70 Passed
C5--Options and Futures Transactions....................................... 4,405,611.18 163,694.44 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 6,152,100.10 Against - 49,177.82 Abstain - 200,699.51 Result - Passed
</TABLE>
4
<PAGE>
MainStay Equity Index Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] The S&P 500 Index* experienced its third consecutive year with returns
over 20% and earned more than half of the year's total return in the second
quarter of 1997.
[ ] Political and economic problems in several Asian markets caused wide
swings in the S&P 500 Index throughout the second half of the year.
[ ] Large mergers and acquisitions continued to affect the market, and
landmark litigation in the technology and tobacco industries had an impact
on future profit potential.
[ ] In an earnings-oriented environment, stocks that did not meet the
market's earnings estimates suffered.
[ ] Overall, the stock market experienced a high degree of volatility, with one
hundred point swings in the Dow Jones Industrial Average+ more the norm
than the exception by year end. Even when measured in percentage terms, the
daily swings in market value have been much higher than was observed in
recent years.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] For the year ended 12/31/97, the MainStay Equity Index Fund returned 32.26%
for Class A shares, excluding all sales charges.
[ ] The Fund benefited from its orientation toward large-capitalization stocks,
which tended to outperform smaller-capitalization issues throughout much of
the year.
[ ] The MainStay Equity Index Fund closely tracked the S&P 500 Index and the
average Lipper++ S&P 500 Index objective fund, which returned 32.60% for
the year ended 12/31/97.
[ ] The Fund outperformed the Lipper general equity average, which was 24.36%
for the year.
================================================================================
- ----------
* See page 6 for more information on the S&P 500 Index.
+ The Dow Jones Industrial Average is a price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but also including
financial, leisure, and other service-oriented firms.
++ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-Year 28.30%, 5-Year 18.45%, since inception 17.83%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year MainStay Equity S&P
End Index Fund 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/20/97 $ 9,700 $10,000 $10,000
12/91 $12,430 $13,040 $10,298
12/92 $13,200 $14,032 $10,603
12/93 $14,391 $15,441 $10,893
12/94 $14,463 $15,645 $11,177
12/95 $19,657 $21,518 $11,467
12/96 $23,988 $26,454 $11,847
12/97 $31,728 $35,280 $12,047
</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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Equity Index Fund Team
EQUITY INDEX FUND TEAM
Steve Killian, James A. Mehling, CFA,
Shruti Parikh, and Francis Ok
For the year ended 12/31/97, the Standard & Poor's 500 Composite Stock Price
Index* returned 33.36%--another outstanding year for equity investors. In fact,
this was the third consecutive year that the stock market provided returns over
20%.
The stock market benefited from strong domestic and foreign capital inflows,
combined with merger mania that continued unabated throughout the year. Among
the largest acquisition offers were WorldCom's $37.0 billion bid for MCI, First
Union's offer for CoreStates, and Starwood Lodging's proposed rescue of ITT
Sheraton from Hilton's take-over attempt. Adding to the market excitement were
major antitrust litigation against Microsoft, a contract dispute between
Microsoft and Sun Microsystems, an out-of-court settlement of an Intel/DEC
patent infringement suit, and a major settlement for big tobacco companies.
Yet all of this paled in comparison to the impact of problems within the smaller
Asian countries. Hong Kong took the lead in October's global market correction,
declining over 13% on October 28, and more than 33% in a span of seven days.
South Korea, the world's 11th largest economy, appealed to the International
Monetary Fund for a $55 billion bailout. And Japan's stock market declined 30%
for the year.
The effects were felt throughout the U.S. stock market, with the Dow+ dropping
554 points on October 27, and recording its largest single-day gain in history
the following day. By the end of the year, 100 point moves in the Dow were more
the norm than the exception.
Given this context, how did the MainStay Equity Index Fund do in 1997?
Very well. For the year ended 12/31/97, the MainStay Equity Index Fund returned
32.26% for Class A shares, excluding all sales charges. This was also quite
close to, though slightly behind the average Lipper++ S&P 500 Index objective
fund, which returned 32.60% for the year. On the other hand, the Fund
outperformed the Lipper general equity average, which was 24.36% in 1997.
[GRAPHIC]
- ----------
* See page 6 for more information on the S&P 500 Index.
+ See page 5 for more information on the Dow Jones Industrial Average.
++ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[GRAPHIC]
Capitalization
- --------------
The dollar value 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, stock repurchases, or price movement.
Weighting
- ---------
The proportion of an index represented by the capitalization of an individual
company or sector. Companies or sectors with larger relative amounts of capital
will thus have greater weightings in an index in which they are represented.
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- -----------------------------------------
<S> <C>
12/91 28.01
12/92 6.19
12/93 9.01
12/94 0.50
12/95 35.91
12/96 22.04
12/97 32.26
</TABLE>
See footnote * on page 11 for more information on performance.
Which sectors were the best performers in 1997?
Truckers, which had done poorly for the previous two years, was the leading
sector in 1997, with a return of 152.9%. With only one stock, however, the
sector accounts for just 0.03% of the Index. Investment bank/brokerage firms
were up 80.7%, savings & loans rose 74.2%, airlines advanced 66.2%, and
broadcast/media returned 64.3%. Each of these sectors accounted for less than 1%
of the Index.
Which securities had the greatest positive impact?
General Electric is the largest capitalization stock in the Index, representing
3.17% of the total, and returned 50.9% for the year. Despite the litigation
Microsoft faced, the company's stock gained 56.4%, representing 2.06% of the
Index. Pfizer returned 82.2%, with a 1.27% weighting. Bristol-Myers Squibb and
Eli Lilly earned 77.5% and 93.5%, respectively, and both represent slightly over
1% of the Index.
Which sectors did poorly in 1997?
Engineering and construction was the worst sector in terms of performance,
returning -37.5%, but had little impact, with just a 0.06% weighting in the
Index. Gold lost 35.9%, metals-miscellaneous was down 34.5%, and shoes slid
33.1%. Of these losers, only gold, with a weighting of 0.23%, represented more
than 0.20% of the Index.
Did any individual stocks have a significant negative impact on the Index?
While several stocks had substantially negative returns, their weighting in the
Index was small enough to make their impact relatively insignificant. The worst
performers in terms of overall impact were 3Com, which returned -52.4% and
represented 0.16% of the Index; Columbia/HCA,
8
<PAGE>
which returned -27.1% and had a 0.25% weighting; NIKE, which fell 33.8% and
represented 0.15% of the Index; Eastman Kodak returned -22.4% with a 0.26%
weighting; and Oracle, which dropped 19.8% and accounted for 0.29% of the Index.
Were there any changes in the Index during the reporting period?
While there were no changes in the Index construction methodology, there were
many additions and deletions to the Index that resulted from corporate actions
and committee decisions. For example, prior to their merger, both Travelers and
Salomon Brothers were separately listed as S&P 500 companies. Since the merger,
however, only Travelers appears. With the deletion of Salomon Brothers, the
Standard & Poor's 500 Index committee assigned Synovus Financial, a southeastern
commercial bank, to the Index to maintain 500 stocks that reflect the overall
makeup of today's stock market.
What is the outlook for 1998?
The Fund seeks to track the performance of the Index regardless of the
investment outlook. While the Asian crisis may cause domestic inflation to
decline and may reduce demand for domestic goods overseas, there are a number of
other factors that may also influence the stock market, many of which are
difficult to forecast.
Rather than try to predict where markets will move, investors in the Fund should
take note of the fact that returns for the last three years have been more than
twice the average annual total return of the S&P 500 Index since 1926.(ss.)
Although past performance is no guarantee of future results, in the past,
markets have tended to move closer to their average returns over time. While we
cannot say whether or when this may occur, the Fund will continue to track the
S&P 500 Index, regardless of the market environment in 1998.
James A. Mehling, CFA
Portfolio Manager
[GRAPHIC]
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
- ----------
(ss.) Source: Ibbotson Associates. Used with permission. All rights reserved.
Past performance is no guarantee of future results.
9
<PAGE>
[GRAPHIC]
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
--------
<S> <C>
Oil-Integrated International 5.7%
Major Regional Banks 5.6%
Drugs 4.7%
Health Care-Diversified 4.1%
Telephone 4.1%
All Other 75.8%
</TABLE>
Actual percentages will vary over time.
10
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 32.26% 19.17% 18.35%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 28.30% 18.45% 17.83%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Equity Index 55 out of 30 out of 13 out of
Fund 66 funds 31 funds 13 funds
Average Lipper
S&P 500 Index
objective fund 32.60% 23.08% 19.17%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $30.91 $0.2971 $0.4109
================================================================================
</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 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 certain fee waivers and/or expense limitations, without which total
return figures may have been lower. The fee waivers and/or expense
limitations are voluntary and 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 for the period 12/20/90 through 12/31/97.
For the 12-month period ended 12/31/97, the Lipper general equity average
included 2,659 funds and the MainStay Equity Index Fund was ranked 446 out
of 2,659; 230 out of 941; and 307 out of 641 funds for the 1-year, 5-year,
and since-inception periods, respectively.
[GRAPHIC]
11
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 12/31/97
- --------------------------------------------------------------------------------
HOLDING AMOUNT
================================================================================
<S> <C>
General Electric Co. $13,494,910
Coca-Cola Co. (The) 9,260,475
Microsoft Corp. 8,758,497
Exxon Corp. 8,478,935
Merck & Co., Inc. 7,153,069
Royal Dutch Petroleum Co. 6,522,062
Intel Corp. 6,455,624
Philip Morris Cos. Inc. 6,171,109
Procter & Gamble Co. (The) 6,025,445
International Business Machines Corp. 5,710,472
================================================================================
</TABLE>
[GRAPHIC]
- ----------
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.
12
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (97.4%)+
AEROSPACE/DEFENSE (1.6%)
Boeing Co. (The).............................. 56,157 $ 2,748,183
General Dynamics Corp......................... 3,535 305,557
Lockheed Martin Corp.......................... 11,034 1,086,849
Northrop Grumman Corp......................... 3,722 428,030
Raytheon Co. Class B.......................... 19,030 961,015
Rockwell International Corp................... 11,784 615,714
United Technologies Corp...................... 13,072 951,805
------------
7,097,153
------------
AIRLINES (0.4%)
AMR Corp. (a)................................. 5,163 663,446
Delta Air Lines, Inc.......................... 4,204 500,276
Southwest Airlines Co......................... 12,373 304,685
US Airways Group, Inc. (a).................... 5,133 320,812
------------
1,789,219
------------
ALUMINUM (0.3%)
Alcan Aluminum Ltd............................ 12,727 351,583
Aluminum Co. of America....................... 9,741 685,523
Reynolds Metals Co............................ 4,182 250,920
------------
1,288,026
------------
AUTO PARTS & EQUIPMENT (0.3%)
Cooper Tire & Rubber Co....................... 4,385 106,884
Echlin Inc.................................... 3,507 126,910
Genuine Parts Co.............................. 10,159 344,771
Goodyear Tire & Rubber Co. (The).............. 8,768 557,864
------------
1,136,429
------------
AUTOMOBILES (1.6%)
Chrysler Corp................................. 37,264 1,311,227
Ford Motor Co................................. 67,437 3,283,339
General Motors Corp........................... 39,794 2,412,511
------------
7,007,077
------------
BEVERAGES - ALCOHOLIC (0.5%)
Anheuser-Busch Cos., Inc...................... 27,655 1,216,820
Brown-Forman Corp. Class B.................... 3,808 210,392
Coors (Adolph) Co. Class B.................... 2,077 69,060
Seagram Co. Ltd. (The)........................ 20,010 646,573
------------
2,142,845
------------
BEVERAGES - SOFT DRINKS (2.8%)
Coca-Cola Co. (The)........................... 138,994 9,260,475
PepsiCo, Inc.................................. 85,212 3,104,912
------------
12,365,387
------------
BROADCAST/MEDIA (0.9%)
CBS Corp...................................... 39,708 1,168,904
Clear Channel
Communications, Inc. (a)................... 5,436 431,822
Comcast Corp. Special Class A................. 19,563 617,457
Tele-Communications, Inc. Series A
TCI Group (a).............................. 28,499 796,191
US West Media Group (a)....................... 34,138 985,735
------------
4,000,109
------------
BUILDING MATERIALS (0.2%)
Masco Corp.................................... 9,278 472,018
Owens Corning................................. 2,864 97,734
Sherwin-Williams Co. (The).................... 9,680 268,620
------------
838,372
------------
CHEMICALS (2.0%)
Air Products & Chemicals, Inc................. 6,201 510,032
Dow Chemical Co. (The)........................ 12,843 1,303,565
Du Pont (E.I.) De Nemours & Co................ 63,456 3,811,326
Eastman Chemical Co........................... 4,442 264,577
Goodrich (B.F.) Co. (The)..................... 4,024 166,744
Hercules Inc.................................. 5,471 273,892
Monsanto Co................................... 33,338 1,400,196
Praxair, Inc.................................. 8,865 398,925
Rohm & Haas Co................................ 3,583 343,072
Union Carbide Corp............................ 7,011 301,035
------------
8,773,364
------------
CHEMICALS - DIVERSIFIED (0.3%)
Avery Dennison Corp........................... 5,821 260,490
Engelhard Corp................................ 8,050 139,869
FMC Corp. (a)................................. 2,058 138,529
PPG Industries, Inc........................... 10,096 576,734
------------
1,115,622
------------
CHEMICALS - SPECIALTY (0.3%)
Grace (W.R.) & Co............................. 4,087 328,748
Great Lakes Chemical Corp..................... 3,374 151,408
Morton International, Inc..................... 7,464 256,575
Nalco Chemical Co............................. 3,820 151,129
Sigma-Aldrich Corp............................ 5,667 225,263
------------
1,113,123
------------
</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.
13
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
COMMUNICATION - EQUIPMENT MANUFACTURERS (2.2%)
Andrew Corp. (a).............................. 5,104 $ 122,496
Bay Networks, Inc. (a)........................ 11,859 303,146
Cabletron Systems, Inc. (a)................... 8,820 132,300
Cisco Systems, Inc. (a)....................... 56,440 3,146,558
DSC Communications Corp. (a).................. 6,627 159,048
Lucent Technologies Inc....................... 36,091 2,882,769
NextLevel Systems, Inc. (a)................... 8,197 146,521
Northern Telecom Ltd.......................... 14,719 1,309,991
Scientific-Atlanta, Inc....................... 4,302 72,059
Tellabs, Inc. (a)............................. 10,197 539,166
3Com Corp. (a)................................ 19,403 677,892
------------
9,491,946
------------
COMPUTER - SOFTWARE & SERVICES (3.6%)
Adobe Systems Inc............................. 4,129 170,321
Autodesk, Inc................................. 2,606 96,422
Automatic Data Processing, Inc................ 16,420 1,007,778
Ceridian Corp. (a)............................ 4,282 196,169
Computer Associates
International, Inc......................... 30,685 1,622,469
Computer Sciences Corp. (a)................... 4,357 363,810
Equifax Inc................................... 8,442 299,163
First Data Corp............................... 24,081 704,369
HBO & Co...................................... 11,187 536,976
Microsoft Corp. (a)........................... 67,764 8,758,497
Novell, Inc. (a).............................. 19,669 147,518
Oracle Corp. (a).............................. 54,994 1,227,054
Parametric Technology Corp. (a)............... 7,134 337,973
Shared Medical Systems Corp................... 1,318 86,988
------------
15,555,507
------------
COMPUTER SYSTEMS (3.7%)
Apple Computer, Inc. (a)...................... 7,146 93,791
Compaq Computer Corp. (a)..................... 42,537 2,400,682
Data General Corp. (a)........................ 2,696 47,011
Dell Computer Corp. (a)....................... 18,357 1,541,988
Digital Equipment Corp. (a)................... 8,297 306,989
EMC Corp. (a)................................. 27,862 764,464
Hewlett-Packard Co............................ 58,419 3,651,187
International Business
Machines Corp.............................. 54,613 5,710,472
Seagate Technology, Inc. (a).................. 13,735 264,399
Silicon Graphics, Inc. (a).................... 10,480 130,345
Sun Microsystems, Inc. (a).................... 21,060 839,768
Unisys Corp. (a).............................. 9,905 137,432
------------
15,888,528
------------
CONGLOMERATES (0.2%)
Tenneco Inc................................... 9,681 382,399
Textron Inc................................... 9,295 580,938
------------
963,337
------------
CONTAINERS - METAL & GLASS (0.2%)
Ball Corp..................................... 1,726 60,949
Crown Cork & Seal Co., Inc.................... 7,237 362,755
Owens-Illinois, Inc. (a)...................... 7,838 297,354
------------
721,058
------------
CONTAINERS - PAPER (0.1%)
Bemis Co., Inc................................ 2,999 132,144
Stone Container Corp.......................... 5,523 57,646
Temple-Inland Inc............................. 3,107 162,535
------------
352,325
------------
COSMETICS (0.9%)
Alberto-Culver Co. Class B.................... 3,110 99,714
Avon Products, Inc............................ 7,410 454,789
Gillette Co. (The)............................ 31,470 3,160,768
International Flavors &
Fragrances Inc............................. 6,150 316,725
------------
4,031,996
------------
DRUGS (4.7%)
Lilly (Eli) & Co. ............................ 62,359 4,341,746
Merck & Co., Inc. ............................ 67,323 7,153,069
Pfizer Inc. .................................. 72,573 5,411,224
Pharmacia & Upjohn, Inc. ..................... 28,578 1,046,669
Schering-Plough Corp. ........................ 41,147 2,556,257
------------
20,508,965
------------
ELECTRIC POWER COMPANIES (2.7%)
American Electric Power Co., Inc. ............ 10,618 548,154
Baltimore Gas & Electric Co. ................. 8,273 281,799
Carolina Power & Light Co. ................... 8,521 361,610
Central & South West Corp. ................... 11,934 322,964
Cinergy Corp. ................................ 8,852 339,142
Consolidated Edison Co.
of New York, Inc. ......................... 13,115 537,715
Dominion Resources, Inc. ..................... 10,377 441,671
DTE Energy Co. ............................... 8,158 282,981
Duke Energy Corp. ............................ 20,218 1,119,572
Edison International.......................... 21,430 582,628
Entergy Corp. ................................ 13,558 405,893
FirstEnergy Corp. (a)......................... 12,939 375,246
FPL Group, Inc. .............................. 10,232 605,606
GPU, Inc. .................................... 6,796 286,282
Houston Industries Inc. ...................... 16,077 429,055
</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)
ELECTRIC POWER COMPANIES (Continued)
Niagara Mohawk Power Corp. (a)................ 8,115 $ 85,207
Northern States Power Co. .................... 4,164 242,553
PacifiCorp.................................... 16,695 455,982
PECO Energy Co. .............................. 12,498 303,076
PG&E Corp. ................................... 24,621 749,402
PP&L Resources, Inc. ......................... 9,174 219,603
Public Service Enterprise
Group Inc. ................................ 13,051 413,554
Southern Co. (The)............................ 38,736 1,002,294
Texas Utilities Co. .......................... 13,836 575,059
Unicom Corp. ................................. 12,071 371,183
Union Electric Co. ........................... 7,602 328,786
------------
11,667,017
------------
ELECTRICAL EQUIPMENT (3.8%)
AMP Inc. ..................................... 12,269 515,298
Emerson Electric Co. ......................... 24,969 1,409,188
General Electric Co. (d)...................... 183,917 13,494,910
General Signal Corp. ......................... 2,792 117,788
Grainger (W.W.), Inc. ........................ 2,764 268,626
Honeywell Inc. ............................... 7,180 491,830
Raychem Corp. ................................ 4,876 209,973
Thomas & Betts Corp. ......................... 3,077 145,388
------------
16,653,001
------------
ELECTRONIC - DEFENSE (0.0%) (b)
EG&G, Inc. ................................... 2,636 54,862
------------
ELECTRONIC - INSTRUMENTATION (0.1%)
Perkin-Elmer Corp. (The)...................... 2,497 177,443
Tektronix, Inc. .............................. 2,872 113,983
------------
291,426
------------
ELECTRONIC - SEMICONDUCTORS (2.5%)
Advanced Micro
Devices, Inc. (a).......................... 7,918 142,029
Applied Materials, Inc. (a)................... 20,478 616,900
Intel Corp. .................................. 91,895 6,455,624
KLA-Tencor Corp. (a).......................... 4,700 181,537
LSI Logic Corp. (a)........................... 7,909 156,203
Micron Technology, Inc. ...................... 11,815 307,190
Motorola, Inc. ............................... 33,504 1,911,822
National Semiconductor
Corp. (a).................................. 9,105 236,161
Texas Instruments Inc. ....................... 21,944 987,480
------------
10,994,946
------------
ENGINEERING & CONSTRUCTION (0.1%)
Fluor Corp.................................... 4,758 177,830
Foster Wheeler Corp........................... 2,262 61,216
------------
239,046
------------
ENTERTAINMENT (1.5%)
King World
Productions, Inc. (a)...................... 2,065 119,254
Time Warner Inc............................... 31,428 1,948,536
Viacom Inc. Class B (a)....................... 19,903 824,730
Walt Disney Co. (The)......................... 37,914 3,755,856
------------
6,648,376
------------
FINANCIAL - MISCELLANEOUS (2.8%)
American Express Co. ......................... 26,147 2,333,620
American General Corp. ....................... 13,638 737,304
Fannie Mae.................................... 59,654 3,404,006
Freddie Mac................................... 39,106 1,640,008
Green Tree Financial Corp. ................... 7,693 201,460
MBIA Inc. .................................... 4,981 332,793
MBNA Corp. ................................... 28,148 768,792
Morgan Stanley, Dean Witter,
Discover & Co. ............................ 33,333 1,970,814
SunAmerica Inc. .............................. 11,015 470,891
Transamerica Corp. ........................... 3,603 383,720
------------
12,243,408
------------
FOOD DISTRIBUTORS (0.2%)
Cardinal Health, Inc. ........................ 6,092 457,661
SUPERVALU Inc. ............................... 3,363 140,826
Sysco Corp. .................................. 9,621 438,357
------------
1,036,844
------------
FOODS (2.9%)
Archer-Daniels-Midland Co. ................... 31,318 679,209
Campbell Soup Co. ............................ 25,818 1,500,671
ConAgra, Inc. ................................ 26,569 871,795
CPC International Inc. ....................... 8,039 866,202
General Mills, Inc. .......................... 8,876 635,744
Heinz (H.J.) Co. ............................. 20,592 1,046,331
Hershey Foods Corp. .......................... 8,037 497,792
Kellogg Co. .................................. 23,079 1,145,295
Quaker Oats Co. (The)......................... 7,711 406,755
Ralston-Ralston Purina Group.................. 5,930 551,120
Sara Lee Corp. ............................... 26,966 1,518,523
Unilever, N.V................................. 35,905 2,241,819
Wrigley (Wm.) Jr. Co. ........................ 6,468 514,610
------------
12,475,866
------------
</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)
GOLD (0.2%)
Barrick Gold Corp. ........................... 20,998 $ 391,088
Battle Mountain Gold Co. ..................... 12,950 76,081
Echo Bay Mines Ltd. (a)....................... 7,820 19,061
Homestake Mining Co. ......................... 8,281 73,494
Newmont Mining Corp. ......................... 8,781 257,942
Placer Dome Inc. ............................. 13,358 169,480
------------
987,146
------------
HARDWARE & TOOLS (0.1%)
Black & Decker Corp. (The).................... 5,240 204,688
Snap-on Inc. ................................. 3,469 151,335
Stanley Works (The)........................... 4,967 234,380
------------
590,403
------------
HEALTH CARE - DIVERSIFIED (4.1%)
Abbott Laboratories........................... 42,989 2,818,466
Allergan, Inc. ............................... 3,620 121,496
American Home Products Corp. ................. 36,495 2,791,868
Bristol-Myers Squibb Co. ..................... 55,914 5,290,862
Johnson & Johnson............................. 75,609 4,980,743
Mallinckrodt Inc. ............................ 4,141 157,358
Warner-Lambert Co. ........................... 15,278 1,894,472
------------
18,055,265
------------
HEALTH CARE - HMOs (0.2%)
Humana Inc. (a)............................... 9,193 190,755
United Healthcare Corp. ...................... 10,559 524,650
------------
715,405
------------
HEALTH CARE - MISCELLANEOUS (0.4%)
ALZA Corp. (a)................................ 4,767 151,650
Amgen Inc. (a)................................ 14,887 805,759
HEALTHSOUTH Corp. (a)......................... 22,077 612,637
Manor Care, Inc. ............................. 3,531 123,585
------------
1,693,631
------------
HEAVY DUTY TRUCKS & PARTS (0.3%)
Cummins Engine Co., Inc. ..................... 2,251 132,950
Dana Corp. ................................... 5,889 279,727
Eaton Corp. .................................. 4,300 383,775
ITT Industries, Inc. ......................... 6,623 207,797
Navistar International
Corp. (a).................................. 4,154 103,071
PACCAR Inc. .................................. 4,390 230,475
------------
1,337,795
------------
HOMEBUILDING (0.0%) (b)
Centex Corp. ................................. 1,584 99,693
Kaufman & Broad Home Corp. ................... 2,206 49,497
Pulte Corp. .................................. 1,207 50,468
------------
199,658
------------
HOSPITAL MANAGEMENT (0.4%)
Columbia/HCA Healthcare Corp. ................ 36,419 1,078,913
Tenet Healthcare Corp. (a).................... 17,135 567,597
------------
1,646,510
------------
HOTEL - MOTEL (0.4%)
Harrah's Entertainment, Inc. (a).............. 5,638 106,417
Hilton Hotels Corp. .......................... 14,065 418,434
ITT Corp. (a)................................. 6,578 545,152
Marriott International, Inc. ................. 7,181 497,284
------------
1,567,287
------------
HOUSEHOLD - FURNISHINGS & APPLIANCES (0.1%)
Armstrong World
Industries, Inc. .......................... 2,141 160,040
Maytag Corp. ................................. 5,382 200,816
Whirlpool Corp. .............................. 4,110 226,050
------------
586,906
------------
HOUSEHOLD PRODUCTS (2.2%)
Clorox Co. (The).............................. 5,760 455,400
Colgate-Palmolive Co. ........................ 16,659 1,224,436
Fort James Corp. ............................. 11,701 447,563
Kimberly-Clark Corp. ......................... 31,273 1,542,150
Procter & Gamble Co. (The).................... 75,495 6,025,445
------------
9,694,994
------------
HOUSEWARES (0.2%)
Fortune Brands, Inc. ......................... 9,603 355,911
Newell Co. ................................... 8,834 375,445
Rubbermaid Inc. .............................. 8,480 212,000
Tupperware Corp. ............................. 3,410 95,054
------------
1,038,410
------------
INSURANCE BROKERS (0.3%)
Aon Corp. .................................... 9,376 549,668
Marsh & McLennan Cos., Inc. .................. 9,453 704,839
------------
1,254,507
------------
</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)
INVESTMENT BANK/BROKERAGE (0.5%)
Merrill Lynch & Co., Inc. .................... 18,629 $ 1,358,753
Schwab (Charles) Corp. (The).................. 14,883 624,156
------------
1,982,909
------------
LEISURE TIME (0.1%)
Brunswick Corp. .............................. 5,547 168,143
Mirage Resorts, Inc. (a)...................... 10,106 229,912
------------
398,055
------------
LIFE INSURANCE (0.6%)
Aetna Inc. ................................... 8,372 590,749
Conseco, Inc. ................................ 10,607 481,956
Jefferson-Pilot Corp. ........................ 4,003 311,734
Lincoln National Corp. ....................... 5,721 446,953
Torchmark Corp. .............................. 7,758 326,321
UNUM Corp. ................................... 7,820 425,212
------------
2,582,925
------------
MACHINE TOOLS (0.0%) (b)
Cincinnati Milacron Inc. ..................... 2,223 57,659
------------
MACHINERY - DIVERSIFIED (0.8%)
Briggs & Stratton Corp. ...................... 1,474 71,581
Case Corp. ................................... 4,252 256,980
Caterpillar Inc. ............................. 20,889 1,014,422
Cooper Industries, Inc. ...................... 6,873 336,777
Deere & Co. .................................. 14,217 829,029
Harnischfeger Industries, Inc. ............... 2,686 94,849
Ingersoll-Rand Co. ........................... 9,306 376,893
NACCO Industries, Inc. Class A................ 480 51,450
Thermo Electron Corp. (a)..................... 8,389 373,311
Timken Co. (The).............................. 3,529 121,309
------------
3,526,601
------------
MAJOR REGIONAL BANKS (5.6%)
Banc One Corp................................. 32,960 1,790,140
Bank of New York Co., Inc. (The).............. 21,288 1,230,713
BankBoston Corp............................... 8,146 765,215
Barnett Banks, Inc............................ 10,819 777,616
BB&T Corp..................................... 7,667 491,167
Comerica Inc.................................. 5,960 537,890
CoreStates Financial Corp..................... 11,137 891,656
Fifth Third Bancorp........................... 8,678 709,427
First Union Corp.............................. 35,234 1,805,742
Fleet Financial Group, Inc.................... 14,062 1,053,771
Huntington Bancshares Inc..................... 10,793 388,548
KeyCorp ...................................... 12,197 863,700
Mellon Bank Corp.............................. 14,156 858,207
National City Corp............................ 12,145 798,534
NationsBank Corp.............................. 40,042 2,435,054
Norwest Corp.................................. 42,490 1,641,176
PNC Bank Corp................................. 17,208 981,932
Republic New York Corp........................ 3,093 353,182
State Street Corp............................. 9,036 525,782
SunTrust Banks, Inc........................... 11,845 845,437
Synovus Financial Corp........................ 9,791 320,655
U.S. Bancorp.................................. 13,931 1,559,401
Wachovia Corp................................. 11,422 926,610
Wells Fargo & Co.............................. 4,980 1,690,399
------------
24,241,954
------------
MANUFACTURED HOUSING (0.0%) (b)
Fleetwood Enterprises, Inc. .................. 2,010 85,299
------------
MANUFACTURING - DIVERSIFIED (1.1%)
Aeroquip-Vickers, Inc. ....................... 1,563 76,685
AlliedSignal Inc. ............................ 31,624 1,231,359
Crane Co. .................................... 2,607 113,079
Dover Corp. .................................. 12,502 451,635
Illinois Tool Works Inc. ..................... 14,009 842,291
Johnson Controls, Inc. ....................... 4,601 219,698
Millipore Corp. .............................. 2,436 82,672
Pall Corp. ................................... 7,087 146,612
Parker-Hannifin Corp. ........................ 6,296 288,829
Tyco International Ltd. ...................... 29,800 1,342,862
------------
4,795,722
------------
MEDICAL PRODUCTS (1.0%)
Bard (C.R.), Inc. ............................ 3,241 101,484
Bausch & Lomb Inc. ........................... 3,117 123,511
Baxter International Inc. .................... 15,597 786,674
Becton, Dickinson & Co. ...................... 6,869 343,450
Biomet, Inc. ................................. 6,194 158,721
Boston Scientific Corp. (a)................... 10,862 498,294
Guidant Corp. ................................ 8,285 515,741
Medtronic, Inc. .............................. 26,243 1,372,837
St. Jude Medical, Inc. (a).................... 5,176 157,868
United States Surgical Corp................... 4,133 121,149
------------
4,179,729
------------
METALS - MISCELLANEOUS (0.2%)
ASARCO Inc. .................................. 2,336 52,414
Cyprus Amax Minerals Co. ..................... 5,286 81,272
Freeport-McMoRan
Copper & Gold Inc. Class B................. 10,895 171,596
</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)
METALS - MISCELLANEOUS (Continued)
Inco Ltd. .................................... 9,387 $ 159,579
Phelps Dodge Corp. ........................... 3,423 213,082
------------
677,943
------------
MISCELLANEOUS (1.2%)
AirTouch Communications, Inc. (a)............. 28,268 1,174,889
American Greetings Corp. Class A.............. 4,232 165,577
Corning Inc. ................................. 12,936 480,249
Harcourt General, Inc. ....................... 3,975 217,631
Harris Corp. ................................. 4,455 204,373
Jostens, Inc. ................................ 2,161 49,838
Minnesota Mining &
Manufacturing Co. ......................... 22,944 1,882,842
Pioneer Hi-Bred
International, Inc. ....................... 3,692 395,967
TRW, Inc. .................................... 6,919 369,301
Whitman Corp. ................................ 5,658 147,462
------------
5,088,129
------------
MONEY CENTER BANKS (2.7%)
BankAmerica Corp. ............................ 39,016 2,848,168
Bankers Trust New York Corp. ................. 5,547 623,691
Chase Manhattan Corp. (The)................... 23,781 2,604,019
Citicorp...................................... 25,721 3,252,099
First Chicago NBD Corp. ...................... 16,357 1,365,810
Morgan (J.P.) & Co., Inc. .................... 10,032 1,132,362
------------
11,826,149
------------
MULTI-LINE INSURANCE (2.1%)
American International
Group, Inc. ............................... 39,362 4,280,618
CIGNA Corp. .................................. 4,272 739,323
Hartford Financial Services
Group, Inc. ............................... 6,607 618,167
Travelers Group Inc. ......................... 64,299 3,464,109
------------
9,102,217
------------
NATURAL GAS DISTRIBUTORS & PIPELINES (0.7%)
Coastal Corp. (The)........................... 5,910 366,051
Columbia Gas System, Inc...................... 3,077 241,737
Consolidated Natural Gas Co................... 5,316 321,618
Eastern Enterprises........................... 1,108 49,860
Enron Corp.................................... 17,870 742,722
NICOR Inc..................................... 2,713 114,455
ONEOK, Inc.................................... 1,764 71,221
Pacific Enterprises........................... 4,646 174,806
Peoples Energy Corp........................... 1,988 78,277
Sonat, Inc. .................................. 4,771 218,273
Williams Cos., Inc. (The)..................... 18,018 511,261
------------
2,890,281
------------
OFFICE EQUIPMENT & SUPPLIES (0.5%)
Moore Corp. Ltd. ............................. 4,939 74,702
Pitney Bowes Inc. ............................ 8,287 745,312
Xerox Corp. .................................. 18,325 1,352,614
------------
2,172,628
------------
OIL & GAS DRILLING (0.1%)
Helmerich & Payne, Inc. ...................... 1,354 91,903
Rowan Cos., Inc. (a).......................... 4,803 146,491
------------
238,394
------------
OIL - EXPLORATION & PRODUCTION (0.3%)
Anadarko Petroleum Corp. ..................... 3,370 204,517
Apache Corp. ................................. 5,063 177,521
Burlington Resources Inc. .................... 10,001 448,170
Oryx Energy Co. (a)........................... 5,943 151,547
Union Pacific
Resources Group, Inc. ..................... 14,252 345,611
------------
1,327,366
------------
OIL - INTEGRATED DOMESTIC (1.1%)
Amerada Hess Corp. ........................... 5,157 282,990
Ashland Inc. ................................. 4,206 225,810
Atlantic Richfield Co. ....................... 17,991 1,441,529
Kerr-McGee Corp. ............................. 2,671 169,108
Occidental Petroleum Corp. ................... 18,987 556,556
Pennzoil Co. ................................. 2,658 177,588
Phillips Petroleum Co. ....................... 14,768 718,094
Sun Co., Inc. ................................ 4,123 173,424
Unocal Corp. ................................. 13,877 538,601
USX-Marathon Group............................ 16,115 543,881
------------
4,827,581
------------
OIL - INTEGRATED INTERNATIONAL (5.7%)
Amoco Corp. .................................. 27,333 2,326,722
Chevron Corp. ................................ 36,787 2,832,599
Exxon Corp. .................................. 138,573 8,478,935
Mobil Corp. .................................. 44,134 3,185,923
Royal Dutch Petroleum Co. .................... 120,361 6,522,062
Texaco Inc. .................................. 30,809 1,675,239
------------
25,021,480
------------
</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)
OIL - WELL EQUIPMENT & SERVICES (0.9%)
Baker Hughes Inc. ............................ 9,436 $ 411,646
Dresser Industries, Inc. ..................... 9,819 411,784
Halliburton Co. .............................. 14,690 762,962
McDermott International, Inc. ................ 3,071 112,475
Schlumberger Ltd. ............................ 27,783 2,236,532
Western Atlas Inc. (a)........................ 2,975 220,150
------------
4,155,549
------------
PAPER & FOREST PRODUCTS (0.7%)
Boise Cascade Corp. .......................... 3,074 92,988
Champion International Corp. ................. 5,351 242,467
Georgia-Pacific Corp. ........................ 5,106 310,189
International Paper Co. ...................... 17,044 735,023
Louisiana-Pacific Corp. ...................... 6,123 116,337
Mead Corp. (The).............................. 5,820 162,960
Potlatch Corp. ............................... 1,587 68,241
Union Camp Corp. ............................. 3,855 206,965
Westvaco Corp. ............................... 5,703 179,288
Weyerhaeuser Co. ............................. 11,100 544,594
Willamette Industries, Inc. .................. 6,195 199,402
------------
2,858,454
------------
PERSONAL LOANS (0.3%)
Beneficial Corp............................... 3,026 251,536
Countrywide Credit Industries, Inc. .......... 6,021 258,150
Household International, Inc.................. 6,007 766,268
Providian Financial Corp...................... 5,198 234,885
------------
1,510,839
------------
PHOTOGRAPHY/IMAGING (0.3%)
Eastman Kodak Co. ............................ 18,323 1,114,267
IKON Office Solutions, Inc. .................. 7,474 210,206
Polaroid Corp. ............................... 2,571 125,176
------------
1,449,649
------------
POLLUTION CONTROL (0.3%)
Browning-Ferris Industries, Inc. ............. 11,087 410,219
Waste Management, Inc. ....................... 25,546 702,515
------------
1,112,734
------------
PROPERTY - CASUALTY INSURANCE (1.6%)
Allstate Corp. (The).......................... 24,087 2,188,906
Chubb Corp. (The)............................. 9,544 721,765
Cincinnati Financial Corp. ................... 3,100 436,325
General Re Corp. ............................. 4,487 951,244
Loews Corp. .................................. 6,452 684,719
MGIC Investment Corp. ........................ 6,410 426,265
Progressive Corp. (The)....................... 3,989 478,181
SAFECO Corp. ................................. 7,805 380,494
St. Paul Cos., Inc. (The)..................... 4,724 387,663
USF&G Corp. .................................. 6,431 141,884
------------
6,797,446
------------
PUBLISHING (0.1%)
McGraw-Hill Cos., Inc. (The).................. 5,616 415,584
Meredith Corp. ............................... 3,132 111,773
------------
527,357
------------
PUBLISHING - NEWSPAPER (0.6%)
Dow Jones & Co., Inc. ........................ 5,429 291,469
Gannett Co., Inc. ............................ 15,862 980,470
Knight-Ridder, Inc. .......................... 4,742 246,584
New York Times Co. (The) Class A.............. 5,449 360,315
Times Mirror Co. (The) Class A................ 5,304 326,196
Tribune Co. .................................. 6,812 424,047
------------
2,629,081
------------
RAILROADS (0.7%)
Burlington Northern Santa Fe Corp. ........... 8,714 809,857
CSX Corp. .................................... 12,254 661,716
Norfolk Southern Corp. ....................... 21,159 651,962
Union Pacific Corp. .......................... 13,840 864,135
------------
2,987,670
------------
RESTAURANTS (0.5%)
Darden Restaurants, Inc. ..................... 8,603 107,537
McDonald's Corp. ............................. 38,568 1,841,622
Tricon Global Restaurants, Inc. (a)........... 8,591 249,676
Wendy's International, Inc. .................. 7,327 176,306
------------
2,375,141
------------
RETAIL STORES - APPAREL (0.3%)
Charming Shoppes, Inc. (a).................... 5,988 28,069
Gap, Inc. (The)............................... 22,604 801,012
Limited, Inc. (The)........................... 15,187 387,268
TJX Cos., Inc. (The).......................... 9,162 314,944
------------
1,531,293
------------
RETAIL STORES - DEPARTMENT (0.6%)
Dillard's, Inc. Class A....................... 6,356 224,049
Federated Department
Stores, Inc. (a)........................... 11,780 507,276
May Department Stores Co. (The)............... 13,115 690,997
Mercantile Stores Co., Inc. .................. 2,048 124,672
</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 Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
RETAIL STORES - DEPARTMENT (Continued)
Nordstrom, Inc. .............................. 4,337 $ 261,846
Penney (J.C.) Co., Inc. ...................... 14,018 845,461
------------
2,654,301
------------
RETAIL STORES - DRUGS (0.3%)
Longs Drug Stores Corp. ...................... 2,167 69,615
Rite Aid Corp. ............................... 6,911 405,589
Walgreen Co. ................................. 27,574 865,134
------------
1,340,338
------------
RETAIL STORES - FOOD CHAIN (0.5%)
Albertson's, Inc. ............................ 13,803 653,917
American Stores Co. .......................... 15,284 314,277
Giant Food Inc. Class A....................... 3,340 112,516
Great Atlantic & Pacific
Tea Co., Inc. (The)........................ 2,294 68,103
Kroger Co. (The) (a).......................... 14,261 526,766
Winn-Dixie Stores, Inc. ...................... 8,370 365,665
------------
2,041,244
------------
RETAIL STORES - GENERAL MERCHANDISE (1.6%)
Dayton Hudson Corp. .......................... 12,242 826,335
Kmart Corp. (a)............................... 27,379 316,570
Sears, Roebuck & Co. ......................... 22,016 996,224
Wal-Mart Stores, Inc. ........................ 126,621 4,993,615
------------
7,132,744
------------
RETAIL STORES - SPECIALTY (1.2%)
AutoZone, Inc. (a)............................ 8,503 246,587
Circuit City Stores -
Circuit City Group......................... 5,524 196,447
Costco Cos., Inc. (a)......................... 11,924 532,109
CVS Corp. .................................... 9,639 617,498
Home Depot, Inc. (The)........................ 40,984 2,412,933
Lowe's Cos., Inc. ............................ 9,688 461,997
Pep Boys-Manny, Moe & Jack (The).............. 3,511 83,825
Tandy Corp. .................................. 5,945 229,254
Toys "R" Us, Inc. (a)......................... 16,033 504,037
Woolworth Corp. (a)........................... 7,576 154,361
------------
5,439,048
------------
SAVINGS & LOANS (0.4%)
Ahmanson (H.F.) & Co. ........................ 5,257 351,890
Golden West Financial Corp. .................. 3,283 321,119
Washington Mutual, Inc. ...................... 14,427 920,623
------------
1,593,632
------------
SHOES (0.2%)
NIKE, Inc. Class B............................ 16,227 636,910
Reebok International Ltd. .................... 3,110 89,607
------------
726,517
------------
SPECIALIZED SERVICES (1.0%)
Block (H&R), Inc. ............................ 5,864 262,780
Cendant Corp. (a)............................. 44,424 1,527,075
Cognizant Corp. .............................. 9,181 409,128
Dun & Bradstreet Corp. (The).................. 9,533 294,927
Ecolab Inc. .................................. 3,594 199,242
Interpublic Group of Cos., Inc. (The)......... 6,989 348,140
Laidlaw Inc. ................................. 18,467 251,613
National Service Industries, Inc. ............ 2,406 119,247
Omnicom Group Inc. ........................... 9,200 389,850
Safety-Kleen Corp. ........................... 3,183 87,334
Service Corp. International .................. 14,151 522,703
------------
4,412,039
------------
SPECIALTY PRINTING (0.1%)
Deluxe Corp. ................................. 4,622 159,459
Donnelley (R.R.) & Sons Co. .................. 8,171 304,370
Harland (John H.) Co. ........................ 1,760 36,960
------------
500,789
------------
STEEL (0.2%)
Allegheny Teledyne Inc. ...................... 9,725 251,634
Armco Inc. (a)................................ 6,046 29,852
Bethlehem Steel Corp. (a)..................... 6,336 54,648
Inland Steel Industries, Inc. ................ 2,714 46,477
Nucor Corp. .................................. 4,924 237,891
USX-U.S. Steel Group Inc. .................... 4,786 149,563
Worthington Industries, Inc. ................. 5,416 89,364
------------
859,429
------------
TELECOMMUNICATIONS - LONG DISTANCE (2.3%)
AT&T Corp. ................................... 91,158 5,583,428
MCI Communications Corp. ..................... 39,138 1,675,596
Sprint Corp. ................................. 24,239 1,421,011
WorldCom, Inc. (a)............................ 50,669 1,532,737
------------
10,212,772
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
TELEPHONE (4.1%)
ALLTEL Corp. ................................. 10,368 $ 425,736
Ameritech Corp. .............................. 30,720 2,472,960
Bell Atlantic Corp. .......................... 43,636 3,970,876
BellSouth Corp. .............................. 55,608 3,131,425
Frontier Corp. ............................... 9,222 221,904
GTE Corp. .................................... 53,720 2,806,870
SBC Communications Inc. ...................... 51,364 3,762,413
US West Communications Group.................. 27,100 1,222,888
------------
18,015,072
------------
TEXTILES - APPAREL MANUFACTURERS (0.2%)
Fruit of the Loom, Inc.
Class A (a)................................ 4,119 105,549
Liz Claiborne, Inc. .......................... 3,886 162,483
Russell Corp. ................................ 2,192 58,225
Springs Industries, Inc. Class A.............. 1,092 56,784
VF Corp. ..................................... 7,015 322,252
------------
705,293
------------
TOBACCO (1.5%)
Philip Morris Cos. Inc. ...................... 136,190 6,171,109
UST Inc. ..................................... 10,293 380,198
------------
6,551,307
------------
TOYS (0.2%)
Hasbro, Inc. ................................. 7,159 225,508
Mattel, Inc. ................................. 16,316 607,771
------------
833,279
------------
TRANSPORTATION - MISCELLANEOUS (0.1%)
Federal Express Corp. (a)..................... 6,385 389,884
Ryder System, Inc. ........................... 4,399 144,067
------------
533,951
------------
TRUCKERS (0.0%) (b)
Caliber System, Inc........................... 2,223 108,232
------------
Total Common Stocks
(Cost $297,340,472)........................ 424,471,318(c)
------------
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (1.7%)
COMMERCIAL PAPER (1.0%) Dynamic Fuji Corp.
6.75%, due 2/13/98 (d)..................... $2,600,000 $ 2,579,037
7.50%, due 2/13/98 (d)..................... 900,000 891,938
7.65%, due 2/13/98 (d)..................... 1,100,000 1,089,949
------------
Total Commercial Paper
(Cost $4,560,924).......................... 4,560,924
------------
U.S. GOVERNMENT (0.7%)
United States Treasury Bills
4.89%, due 3/26/98 (d)..................... 1,000,000 988,103
5.14%, due 4/2/98 (d)...................... 2,000,000 1,973,950
------------
Total U.S. Government
(Cost $2,962,889).......................... 2,962,053
------------
Total Short-Term Investments
(Cost $7,523,813).......................... 7,522,977
------------
Total Investments
(Cost $304,864,285) (e).................... 99.1% 431,994,295(f)
Cash and Other Assets,
Less Liabilities........................... 0.9 3,694,511
------------ ------------
Net Assets.................................... 100.0% $435,688,806
============ ============
<CAPTION>
Unrealized
Contracts Appreciation/
Long (Depreciation)(g)
===================================
<S> <C> <C>
FUTURES CONTRACTS (0.0%) (b)
Standard & Poor's 500
March 1998................ 30 $ 42,990
Mini March 1998........... 4 (45)
------------
Total Futures Contracts (Settlement
Value $7,539,070) (c)..... $ 42,945
============
</TABLE>
- ----------
(a) Non-income producing security.
(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 99.2% of net assets.
(d) Segregated or partially segregated as collateral for futures contracts.
(e) The cost for Federal income tax purposes is $304,930,457.
(f) At December 31, 1997, net unrealized appreciation was $127,063,838, 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 $130,506,797 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $3,442,959.
(g) Represents the difference between the value of the contracts at the time
they were opened and the value at December 31, 1997.
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 Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $304,864,285).................................. $431,994,295
Cash............................................................................................... 1,971
Receivables:
Fund shares sold................................................................................. 3,674,901
Investment securities sold....................................................................... 1,255,889
Dividends and interest........................................................................... 556,600
Unamortized organization expense................................................................... 37,032
------------
Total assets.................................................................................... 437,520,688
------------
LIABILITIES:
Payables:
Investment securities purchased.................................................................. 1,189,351
Fund shares redeemed............................................................................. 279,841
NYLIFEDistributors............................................................................... 89,779
Transfer agent................................................................................... 45,529
MainStay Management.............................................................................. 43,644
NYLIFE Inc....................................................................................... 33,000
Custodian........................................................................................ 18,123
Accrued expenses................................................................................... 128,695
Variation margin payable on futures contracts...................................................... 3,920
------------
Total liabilities............................................................................... 1,831,882
------------
Net Assets......................................................................................... $435,688,806
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized.............................................................. $ 140,941
Additional paid-in capital......................................................................... 304,227,473
Accumulated undistributed net investment income.................................................... 15,071
Accumulated undistributed net realized gain on investments......................................... 4,132,366
Net unrealized appreciation on investments......................................................... 127,172,955
------------
Net assets applicable to outstanding shares........................................................ $435,688,806
============
Shares of beneficial interest outstanding.......................................................... 14,094,106
============
Net asset value per share outstanding.............................................................. $ 30.91
Maximum sales charge (3.00% of offering price)..................................................... 0.96
------------
Maximum offering price per share outstanding....................................................... $ 31.87
============
</TABLE>
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 Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a).................................................................................... $ 5,368,077
Interest......................................................................................... 1,425,916
------------
Total income.................................................................................... 6,793,993
------------
Expenses:
Administration................................................................................... 1,024,263
Distribution..................................................................................... 826,562
Management....................................................................................... 372,795
Transfer agent................................................................................... 366,441
Advisory......................................................................................... 256,066
Shareholder communication........................................................................ 190,026
Registration..................................................................................... 89,519
Custodian........................................................................................ 75,657
Professional..................................................................................... 45,880
Amortization of organization costs............................................................... 12,479
Trustees......................................................................................... 9,087
Miscellaneous.................................................................................... 18,161
------------
Total expenses before reimbursement............................................................. 3,286,936
Expense reimbursement from Administrator or Manager................................................ (641,937)
------------
Net expenses.................................................................................... 2,644,999
------------
Net investment income.............................................................................. 4,148,994
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions............................................................................ 3,681,980
Futures transactions............................................................................. 4,950,639
------------
Net realized gain on investments................................................................... 8,632,619
------------
Net change in unrealized appreciation on investments:
Security transactions............................................................................ 73,750,850
Futures transactions............................................................................. 70,004
------------
Net unrealized gain on investments................................................................. 73,820,854
------------
Net realized and unrealized gain on investments.................................................... 82,453,473
------------
Net increase in net assets resulting from operations............................................... $ 86,602,467
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $32,775.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income........................................................... $ 4,148,994 $ 2,880,833
Net realized gain on investments................................................ 8,632,619 5,505,296
Net change in unrealized appreciation on investments............................ 73,820,854 25,632,481
------------ ------------
Net increase in net assets resulting from operations............................ 86,602,467 34,018,610
------------ ------------
Dividends and distributions to shareholders:
From net investment income...................................................... (4,133,923) (4,255,511)
From net realized gain on investments........................................... (5,707,208) (6,641,480)
------------ ------------
Total dividends and distributions to shareholders.............................. (9,841,131) (10,896,991)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares................................................ 180,823,270 99,873,971
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions 9,532,058 10,618,632
------------ ------------
190,355,328 110,492,603
Cost of shares redeemed......................................................... (57,177,469) (17,172,280)
------------ ------------
Increase in net assets derived from capital share transactions................. 133,177,859 93,320,323
------------ ------------
Net increase in net assets..................................................... 209,939,195 116,441,942
NET ASSETS:
Beginning of year................................................................. 225,749,611 109,307,669
------------ ------------
End of year....................................................................... $435,688,806 $225,749,611
============ ============
Accumulated undistributed net investment income................................... $ 15,071 $ --
============ ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
September 1
Year ended December 31 through Year ended August 31
------------------------------------------- December 31 ----------------------
1997 1996 1995 1994* 1994 1993
-------- -------- -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ................ $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15
-------- -------- -------- ------- ------- -------
Net investment
income ............................. 0.30 0.30 0.24 0.09 0.27 0.22
Net realized and unrealized
gain (loss) on investments ......... 7.24 3.92 4.82 (0.48) 0.37 1.47
-------- -------- -------- ------- ------- -------
Total from investment operations ..... 7.54 4.22 5.06 (0.39) 0.64 1.69
-------- -------- -------- ------- ------- -------
Less dividends and distributions:
From net investment income ........... (0.30) (0.54) (0.27) -- (0.25) (0.18)
From net realized gain
on investments ..................... (0.41) (0.82) (0.27) -- (0.18) (0.02)
-------- -------- -------- ------- ------- -------
Total dividends and distributions (0.71) (1.36) (0.54) -- (0.43) (0.20)
-------- -------- -------- ------- ------- -------
Reverse share split .................. 0.71 1.36 0.54 -- 0.43 0.20
-------- -------- -------- ------- ------- -------
Net asset value at end of period ..... $ 30.91 $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84
======== ======== ======== ======= ======= =======
Total investment return (a) .......... 32.26% 22.04% 35.91% (2.68%) 4.59% 13.91%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ............. 1.25% 1.8% 1.7% 2.0%+ 1.9% 1.9%
Expenses .......................... 0.80% 0.8% 1.1% 0.9%+ 0.9% 0.9%
Expenses (before
reimbursement) .................. 0.99% 1.0% 1.1% 0.9%+ 0.9% 0.9%
Portfolio turnover rate .............. 3% 3% 4% 2% 12% 4%
Average commission rate paid ......... $ 0.0499 $ 0.0465 (b) (b) (b) (b)
Net assets at end of
period (in 000's) .................. $435,689 $225,750 $109,308 $61,561 $62,828 $62,921
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Total return is calculated exclusive of sales charge 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.
25
<PAGE>
MainStay Equity Index Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 (and reflect
reinvestment of dividends) 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 the
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
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 Sub-Adviser, if these
prices are deemed to be representative of market values at the regular close of
business of the 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 and
price, 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
26
<PAGE>
Notes to Financial Statements
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 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.
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
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 December 19, 1997, and also underwent a reverse
share split on that day. The reverse share split rate was 0.9765 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
7).
In the event NYLIFE Securities Inc., an indirect wholly owned subsidiary of New
York Life Insurance Company ("New York Life"), 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.
27
<PAGE>
MainStay Equity Index 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 direct allocations of expenses can be made.
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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life, administers the Fund's business affairs and has
investment advisory responsibilities. MainStay Management has engaged the
services of Monitor Capital Advisors, Inc. ("Monitor") as sub-adviser of the
Fund. Monitor, a registered investment adviser and indirect wholly owned
subsidiary of New York Life, is responsible for the day-to-day portfolio
management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.50%. During the year ended December 31, 1997, the Manager
voluntarily agreed to reduce its fee payable by the Fund by the difference
between the Fund's total expenses (including 12b-1 fees) and 0.80% of the Fund's
average annual net assets.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and Monitor, the Manager pays the Sub-Adviser a monthly fee of 0.10% of the
average daily net assets of the Fund.
Prior to October 27, 1997, Monitor acted as investment adviser to the Fund and
NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly owned
subsidiary of New York Life, acted as administrator. Monitor and NYLIFE
Distributors were paid a monthly fee at an annual rate of 0.10% and 0.40%,
respectively, of the average daily net assets of the Fund. NYLIFE Distributors
had agreed to assume the expenses of the Fund to the extent that such expenses
would exceed 0.80% of the average daily net assets of the Fund. As described
above, MainStay Management is currently paid a fee at a rate equal to the
aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997 and the expense reimbursement also remains the same as prior to
that date. For the period January 1, 1997, through October 26, 1997, Monitor and
NYLIFE Distributors earned fees of $256,066 and $1,024,263, respectively, and
NYLIFE Distributors reimbursed the Fund $418,496. For the period October 27,
1997, through December 31, 1997, MainStay Management earned $372,795 and
reimbursed the Fund $223,441.
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.
28
<PAGE>
Notes to Financial Statements continued
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 and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charge. The Fund was advised that the amount of sales charge retained by
NYLIFE Distributors was $329,059 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$253,273 and $15,736, respectively.
Trustees' Fee. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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, 1997, NYLIFE Securities beneficially held shares of the
Fund with a net asset value of $309,100, which represents 0.1% of the Fund's net
assets at year end.
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $9,915 for the year ended December
31, 1997.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $132,565 and $7,659, respectively.
Note 5--Line of Credit
The Fund and certain affiliated funds maintain a line of credit with the
Custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
29
<PAGE>
MainStay Equity Index Fund
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
---- ----
<S> <C> <C>
Shares sold ............................................ 6,514 4,773
Shares issued in reinvestment of
dividends and distributions ........................... 324 491
------ -----
6,838 5,264
Shares redeemed ........................................ (2,069) (810)
Reduction of shares due to reverse share split ......... (334) (503)
------ -----
Net increase ........................................... 4,435 3,951
====== =====
</TABLE>
Note 7--Guarantee:
NYLIFE Inc. ("NYLIFE"), a New York corporation and a wholly owned subsidiary of
New York Life Insurance Company ("New York Life"), will guarantee
unconditionally and irrevocably pursuant to a Guaranty Agreement between NYLIFE
and the Fund (the "Guarantee") that if, exactly 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share when purchased, plus the value of all dividends and
distributions paid, including cumulative reinvested dividends and distributions
attributable to such share paid during that 10-year period ("Guarantee Share"),
is less than the public offering price initially paid for the share ("Guaranteed
Amount"), NYLIFE will pay for disbursement to shareholders an amount equal to
the difference between the Guaranteed Amount for each such share and the net
asset value of each such Guaranteed Share outstanding and held by shareholders
as of the close of business on the Guarantee Date. There is no charge to the
Fund or its shareholders for the Guarantee.
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 Equity Index Fund (one of
the fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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, 1998
31
<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 showing of companies in expanding markets and are willing to accept a higher
risk/return with strong growth potential level of risk for higher return potential
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Invests in a portfolio that tracks You seek a conservative way to
EQUITY INDEX FUND graph showing the makeup and returns of the participate in the growth potential
risk/return S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph showing international stock markets with of international equities or want to
risk/return an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/return a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/return convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/return opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/return attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 showing consistent with safety of principal current income and safety of principal
risk/return primarily from U.S. government
of Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/return fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/return risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund risk/return preservation of capital, and competitive yields on cash you're plan-
of Fund] liquidity, with free checkwriting** ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/return a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph showing from both federal and California keep more of what you earn by invest-
risk/return income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph showing from federal, New York State, and and want to keep more of what you earn
risk/return New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks high current income You're in a high federal income tax
Tax Free Bond Fund risk/return exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============------------------
Equity Index Fund
-----------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved. MSAN07-02/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Government Fund Highlights 5
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation--
Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Portfolio Composition 9
Returns & Lipper Rankings 12
Portfolio of Investments 13
Financial Statements 15
Notes to Financial Statements 19
Report of Independent Accountants 25
The MainStay Funds 26
<PAGE>
- --------------------------------------------------------------------------------
[GRPAHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Government Fund, and MainStay Management, Inc.; approve a Subadvisory
Agreement between MainStay Management, Inc., on behalf of the MainStay
Government Fund, and MacKay Shields Financial Corporation; amend the Plan of
Distribution for Class B shares; eliminate or revise certain fundamental
investment restrictions including eliminating certain state-imposed fundamental
investment restrictions and eliminating or revising fundamental restrictions
pertaining to issuer concentration, borrowing money, industry concentration, and
issuing senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
Government Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 41,381,493 2,740,735 Passed
Nancy Maginnes Kissinger.................................................. 41,381,493 2,740,735 Passed
Donald E. Nickelson....................................................... 41,381,493 2,740,735 Passed
Richard S. Trutanic....................................................... 41,381,493 2,740,735 Passed
Harry G. Hohn............................................................. 41,376,861 2,745,367 Passed
Terry L. Lierman.......................................................... 41,381,493 2,740,735 Passed
Donald K. Ross............................................................ 41,381,493 2,740,735 Passed
Walter W. Ubl............................................................. 41,381,493 2,740,735 Passed
Alice T. Kane............................................................. 41,381,493 2,740,735 Passed
John B. McGuckian......................................................... 41,381,493 2,740,735 Passed
Stephen C. Roussin........................................................ 41,381,493 2,740,735 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 39,855,134.49 Against - 919,464.17 Abstain - 3,347,626.63 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 39,789,598.48 Against - 860,367.16 Abstain -3,472,261.65 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C> <C>
For - 37,451,546.43 Against - 940,275.01 Abstain - 3,762,590.04 Broker Non-Vote - 999,845.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 37,886,579.29 Against - 1,358,396.26 Abstain - 3,848,251.74 Broker Non-Vote - 1,029,000.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 37,877,399.29 1,367,576.26 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 37,846,584.29 1,398,391.27 Passed
A3--Real Estate Limited Partnership Interests.............................. 37,803,072.28 1,441,903.28 Passed
C1--Issuer Concentration................................................... 37,877,924.29 1,367,051.26 Passed
C2--Borrowing Money........................................................ 37,847,762.29 1,397,213.27 Passed
C3--Industry Concentration................................................. 37,861,746.29 1,383,229.27 Passed
C4--Issuing Senior Securities.............................................. 37,835,850.28 1,409,125.27 Passed
<CAPTION>
Proposal 6--Ratification of the Selection of Price Waterhouse LLP as IndependentCertified Public Accountants of the Trust
<S> <C> <C> <C>
For - 40,497,848.61 Against -394,648.07 Abstain - 3,229,728.61 Result - Passed
</TABLE>
4
<PAGE>
MainStay Government Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] Interest rates remained relatively stable during the first half of 1997,
despite a Federal Reserve Board move to raise interest rates 25 basis
points at the end of March.
[ ] In the second half of the year, declining budget deficits, low inflation,
and expectations of a slowing economy caused interest rates to decline and
bond prices to rally.
[ ] The yield curve flattened in the second half of 1997, as foreign central
banks sold short-term Treasuries to raise cash to defend their currencies.
In addition, long-term government securities outperformed on expectations
of reduced inflation and slower economic growth.
[ ] Fiscal problems in Asia caused investors to refocus on the risk components
of income securities and led to a flight to quality, which supported the
rally in long-term bonds.
[ ] The reduction in the United States budget deficit led many investors to
rethink market supply and demand dynamics as fewer government securities
will be required to fund a smaller deficit.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 9.12% and 8.54% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] Class A shares outperformed the average Lipper* general U.S. government
fund, while Class B shares underperformed the average Lipper general U.S.
government fund, which returned 8.84%.
[ ] The Fund benefited from having a neutral duration during the first half of
the year and having a longer duration during the second half of 1997.
[ ] The Fund benefited from shifting opportunities among older and newer
Treasury issues and a movement out of mortgage-related issues into
government and agency securities.
[ ] Asset-backed securities accounted for as much as 20% of the portfolio in
the first half of the year. The Fund profited by reducing this position by
10% early in the second half of the year, in anticipation of increased
volatility and prepayment concerns.
================================================================================
- ----------
* See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation
CLASS A SHARES SEC Returns: 1-Year 4.21%, 5-Year 4.93%, 10-Year 6.69%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year MainStay Lehman Brothers
End Government Bond Government Bond Index* Inflation+
<S> <C> <C> <C>
12/87 $ 9,550 $10,000 $10,000
12/88 $10,161 $10,703 $10,441
12/89 $11,398 $12,226 $10,925
12/90 $12,187 $13,292 $11,608
12/91 $13,821 $15,329 $11,954
12/92 $14,348 $16,437 $12,308
12/93 $15,192 $18,189 $12,645
12/94 $14,759 $17,574 $12,974
12/95 $17,177 $20,797 $13,311
12/96 $17,514 $21,373 $13,752
12/97 $19,113 $23,423 $13,984
</TABLE>
[GRAPHIC] MainStay Government Bond
[GRAPHIC] Lehman Brothers Government Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 3.54%, 5-Year 5.19%, 10-Year 6.99%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year MainStay Lehman Brothers
End Government Bond Government Bond Index* Inflation+
<S> <C> <C> <C>
12/87 $10,000 $10,000 $10,000
12/88 $10,640 $10,703 $10,441
12/89 $11,936 $12,226 $10,925
12/90 $12,762 $13,292 $11,608
12/91 $14,472 $15,329 $11,954
12/92 $15,024 $16,437 $12,308
12/93 $15,908 $18,189 $12,645
12/94 $15,455 $17,574 $12,974
12/95 $17,880 $20,797 $13,311
12/96 $18,104 $21,373 $13,752
12/97 $19,650 $23,423 $13,984
</TABLE>
[GRAPHIC] MainStay Government Bond
[GRAPHIC] Lehman Brothers Government Bond Index*
[GRAPHIC] Inflation+
- -----------
The Class A graph assumes an initial investment of $10,000 made on 12/31/87
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 12/31/87 through 12/31/94.
The Class B graph assumes an initial investment of $10,000 made on
12/31/87. 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.
* 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Government Fund Team
GOVERNMENT FUND TEAM
Christopher Harms, Edward Munshower,
and Ravi Akhoury
During the first half of the year, bonds traded in a relatively narrow range,
despite the Federal Reserve Board's move to raise interest rates 25 basis points
at the end of March. Opportunities among Treasury securities were limited,
shifting the market's focus toward yield-enhancing securities, such as
mortgage-backed and asset-backed securities and collateralized mortgage
obligations.
In the second half of the year, declining inflation, lower budget deficits, and
expectation of a slowing economy led to a bond price rally as yields declined.
At the same time, however, declining yields raised prepayment concerns in
mortgage-backed and asset-backed securities, making these sectors less
attractive to investors.
Problems in the economies of several Asian nations led both domestic and foreign
investors to pursue higher-quality securities. This, combined with expectations
of slower growth due to the Asian influence on the economy and the removed fear
of a Federal Reserve Board tightening, contributed to a rally in long-term
government bonds. In addition, the decline in the U.S. budget deficit has
reduced the amount of bonds the government will need to issue, shifting supply
and demand dynamics in the government market.
Given this context, how did the MainStay Government Fund do in 1997?
For the one-year period ended December 31, 1997, the Fund returned 9.12% and
8.54% for Class A and Class B shares, respectively, excluding all sales charges.
Relative to all Lipper* general U.S. government bond funds, Class A shares
outperformed the average Lipper peer fund while Class B shares underperformed
the average Lipper peer fund which returned 8.84% for the year.
How did you manage the Fund's duration over the course of the year?
As portfolio managers, we adapted our approach to the market environment. In the
first half of the year, there were few opportunities to benefit from the yield
curve or duration plays, so the Fund maintained a relatively neutral duration.
In the second half of the year, we saw the yield curve flatten substantially,
with short-term rates under pressure from selling by foreign central banks and
expectations of the Federal Reserve Board tightening interest rates.
[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 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.
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.
- ----------
* See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[GRAPHIC]
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
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
12/96 1.97
12/97 9.12
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/86 through 12/94. See footnote * on page 12 for more information on
performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
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 15.69
12/96 1.25
12/97 8.54
</TABLE>
See footnote * on page 12 for more information on performance.
As the year progressed and economic growth slowed, we foresaw lower inflation
and lengthened the Fund's duration to about 5.6 years. This strategy proved
successful, particularly when the problems developed in Asia and investors
sought a safe haven in high-quality, long-term bonds.
Which types of securities did you emphasize in the portfolio?
Once again, we had to adapt to changing market conditions. In the first half of
the year, there were very few opportunities to increase value with government
securities, so we moved the Fund out of Treasuries
8
<PAGE>
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
U.S. Treasury Noted 10.4%
U.S. Treasury Bonds 30.7%
Federal National Mortgage Association 29.1%
Government National Mortgage Association 12.6%
Asset-Backed Securities 16.8%
Mortgage-Backed Securities 6.4%
Cash, Equivalendts & Other Assets,
Less Liabilities (6.0)%
</TABLE>
Actual percentages will vary over time.
and increased its positions among yield-enhancing bonds, including
mortgage-backed securities, asset-backed bonds, and unleveraged collateralized
mortgage obligations or CMOs. When opportunities arose, we took some profits for
the Fund in the CMOs, and also invested some of the Fund's assets in low-balance
mortgage loans.
What are low-balance loans?
Low-balance loans are securities backed by smaller, nonconforming,
limited-documentation mortgages for self-employed individuals. The focus is on
individuals with impeccable credit credentials so the securities carry AAA
credit ratings--the highest available. Since the borrowers generally pay about
100 basis points over standard mortgages to get the loans, we found them very
attractive for the Fund. While more investors are now beginning to see the
opportunities in these securities, we were among the early investors and did
well with them.
Were there other securities that attracted your attention through the first half
of the year?
Yes. The Fund invested in AAA-rated manufactured housing loans and home equity
loans of similar quality. Both were positive contributors to the Fund's
performance.
How did things change in the second half of the year?
Over the course of the fourth quarter of 1997, yields declined 48 basis points
for the 30-year Treasury bond and 10 basis points for 2-year Treasuries. Since
bond prices rise when yields decline, this was positive for the Fund's overall
performance, particularly since the Fund was invested in longer-duration bonds.
In fact, the last four months of the year generated all of the increase in price
and over 50% of the total return in the market for income securities. While the
economic and inflation picture remained relatively positive, problems in Asia
caused a flight to quality, which created heavy demand among government
securities and helped contribute to declining yields.
[GRAPHIC]
Flight to quality
- -----------------
When investors in general move to improve the credit quality of the securities
they own, either because of credit concerns or a lack of yield advantages among
lower-rated securities.
9
<PAGE>
How did the bond rally affect risk in the market for income securities?
With yields going lower, prepayment risk increased. So we decided to trim our
holdings among mortgage-backed and asset-backed securities. The Fund maintained
small positions in commercial mortgages and CMOs, where prepayment risk is
lower. These sales benefited the Fund, as mortgage-backed securities
underperformed over the second half of the year. Toward the end of the year, we
increased the Fund's mortgage holdings slightly with discounted mortgages, which
we felt would not be affected as much should interest rates continue to decline.
Where did you put the money you raised selling mortgage-backed and asset-backed
securities?
Primarily into Treasury securities. In the second half of the year, we were able
to capitalize on several opportunities to switch between newer and older
government issues and back again, based on shifting supply and demand
characteristics in the market and capturing incremental gains with each move.
The positive impact on overall performance was further enhanced by the Fund's
longer duration strategy.
Were there other securities that you bought in the second half of the year?
We also purchased some agency securities for the Fund. In October, rising credit
concerns caused yield spreads on all non-Treasury investments to widen about 15
basis points. At that time, we saw opportunities in short agency securities. We
also increased the Fund's position in Fannie Maes, which offered attractive
characteristics with limited prepayment concerns. Both have performed in line
with our expectations, contributing positively to the Fund's performance.
Has the portfolio maintained its high- quality rating?
Yes, it has. The MainStay Government Fund holds securities which are agency
rated,+ which is better than AAA. The Fund seeks to take advantage of
opportunities as they arise, but as managers, we try not to stretch for yield by
compromising the quality of the Fund's investments.
Do you have any regrets regarding 1997?
Not really. We believe we acted prudently in 1997, adjusting the Fund's holdings
to reflect the shifting opportunities that arose throughout the year. Of course,
there may have been some opportunities we missed, but overall, we believe
mortgages were the best place to be in the first half of the year. In the second
half of the year we believed Treasuries were best--and since that's where the
Fund was primarily invested, we have no particular regrets.
What do you see on the horizon?
Going forward, we believe the economy may slow, at least for the first six
months of 1998, reflecting the impact of the Asian crisis on our economy. The
decreasing budget deficit will reduce the need for Treasury financing and unless
demand slackens, the reduced supply should have a positive effect on Treasuries.
We also believe that stability on the inflation front will generally be
[GRAPHIC]
Prepayment risk
- ---------------
The risk that mortgage or loan holders will repay their obligations before they
mature, shortening the stream of interest payments investors receive.
- ----------
+ Agency rating is above AAA. Currently debt rated AAA has the highest rating
assigned by Standard & Poor's. These ratings are based solely on the
creditworthiness of the bonds in the portfolio and are not meant to
represent the stability or safety of the Fund.
10
<PAGE>
good for the bond market. However, we cannot become complacent. With
unemployment at such low levels, there remains the possibility that wage hikes
could create inflationary pressure. So we're keeping our eyes open and carefully
monitoring market developments.
Do you think the Southeast Asian situation will have a major effect on the
markets?
It definitely has had an impact so far. It has caused many investors to rethink
their positions on risk. The coming months will tell how severe the fallout will
be for international markets and the U.S. economy. But so far, the flight to
quality has had a positive impact on funds like ours, which are currently
positioned with high-quality bonds and a longer duration. Regardless of how
things develop on the international front, we will continue to seek securities
that offer a high level of current income, consistent with safety of principal.
Ravi Akhoury
Edward Munshower
Portfolio Managers
[GRAPHIC]
Past performance is no guarantee of future results.
11
<PAGE>
[GRAPHIC]
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund average annual total returns*
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 9.12% 5.90% 7.18% 6.96%
Class B 8.54% 5.51% 6.99% 6.79%
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund SEC returns*
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 4.21% 4.93% 6.69% 6.54%
Class B 3.54% 5.19% 6.99% 6.79%
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 61 out of n/a n/a n/a
179 funds
Class B 103 out of 62 out of 46 out of 29 out of
179 funds 78 funds 52 funds 35 funds
Average Lipper
general U.S.
government fund 8.84% 6.31% 7.91% 7.48%
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
========================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $8.27 $0.4983 $0.0000
Class B $8.25 $0.4539 $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 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
12/31/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
12
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
===================================
<S> <C> <C>
LONG-TERM INVESTMENTS (106.0%)+
ASSET-BACKED SECURITIES (16.8%)
AUTO LEASES (2.1%)
Nissan Auto Receivables Grantor Trust
Series 1997-A Class A
6.15%, due 2/15/03......................... $13,414,818 $ 13,409,989
------------
CONSUMER LOANS (5.2%)
Chase Manhattan Recreational
Vehicle Owner Trust
Series 1997-A Class A5
6.05%, due 11/15/04........................ 7,475,000 7,460,125
Green Tree Recreational, Equipment &
Consumer Trust
Series 1996-C Class A1
6.2205%, due 10/15/17 (a).................. 2,621,672 2,624,136
Series 1997-C Class A1
6.49%, due 2/15/18......................... 19,636,110 19,707,585
NationsCredit Grantor Trust
Series 1997-2 Class A2
6.25%, due 11/15/13........................ 4,250,645 4,254,173
------------
34,046,019
------------
EQUIPMENT LOANS (2.7%)
Case Equipment Loan Trust
Series 1997-A Class A3
6.45%, due 3/15/04......................... 17,600,000 17,706,480
------------
HOME EQUITY LOANS (6.1%)
Household Finance Corp.
Home Equity Loan Asset-
Backed Certificates
Series 1992-2 Class A2
6.485%, due 10/20/07 (a)................... 9,624,875 9,641,430
Revolving Home Equity Loan Trust
Series 1994-2 Class A1
6.1988%, due 9/20/14 (a)................... 8,977,593 8,981,094
Southern Pacific Secured Assets Corp.
Series 1997-1 Class A1
6.1688%, due 4/25/27 (a)................... 16,316,317 16,286,947
The Money Store Home Equity Trust
Series 1997-A Class A10
6.1105%, due 5/15/25 (a)................... 5,154,555 5,148,936
------------
40,058,407
------------
STUDENT LOANS (0.7%)
Nellie Mae, Inc.
Series 1996-1 Class A1
6.1505%, due 12/15/04 (a).................. 4,624,925 4,623,676
------------
Total Asset-Backed Securities
(Cost $109,731,128)........................ 109,844,571
------------
MORTGAGE-BACKED SECURITIES (6.4%)
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (3.3%)
Asset Securitization Corp.
Series 1997-D5 Class A1C
6.75%, due 2/14/41 (b)..................... 7,220,000 7,372,992
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class A1
7.3437%, due 6/15/21 (a)(b)................ 7,876,707 8,014,156
Structured Asset Securities Corp.
Series 1997-LLI Class A1
6.79%, due 6/12/04 (b)..................... 6,097,898 6,232,174
------------
21,619,322
------------
FIRST MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (3.1%)
Bear Stearns Mortgage Securities Inc.
Series 1996-4 Class AI2
10.50%, due 9/25/27 (b).................... 2,186,959 2,275,793
Countrywide Mortgage-Backed
Securities Inc.
Series 1997-A3 Class A7
10.00%, due 5/25/27 (b).................... 6,625,925 6,942,976
Series 1997-A5 Class A4
10.00%, due 7/25/27 (b).................... 4,107,576 4,290,239
Series 1997-A8 Class A2
10.00%, due 10/25/27 (b)................... 2,436,889 2,709,772
Structured Asset Securities Corp.
Series 1996-2 Class A1
7.00%, due 8/25/26 (b)..................... 3,728,925 3,747,271
------------
19,966,051
------------
Total Mortgage-Backed Securities
(Cost $41,420,108 )........................ 41,585,373
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (82.8%)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MEDIUM-TERM NOTE) (4.9%)
5.96%, due 7/23/99......................... 32,200,000 32,278,890
------------
</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.
13
<PAGE>
MainStay Government Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===================================
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL AGENCIES (Continued)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE
PASS-THROUGH SECURITIES) (24.2%)
6.00%, due 10/1/08......................... $24,854,573 $ 24,613,732
6.45%, due 1/1/05 TBA (c).................. 5,325,000 5,376,812
6.50%, due 6/13/24 TBA (c)................. 43,460,000 42,903,277
6.54%, due 2/4/05 TBA (c).................. 5,000,000 5,074,650
6.65%, due 1/30/08 TBA (c)................. 4,205,000 4,297,931
6.72%, due 11/1/07 (b)..................... 5,980,441 6,142,153
6.765%, due 1/1/07 (b)..................... 12,744,174 13,106,746
7.00%, due 1/12/25 TBA (c)................. 56,260,000 56,664,509
------------
158,179,810
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE
PASS-THROUGH SECURITIES) (12.6%)
7.00%, due 12/15/23 - 5/15/27 (b) ......... 52,075,911 52,661,765
7.50%, due 12/15/23 (b).................... 8,024,298 8,242,479
9.50%, due 5/15/22 (b)..................... 19,845,027 21,668,388
------------
82,572,632
------------
UNITED STATES TREASURY BONDS (30.7%)
6.125%, due 11/15/27 (d)................... 63,960,000 65,729,134
6.25%, due 8/15/23 (d)..................... 41,211,000 42,447,330
7.625%, due 2/15/25 (d).................... 9,720,000 11,796,095
8.875%, due 8/15/17 (d).................... 30,332,000 40,260,877
12.00%, due 8/15/13 (d).................... 27,285,000 40,202,810
------------
200,436,246
------------
UNITED STATES TREASURY NOTES (10.4%)
5.50%, due 11/15/98........................ 11,850,000 11,837,083
5.75%, due 10/31/02 (d).................... 12,095,000 12,106,369
6.25%, due 2/28/02......................... 1,750,000 1,781,990
7.75%, due 11/30/99 (d).................... 28,185,000 29,228,691
7.875%, due 11/15/04 (d)................... 11,725,000 13,108,198
------------
68,062,331
------------
Total U.S. Government &
Federal Agencies
(Cost $525,584,523)........................ 541,529,909
------------
Total Long-Term Investments
(Cost $676,735,759)........................ 692,959,853
------------
SHORT-TERM INVESTMENTS (11.3%)
COMMERCIAL PAPER (11.3%)
American Express Credit Corp.
6.254%, due 1/2/98 ........................ 32,000,000 32,000,000
American General Finance Corp.
6.652%, due 1/2/98 (b)..................... 30,585,000 30,585,000
Ford Motor Credit Corp.
6.005%, due 1/5/98......................... 5,265,000 5,265,000
Prudential Funding Corp.
6.121%, due 1/6/98......................... 6,000,000 6,000,000
------------
Total Short-Term Investments
(Cost $73,850,000)......................... 73,850,000
------------
Total Investments
(Cost $750,585,759) (e).................... 117.3% 766,809,853(f)
Liabilities in Excess of
Cash and Other Assets...................... (17.3) (113,205,046)
------------- ------------
Net Assets.................................... 100.0% $653,604,807
============= ============
</TABLE>
- ----------
(a) Floating rate. Rate shown is the rate in effect at December 31, 1997.
(b) Segregated or partially segregated as collateral for TBA.
(c) 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.
(d) Represents securities out on loan or a portion of which is out on loan.
(e) The cost for Federal income tax purposes is $751,528,329.
(f) At December 31, 1997 net unrealized appreciation was $15,281,524, 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 $15,484,487 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $202,963.
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 Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $750,585,759).................................. $ 766,809,853
Cash............................................................................................... 3,342
Collateral held for securities loaned, at value (Note 5)........................................... 189,473,894
Receivables:
Investment securities sold....................................................................... 57,559,556
Interest......................................................................................... 6,664,175
Fund shares sold................................................................................. 1,521,161
--------------
Total assets.................................................................................... 1,022,031,981
--------------
LIABILITIES:
Securities lending collateral, at value (Note 5) 189,473,894
Payables:
Investment securities purchased.................................................................. 176,327,004
Fund shares redeemed............................................................................. 1,473,465
NYLIFE Distributors.............................................................................. 546,073
MainStay Management.............................................................................. 341,799
Transfer agent................................................................................... 124,533
Custodian........................................................................................ 12,255
Trustees......................................................................................... 4,309
Accrued expenses................................................................................... 123,842
--------------
Total liabilities............................................................................... 368,427,174
--------------
Net assets......................................................................................... $ 653,604,807
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A.......................................................................................... $ 20,699
Class B.......................................................................................... 771,536
Additional paid-in capital......................................................................... 775,164,877
Accumulated undistributed net investment income.................................................... 4,118
Accumulated net realized loss on investments....................................................... (138,580,517)
Net unrealized appreciation on investments......................................................... 16,224,094
--------------
Net assets......................................................................................... $ 653,604,807
==============
CLASS A
Net assets applicable to outstanding shares........................................................ $ 17,113,752
==============
Shares of beneficial interest outstanding.......................................................... 2,069,931
==============
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........................................................ $ 636,491,055
==============
Shares of beneficial interest outstanding.......................................................... 77,153,584
==============
Net asset value and offering price per share outstanding........................................... $ 8.25
==============
</TABLE>
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 Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................................................... $ 51,650,701
------------
Expenses:
Distribution--Class B............................................................................ 3,849,567
Service.......................................................................................... 1,764,382
Administration................................................................................... 1,760,807
Advisory......................................................................................... 1,760,807
Transfer agent................................................................................... 1,152,853
Management....................................................................................... 712,902
Shareholder communication........................................................................ 241,809
Recordkeeping.................................................................................... 97,518
Custodian........................................................................................ 85,077
Professional..................................................................................... 72,666
Registration..................................................................................... 35,911
Trustees......................................................................................... 17,868
Miscellaneous.................................................................................... 5,854
------------
Total expenses.................................................................................. 11,558,021
------------
Net investment income.............................................................................. 40,092,680
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments................................................................... 2,612,844
Net change in unrealized appreciation on investments............................................... 13,181,818
------------
Net realized and unrealized gain on investments.................................................... 15,794,662
------------
Net increase in net assets resulting from operations............................................... $ 55,887,342
============
</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 Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income........................................................... $ 40,092,680 $ 50,252,534
Net realized gain (loss) on investments......................................... 2,612,844 (18,412,508)
Net change in unrealized appreciation on investments............................ 13,181,818 (24,606,272)
------------- -------------
Net increase in net assets resulting from operations............................ 55,887,342 7,233,754
------------- -------------
Dividends to shareholders:
From net investment income:
Class A........................................................................ (1,019,757) (979,480)
Class B........................................................................ (38,267,749) (49,047,447)
------------- -------------
Total dividends to shareholders.............................................. (39,287,506) (50,026,927)
------------- -------------
Capital share transactions: Net proceeds from sale of shares:
Class A........................................................................ 10,873,435 10,249,736
Class B........................................................................ 47,345,675 69,491,869
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A........................................................................ 738,859 672,638
Class B........................................................................ 28,767,769 36,261,617
------------- -------------
87,725,738 116,675,860
Cost of shares redeemed:
Class A........................................................................ (11,379,777) (6,715,743)
Class B........................................................................ (238,724,333) (270,751,384)
------------- -------------
Decrease in net assets derived from capital share transactions............... (162,378,372) (160,791,267)
------------- -------------
Net decrease in net assets................................................... (145,778,536) (203,584,440)
NET ASSETS:
Beginning of year................................................................. 799,383,343 1,002,967,783
------------- -------------
End of year....................................................................... $ 653,604,807 $ 799,383,343
============= =============
Accumulated undistributed net investment income................................... $ 4,118 $ --
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
---------------------------------------
Class A Class B Class A Class B Class A Class B September 1
------- -------- -------- -------- ------- -------- through Year ended August 31
Year ended Year ended Year ended December 31 ------------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
------- -------- -------- -------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 7.76 $ 8.04 $ 8.77 $ 8.88
------- -------- -------- -------- ------- -------- ---------- ---------- ----------
Net investment income ..... 0.50 0.45 0.50 0.46 0.58 0.54 0.19 0.57 0.68
Net realized and
unrealized gain (loss)
on investments .......... 0.21 0.21 (0.35) (0.37) 0.65 0.65 (0.29) (0.71) (0.09)
------- -------- -------- -------- ------- -------- ---------- ---------- ----------
Total from investment
operations .............. 0.71 0.66 0.15 0.09 1.23 1.19 (0.10) (0.14) 0.59
------- -------- -------- -------- ------- -------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment
income .................. (0.50) (0.45) (0.50) (0.46) (0.58) (0.54) (0.18) (0.57) (0.70)
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) (0.45) (0.50) (0.46) (0.58) (0.54) (0.18) (0.59) (0.70)
------- -------- -------- -------- ------- -------- ---------- ---------- ----------
Net asset value at end
of period ............... $ 8.27 $ 8.25 $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 8.04 $ 8.77
======= ======== ======== ======== ======= ======== ========== ========== ==========
Total investment return (a) 9.12% 8.54% 1.97% 1.25% 16.38% 15.69% (1.24%) (1.63%) 6.92%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .............. 6.23% 5.67% 6.3% 5.7% 7.3% 6.7% 7.1%+ 7.1% 7.8%
Expenses ............. 1.09% 1.65% 1.0% 1.6% 1.0% 1.7% 1.7%+ 1.7% 1.7%
Portfolio turnover rate ... 338% 338% 307% 307% 540% 540% 143% 491%
629%
Net assets at end of
period (in 000's) ...... $17,114 $636,491 $ 16,413 $782,970 $12,784 $990,184 $1,024,492 $1,119,586 $1,210,998
</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.
18
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
The Fund's investment objective is to seek a high level of current income,
consistent with safety of principal.
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 Sub-Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Sub-Adviser to be representative of market values at the regular close of
business of the 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 Sub-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.
19
<PAGE>
MainStay Government Fund
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 Exchange will not be reflected in the Fund's calculation of net
asset value unless the Sub-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 MDRs
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 liabilities for such purchase commitments are
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.
Securities Lending. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are secured by collateral (cash or securities)
at least equal at all times to the market value of the securities loaned. The
Fund may bear the risk of delay in recovery of, or loss of rights in, the
securities loaned should the borrower of the securities fail financially. The
Fund receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
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 difference of $801,056 has been reclassified from accumulated
net realized loss on investments to accumulated undistributed net investment
income due to the treatment of gains (losses) on paydowns.
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. Premiums on securities purchased are not
amortized for this Fund.
20
<PAGE>
Notes to Financial Statements continued
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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.60% on assets up to $1 billion and 0.55% on assets in
excess of $1 billion.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.30% of
the average daily net assets of the Fund on assets up to $1 billion and 0.275%
on assets in excess of $1 billion.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.30% of
the average daily net assets of the Fund up to $1 billion and 0.275% on assets
in excess of $1 billion. As described above, MainStay Management is currently
paid a fee at a rate equal to the aggregate of the advisory and administrative
fee rates in effect prior to October 27, 1997. For the period January 1, 1997,
through October 26, 1997, MacKay-Shields and NYLIFE Distributors each earned
fees of $1,760,807. For the period October 27, 1997, through December 31, 1997,
MainStay Management earned $712,902.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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
21
<PAGE>
MainStay Government Fund
to the Class A Plan, the Distributor receives a monthly service fee 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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $5,803 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$788,647 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$646,145 and $49,009, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $24,093 for the year ended December
31, 1997.
22
<PAGE>
Notes to Financial Statements continued
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $16,639 and $80,879 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Federal Income Tax:
At December 31, 1997, for Federal income tax purposes, capital loss
carryforwards of $137,637,947 are available, as shown in the table below, to the
extent provided by regulations to offset future realized gains of the Fund
through 2005. 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.
<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
2005 1,896
--------
$137,638
========
</TABLE>
Note 5--Portfolio Securities Loaned:
At December 31, 1997, the Fund had securities on loan with a market value of
$195,859,450 to broker-dealers and government securities dealers.
Cash collateral received by the Fund is invested in investment grade commercial
paper, or other securities in accordance with the Fund's Securities Lending
Procedures. Such investments are included as an asset and a corresponding
liability in the Statement of Assets and Liabilities. While the Fund invests
cash collateral in investment grade securities or other "high quality"
investment vehicles, the Fund bears the risk that liability for the collateral
may exceed the value of the investment. Non-cash collateral received and held by
the Fund, in the form of U.S. Government obligations, had a value of $12,101,400
at December 31, 1997.
Net income earned by the Fund for securities lending transactions amounted to
$273,989, net of broker fees and rebates, for the year ended December 31, 1997,
which is included as interest income on the Statement of Operations.
Note 6--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of U.S. Government
securities were $2,071,927 and $2,235,620, respectively. Purchases and sales of
securities other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $342,147 and $238,062,
respectively.
23
<PAGE>
MainStay Government Fund
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .............................. 1,341 5,865 1,262 8,590
Shares issued in reinvestment of dividends 91 3,568 84 4,497
------ ------- ----- -------
1,432 9,433 1,346 13,087
Shares redeemed .......................... (1,400) (29,669) (828) (33,474)
------ ------- ----- -------
Net increase (decrease) .................. 32 (20,236) 518 (20,387)
====== ======= ===== =======
</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 Government Fund (one of
the fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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 24, 1998
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 with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 S&P 500* of stocks with the protection of a
Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[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 an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) graph indicating a special blend of capital may offer growth potential if converted
risk/reward of appreciation and current income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph indicating return from common stocks, have undervalued and you want to
risk/reward of convertible securities, and high-yield manage risk through multimarket
Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[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 bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 primarily from U.S. government
Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
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 maximum current income|| securities with high-yield potential++
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph indicating non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward of risk control diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating preservation of capital, and competitive yields on cash you're plan-
risk/reward of liquidity, with free checkwriting** ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph indicating tive overall return by investing in higher income and overall return by
risk/reward of a diversified portfolio of domestic investing in multiple bond market
Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free+++
Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income You are in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal income tax bracket or want to pay less of your
risk/reward of with preservation of capital+++ investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============---------------
Government Fund
--------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN08-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay High Yield Corporate Bond Fund
Highlights 5
$10,000 Invested in the MainStay High Yield
Corporate Bond Fund versus S&P 500, First
Boston High Yield Index, and Inflation--
Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Industry--Top 5 9
Quality Breakdown 11
Returns & Lipper Rankings 14
Top 10 Holdings 15
10 Largest Purchases 16
10 Largest Sales 16
Portfolio of Investments 17
Financial Statements 28
Notes to Financial Statements 32
Report of Independent Accountants 40
The MainStay Funds 42
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising
first quarter rise, the stock market took a disappointing turn in April. Before
long, however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* See page 6 for additional information on the S&P 500.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay High Yield Corporate Bond Fund, and MainStay Management, Inc.; approve
a Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay High Yield Corporate Bond Fund, and MacKay Shields Financial
Corporation; amend the Plan of Distribution for Class B shares; eliminate or
revise certain fundamental investment restrictions including eliminating certain
state-imposed fundamental investment restrictions and eliminating or revising
fundamental restrictions pertaining to issuer concentration, borrowing money,
industry concentration, and issuing senior securities; and ratify the selection
of Price Waterhouse LLP as independent certified public accountants of the
Trust.
A summary of the proposals and the voting by shareholders of the MainStay High
Yield Corporate Bond Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 224,395,428 7,570,079 Passed
Nancy Maginnes Kissinger.................................................. 224,377,890 7,587,617 Passed
Donald E. Nickelson....................................................... 224,430,236 7,535,271 Passed
Richard S. Trutanic....................................................... 224,412,969 7,552,538 Passed
Harry G. Hohn............................................................. 224,418,394 7,547,113 Passed
Terry L. Lierman.......................................................... 224,433,931 7,531,576 Passed
Donald K. Ross............................................................ 224,393,632 7,571,875 Passed
Walter W. Ubl............................................................. 224,441,506 7,524,001 Passed
Alice T. Kane............................................................. 224,430,837 7,534,670 Passed
John B. McGuckian......................................................... 224,408,450 7,557,057 Passed
Stephen C. Roussin........................................................ 224,404,850 7,560,657 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 217,520,713.74 Against - 3,929,089.34 Abstain - 10,515,702.91 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay
Shields Financial Corporation
<S> <C> <C> <C>
For - 217,006,075.70 Against - 4,001,300.35 Abstain - 10,958,127.95 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 154,060,365.07 Against - 5,649,299.04 Abstain - 11,580,862.08 Broker Non-Vote - 45,832,339.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 162,247,455.88 Against - 6,042,992.67 Abstain - 12,984,379.44 Broker Non-Vote - 50,690,679.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation............................... 162,163,899.87 6,126,548.68 Passed
A2--Oil, Gas, or Mineral Lease Interests.................................. 161,974,643.86 6,315,804.70 Passed
A3--Real Estate Limited Partnership Interests............................. 161,849,293.84 6,441,154.71 Passed
C1--Issuer Concentration.................................................. 162,166,435.87 6,124,012.68 Passed
C2--Borrowing Money....................................................... 161,980,479.86 6,309,968.70 Passed
C3--Industry Concentration................................................ 162,035,619.86 6,254,828.69 Passed
C4--Issuing Senior Securities............................................. 161,868,565.85 6,421,882.71 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent
Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 221,202,275.06 Against - 1,473,016.13 Abstain - 9,289,990.81 Result - Passed
</TABLE>
4
<PAGE>
MainStay High Yield Corporate Bond Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] After interest rates rose slightly at the end of March, moderate economic
growth and reduced inflation concerns caused rates to decline throughout
the rest of the year.
[ ] Yield spreads of high-yield bonds relative to U.S. Treasuries remained at
historically low levels throughout most of the year.
[ ] Problems in Southeast Asia in the second half of the year resulted in a
flight to higher-quality issues in both the high-grade and high-yield
sectors.
[ ] Significant inflows of foreign capital, strong new issuance, and
historically low default levels artificially bolstered the price of
high-yield securities.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 12.20% and 11.55% for Class A and Class B
shares, respectively, excluding all sales charges, for the period ended
12/31/97.
[ ] Both share classes underperformed the average Lipper* high current yield
fund, which returned 12.96% for the year ended 12/31/97.
[ ] Class A and Class B shares both received a 5-star overall rating from
Morningstar+ as of 12/31/97.
[ ] Among high-yield issuers, the Fund emphasized higher-quality credits over
middle- and lower-quality issues.
[ ] The Fund emphasized short-duration through the first three quarters of the
year, but began to lengthen duration during the fourth quarter.
================================================================================
- ----------
* See footnote and table on page 14 for more information on Lipper Analytical
Services, Inc.
+ Morningstar, Inc. is an independent fund performance monitor. Its ratings
reflect historic risk-adjusted performance, taking into account fees and
sales charges, and may change monthly. Its ratings of 1 (low) to 5 (high)
stars are based on a fund's 3-, 5-, and 10-year average annual returns with
fee adjustments in excess of 90-day Treasury bill returns, and a risk
factor that reflects fund performance below 90-day Treasury bill monthly
returns. The top 10% of the funds in a rating group may receive 5 stars,
the next 22.5% receive 4 stars, the middle 35% receive 3 stars, the next
22.5% receive 2 stars, and the bottom 10% receive 1 star. The MainStay High
Yield Corporate Bond Fund Class B shares received 5 stars, 5 stars, and 5
stars from Morningstar for the 3-, 5-, and 10-year periods ending 12/31/97
from among 1,371; 771; and 323 taxable bond funds, respectively; and Class
A shares received 5 stars for the 3-year period ending 12/31/97 from among
1,371 taxable bond funds.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay High Yield
Corporate Bond Fund versus S&P 500,
First Boston High Yield Index, and Inflation
CLASS A SHARES SEC Returns: 1-Year 7.16%, 5-Year 13.11%, 10-Year 11.79%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay High Yield First
Year Corporate Bond Boston High S&P
End Fund Yield Index* 500+ Inflation++
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12/87 $ 9,550 $10,000 $10,000 $10,000
12/88 $11,163 $11,143 $11,656 $10,441
12/89 $10,600 $11,188 $15,342 $10,925
12/90 $ 9,768 $10,475 $14,866 $11,608
12/91 $12,921 $15,058 $19,385 $11,954
12/92 $15,717 $17,568 $20,861 $12,308
12/93 $19,121 $20,888 $22,955 $12,645
12/94 $19,407 $20,687 $23,258 $12,974
12/95 $23,343 $24,287 $31,989 $13,311
12/96 $27,154 $27,302 $39,327 $13,752
12/97 $30,468 $30,749 $52,447 $13,984
</TABLE>
[GRAPHIC] MainStay High Yield Corporate Bond Fund
[GRAPHIC] First Boston High Yield Index*
[GRAPHIC] S&P 500+
[GRAPHIC] Inflation++
CLASS B SHARES SEC Returns: 1-Year 6.55%, 5-Year 13.53%, 10-Year 12.11%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay High Yield First
Year Corporate Bond Boston High S&P
End Fund Yield Index* 500+ Inflation++
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12/87 $10,000 $10,000 $10,000 $10,000
12/88 $11,689 $11,143 $11,656 $10,441
12/89 $11,099 $11,188 $15,342 $10,925
12/90 $10,228 $10,475 $14,866 $11,608
12/91 $13,529 $15,058 $19,385 $11,954
12/92 $16,458 $17,568 $20,861 $12,308
12/93 $20,021 $20,888 $22,955 $12,645
12/94 $20,321 $20,687 $23,258 $12,974
12/95 $24,327 $24,287 $31,989 $13,311
12/96 $28,116 $27,302 $39,327 $13,752
12/97 $31,364 $30,749 $52,447 $13,984
</TABLE>
[GRAPHIC] MainStay High Yield Corporate Bond Fund
[GRAPHIC] First Boston High Yield Index*
[GRAPHIC] S&P 500+
[GRAPHIC] Inflation++
- ---------
The Class A graph assumes an initial investment of $10,000 made on 12/31/87
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 12/31/87 through
12/31/94. The Class B graph assumes an initial investment of $10,000 made
on 12/31/87. 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.
* The MainStay High Yield Corporate Bond Fund, going forward, will measure
its performance against the First Boston High Yield Index. This Index
reflects the holdings of the Fund better than the S&P 500, against which
the Fund is currently measured, and the Subadviser believes that it is,
therefore, a better performance benchmark. The First Boston High Yield
Index is a market-weighted index that includes publicly traded bonds rated
below BBB by Standard & Poor's and Baa by Moody's. The Index assumes
reinvestment of all distributions and interest payments and does not take
into account brokerage fees or taxes. Securities in the Fund will not
precisely match those in the Index and so, performance of the Fund will
differ.
+ "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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of High Yield Corporate Bond Fund Team
HIGH YIELD CORPORATE BOND FUND TEAM
Matt Philo, Steven Tananbaum, and Don Morgan
At the end of March 1997, concerns about inflation and the rate of
economic growth led the Federal Reserve Board to move to raise interest rates by
25 basis points. As the year progressed, economic growth slowed to more moderate
levels and inflation remained under control, causing interest rates to steadily
decline.
As currency problems and financial difficulties emerged in Southeast Asia,
inflation concerns evaporated and the possibility of deflation swept across the
investment horizon. The market reacted to the Asian turmoil with a flight to
quality that boosted bond prices and generally reduced yields. In the high-yield
market, upper-tier securities substantially outperformed the middle- and
lower-tiers, and investors avoided emerging market debt, regardless of
underlying fundamentals.
With the U.S. dollar strong throughout the year, foreign capital flowed into
domestic securities, including the high-yield bond market. Strong new issuance
and historically low default levels helped to attract investors and bolster
prices, often to artificially high levels. As a result, it appeared that new
issues tended to be overpriced relative to their intrinsic value, and fair
values tended to be more evident in the secondary market.
Given this context, how did the MainStay High Yield Corporate Bond Fund perform
in 1997?
The MainStay High Yield Corporate Bond Fund returned 12.20% and 11.55% for Class
A and Class B shares, respectively, excluding all sales charges, for the year
ended 12/31/97. Both share classes underperformed the average Lipper* high
current yield fund, which returned 12.96% for the year. Class A and Class B
shares both received a 5-star overall rating from Morningstar+ as of 12/31/97.
What factors caused the Fund to underperform its peers?
There were three basic themes that affected the Fund's relative results. First,
over the course of the year, yield spreads tightened, causing the risks of
higher-yield securities to increase beyond their reward potential, which led the
Fund to pursue
[GRAPHIC]
Inflation/Deflation
- -------------------
Inflation is an increase in the cost of goods and services over time. As prices
rise, the purchasing power of the dollar declines. Deflation is a reduction in
the cost of goods over time. When deflation occurs, the purchasing power of the
dollar increases.
Flight to quality
- -----------------
When investors in general move to improve the credit quality of the securities
they own, either because of credit concerns or a lack of yield advantages among
lower-rated securities.
Upper-tier
securities
- ----------
Within the high-yield market, securities vary widely in their credit quality.
Those with higher quality ratings (within the high-yield sector) are designated
as upper-tier, whereas those with respectively lower quality ratings would be
designated middle- and lower-tier.
- ----------
* See footnote and table on page 14 for more information on Lipper Analytical
Services, Inc.
+ See footnote on page 5 for more information on Morningstar, Inc.
7
<PAGE>
[GRAPHIC]
Default
- -------
Failure of a debtor to repay principal or interest on an obligation or to meet
some other provision of a debt instrument. If an issuer defaults, bondholders
may make claims against the assets of the issuer to recoup their principal.
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 intermediate-term and short-term Treasury issues.
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its income securities--or a measure of the general credit risk of securities in
an income portfolio.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
End %
- -------------------------------------
<S> <C>
12/86 5.01
12/87 0.19
12/88 16.89
12/89 (5.04)
12/90 (7.85)
12/91 32.27
12/92 21.65
12/93 21.65
12/94 1.50
12/95 20.28
12/96 16.33
12/97 12.20
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/86 through 12/94. See footnote * on page 14 for more information on
performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
End %
- -------------------------------------
<S> <C>
12/86 5.01
12/87 0.19
12/88 16.89
12/89 (5.04)
12/90 (7.85)
12/91 32.27
12/92 21.65
12/93 21.65
12/94 1.50
12/95 19.71
12/96 15.58
12/97 11.55
</TABLE>
See footnote * on page 14 for more information on performance.
higher quality. As we continued to emphasize higher credit quality within the
high-yield universe, we reduced the Fund's potential to outperform more
aggressive funds which invested in lower-quality securities. Second, as a
defensive measure, we emphasized shorter-duration credits during the first three
quarters of the year, which had a negative impact on performance. In the fourth
quarter, we lengthened our duration, which had a positive effect as interest
rates continued to decline. Third, we were somewhat premature in increasing the
Fund's emerging market exposure before and during the correction in those
markets. While we still believe that some of the Fund's Asian holdings have
promising fundamentals, given the market's flight to quality, such fundamentals
have largely been overlooked.
8
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Media 15.6%
Cable 8.3%
Cellular Telephone 6.4%
Casinos 4.4%
Health Care 4.2%
All Other 61.1%
</TABLE>
Actual percentages will vary over time. Excludes U.S. government & federal
agency issues.
Did the Fund have Asian holdings that were greatly affected?
When the Asian problems began, we asked ourselves which positions were most
likely to be affected. We realized that cyclicals were very vulnerable and
immediately reduced the Fund's exposure in that area. For example, we reduced
the Fund's position in GPA, an aircraft leasing company that had exposure to
emerging markets.
In all of the Fund's emerging market debt, we had already decided to focus only
on premier companies, which generally would be positive for the Fund. One issue
that has had very poor performance, however, is First Pacific Capital--a
conglomerate with premier Asian holdings, excellent fundamentals, a liquid
balance sheet, and promising prospects. Despite these strengths, the price of
the bonds continued to decline through the end of the year. The Fund continues
to hold First Pacific Capital and we believe it may perform well when the Asian
situation begins to calm down.
Was all of the Asian news bad?
No, it wasn't. The Fund owned bonds in all three of Asia Pulp & Paper's
subsidiaries, but the decision was made to sell them well ahead of the market
turmoil. While the sales were relatively neutral for the Fund, our decision to
get out of the bonds was the right decision, given their subsequent performance.
Have you made other defensive moves for the Fund?
Yes. We moved the Fund toward higher-quality credits within the high-yield
sector as spreads between high-yield and high-grade securities became extremely
narrow. In seeking to extend duration without taking on additional risk, the
Fund purchased a 5% position in Treasury notes.
[GRAPHIC]
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.
Cyclicals
- ---------
Securities that tend to rise quickly with economic upturns and fall quickly when
the economy slows. Noncyclical industries, such as food, insurance, and
pharmaceuticals, are likely to have more consistent performance regardless of
economic changes.
9
<PAGE>
[GRAPHIC]
Cash Flow
- ---------
The amount of income or earnings available to cover outstanding liabilities and
other obligations, including debt service.
Tender
- ------
To offer money or goods in settlement for a prior debt or claim.
Were there other positive themes during 1997?
Before answering that, it's important to note that we're primarily "bottom-up"
investors. Unlike "top-down" investors, we don't look for general investment
themes and then try to find securities that fit them. Instead, we select
securities based on their individual merits. We look at the company's debt
coverage, free cash flow, management, and overall business prospects, and select
individual situations that we believe will provide more than adequate
compensation for any risks the Fund must assume.
With that said, we did see some positive trends unfold as a result of our
selection process. For example, in selecting securities, we often consider the
possibility of tenders--or offers to buy back debt that doesn't carry call
provisions. In a declining rate environment, companies often have an incentive
to repurchase their debt if they feel that refinancing would be advantageous.
Owens-Illinois is a container company that we felt was likely to restructure its
obligations and tender for its senior debt. By buying a significant amount of
that debt, we were able to secure very solid performance in the first half of
the year, rolling into new debt that has continued to perform well in the second
half of the year. We also saw a tender at Ivex Packaging, which was profitable
for the Fund. While each of these situations was unique, our ability to identify
companies likely to refinance noncallable bonds has unfolded as a positive theme
in 1997.
What were some of the Fund's significant purchases during the year?
In the first half of the year, we had success with TCI Satellite Entertainment.
When the bonds originally came to market, we believed they were overpriced. When
they reached a substantial discount, we bought them for the Fund in the
secondary market and sold them when they returned to par. Although it was a
lower-tier credit, we felt the potential rewards outweighed the risks, and the
transactions were positive for the Fund.
USN Communications was purchased in 1997 and allowed the Fund to participate in
the emerging local telephone provider market. We liked the company's management
and business strategy and believed their bonds were attractively priced.
The purchase had a positive impact on performance.
The Fund also bought Pegasus Shipping first mortgage notes for the Fund. The
notes are secured by Panamax oil tankers that concentrate on North American
trade. The company has a very strong cash flow--enough to retire three-quarters
of the company's debt in five years. The price and yield were attractive, the
assets were solid, and the notes performed well for the Fund.
What exactly do you look for in a bond?
While situations vary, we generally look for a substantial yield advantage,
strong liquidity, and free cash flow or asset coverage. A company that can
afford to reduce its debt is much more appealing to us than one that needs every
dime it raises. Since
10
<PAGE>
we believe we're in the later stages of the credit cycle, we also want companies
that will continue to be able to generate predictable cash flow even if the
economy should take a major downturn.
We also look for opportunities. When the market doesn't perceive the full
potential of a company or security, we believe we can make sound investments for
the Fund at attractive prices. An excellent example might be ICN
Pharmaceuticals. In the early 1990s, the company was highly leveraged, but since
then, it has significantly reduced its debt levels. We think of the company as a
strong BB credit that may advance to investment grade. But because of the
company's checkered past, its bonds were priced similar to a weak BB credit. We
made a sizeable purchase of ICN Pharmaceutical bonds and they have performed
well for the Fund--and may do even better if the company is upgraded.
What sort of situations may prompt the Fund to sell?
There are a variety of reasons why the Fund may sell bonds. If an entire market
shifts, as occurred in Southeast Asia, that may prompt the Fund to sell.
International Semi-Technology Microelectronics was a company we felt would be
very vulnerable during the Asian difficulties. The Fund owned about $100 million
of their bonds at one point, and we sold $80 million of them in what we felt was
a reasonable price range. By year end, the bonds were trading at nearly half the
price at which the Fund sold them. Although the Fund continues to hold some of
these bonds, the decision to sell was positive for the Fund in terms of risk
management.
In a similar, but less extreme example, we sold bonds of Vencor, a hospital
chain, because of a general shift in the hospital management industry. With
QUALITY BREAKDOWN AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
U.S. Government & Federal Agencies 10.3%
A 0.2%
BBB 4.2%
BB 21.6%
B 41.1%
CCC 7.1%
D 0.2%
Cash, Equivalents & Other Assets, less Liabilities 8.7%
All Other 6.6%
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
[GRAPHIC]
11
<PAGE>
[GRAPHIC]
Columbia/HCA under federal investigation, we found that Vencor's risk/reward
profile had changed substantially enough to cause us to rethink the Fund's
position. The sale was modestly profitable for the Fund, but we think it was
wise given the shifting industry fundamentals.
In other cases, such as Spanish Broadcasting and Casino America, bonds may
simply rise to the price target we've set and we'll sell or reduce the Fund's
position to take profits and look for other opportunities with more price
potential.
In still other cases, a company-specific event can prompt a sale. UIH is an
international cable company that benefited by selling a relatively minor asset
for a huge price. That resulted in a tremendous boost for the bonds, and we sold
some of the Fund's holdings at a substantial gain. In fact, UIH was one of the
strongest performers in the Fund for the year.
Which other names were strong performers?
Kabelmedia was very strong. The company benefited from consolidation in
international media and provided outstanding returns. With the growing
competition in local area telephone service, USN Communications used its
positioning in that market to good advantage, and the bonds made a substantial
contribution to the Fund's performance. And Family Restaurants was a new
purchase in 1997 that had a solid business plan, executed it well, and the
market rewarded its efforts.
Which of the Fund's holdings did poorly?
Alliance Entertainment was a troubled company we believed could benefit from a
strong business partner. When no partner emerged, however, the company went
bankrupt. While bondholders may have claim to the company assets, the holding
was a negative performer for the Fund. Cityscape was an overly aggressive
subprime mortgage lender that faced prepayment problems in a declining rate
environment. We felt that we had bought Cityscape bonds at a low price, but as
rates continued to decline, the company continued to face difficulties. While we
remain cautiously optimistic, the holding had a negative impact on performance
in 1997.
What do those examples say about the high-yield market?
They support what we've been saying for some time--that there are different
credit quality tiers in the high-yield market and they offer different
risk/reward characteristics. We've generally reduced our holding in the bottom
tier, simply because the risks have become greater and the reward potential
seems inadequate to justify the risks. While the Fund has occasionally had
success with bottom-tier securities, in 1997 we concentrated more heavily in the
upper tier, where there are stronger companies with more cash flow to cover
difficulties, should they occur. As the Asian meltdown clearly shows,
difficulties can arise suddenly and unexpectedly. If and when that happens, we'd
prefer to see the Fund invested
12
<PAGE>
in relatively strong credits that will get stronger--rather than weak ones that
will get weaker.
How was the Fund weighted relative to the high-yield market in general at year
end?
In the high-yield market, media and telecommunications companies account for a
high percentage of issues. While the Fund holds quite a few of the names in
these areas, at year end, it was about market weighted in telecommunications and
slightly overweighted in media. With good results from casinos--such as Casino
America and President Riverboat Casino--both of which contributed positively to
performance in 1997, the Fund was overweighted in casinos at year end. It was
also overweighted in industrials, with names such as Owens-Illinois, Thermadyne,
and Easco, each of which contributed positively to performance.
We saw little value in energy and the Fund was significantly underweighted there
at year end. We believe this was a positive decision since energy has generally
underperformed, particularly with mild weather and declining oil prices.
Although the Fund experienced some positive results in the paper industry in the
first half of the year, with names like Stone Container and Gaylord Container,
at year end the Fund was underweighted in the paper industry.
What is your outlook going forward?
We continue to believe that quality will be very important. Despite relatively
low default levels overall, we're seeing more defaults in the bottom tier of the
high-yield market and less value in the middle and lower tiers. While we
continue to see promise in the emerging markets, we believe it may take some
time for the investment world to refocus on fundamentals there. We remain
relatively defensive, looking for companies that can generate predictable cash
flow, even in an economic downturn. Of course, we will continue to pursue
maximum current income and capital appreciation opportunities in accordance with
the Fund's objective.
Denis Laplaige
Steven Tananbaum
Portfolio Managers
[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 larger than the sector's share of the market as a whole.
The potential for high yield is accompanied by higher risk. Certain of the
Fund's investments may be speculative.
Past performance is no guarantee of future results.
13
<PAGE>
[GRAPHIC]
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund average annual total returns*
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 12.20% 14.15% 12.30% 10.92%
Class B 11.55% 13.77% 12.11% 10.76%
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund SEC returns*
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 7.16% 13.11% 11.79% 10.49%
Class B 6.55% 13.53% 12.11% 10.76%
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 110 out of n/a n/a n/a
181 funds
Class B 134 out of 4 out of 7 out of 10 out of
181 funds 67 funds 50 funds 35 funds
Average Lipper high
current yield fund 12.96% 11.36% 10.66% 9.68%
========================================================================================
- ----------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
========================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $8.16 $0.7401 $0.3411
Class B $8.15 $0.6892 $0.3411
========================================================================================
</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 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
12/31/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
14
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 12/31/97
=======================================================================================
HOLDING AMOUNT
=======================================================================================
<S> <C>
Viacom, Inc., 6.75%,due 1/15/03 $87,223,954
Loewen Group, Inc. (The), 6.70%, due 10/1/99 80,312,960
CD Radio, Inc., (zero coupon), due 12/1/07
15.00%, beginning 12/1/02 62,929,840
First Pacific Capital Ltd., 2.00%, due 3/27/02 54,599,010
Supercanal Holding, S.A.
14.50%, due 11/12/98 54,153,500
Thermadyne Holdings Corp., 10.75%, due 11/1/03 50,754,920
Le Groupe Videotron Ltee, 10.625%, due 2/15/05 48,854,260
Viacom, Inc., 8.00%, due 7/7/06 47,846,175
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06, 13.50%, beginning 6/1/01 47,656,450
Abbey Healthcare Group, Inc., 9.50%, due 11/1/02 46,612,530
=======================================================================================
</TABLE>
[GRAPHIC]
- ----------
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
and U.S. government and federal agency issues are excluded. See Portfolio of
Investments for specific type of security held.
15
<PAGE>
[GRAPHIC]
- ----------
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 and U.S. government and
federal agency issues are excluded. See Portfolio of Investments for specific
type of security held.
<TABLE>
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
========================================================================================
<S> <C>
Viacom, Inc., 6.75%, due 1/15/03, 8.00%, due 7/7/06
Class A Common Stock and Class B Common Stock $149,478,281
PanAmSat L.P., (zero coupon), due 8/1/03
11.375%, beginning 8/1/98 87,327,983
Loewen Group, Inc. (The), 6.70%, due 10/1/99
and Common Stock 85,036,103
CD Radio, Inc., (zero coupon), due 12/1/07
15.00%, beginning 12/1/02 and 5.00% Preferred Stock 78,500,393
AES Corp., 7.6875%, due 6/26/03 and 8.375%, due 8/15/07 72,441,250
First Pacific Capital Ltd., 2.00%, due 3/27/02 62,915,283
CMS Energy Corp., 7.625%, due 11/15/04 and 8.125%, due 5/15/02 54,533,571
Supercanal Holding, S.A., 14.50%, due 11/12/98
and Series A Warrants, expiration 11/14/99 53,876,500
Rogers Cantel, Inc., 8.30%, due 10/1/07 and 9.375%, due 6/1/08 52,018,705
Tenet Healthcare Corp., 7.875%, due 1/15/03 and 10.125%, due 3/1/05 51,711,925
========================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- ----------------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
========================================================================================
<S> <C>
TCI Satellite Entertainment Corp., (zero coupon), due 2/15/07
12.25%, beginning 2/15/02 and TCI Pacific Communication, Inc.
5.00%, Class A Preferred Stock $60,044,904
TeleWest, PLC, (zero coupon),due 10/1/07
11.00%, beginning 10/1/00 55,667,835
Tenet Healthcare Corp., 7.875%, due 1/15/03 and
10.125%, due 3/1/05 51,483,738
Ionica, PLC, (zero coupon), due 5/1/07, 15.00%, beginning 5/1/02 and
13.50%, due 8/15/06 48,297,595
Casino America, Inc., 11.50%, due 6/1/01 and 12.50%, due 8/1/03 48,142,713
McCaw International Ltd., (zero coupon), due 4/15/07
13.00%, beginning 4/15/02, Units (zero coupon), due 4/15/07
13.00%, beginning 4/15/02 and Warrants expiration 4/15/07 45,129,450
GPA Delaware, Inc., 8.75%, due 12/15/98 40,332,605
UIH Australia/Pacific, Inc., Series B, (zero coupon), due 5/15/06
14.00%, beginning 5/15/01 39,038,460
Argosy Gaming Co., 13.25%, due 6/1/04 36,934,573
Clearnet Communications, Inc., (zero coupon), due 12/15/05
14.75%, beginning 12/15/00, Class A Common Stock and
Warrants expiration 9/15/05 36,830,354
========================================================================================
</TABLE>
16
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
=========================================
<S> <C> <C>
LONG-TERM BONDS (81.3%)+
CONVERTIBLE BONDS (3.9%)
BANKS (0.1%)
MBI Finance Ltd.
(zero coupon),
due 12/18/01 (c)(v)........................ $ 1,000,000 $ 560,000
(zero coupon), due 12/18/01 (v)............ 5,650,000 3,164,000
--------------
3,724,000
--------------
CELLULAR TELEPHONE (0.7%)
Metro Pacific Capital Ltd.
2.50%, due 4/11/03 (v)..................... 10,893,000 7,516,170
Technology Resources
Industries Berhad
2.75%, due 11/28/04 (v).................... 2,030,000 2,090,900
United Communication Industry
Public Co., Ltd.
2.75%, due 4/4/06 (v)...................... 8,565,000 3,426,000
United States Cellular Corp.
(zero coupon), due 6/15/15................. 34,345,000 12,321,269
--------------
25,354,339
--------------
CONGLOMERATES (1.5%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (c)(v).................. 2,000,000 1,590,000
2.00%, due 3/27/02 (v)..................... 68,678,000 54,599,010
--------------
56,189,010
--------------
ENERGY (0.1%)
Lukinter Finance B.V.
1.00%, due 11/3/03 (v)..................... 4,500,000 3,746,250
--------------
MEDIA (0.9%)
Rogers Communications, Inc.
(zero coupon), due 5/20/13 (o)............. 75,259,000 31,702,854
--------------
PAPER & FOREST PRODUCTS (0.3%)
Sappi BVI Finance Ltd.
7.50%, due 8/1/02 (v)...................... 11,870,000 10,920,400
--------------
REAL ESTATE (0.3%)
JG Summit (Cayman) Ltd.
3.50%, due 12/23/03 (v).................... 16,829,000 9,424,240
--------------
TECHNOLOGY (0.0%) (b)
Samsung Electronics Co., Ltd.
0.25%, due 12/31/06 (v).................... 1,250,000 1,018,750
--------------
Total Convertible Bonds
(Cost $158,169,843)........................ 142,079,843
--------------
CORPORATE BONDS (58.4%)
AEROSPACE (0.6%)
Rohr, Inc.
9.25%, due 3/1/17.......................... 6,000,000 6,150,000
Sequa Corp.
8.75%, due 12/15/01........................ 1,742,000 1,768,130
9.375%, due 12/15/03....................... 12,100,000 12,493,250
9.625%, due 10/15/99....................... 1,000,000 1,032,500
--------------
21,443,880
--------------
AUTO MANUFACTURING (0.2%)
Titan Tire Corp.
7.00%, due 2/11/00 (p)..................... 6,542,838 6,362,910
--------------
AUTO PARTS (0.9%)
CSK Auto, Inc.
Series A
11.00%, due 11/1/06........................ 29,502,000 32,452,200
--------------
BANKS (0.6%)
Central Bank Philippines
Series B
6.50%, due 12/1/17 (aa).................... 3,000,000 2,475,000
First Nationwide Holdings, Inc.
12.25%, due 5/15/01........................ 3,880,000 4,365,000
Local Financial Corp.
11.00%, due 9/5/04 (c)..................... 15,095,000 15,925,225
--------------
22,765,225
--------------
BUILDING MATERIALS (0.3%)
Associated Materials, Inc.
11.50%, due 8/15/03........................ 9,456,000 10,117,920
Triangle Pacific Corp.
10.50%, due 8/1/03......................... 1,500,000 1,575,000
--------------
11,692,920
--------------
</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>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=========================================
<S> <C> <C>
CORPORATE BONDS (Continued)
BUILDINGS (1.7%)
Greystone Homes, Inc.
10.75%, due 3/1/04......................... $ 30,429,000 $ 33,167,610
NVR, Inc.
11.00%, due 4/15/03........................ 20,606,000 22,254,480
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(h)(i)...................... 108,500 30,380
U.S. Home Corp.
8.88%, due 8/15/07......................... 5,000,000 5,075,000
--------------
60,527,470
--------------
CABLE (6.1%)
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99.................. 20,500,000 6,765,000
Continental Cablevision, Inc.
11.00%, due 6/1/07......................... 8,600,000 9,561,970
CS Wireless Systems, Inc.
Series B
(zero coupon), due 3/1/06
11.375%, beginning 3/1/01.................. 35,047,000 9,112,220
Heartland Wireless
Communications, Inc.
Series B
14.00%, due 10/15/04....................... 23,985,000 8,874,450
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99................... 49,272,000 45,576,600
Supercanal Holding, S.A.
14.50%, due 11/12/98 (d)(p)................ 55,400,000 54,153,500
UIH Australia/Pacific, Inc.
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01 (c).............. 3,000,000 1,980,000
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01.................. 21,315,000 14,067,900
United International Holdings, Inc.
(zero coupon), due 11/15/99................ 50,460,000 42,386,400
Series B
(zero coupon), due 11/15/99................ 32,830,000 27,577,200
--------------
220,055,240
--------------
CASINOS (3.3%)
Casino America, Inc.
12.50%, due 8/1/03......................... 7,000,000 7,603,750
Casino Magic Finance Corp.
11.50%, due 10/15/01....................... 5,567,000 5,344,320
El Comandante Capital Corp.
11.75%, due 12/15/03....................... 18,883,000 18,694,170
Grand Casinos, Inc.
10.125%, due 12/1/03....................... 5,160,000 5,547,000
Horseshoe Gaming LLC
Series B
12.75%, due 9/30/00........................ 31,044,000 34,148,400
Penn National Gaming, Inc.
10.625%, due 12/15/04 (c).................. 10,510,000 10,825,300
President Riverboat Casinos, Inc.
13.00%, due 9/15/01........................ 29,961,000 27,863,730
Riviera Holdings Corp.
11.00%, due 12/31/02....................... 6,750,000 7,155,000
Treasure Bay Gaming & Resorts
Class A
(zero coupon)
due 1/1/50 (a)(e)(h)(i).................... 9,886,075 2,534,888
Trump Castle Funding, Inc.
13.875%, due 11/15/05 (g).................. 245 223
--------------
119,716,781
--------------
CELLULAR TELEPHONE (2.1%)
CCPR Services, Inc.
10.00%, due 2/1/07......................... 29,250,000 28,080,000
Centennial Cellular Corp.
8.875%, due 11/1/01........................ 17,118,000 17,545,950
10.125%, due 5/15/05....................... 15,085,000 16,367,225
CommNet Cellular, Inc.
(zero coupon), due 9/1/03
11.75%, beginning 9/1/98................... 4,910,000 4,922,275
PriCellular Wireless Corp.
Series B
14.00%, due 11/15/01....................... 9,355,000 10,384,050
--------------
77,299,500
--------------
CHEMICALS (1.7%)
Agricultural Minerals & Chemicals, Inc.
10.75%, due 9/30/03........................ 15,250,000 16,317,500
International Specialty Products, Inc.
Series B
9.00%, due 10/15/03........................ 29,000,000 30,051,250
Uniroyal Chemical Co., Inc.
9.00%, due 9/1/00.......................... 14,450,000 14,991,875
--------------
61,360,625
--------------
CHILD CARE SERVICES (0.6%)
La Petite Holdings Corp.
9.625%, due 8/1/01......................... 20,292,000 20,900,760
--------------
</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>
Principal
Amount Value
=========================================
<S> <C> <C>
CORPORATE BONDS (Continued)
COMPUTERS & OFFICE EQUIPMENT (0.1%)
Unisys Corp.
10.625%, due 10/1/99....................... $ 3,500,000 $ 3,570,000
--------------
CONGLOMERATES (0.3%)
Figgie International, Inc.
9.875%, due 10/1/99........................ 11,750,000 12,249,375
--------------
CONSUMER DURABLES (0.6%)
Selmer Co., Inc.
11.00%, due 5/15/05........................ 19,750,000 21,725,000
11.00%, due 5/15/05 (c).................... 1,500,000 1,650,000
--------------
23,375,000
--------------
CONTAINERS (1.0%)
Owens-Illinois, Inc.
7.85%, due 5/15/04......................... 33,850,000 35,540,537
--------------
DEFENSE ELECTRONICS (0.5%)
Alliant Techsystems, Inc.
11.75%, due 3/1/03......................... 17,025,000 18,706,219
--------------
DRUGS (0.5%)
ICN Pharmaceuticals, Inc.
Series B
9.25%, due 8/15/05......................... 16,505,000 17,495,300
--------------
ELECTRIC UTILITIES (1.6%)
CMS Energy Corp.
7.625%, due 11/15/04....................... 21,500,000 21,475,684
8.125%, due 5/15/02........................ 10,655,000 10,968,619
Midland Funding Corp. I
Series C-91
10.33%, due 7/23/02........................ 16,297,028 17,527,698
Series C-94
10.33%, due 7/23/02........................ 8,113,286 8,725,961
--------------
58,697,962
--------------
EQUIPMENT FINANCING (2.1%)
Atlas Air, Inc.
12.25%, due 12/1/02........................ 11,112,000 12,330,875
Continental Airlines, Inc.
8.00%, due 6/30/00 (p)..................... 9,937,545 9,937,545
GPA Airplanes Trust
10.875%, due 3/15/19....................... 16,000,000 18,497,920
S-C Aircraft
Series 1997-C
11.00%, due 7/1/04 (c)(p).................. 12,900,000 13,416,000
Seven Sixty Seven Leasing, Inc.
7.656%, due 2/2/02 (d)(p).................. 21,408,577 22,050,835
--------------
76,233,175
--------------
FINANCE (1.1%)
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04......................... 56,665,000 26,065,900
Imperial Credit Industries, Inc.
Series B
9.875%, due 1/15/07........................ 14,214,000 14,000,790
--------------
40,066,690
--------------
FOOD (0.2%)
Cuddy International Corp.
10.75%, due 12/1/07 (c).................... 2,000,000 2,025,000
DGS International Finance Co., B.V.
10.00%, due 6/1/07 (c)..................... 5,000,000 4,100,000
--------------
6,125,000
--------------
FOOD, BEVERAGES & TOBACCO (1.8%)
Americold Corp.
Series B
11.50%, due 3/1/05......................... 10,246,000 10,937,605
Colorado Prime Corp.
12.50%, due 5/1/04 (c)..................... 18,825,000 18,730,875
Foodbrands America, Inc.
10.75%, due 5/15/06........................ 17,130,000 19,870,800
Sparkling Spring Water Group Ltd.
11.50%, due 11/15/07 (c)................... 5,595,000 5,762,850
Standard Commercial Corp.
8.875%, due 8/1/05 (c)..................... 8,995,000 9,084,950
--------------
64,387,080
--------------
HEALTH CARE (3.8%)
Abbey Healthcare Group, Inc.
9.50%, due 11/1/02......................... 44,552,000 46,612,530
Extendicare Health Services, Inc.
9.35%, due 12/15/07 (c).................... 26,975,000 27,649,375
Magellan Health Services, Inc.
Series A
11.25%, due 4/15/04........................ 27,230,000 30,191,263
Quest Diagnostics, Inc.
10.75%, due 12/15/06....................... 31,065,000 33,899,681
--------------
138,352,849
--------------
</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>
CORPORATE BONDS (Continued)
INDUSTRIAL (1.8%)
Interlake Corp.
12.00%, due 11/15/01....................... $ 3,500,000 $ 3,832,500
Thermadyne Holdings Corp.
10.25%, due 5/1/02......................... 11,616,000 11,964,480
10.75%, due 11/1/03........................ 47,882,000 50,754,920
--------------
66,551,900
--------------
INSURANCE (0.2%)
Superior National Capital Trust I
10.75%, due 12/1/17 (c)(f1)................ 3,955,000 4,043,987
Veritas Capital Trust
10.00%, due 1/1/28 (c)(f2)................. 2,170,000 2,213,400
--------------
6,257,387
--------------
LEISURE (1.1%)
Bally Total Fitness Holdings Corp.
9.875%, due 10/15/07 (c)................... 38,908,000 39,199,810
--------------
MEDIA (9.8%)
Affiliated Newspapers Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99................... 23,872,000 22,559,040
Allbritton Communications Co.
11.50%, due 8/15/04........................ 18,895,000 19,792,512
Antenna TV, S.A.
9.00%, due 08/1/07......................... 3,475,000 3,475,000
Ascent Entertainment Group, Inc.
(zero coupon), due 12/15/04
11.875%, beginning 12/15/02 (c)............ 18,100,000 10,362,250
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning 12/1/02.................. 136,804,000 62,929,840
Comcast Corp.
9.125%, due 10/15/06....................... 7,000,000 7,437,500
9.50%, due 1/15/08......................... 4,300,000 4,568,750
Garden State Newspapers, Inc.
12.00%, due 7/1/04......................... 9,065,000 10,209,456
General Media, Inc.
10.625%, due 12/31/00...................... 41,411,000 36,441,680
Maxwell Communications Corp., PLC
Facility A (a)(h)(i)(j).................... 9,973,584 1,072,160
SCI Television, Inc.
11.00% due 6/30/05......................... 28,428,000 30,002,456
Telemundo Group, Inc.
7.00%, due 2/15/06
10.50%, beginning 2/15/99.................. 9,500,000 10,022,500
Viacom, Inc.
6.75%, due 1/15/03......................... 88,925,000 87,223,954
8.00%, due 7/7/06.......................... 47,490,000 47,846,175
--------------
353,943,273
--------------
MEDICAL EQUIPMENT (0.3%)
Kinetic Concepts, Inc.
9.625%, due 11/1/07 (c).................... 9,566,000 9,721,448
--------------
MINING (0.3%)
Glencore Nickel Pty Ltd.
9.00%, due 12/1/14 (c)..................... 10,000,000 9,925,000
--------------
PAPER & FOREST PRODUCTS (0.8%)
Asia Pulp & Paper Co Ltd.
8.867%, due 9/15/99 (d)(v)................. 20,000,000 17,000,000
Stone Container Corp.
Bank debt
9.25%, due 10/1/03 (c)(d)(p)............... 4,975,000 4,981,219
11.875%, due 12/1/98....................... 1,900,000 1,957,000
12.625%, due 7/15/98....................... 5,750,000 5,951,250
--------------
29,889,469
--------------
PERSONAL SERVICES (2.4%)
Comforce Operating, Inc.
12.00%, due 12/1/07 (c).................... 5,000,000 5,037,500
Loewen Group, Inc. (The)
6.70%, due 10/1/99 (c)..................... 80,000,000 80,312,960
--------------
85,350,460
--------------
POLLUTION & RELATED (0.2%)
ICF Kaiser International, Inc.
13.00%, due 12/31/03....................... 5,419,000 5,581,570
--------------
REAL ESTATE (0.5%)
JG Summit Holdings
8.375%, due 3/17/04........................ 24,840,000 19,623,600
Olympia & York Maiden
Lane Finance Corp.
10.375%, due 12/31/95
(a)(h)(i)(n)............................... 4,000 2,080
--------------
19,625,680
--------------
RECREATION & ENTERTAINMENT (1.6%)
Affinity Group, Inc.
11.50%, due 10/15/03....................... 36,315,000 38,584,688
Affinity Group Holding, Inc.
11.00%, due 4/1/07 (c)..................... 12,935,000 13,775,775
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
=========================================
<S> <C> <C>
CORPORATE BONDS (Continued)
RECREATION & ENTERTAINMENT (Continued)
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (h)(i)................. $ 42,087,000 $ 1,683,480
Hollywood Entertainment Corp.
10.625%, due 8/15/04....................... 3,350,000 3,283,000
--------------
57,326,943
--------------
RESTAURANTS & LODGING (1.1%)
American Restaurant Group, Inc.
Series 92
13.00%, due 9/15/98........................ 194,235 186,465
Series 93
13.00%, due 9/15/98........................ 78,281 75,150
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning
6/30/99 (c)(p)............................. 48,350,000 40,976,625
--------------
41,238,240
--------------
RETAIL (1.6%)
Barnes & Noble, Inc.
Series B
11.875%, due 1/15/03....................... 29,185,000 31,009,063
Eckerd Corp.
9.25%, due 2/15/04......................... 7,441,000 7,971,171
Guitar Center Management Co.
11.00%, due 7/1/06......................... 2,403,000 2,667,330
Hills Stores Co.
Series B
12.50%, due 7/1/03......................... 2,560,000 2,044,800
Icon Health & Fitness Holdings, Inc
Series B
(zero coupon), due 11/15/04
15.00%, beginning 11/15/99................. 16,000,000 13,920,000
--------------
57,612,364
--------------
STEEL, ALUMINUM & OTHER METALS (2.4%)
Easco Corp.
Series B
10.00%, due 3/15/01........................ 20,150,000 20,553,000
Kaiser Aluminum & Chemical Corp.
12.75%, due 2/1/03......................... 5,700,000 6,084,750
LTV Corp. (The)
8.20%, due 9/15/07 (c)..................... 36,800,000 35,512,000
Metallurg, Inc.
11.00%, due 12/1/07 (c).................... 5,560,000 5,699,000
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05........................ 16,586,000 18,617,785
--------------
86,466,535
--------------
TECHNOLOGY (0.1%)
Samsung Electronics Co., Ltd.
6.363%, due 6/21/01 (d)(v)................. 4,000,000 3,200,000
--------------
TELECOMMUNICATION SERVICES (1.5%)
Intermedia Communications, Inc.
8.50%, due 1/15/08 (c)..................... 6,095,000 6,095,000
Paging Network, Inc.
10.00%, due 10/15/08....................... 2,225,000 2,305,656
USN Communications, Inc.
(zero coupon), due 8/15/04
14.625%, beginning 8/15/00 (c)............. 60,625,000 46,075,000
--------------
54,475,656
--------------
TEXTILE & APPAREL (0.1%)
Worldtex, Inc.
9.625%, due 12/15/07 (c)................... 5,000,000 5,150,000
--------------
TRANSPORTATION (0.9%)
Kitty Hawk, Inc.
9.95%, due 11/15/04 (c).................... 3,990,000 4,009,950
Pegasus Shipping Hellas Ltd.
11.875%, due 11/15/04 (c).................. 28,190,000 27,908,100
Trico Marine Services, Inc.
Series E
8.50%, due 8/1/05 (c)...................... 1,165,000 1,181,019
--------------
33,099,069
--------------
Total Corporate Bonds
(Cost $2,101,137,002)...................... 2,113,991,502
--------------
FOREIGN BONDS (0.1%)
MEDIA (0.0%)(b)
Maxwell Communications Corp., PLC
Facility B (a)(h)(i)(j).................... (pound) 1,131,066 200,065
--------------
RETAIL (0.0%) (b)
Isosceles
Bank debt
15.05%, due 6/30/03 (d)(x)................. 925,864 3,809
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
21
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=========================================
<S> <C> <C>
FOREIGN BONDS (Continued)
RETAIL (Continued)
Bank debt, Series B
15.05%, due 6/30/03 (d)(x)................. (pound) 3,742,808 $ 15,396
--------------
19,205
--------------
STEEL, ALUMINUM & OTHER METALS (0.1%)
Greenstone Resources Ltd.
9.00%, due 2/28/02......................... C$ 6,000,000 3,438,107
--------------
Total Foreign Bonds
(Cost $8,169,593).......................... 3,657,377
--------------
FOREIGN GOVERNMENT (0.3%)
Vnesheconombank of the USSR
6.719%, due 12/15/20
(c)(d)(m)(p)............................... $ 17,200,000 10,599,500
--------------
Total Foreign Government
(Cost $9,713,967).......................... 10,599,500
--------------
LOAN PARTICIPATIONS (0.6%)
CHEMICALS (0.6%)
Kronos International, Inc.
Bank debt
3.612%, due 9/15/99 (d)(j)(p).............. DM25,299,396 13,859,021
Bank debt
4.284%, due 9/15/00 (d)(j)(p).............. 13,448,941 7,367,336
--------------
21,226,357
--------------
Total Loan Participations
(Cost $20,654,826)......................... 21,226,357
--------------
U.S. GOVERNMENT &
FEDERAL AGENCIES (10.3%)
FEDERAL HOME LOAN MORTGAGE CORP. (2.7%)
13.00%, due 8/12/98........................ $ 95,000,000 98,991,900
--------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (1.2%)
Series B
12.00%, due 6/26/98........................ 43,000,000 44,262,910
--------------
UNITED STATES TREASURY NOTES (6.4%)
6.125%, due 8/15/07........................ $ 67,500,000 $ 69,367,050
6.875%, due 5/15/06........................ 31,500,000 33,705,000
7.25%, due 5/15/04 (q)..................... 107,300,000 115,800,306
9.125%, due 5/15/99........................ 10,900,000 11,388,756
--------------
230,261,112
--------------
Total U.S. Government &
Federal Agencies
(Cost $377,334,431)........................ 373,515,922
--------------
YANKEE BONDS (7.7%)
CABLE (1.3%)
Australis Holdings Pty Ltd.
(zero coupon), due 11/1/02
15.00%, beginning 11/1/00.................. 10,074,000 5,591,070
CF Cable TV, Inc.
11.625%, due 2/15/05....................... 6,750,000 7,627,500
Kabelmedia Holdings GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01.................. 35,664,000 26,748,000
TeleWest, PLC
(zero coupon), due 10/1/07
11.00%, beginning 10/1/00.................. 9,728,000 7,551,360
--------------
47,517,930
--------------
CELLULAR TELEPHONE (3.3%)
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01................... 65,060,000 47,656,450
Occidente y Caribe Celular, S.A.
Series B
(zero coupon), due 3/15/04
14.00%, beginning 3/15/01.................. 26,460,000 19,845,000
Rogers Cantel, Inc.
8.30%, due 10/1/07......................... 31,140,000 30,906,450
9.375%, due 6/1/08......................... 20,000,000 21,000,000
--------------
119,407,900
--------------
COMPUTERS & OFFICE EQUIPMENT (0.1%)
International Semi-Technology
Microelectronics, Inc.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00.................. 12,642,000 4,803,960
--------------
MEDIA (1.7%)
Le Groupe Videotron Ltee
10.625%, due 2/15/05....................... 44,212,000 48,854,260
Rogers Communications, Inc.
8.875%, due 7/15/07........................ 11,810,000 11,810,000
--------------
60,664,260
--------------
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
22
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
=========================================
<S> <C> <C>
YANKEE BONDS (Continued)
PAPER & FOREST PRODUCTS (0.7%)
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c).................... $ 14,870,000 $ 15,576,325
Uniforet, Inc.
11.125%, due 10/15/06...................... 8,686,000 8,512,280
--------------
24,088,605
--------------
STEEL, ALUMINUM & OTHER METALS (0.2%)
Ivaco, Inc.
11.50%, due 9/15/05........................ 8,000,000 8,640,000
--------------
TELECOMMUNICATION SERVICES (0.2%)
Fonorola, Inc.
12.50%, due 8/15/02........................ 5,439,000 6,064,485
--------------
TELEPHONE UTILITIES (0.1%)
Comtel Brasileira Ltd.
10.75%, due 9/26/04 (v).................... 2,000,000 1,950,000
--------------
TESTING SERVICES (0.1%)
Intertek Testing Services Ltd.
12.00%, due 11/1/07 (c)(g)(p).............. 4,499,114 4,544,105
--------------
Total Yankee Bonds
(Cost $266,426,775)........................ 277,681,245
--------------
Total Long-Term Bonds
(Cost $2,941,606,437)...................... 2,942,751,746
--------------
<CAPTION>
Shares
=================
<S> <C> <C>
COMMON STOCKS (5.2%)
APPLIANCES & FURNITURE (0.0%) (b)
Central Rents, Inc. (a)(c).................... 10,500 630,000
--------------
BANKS (0.3%)
Kookmin Bank GDR (u).......................... 710,700 3,375,825
Metropolitan Bank & Trust Co. (bb)............ 1,263,480 8,629,030
--------------
12,004,855
--------------
BUILDING MATERIALS (0.0%) (b)
Hanson, PLC ADR (k)........................... 76,750 1,770,047
--------------
CABLE (0.8%)
CS Wireless Systems, Inc. (a)(c).............. 5,181 52
Matav-Cable Systems Media
Ltd., ADR (a)(k)........................... 202,300 3,641,400
United International Holdings
Inc., Class A (a).......................... 2,292,700 26,366,050
--------------
30,007,502
--------------
CASINOS (0.8%)
Casino America, Inc. (a)...................... 207,925 506,817
Colorado Gaming &
Entertainment Co. (a)...................... 368,128 2,116,736
Grand Casinos, Inc. (a)....................... 614,600 8,373,925
Harrah's Entertainment, Inc. (a).............. 868,280 16,388,785
--------------
27,386,263
--------------
CELLULAR TELEPHONE (0.2%)
Celcaribe, S.A. (a)(c)........................ 751,212 3,004,848
Clearnet Communications, Inc.
Class A (a)................................ 127,125 1,446,047
Rogers Cantel Mobile
Communications, Inc., Class B (a).......... 353,200 3,289,175
--------------
7,740,070
--------------
DRUGS (0.0%) (b)
ICN Pharmaceuticals, Inc...................... 16,181 792,869
--------------
ELECTRIC UTILITIES (0.1%)
Energy Group, PLC ADR (k)..................... 76,750 3,420,172
--------------
FOOD, BEVERAGES & TOBACCO (0.2%)
Dr. Pepper Bottling Holdings, Inc.
Class A (a)................................ 200,000 4,500,000
Imperial Tobacco Group, PLC
ADR (k).................................... 153,500 1,939,718
TLC Beatrice International Holdings
Inc. (a)................................... 25,000 1,250,000
--------------
7,689,718
--------------
GAS UTILITIES (0.0%) (b)
Arcus Group Corp. (a)(h)...................... 98,050 196,100
--------------
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
23
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Shares Value
=========================================
<S> <C> <C>
COMMON STOCKS (Continued)
HEALTH CARE (0.4%)
Beverly Enterprises, Inc. (a)................. 200,000 $ 2,600,000
Columbia/HCA Healthcare Corp.................. 40,000 1,185,000
Quest Diagnostics, Inc. (a)................... 634,500 10,707,187
--------------
14,492,187
--------------
MEDIA (0.5%)
Affiliated Newspapers
Investments, Inc. (a)...................... 28,000 3,360,000
Le Groupe Videotron Ltee (w).................. 121,800 1,072,378
Rogers Communications, Inc.
Class B (a)(w)............................. 791,375 3,815,588
Viacom, Inc.
Class B (a)................................ 217,100 8,996,081
--------------
17,244,047
--------------
PERSONAL SERVICES (0.2%)
Loewen Group, Inc. (The)...................... 214,000 5,510,500
--------------
REAL ESTATE (0.1%)
American Health Properties, Inc. (l).......... 5,130 76,309
Metropolis Realty Trust, Inc.................. 126,278 5,303,676
--------------
5,379,985
--------------
RECREATION & ENTERTAINMENT (0.1%)
Hollywood Entertainment Corp. (a)............. 250,000 2,656,250
--------------
RESTAURANTS & LODGING (0.1%)
Lone Star Steakhouse &
Saloon, Inc. (a)........................... 120,665 2,111,637
--------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
Series B (a)............................... 43,750 43,750
--------------
STEEL, ALUMINUM & OTHER METALS (1.0%)
Amax Gold, Inc. (a)........................... 585,400 1,353,737
LTV Corp. (The)............................... 487,900 4,818,013
Newmont Mining Corp........................... 527,980 15,509,412
Noranda, Inc. (w)............................. 522,000 8,972,958
Ryerson Tull, Inc., Class A (a)............... 323,860 4,493,558
--------------
35,147,678
--------------
TECHNOLOGY (0.1%)
Samsung Electronics Co., Ltd.
GDR (a)(u)................................. 50,000 281,500
Samsung Electronics Co., Ltd.
GDR (c)(u)................................. 340,275 4,763,850
--------------
5,045,350
--------------
TELECOMMUNICATION SERVICES (0.3%)
PageMart Wireless, Inc., Class A (a).......... 45,500 358,312
PT Telekomunikasi
Indonesia ADR (k).......................... 952,950 10,542,010
--------------
10,900,322
--------------
TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of America, Inc. (a)............ 17,400 130,500
--------------
Total Common Stocks
(Cost $197,017,335)........................ 190,299,802
--------------
PREFERRED STOCKS (4.1%)
BANKS (0.0%) (b)
River Bank America, N.Y.
15.00%, Series A........................... 30,000 705,000
--------------
CABLE (0.0%) (b)
Cablevision Systems Corp.
8.50%, Series I (r)........................ 8,000 308,000
--------------
CASINOS (0.3%)
Station Casinos, Inc.
7.00%, (r)................................. 280,195 11,487,995
--------------
DOMESTIC OIL & GAS (0.5%)
EEX Capital Inc. (c)(p)....................... 16,022 16,381,373
--------------
DRUGS (0.1%)
ICN Pharmaceuticals, Inc.
Series B (c)(m)(r)......................... 959 959,000
--------------
EQUIPMENT FINANCING (0.6%)
GPA Group, PLC (a)(p)......................... 41,600,000 22,464,000
--------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Seven Up Holdings Co.
16.00% (a)................................. 4,491 129,542
--------------
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
24
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Shares Value
=========================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
MEDIA (2.2%)
CD Radio, Inc.
10.50%, Series C (c)(r).................... 221,390 $ 23,661,888
Granite Broadcasting Corp.
12.75% (g)................................. 3,723 4,132,669
Paxson Communications Corp.
12.50% (g)................................. 15,157 15,611,363
Primedia, Inc.
11.625%, Series B (m)...................... 63,492 6,841,263
Spanish Broadcasting System, Inc.
14.25% (c)(g).............................. 27,231 28,864,860
--------------
79,112,043
--------------
REAL ESTATE (0.4%)
Crown American Realty Trust
11.00%, Series A........................... 294,930 15,410,093
--------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
$0.056, Series A (g)....................... 2,297 1,149
--------------
Total Preferred Stocks
(Cost $134,610,270)........................ 146,958,195
--------------
WARRANTS (0.7%)
CABLE (0.1%)
Supercanal Holding, S.A.
Series A
expire 11/14/99 (a)(c)(p).................. 6,822,324 545,786
UIH Australia/Pacific, Inc.
expire 5/15/06 (a)(c)...................... 24,315 291,780
United International Holdings, Inc.
expire 11/15/99 (a)........................ 20,834 62,502
--------------
900,068
--------------
CASINOS (0.0%) (b)
Belle Casino, Inc. (a)(c)..................... 5,500 55
Boomtown, Inc.
expire 11/1/98 (a)(c)...................... 7,350 1,837
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 Cruises, Inc.
expire 12/1/98 (a)......................... 12,000 60,000
--------------
421,200
--------------
CELLULAR TELEPHONE (0.1%)
Microcell Telecommunications, Inc.
expire 6/1/06 (a)(c)....................... 92,092 1,260,739
Nextel Communications, Inc.
Series A
expire 12/15/98 (a)........................ 3,087 67,914
Series C
expire 1999 (a)............................ 3,500 35
Occidente y Caribe Celular, S.A.
expire 3/15/04 (a)(c)...................... 105,840 1,058
--------------
1,329,746
--------------
CONGLOMERATES (0.0%)(b)
IFA Capital, Inc.
Series H
expire 11/14/99 (a) (c).................... 8,000 800,000
--------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Colorado Prime Corp.
expire 12/31/03 (a)(c)..................... 18,825 188,250
--------------
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)...................... 9,500 532,000
--------------
MEDIA (0.5%)
General Media, Inc.
expire 12/21/00 (a)........................ 34,486 345
Spanish Broadcasting System, Inc.
expire 6/30/99 (a)(y)...................... 44,150 15,452,500
expire 6/30/99 (a)(c)(z)................... 19,780 3,956,000
--------------
19,408,845
--------------
POLLUTION & RELATED (0.0%) (b)
ICF Kaiser International, Inc.
expire 12/31/98 (a)(cc).................... 48,835 12,209
expire 12/31/99 (a)(c)(dd)................. 28,000 7,000
--------------
19,209
--------------
TELECOMMUNICATION SERVICES (0.0%) (b)
USN Communications, Inc.
expire 8/15/04 (a)(c)...................... 606,250 6,063
--------------
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
25
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Shares Value
=========================================
<S> <C> <C>
WARRANTS (Continued)
TESTING SERVICES (0.0%) (b)
Intertek Testing Services Ltd.
expire 12/31/99 (a)(p)..................... 691 $ 220,000
--------------
Total Warrants
(Cost $8,463,679).......................... 23,830,568
--------------
Principal
Amount
=================
<S> <C> <C>
SHORT-TERM INVESTMENTS (5.6%)
COMMERCIAL PAPER (4.5%)
American Express Credit Corp.
5.837%, due 1/7/98......................... $ 29,399,000 29,399,000
6.056%, due 1/5/98......................... 50,890,000 50,890,000
6.254%, due 1/2/98......................... 57,003,000 57,003,000
Prudential Funding Corp.
5.856%, due 1/6/98......................... 25,000,000 25,000,000
--------------
Total Commercial Paper
(Cost $162,292,000)........................ 162,292,000
--------------
SHORT-TERM BONDS (1.1%)
FOOD, BEVERAGES & TOBACCO (0.2%)
Buenos Aires Embotelladora
Sociedad Anonima
Bank debt
9.479%, due 8/1/98 (i)(p).................. 11,000,000 8,250,000
--------------
MEDIA (0.0%)(b)
Time Warner, Inc.
7.45%, due 2/1/98.......................... 310,000 310,264
--------------
PAPER & FOREST PRODUCTS (0.9%)
P.T. Polysindo Eka Perkasa
(zero coupon), due 3/27/98................. IDR 6,000,000,000 1,640,559
(zero coupon), due 4/7/98.................. 4,000,000,000 1,089,560
(zero coupon), due 4/8/98.................. 5,000,000,000 1,361,951
P.T. Polysindo Eka Perkasa
(zero coupon), due 1/16/98................. 4,000,000 3,400,000
(zero coupon), due 4/14/98................. 3,000,000 2,550,000
(zero coupon), due 4/23/98................. 480,280 408,238
(zero coupon), due 7/17/98................. 16,000,000 13,600,000
(zero coupon), due 10/23/98 (g)............ 10,241,460 8,705,241
(zero coupon), due 10/23/98................ 241,460 205,241
--------------
32,960,790
--------------
Total Short-Term Bonds
(Cost $45,760,535)......................... 41,521,054
--------------
Total Short-Term Investments
(Cost $208,052,535)........................ 203,813,054
--------------
Total Investments
(Cost $3,489,750,256) (s).................. 96.9% 3,507,653,365(t)
Cash and Other Assets,
Less Liabilities........................... 3.1 111,626,790
------------------- --------------
Net Assets.................................... 100.0% $3,619,280,155
=================== ==============
</TABLE>
- ----------
(a) Non-income producing security.
(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, 1997.
(e) Fair valued securities. Aggregate at 0.07% of net assets.
(f1) 10.75% Trust Preferred Securities. The Trust exists solely for the
purpose of issuing the Trust Securities and investing the proceeds
thereof in an equivalent amount of 10.75% Senior Subordinated Notes
due 2017 of the Superior National Insurance Group, Inc.
(f2) 10.00% Trust Preferred Securities. The Issuer Trust exists solely for
the purpose of issuing the Trust Securities and investing the
proceeds thereof in an equivalent amount of 10.00% Subordinated
Deferrable Interest Debentures due 2028 of Veritas Holdings GmbH.
(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 security.
(q) Partially segregated as collateral for unfunded loan participations.
(r) Convertible preferred stock.
(s) The cost for Federal income tax purposes is $3,490,300,966.
26
<PAGE>
Portfolio of Investments continued
(t) At December 31, 1997, net unrealized appreciation was $17,352,399
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 $136,276,594 and
aggregate gross unrealized depreciation for all investments on which
there was an excess of cost over market value of $118,924,195.
(u) GDR--Global Depository Receipt.
(v) Euro-Dollar bond.
(w) Canadian security.
(x) Issuer in liquidation proceedings.
(y) Each warrant entitles the holder thereof to purchase one share of the
Company's Class A common stock at $0.01 per share, subject to
adjustment under certain circumstances on or after the Exercisability
Date and prior to June 30, 1999.
(z) Each warrant entitles the holder thereof to purchase 0.428 shares of
the Company's Class A common stock, par value $0.01 per share.
(aa) Brady Bond.
(bb) Philippine security.
(cc) 4.8 warrants will entitle the holder thereof to purchase 1 share of
common stock at a price equal to $5.00 per share, subject to
adjustment under certain circumstances.
(dd) Each warrant will entitle the holder to purchase 1 share of common
stock at a price equal to $230 per share, subject to adjustment under
certain circumstances.
((pound)) Security denominated in British Pound Sterling.
(C$) Security denominated in Canadian Dollar.
(DM) Security denominated in German Deutsche Mark.
(IDR) Security denominated in Indonesian Rupiah.
27
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $3,489,750,256) .......................................... $ 3,507,653,365
Cash ......................................................................................................... 9,973,681
Deposit with broker .......................................................................................... 2,462,578
Receivables:
Dividends and interest ..................................................................................... 56,453,556
Investment securities sold ................................................................................. 44,399,798
Fund shares sold ........................................................................................... 12,800,444
Unrealized appreciation on forward foreign currency contracts ................................................ 1,163,044
Other assets ................................................................................................. 93,450
---------------
Total assets .............................................................................................. 3,634,999,916
---------------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 7,068,109
NYLIFE Distributors ........................................................................................ 2,898,832
Fund shares redeemed ....................................................................................... 2,532,815
MainStay Management ........................................................................................ 1,730,095
Transfer agent ............................................................................................. 365,948
Custodian .................................................................................................. 33,000
Trustees ................................................................................................... 22,296
Accrued expenses ............................................................................................. 841,862
Unrealized depreciation on forward foreign currency contracts ................................................ 226,804
---------------
Total liabilities ......................................................................................... 15,719,761
---------------
Net assets ................................................................................................... $ 3,619,280,155
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 292,518
Class B .................................................................................................... 4,146,241
Additional paid-in capital ................................................................................... 3,581,959,169
Accumulated distribution in excess of net investment income .................................................. (872,247)
Accumulated undistributed net realized gain on investments ................................................... 15,191,110
Net unrealized appreciation on investments ................................................................... 17,903,109
Net unrealized appreciation on foreign currency and forward foreign currency contracts ....................... 660,255
---------------
Net assets ................................................................................................... $ 3,619,280,155
===============
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 238,840,674
===============
Shares of beneficial interest outstanding .................................................................... 29,251,806
===============
Net asset value per share outstanding ........................................................................ $ 8.16
Maximum sales charge (4.50% of offering price) ............................................................... 0.38
---------------
Maximum offering price per share outstanding ................................................................. $ 8.54
===============
CLASS B
Net assets applicable to outstanding shares .................................................................. $ 3,380,439,481
===============
Shares of beneficial interest outstanding .................................................................... 414,624,110
===============
Net asset value and offering price per share outstanding ..................................................... $ 8.15
===============
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
28
<PAGE>
Statement of Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ..................................................................... $ 12,577,483
Interest .......................................................................... 293,702,042
-------------
Total income ..................................................................... 306,279,525
-------------
Expenses:
Distribution--Class B ............................................................. 17,981,142
Service ........................................................................... 7,810,969
Administration .................................................................... 6,921,965
Advisory .......................................................................... 6,921,965
Management ........................................................................ 3,590,202
Transfer agent .................................................................... 3,251,269
Shareholder communication ......................................................... 1,230,686
Professional ...................................................................... 515,059
Registration ...................................................................... 496,327
Custodian ......................................................................... 324,034
Recordkeeping ..................................................................... 339,509
Trustees .......................................................................... 85,559
Miscellaneous ..................................................................... 63,444
-------------
Total expenses ................................................................. 49,532,130
-------------
Net investment income ............................................................... 256,747,395
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ............................................................. 147,564,306
Foreign currency transactions ....................................................... 978,376
-------------
Net realized gain on investments and foreign currency transactions .................. 148,542,682
-------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................. (64,858,129)
Foreign currency and forward foreign currency contracts ........................... 806,336
-------------
Net unrealized loss on investments and foreign currency ............................. (64,051,793)
-------------
Net realized and unrealized gain on investments and foreign currency transactions ... 84,490,889
-------------
Net increase in net assets resulting from operations ................................ $ 341,238,284
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $134,165.
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
29
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................... $ 256,747,395 $ 174,787,175
Net realized gain on investments ............................................... 147,564,306 70,039,639
Net realized loss on securities sold short ..................................... -- (508,346)
Net realized gain (loss) on foreign currency transactions ...................... 978,376 (912,219)
Net change in unrealized appreciation (depreciation) on securities transactions (64,858,129) 58,603,932
Net change in unrealized depreciation on securities sold short ................. -- 375,243
Net change in unrealized appreciation (depreciation) on foreign currency
and forward foreign currency contracts ........................................ 806,336 42,977
--------------- ---------------
Net increase in net assets resulting from operations ........................... 341,238,284 302,428,401
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................... (15,875,053) (6,713,725)
Class B ....................................................................... (243,546,134) (164,209,186)
From net realized gain on investments and foreign currency transactions:
Class A ....................................................................... (9,477,663) (2,453,906)
Class B ....................................................................... (134,845,754) (51,503,367)
--------------- ---------------
Total dividends and distributions to shareholders ........................... (403,744,604) (224,880,184)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................... 184,071,711 101,308,968
Class B ....................................................................... 1,197,246,355 913,192,615
Net asset value of shares issued to shareholders in reinvestment of
dividends and distributions:
Class A ....................................................................... 19,615,677 7,136,763
Class B .......................................................................... 273,550,920 152,975,773
--------------- ---------------
1,674,484,663 1,174,614,119
Cost of shares redeemed:
Class A ....................................................................... (76,496,410) (37,057,233)
Class B ....................................................................... (474,186,948) (301,207,596)
--------------- ---------------
Increase in net assets derived from capital share transactions .............. 1,123,801,305 836,349,290
--------------- ---------------
Net increase in net assets ....................................................... 1,061,294,985 913,897,507
NET ASSETS:
Beginning of year ................................................................ 2,557,985,170 1,644,087,663
--------------- ---------------
End of year ...................................................................... $ 3,619,280,155 $ 2,557,985,170
=============== ===============
Accumulated undistributed net investment income (excess distribution) ............ $ (872,247) $ 823,169
=============== ===============
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
30
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ----------- -------- ---------- --------- ----------
Year ended Year ended Year ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $8.27 $8.26 $7.92 $7.92 $7.44 $7.44
-------- ----------- -------- ---------- --------- ----------
Net investment income ..... 0.74 0.69 0.72 0.67 0.84 0.81
Net realized and
unrealized gain
(loss) on investments ... 0.23 0.23 0.52 0.52 0.61 0.61
Net realized and
unrealized loss
on foreign
currency transactions ... (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b)
-------- ----------- -------- ---------- --------- ----------
Total from investment
operations .............. 0.97 0.92 1.24 1.19 1.45 1.42
-------- ----------- -------- ---------- --------- ----------
Less dividends and
distributions:
From net investment
income .................. (0.74) (0.69) (0.71) (0.67) (0.84) (0.81)
In excess of net
investment income ....... -- -- (0.01) (0.01)
From net realized gain
on investments .......... (0.34) (0.34) (0.18) (0.18) (0.10) (0.10)
In excess of net realized
gain on investments ..... -- -- (0.02) (0.02) -- --
-------- ----------- -------- ---------- --------- ----------
Total dividends and
distributions ........... (1.08) (1.03) (0.89) (0.85) (0.97) (0.94)
-------- ----------- -------- ---------- --------- ----------
Net asset value at end of
period .................. $8.16 $8.15 $8.27 $8.26 $7.92 $7.92
======== =========== ======== ========== ========= ==========
Total investment return (a) 12.20% 11.55% 16.33% 15.58% 20.28% 19.71%
Ratios (to average net
assets)/
Supplemental Data:
Net investment income .. 8.79% 8.18% 9.0% 8.4% 10.2% 9.5%
Expenses ............... 1.01% 1.62% 1.0% 1.6% 1.0% 1.6%
Portfolio turnover rate ... 128% 128% 118% 118% 137% 137%
Average commission rate
paid .................... $0.0600 $0.0600 $0.0630 $0.0630 (c) (c)
Net assets at end of
period (in 000's) ....... $238,841 $3,380,439 $116,805 $2,441,180 $42,850 $1,601,238
<CAPTION>
Class B
----------------------------------------
September 1
through Year ended August 31
December 31 ---------------------
1994* 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Net asset value at
beginning of period ..... $7.70 $7.93 $7.41
---------- ---------- ---------
Net investment income ..... 0.23 0.69 0.70
Net realized and
unrealized gain
(loss) on investments ... (0.27) (0.08) 0.54
Net realized and
unrealized loss
on foreign
currency transactions ... -- -- --
---------- ---------- ---------
Total from investment
operations .............. (0.04) 0.61 1.24
---------- ---------- ---------
Less dividends and
distributions:
From net investment
income .................. (0.22) (0.67) (0.72)
In excess of net
investment income ....... -- -- --
From net realized gain
on investments .......... -- (0.17) --
In excess of net realized
gain on investments ..... --
---------- ---------- ---------
Total dividends and
distributions ........... (0.22) (0.84) (0.72)
---------- ---------- ---------
Net asset value at end of
period .................. $7.44 $7.70 $7.93
========== ========== =========
Total investment return (a) (0.48%) 7.95% 18.58%
Ratios (to average net
assets)/
Supplemental Data:
Net investment income .. 9.1%+ 8.7% 9.9%
Expenses ............... 1.6%+ 1.6% 1.7%
Portfolio turnover rate ... 45% 190% 207%
Average commission rate
paid .................... (c) (c) (c)
Net assets at end of
period (in 000's) ....... $1,128,913 $1,090,261 $808,538
</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.
31
<PAGE>
MainStay High Yield Corporate Bond Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are
32
<PAGE>
Notes to Financial Statements
deemed by the Sub-Adviser to be representative of market values at the regular
close of business of the 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 Sub-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 Exchange will
not be reflected in the Fund's calculation of net asset value unless the
Sub-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 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.
33
<PAGE>
MainStay High Yield Corporate Bond Fund
Forward foreign currency contracts open at December 31, 1997:
<TABLE>
<CAPTION>
Unrealized
Contract Amount Contract Amount Appreciation/
Sold Purchased (Depreciation)
--------------- --------------- --------------
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C>
German Deutsche Mark vs. US$,
expiring 2/23/98..................... DM 36,209,250 $19,973,614 $ (226,804)
Indonesian Rupiah vs. US$,
expiring 3/27/98--4/8/98............. IDR 15,000,000,000 $ 3,892,799 1,163,044
----------
Net Unrealized Appreciation On
Forward Foreign
Currency Contracts................... $ 936,240
==========
</TABLE>
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, 1997 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.
34
<PAGE>
Notes to Financial Statements continued
Restricted securities held at December 31, 1997:
<TABLE>
<CAPTION>
Principal Percent
Date(s) of Amount/ 12/31/97 of
Security Acquisition Shares Cost Value Net Assets
-------- ----------- ------ ---- ----- ----------
<S> <C> <C> <C> <C> <C>
Buenos Aires Embotelladora
Sociedad Anonima
9.479%, due 8/1/98 10/22/97 $11,000,000 $ 10,620,065 $ 8,250,000 0.2%
Continental Airlines, Inc.
8.00%, due 6/30/00 8/21/97 9,937,545 9,892,302 9,937,545 0.3
EEX Capital Inc.
Preferred Stock 11/17/97-12/12/97 16,022 16,225,610 16,381,373 0.5
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 8/12/97 48,350,000 38,089,808 40,976,625 1.1
GPA Group, PLC
Preferred Stock 3/7/96-12/23/97 41,600,000 16,177,800 22,464,000 0.6
Intertek Testing Services Ltd.
12.00%, due 11/1/07 (a) 11/8/96 4,499,114 4,287,326 4,544,105 0.1
Warrants, expire 12/31/99 11/8/96 691 223,440 220,000 0.0(b)
Kronos International, Inc.
3.612%, due 9/15/99 2/25/97-7/31/97 DM25,299,396 13,560,940 13,859,021 0.4
4.284%, due 9/15/00 2/25/97-7/31/97 DM13,448,941 7,093,886 7,367,336 0.2
S-C Aircraft
Series 1997-C
11.00%, due 7/1/04 3/20/97 $12,900,000 12,900,000 13,416,000 0.4
Seven Sixty Seven Leasing, Inc.
7.656%, due 2/2/02 9/3/97-9/26/97 21,408,577 21,321,189 22,050,835 0.6
Stone Container Corp.
9.25%, due 10/1/03 7/16/97 4,975,000 4,971,280 4,981,219 0.1
Supercanal Holding, S.A.
14.50%, due 11/12/98 11/20/97 55,400,000 53,514,142 54,153,500 1.5
Warrants, expire 11/14/99 11/20/97 6,822,324 545,786 545,786 0.0(b)
Titan Tire Corp.
7.00%, due 2/11/00 6/24/97 6,542,838 6,298,777 6,362,910 0.2
Vnesheconombank of
the USSR
6.719%, due 12/15/20 12/29/97 17,200,000 9,709,000 10,599,500 0.3
------------ ------------ ---
$225,431,351 $236,109,755 6.5%
============ ============ ===
</TABLE>
- ----------
(a) PIK ("Payment in Kind")--interest payment is made with additional
securities.
(b) Less than one tenth of a percent.
DM Deutsche Mark
35
<PAGE>
MainStay High Yield Corporate Bond Fund
Commitments and Contingencies. As of December 31, 1997, the Fund had an unfunded
loan commitment pursuant to the following loan agreement:
<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
- -------- ----------
<S> <C>
Kronos International, Inc. .............................. $9,711,008
==========
</TABLE>
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.
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 difference of $978,376 has been reclassified from accumulated
net realized gain on investments to accumulated distribution in excess of net
investment income due to the tax treatment of foreign currency gains.
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. Premiums
on securities purchased are not amortized for this fund.
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.
36
<PAGE>
Notes to Financial Statements continued
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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.60% on assets up to $500 million and 0.55% on assets
exceeding $500 million.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.30% of
the average daily net assets of the Fund on assets up to $500 million and 0.275%
on assets in excess of $500 million.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.30% of
the average daily net assets of the Fund up to $500 million and 0.275% on assets
in excess of $500 million. As described above, MainStay Management is currently
paid a fee at a rate equal to the aggregate of the advisory and administrative
fee rates in effect prior to October 27, 1997. For the period January 1, 1997,
through October 26, 1997, MacKay-Shields and NYLIFE Distributors each earned
fees of $6,921,965. For the period October 27, 1997, through December 31, 1997,
MainStay Management earned $3,590,202.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (the "Distributor"). The Fund,
with respect to each class of shares, has adopted a Distribution
37
<PAGE>
MainStay High Yield Corporate Bond Fund
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 a monthly service
fee 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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $308,282 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$2,684,352 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$2,114,312 and $125,467, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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.
38
<PAGE>
Notes to Financial Statements continued
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $98,339 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $68,994 and $270,515 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Federal Income Tax:
The Fund intends to elect, to the extent provided by the regulations, to treat
$3,649,868 of qualifying capital losses that arose during the year as if they
arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of U.S. Government
securities were $538,573 and $392,744, respectively. Purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $3,978,883 and
$3,115,292, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
--------------------- ---------------------
Class A Class B Class A Class B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Shares sold ..................................................... 21,799 142,143 12,344 111,564
Shares issued in reinvestment of dividends and distributions .... 2,366 33,033 869 18,686
-------- -------- -------- --------
24,165 175,176 13,213 130,250
Shares redeemed ................................................. (9,042) (56,201) (4,492) (36,876)
-------- -------- -------- --------
Net increase .................................................... 15,123 118,975 8,721 93,374
======== ======== ======== ========
</TABLE>
39
<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 fifteen funds constituting The MainStay Funds, hereafter
referred to as the "Fund") at December 31, 1997, 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, 1997 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 25, 1998
40
<PAGE>
This page intentionally left blank
41
<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 with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 S&P 500* of stocks with the protection of a
Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[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 an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) graph indicating a special blend of capital may offer growth potential if converted
risk/reward of appreciation and current income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph indicating return from common stocks, have undervalued and you want to
risk/reward of convertible securities, and high-yield manage risk through multimarket
Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[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 bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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.
42
<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 primarily from U.S. government
Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
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 maximum current income|| securities with high-yield potential++
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph indicating non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward of risk control diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating preservation of capital, and competitive yields on cash you're plan-
risk/reward of liquidity, with free checkwriting** ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph indicating tive overall return by investing in higher income and overall return by
risk/reward of a diversified portfolio of domestic investing in multiple bond market
Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free+++
Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income You are in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal income tax bracket or want to pay less of your
risk/reward of with preservation of capital+++ investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
43
<PAGE>
===============
MAINSTAY
===============---------------------------------------
High Yield Corporate Bond Fund
--------------------------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES *
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN09-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay International Bond Fund Highlights 5
$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 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Country--Top 5 9
Quality Breakdown 10
Returns & Lipper Rankings 13
Top 10 Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 18
Notes to Financial Statements 22
Report of Independent Accountants 29
The MainStay Funds 30
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay International Bond Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay International Bond Fund, and MacKay Shields Financial Corporation;
amend the Plan of Distribution for Class B shares; eliminate or revise certain
fundamental investment restrictions including eliminating certain state-imposed
fundamental investment restrictions and eliminating or revising fundamental
restrictions pertaining to industry concentration and issuing senior securities;
and ratify the selection of Price Waterhouse LLP as independent certified public
accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
International Bond Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- -------- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 2,035,100 68,405 Passed
Nancy Maginnes Kissinger.................................................. 2,035,100 68,405 Passed
Donald E. Nickelson....................................................... 2,035,100 68,405 Passed
Richard S. Trutanic....................................................... 2,029,132 74,374 Passed
Harry G. Hohn............................................................. 2,035,100 68,405 Passed
Terry L. Lierman.......................................................... 2,035,100 68,405 Passed
Donald K. Ross............................................................ 2,035,100 68,405 Passed
Walter W. Ubl............................................................. 2,035,100 68,405 Passed
Alice T. Kane............................................................. 2,035,100 68,405 Passed
John B. McGuckian......................................................... 2,041,597 61,908 Passed
Stephen C. Roussin........................................................ 2,029,132 74,374 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 2,026,239.20 Against - 19,144.39 Abstain - 58,117.08 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 2,019,268.13 Against - 22,997.52 Abstain - 61,233.46 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 836,707.84 Against - 14,997.02 Abstain - 37,889.04 Broker Non-Vote - 192,972.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 1,695,679.23 Against - 39,322.18 Abstain - 88,101.93 Broker Non-Vote - 280,402.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- ------------ --------- ------
<S> <C> <C> <C>
A2--Oil, Gas, or Mineral Lease Interests................................... 1,694,546.14 40,455.27 Passed
A3--Real Estate Limited Partnership Interests.............................. 1,695,525.35 39,476.05 Passed
C3--Industry Concentration................................................. 1,695,525.35 39,476.05 Passed
C4--Issuing Senior Securities.............................................. 1,695,607.73 39,393.67 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 2,015,334.18 Against - 14,526.55 Abstain - 73,641.49 Result - Passed
</TABLE>
4
<PAGE>
MainStay International Bond Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] Low inflation and moderate economic growth helped the United States
significantly reduce its budget deficit, which was positive news for bond
investors worldwide.
[ ] The U.K. bond market outperformed all other markets both in U.S. dollar and
local currency terms when the Bank of England became an independent central
bank, reducing concerns about inflation and wide economic swings.
[ ] A strengthening U.S. dollar increased currency risk for unhedged positions
in virtually all nations and led to negative overall returns for
international bonds.
[ ] Emerging markets provided outstanding performance for the first three
quarters of 1997, but severely declined in the fourth quarter when
financial and currency problems in Southeast Asia took center stage.
[ ] In the ensuing flight to quality, most products that offered yield
advantages over Treasury securities tended to underperform.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 1.83% and 1.15% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] Both share classes outperformed the average Lipper* international income
fund which returned -0.43% for the 12 months ended 12/31/97.
[ ] Overall, the Fund benefited from a lengthening duration and remaining
underweighted in core European markets and overweighted in peripheral
European markets through most of the year.
[ ] The Fund benefited from increasing investments in the U.K. market, with
emphasis on longer-term securities, which outperformed the short-end of the
market.
[ ] Anticipating that currencies were reaching fair value, the Fund reduced its
currency hedges in midyear, which hurt performance as the U.S. dollar
continued to strengthen relative to most other currencies.
[ ] The Fund's emerging market holdings suffered during the Asian crisis in the
fourth quarter.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
5
<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 SEC Returns: 1-Year -2.75%, since inception 8.69%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Solomon Brothers
Year International Non-U.S. Dollar World
End Bond Fund Government Bond Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $ 9,550 $10,000
12/94 $ 9,569 $10,256
12/95 $11,356 $12,261
12/96 $12,935 $12,761
12/97 $13,171 $12,218
</TABLE>
[GRAPHIC] MainStay International Bond Fund
[GRAPHIC] Solomon Brothers Non-U.S. Dollar World Government Bond Index
CLASS B SHARES SEC Returns: 1-Year -3.85%, since inception 9.08%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Solomon Brothers
Year International Non-U.S. Dollar World
End Bond Fund Government Bond Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $10,000 $10,000
12/94 $10,020 $10,256
12/95 $11,819 $12,261
12/96 $13,371 $12,761
12/97 $13,255 $12,218
</TABLE>
[GRAPHIC] MainStay International Bond Fund
[GRAPHIC] Solomon 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 2.0%, 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of International Bond Fund Team
INTERNATIONAL BOND FUND TEAM
Maureen McFarland, Joseph Portera
Several themes combined to make 1997 a very moderate year for international
bonds. The strength of the U.S. economy and deficit reductions gave most
international markets a psychological boost. This led many investors to pursue
returns among riskier asset classes or emerging markets, which provided
outstanding returns in the first half of the year. Later, however, that proved a
dangerous strategy when financial difficulties in Asian markets caused
yield-enhancing products such as mortgage-backed and asset-backed securities to
suffer severe setbacks. Suddenly the market's focus shifted to quality.
European markets continued to benefit from corporate restructuring and fiscal
improvements associated with European Monetary Union. Peripheral European
markets generally outperformed core European markets, with the highest returns
in local currency terms coming from the U.K., Italy, Australia, Ireland, and
Spain. Given the strength of the U.S. dollar, however, the only major foreign
bond markets to provide positive returns in U.S. dollars were the U.K. and
Canada. Core European countries, including Germany, Belgium, and the
Netherlands, were all down more than 8.50% in U.S. dollar terms. Overall, the
Salomon Brothers Non-U.S. Dollar World Government Bond Index* returned -4.26% in
U.S. dollar terms for the year ended 12/31/97.
The impact of the financial crisis in Asia was felt in markets worldwide.
Currency problems experienced there may affect corporate profitability and
product demand worldwide. On the positive side, inflation expectations have
generally been lowered, which may help keep interest rates in line with
historical averages.
Given this context, how did the MainStay International Bond Fund do in 1997?
For the year ended 12/31/97, the MainStay International Bond Fund provided total
returns of 1.83% and 1.15% for Class A and Class B shares, respectively,
excluding all sales charges. Both share classes outperformed the average Lipper+
international income fund, which returned -0.43% for the same period.
[GRAPHIC]
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
European Monetary Union
- -----------------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
Local currency terms
- --------------------
Returns expressed in local currency terms show what investors using that
currency would have earned, without any adjustment for differences in currency
values. Returns expressed in U.S. dollar terms reflect any differences in the
relative value of the local currency and the U.S. dollar.
- ----------
* See page 6 for more information on the Salomon Brothers Non-U.S. Dollar
World Government Bond Index.
+ See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
End %
- ---------------------------------------------
<S> <C>
12/94 0.20
12/95 18.68
12/96 13.90
12/97 1.83
</TABLE>
Returns reflect the historical performance of the Class B shares for the period
ended 12/31/94. See footnote * on page 13 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
End %
- ---------------------------------------------
<S> <C>
12/94 0.20
12/95 17.96
12/96 13.13
12/97 1.15
</TABLE>
See footnote * on page 13 for more information on performance.
What were the major contributors to the Fund's performance?
One of our best decisions during the year was to maintain a market-weighted
duration. Even though there were times when it looked as though rates would
rise, our decision proved to be highly beneficial in terms of the Fund's overall
performance. Of course, we also made specific country selections that had a
positive impact on the Fund.
Which countries performed the best?
The U.K. was the best overall performer in both local and U.S. dollar terms. We
increased the Fund's position there based on the overall strength of the
economy, the
[GRAPHIC]
Duration
- --------
Equals the weighted average time until bond investors recover their investment.
It is a measurement of interest rate risk.
8
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Germany 15.3%
United Kingdom 13.3%
Canada 12.4%
Italy 11.0%
France 8.4%
Other 39.6%
</TABLE>
Actual percentages will vary over time.
currency, and the positive investment outlook when the Bank of England became
independent from government control. Investors seemed so positive about this
news that U.K. bonds continued to rally even as interest rates rose. The Fund's
U.K. positions were enhanced by the fact that we selected longer-term bonds,
which rallied much more than the short-end of the market. So the Fund's U.K.
bond holdings outperformed the U.K. bond market, which was the best performing
bond market in the world.
Were there other successful markets?
Canada was a strong performer in U.S. dollar terms and we increased the Fund's
Canadian holdings over the course of the year. Unfortunately, however, we bought
both Canadian bonds and Canadian currency. While the bonds were positive
performers, the currency exposure had a negative impact and reduced the Fund's
overall return.
Did you make other positive decisions for the Fund?
Yes, we did. We use a "country-first" approach, which means assessing each
country and currency to determine where to invest. In 1997, we decided that core
European countries didn't have as much value as some of the peripheral European
countries. So the Fund was underweighted in Germany, France, the Netherlands,
Belgium, and Luxembourg. While each of these countries had competitive returns
in local terms, many ended the year with substantial negative returns in U.S.
dollar terms. The Fund benefited from relative outperformance of its Italian
holdings, even though the Italian market's U.S. dollar returns were negative. In
addition to Europe, Australian bonds also provided positive performance during
the year, particularly since the Fund didn't have any currency exposure to those
bonds and the return in local currency terms was over 13%. As the bonds rallied,
the Fund took some profits, which helped its performance.
[GRAPHIC]
Currency exposure
- -----------------
Risk of loss due to owning securities denominated in different currencies, the
value of which may change at any time. Currency exposure can be reduced through
a risk management technique known as hedging.
9
<PAGE>
What happened in the emerging markets?
In the fourth quarter, emerging market debt suffered some major setbacks.
Fortunately, we stayed out of Southeast Asia, which was a highly positive
decision in light of what happened to many economies, currencies, and financial
companies. The Fund held Russian, Brazilian, and Argentine bonds that were hurt
in the aftermath of the Asian financial difficulties. We decided to cut the
Fund's emerging market debt almost in half, which proved to be a wise decision,
given the fact that prices declined after we sold. We used the money from the
sale of Russian bonds to buy German government securities and we used the
Argentine proceeds to buy Gilts--or British government bonds--which were
generally good for the portfolio.
Which emerging markets did the Fund continue to hold at year end?
The Fund held only the top-tier emerging market debt at year end, including
securities in Mexico, Panama, Argentina, and South Africa. We believe that
Panama, which was a BB-rated credit at year end, may be due for an upgrade. And
among the emerging markets, we feel that these countries may be among the safest
places to invest.
Were there other problem areas in the international bond market?
As the Asian problems unfolded, there was a general flight to quality, which
made owning spread products--or securities that offered yield advantages over
local Treasury securities--less attractive. Fannie Mae, the Federal National
Mortgage Association, had issued bonds in Hong Kong dollars, New Zealand
dollars, Australian dollars, and U.K. sterling. As the fallout in Asia began, we
reduced the Fund's exposure even to relatively secure investments, such as
Fannie Mae, the European Investment Bank, Lloyd Bank, and Abbey National Bank,
when liquidity started to disappear. In some cases, we used the proceeds to buy
Gilts for their
QUALITY BREAKDOWN AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
AAA 58.7%
AA 24.4%
A 3.8%
BBB 0.8%
BB 5.6%
B 0.9%
Government Agencies 1.1%
Cash, Equivalents & Other Assets,
less Liabilities 4.7%
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
[GRAPHIC]
Flight to quality
- -----------------
When investors in general move to improve the credit quality and liquidity of
the securities they own, either because of credit concerns or international
crisis.
10
<PAGE>
quality and liquidity. Most of those sales were near the break-even point, but
were positive for the portfolio, given the bonds' subsequent performance.
Of course, there was also some positive news. We sold some South African Yankee
bonds at the end of the third quarter, after spreads had narrowed and the market
became hungry for a spread product, which was a positive for the Fund. We also
held some corporate bonds and high-yield issues denominated in deutsche marks,
such as an issue from ITT, that performed well.
What were some of the Fund's other significant purchases and sales during the
year?
In the second half of the year, we bought Mexican bonds denominated in Canadian
dollars for the Fund. Although at the time we believed the Canadian bond and
currency markets were cheap, as things developed, the Fund lost money on both
sides of the transaction. We also purchased a sizable amount of New Zealand
bonds for the Fund, without assuming any currency risk. Although we believed the
bonds were well priced, in an erratic market, they became even cheaper, which
had a negative impact on the Fund's performance every quarter.
What steps did you take to help protect investors from currency risk?
For the first half of the year, the Fund's investment portfolio was about 75%
hedged. We did take on some yen exposure for the Fund through the purchase of
Japanese money market instruments early in the year, but we closed that position
out at a profit after the yen strengthened relative to the dollar. By the third
quarter, we believed that the dollar had reached its fair value relative to the
deutsche mark. At that point, we started to reduce the Fund's currency hedges,
which detracted from the Fund's performance as the dollar continued to
strengthen throughout the rest of the year. By year end, the Fund had a market
weighting of approximately 60% in European currency.
What is the overall quality of the Fund's investment portfolio?
Since the Fund invests primarily in government bonds, the quality is relatively
high. As of December 31, 1997, the overall quality of the securities in the
Fund's investment portfolio was AA, though of course the Fund included
securities across a wide spectrum of quality ratings.
What is your outlook going forward?
We believe that the impact of the Asian crisis has been widely underestimated
and that it may have a severe impact on prices worldwide. One view is that
prices will decline, keeping inflation low, which should be very good for
international bonds. Market volatility should keep central banks from raising
rates and may prompt us to move down the yield curve, looking at securities with
shorter maturities, while maintaining the Fund's longer duration.
We like the Fund's country exposure as of year end. As Europe emerges from
recession, we anticipate that European bonds may become attractive if U.S.
investors continue to see domestic spreads narrow to very tight levels. Given
Panama's solid growth, low debt ratios, and political stability, we may increase
the Fund's exposure
[GRAPHIC]
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 in
other markets, including the issuer's domestic market overseas.
11
<PAGE>
there--and since Panama doesn't have a local currency, we can entirely avoid
currency risk in that market.
Whatever the future brings, we'll continue to seek competitive overall return
commensurate with an acceptable level of risk by investing in a diversified
portfolio of non-U.S. debt securities, primarily government debt securities.
Joseph Portera
Portfolio Manager
[GRAPHIC]
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.
Past performance is no guarantee of future results.
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
1 year Life of Fund through 12/31/97
<S> <C> <C>
Class A 1.83% 10.22%
Class B 1.15% 9.57%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
1 year Life of Fund through 12/31/97
<S> <C> <C>
Class A -2.75% 8.69%
Class B -3.85% 9.08%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
================================================================================
1 year Life of Fund through 12/31/97
<S> <C> <C>
Class A 14 out of n/a
46 funds
Class B 17 out of 7 out of
46 funds 25 funds
Average Lipper
international
income fund -0.43% 7.76%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.10 $0.7617 $0.2822
Class B $10.12 $0.7009 $0.2822
================================================================================
</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 certain fee waivers and/or expense limitations, without which total
return figures may have been lower. The fee waivers and/or expense
limitations are voluntary and 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 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
12/31/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
[GRAPHIC]
13
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 12/31/97
- ----------------------------------------------------------------------------------------
HOLDING COUNTRY AMOUNT
========================================================================================
<S> <C> <C>
United Kingdom Treasury Bond, 7.50%, due 12/7/06 United Kingdom $1,432,735
Kingdom of Denmark, 7.00%, due 12/15/04 Denmark 1,174,019
Buoni Poliennali del Tesoro, 12.00%, due 5/1/02 Italy 1,124,739
Bundesobligation, Series 117, 5.125%, due 11/21/00 Germany 1,001,777
Bundesobligation, Series 123, 4.50%, due 5/17/02 Germany 992,314
Buoni Poliennali del Tesoro, 9.00%, due 11/1/23 Italy 954,296
Nykredit, Series ANN1, 7.00%, due 10/1/29 Denmark 871,944
United Kingdom Treasury Bond, 10.00%, due 2/26/01 United Kingdom 855,740
Buoni Poliennali del Tesoro, 10.50%, due 7/15/00 Italy 845,575
Bayerische Landesbank Giro, 7.875%, due 12/7/06 United Kingdom 799,692
========================================================================================
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- ----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF PURCHASE
========================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds, due 2/26/01 - 12/7/15 United Kingdom $5,589,203
Republic of Argentina, due 11/1/99 - 3/31/23 United States 4,989,488
Australian Government, due 4/15/00 - 2/15/06 Australia 4,000,821
Buoni Poliennali del Tesoro, due 4/1/99 - 11/1/26 Italy 3,743,170
Bundesobligation, due 6/21/99 - 2/16/06 Germany 3,273,725
Republic of Brazil, due 11/5/01 - 4/15/24 United States 2,793,856
United Mexican States, due 6/2/03 - 12/31/19 United States 2,372,041
Nykredit, due 10/1/26 - 10/1/29 Denmark 1,760,632
New Zealand Government, due 2/15/00-D 11/15/06 New Zealand 1,623,092
Ministry Finance Russia, due 11/27/01 - 3/25/04 Germany 1,518,293
========================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- ----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF SALE
========================================================================================
<S> <C> <C>
Australian Government, due 4/15/00 - 2/15/06 Australia $5,080,641
United Kingdom Treasury Bonds, due 2/26/01 - 12/7/15 United Kingdom 5,030,324
Buoni Poliennali del Tesoro, due 8/1/97 - 11/1/26 Italy 4,911,612
Republic of Argentina, due 11/1/99 - 3/31/23 United States 4,292,754
Republic of Brazil, due 11/5/01 - 4/15/24 United States 2,710,309
Kingdom of Denmark, due 11/15/98 - 11/10/24 Denmark 1,762,521
Canadian Government, due 9/1/00 - 6/1/25 Canada 1,590,827
Republic of Venezuela, due 12/18/07 - 3/31/20 United States 1,482,656
Ministry Finance Russia, due 11/27/01 - 3/25/04 Germany 1,471,678
Republic of Austria, due 3/22/99 - 1/24/05 Austria 1,422,767
========================================================================================
</TABLE>
[GRAPHIC]
- ----------
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.
14
<PAGE>
Portfolio of Investments* December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
====================================
<S> <C> <C>
LONG-TERM BONDS (87.0%)+
CORPORATE BONDS (16.6%)
DENMARK (2.6%)
Nykredit
Series ANN1
7.00%, due 10/1/29.................... DK 6,040,000 $ 871,944
-----------
GERMANY (2.9%)
Bayerische VBK New York
4.50%, due 6/24/02.................... DM 730,000 399,338
Deutsche Pfandbrief Bank
Series 436
5.75%, due 3/4/09..................... 730,000 406,062
Venezuela Synthetic Sovereign
Investments Ltd.
10.125%, due 12/29/03................. 260,000 148,212
-----------
953,612
-----------
NEW ZEALAND (0.9%)
International Bank of
Reconstruction & Development
Medium-Term Notes Series E
(zero coupon), due 8/20/07............ N$ 1,011,000 296,244
-----------
SOUTH AFRICA (0.5%)
International Bank of
Reconstruction & Development
Medium-Term Notes Series E
(zero coupon), due 12/29/17........... ZAR 10,100,000 173,297
-----------
SWEDEN (2.9%)
Banque Nationale de Paris
Medium-Term Notes Series E
11.00%, due 11/4/99................... SK 3,050,000 415,200
Stadshypotek AB
Series 1553
10.00%, due 12/20/00.................. 4,000,000 558,817
-----------
974,017
-----------
UNITED KINGDOM (4.3%)
Bayerische Landesbank Giro
7.875%, due 12/7/06................... (pound) 452,000 799,692
European Investment Bank
8.75%, due 8/25/17.................... 300,000 608,944
-----------
1,408,636
-----------
UNITED STATES (2.5%)
Banco Nacional Commerciale Exterior
Series REGS
8.00%, due 7/18/02.................... $ 300,000 $ 290,625
Series REGS
11.25%, due 5/30/06................... 490,000 546,350
-----------
836,975
-----------
Total Corporate Bonds
(Cost $5,600,889)..................... 5,514,725
-----------
GOVERNMENTS & FEDERAL AGENCIES (70.4%)
ARGENTINA (0.8%)
Argentina Bocon Previs
Series Pre-1
3.39%, due 4/1/01 (b)................. AP 292,678 262,809
-----------
AUSTRALIA (1.7%)
Australian Government
Series 803
9.50%, due 8/15/03.................... A$ 116,000 88,871
Series 1002
10.00%, due 10/15/02.................. 265,000 203,330
Fannie Mae
Medium-Term Notes Series E
6.375%, due 8/15/07................... 245,000 160,596
Queensland Treasury Corp.
8.00%, due 9/14/07.................... 125,000 91,219
-----------
544,016
-----------
CANADA (9.2%)
Alberta Government Telephone
Series UB
9.60%, due 7/7/98..................... C$ 650,000 466,813
Canadian Government
Series WB60
7.25%, due 6/1/07..................... 600,000 469,889
Series H74
10.00%, due 6/1/08.................... 160,000 149,857
Series A33
11.50%, due 9/1/00.................... 230,000 185,290
Province of Ontario
7.25%, due 9/27/05.................... 835,000 629,619
9.75%, due 10/29/01................... 133,000 105,384
Province of Quebec
7.75%, due 3/30/06.................... 375,000 292,318
United Mexican States
7.00%, due 6/2/03..................... 1,140,000 744,812
-----------
3,043,982
-----------
</TABLE>
+ Percentages indicated are based on Fund net assets.
* Investments are grouped by currency denomination.
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 Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
====================================
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (Continued)
DENMARK (4.6%)
Kingdom of Denmark
7.00%, due 12/15/04................... DK 7,375,000 $ 1,174,019
8.00%, due 11/15/01................... 2,220,000 358,036
-----------
1,532,055
-----------
EUROPEAN MONETARY UNION (1.6%)
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05 ................... ECU 430,000 535,560
-----------
FRANCE (5.4%)
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05.................... FF 1,070,000 203,386
8.25%, due 2/27/04.................... 2,262,000 440,227
8.50%, due 3/28/00.................... 2,790,000 504,122
8.50%, due 11/25/02................... 2,900,000 558,802
8.50%, due 12/26/12................... 420,000 90,411
-----------
1,796,948
-----------
GERMANY (12.4%)
Bundesobligation
Series 123
4.50%, due 5/17/02.................... DM 1,805,000 992,314
Series 117
5.125%, due 11/21/00.................. 1,768,000 1,001,777
Province of Ontario
6.25%, due 1/13/04.................... 500,000 291,984
Republic of Deutschland
Series 96
6.00%, due 2/16/06.................... 1,024,000 598,097
Series 94
6.25%, due 1/4/24 (a)................. 420,000 245,430
Treuhandanstalt
6.25%, due 3/4/04..................... 845,000 500,126
7.50%, due 9/9/04..................... 740,000 466,378
-----------
4,096,106
-----------
IRELAND (2.7%)
Irish Government
6.25%, due 4/1/99 (a)................. IP 113,000 163,559
6.50%, due 10/18/01................... 200,000 299,462
8.00%, due 8/18/06.................... 253,000 420,650
-----------
883,671
-----------
ITALY (11.0%)
Buoni Poliennali del Tesoro
8.50%, due 1/1/04..................... IL 890,000,000 581,366
9.00%, due 11/1/23 ................... 1,220,000,000 954,296
9.50%, due 2/1/01..................... 215,000,000 136,962
10.50%, due 7/15/00................... 1,325,000,000 845,575
12.00%, due 5/1/02.................... 1,580,000,000 1,124,739
-----------
3,642,938
-----------
NEW ZEALAND (1.4%)
Fannie Mae
7.25%, due 6/20/02.................... N$ 379,000 215,338
New Zealand Government
8.00%, due 11/15/06................... 396,000 244,003
-----------
459,341
-----------
SPAIN (3.7%)
Spanish Government
7.35%, due 3/31/07.................... SP 30,180,000 222,475
8.30%, due 12/15/98................... 4,000,000 27,124
10.25%, due 11/30/98.................. 15,850,000 109,045
10.50%, due 10/30/03.................. 66,300,000 547,266
11.30%, due 1/15/02................... 41,490,000 333,601
-----------
1,239,511
-----------
SWEDEN (3.8%)
Swedish Government
Series 1035
6.00%, due 2/9/05..................... SK 800,000 101,555
Series 1038
6.50%, due 10/25/06................... 3,600,000 471,282
Series 1030
13.00%, due 6/15/01................... 4,500,000 696,594
-----------
1,269,431
-----------
UNITED KINGDOM (9.0%)
Republic of Argentina
Series LELI
10.00%, due 6/25/07................... (pound) 85,000 132,517
United Kingdom Treasury Bonds
7.50%, due 12/7/06.................... 810,000 1,432,735
8.00%, due 9/27/13.................... 293,000 560,746
10.00%, due 2/26/01 (a)............... 477,000 855,740
-----------
2,981,738
-----------
</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>
GOVERNMENTS & FEDERAL AGENCIES (Continued)
UNITED STATES (3.1%)
Bonos del Tesoro
Series BT02
8.75%, due 5/9/02..................... $ 170,000 $ 161,500
Petroleos Mexicanos
6.938%, due 3/8/99 (b)................ 150,000 148,875
Republic of Panama
Series REGS
7.875%, due 2/13/02................... 255,000 247,031
8.875%, due 9/30/27................... 510,000 479,400
-----------
1,036,806
-----------
Total Governments & Federal Agencies
(Cost $23,952,565).................... 23,324,912
-----------
Total Long-Term Bonds
(Cost $29,553,454).................... 28,839,637
-----------
SHORT-TERM INVESTMENTS (9.1%)
COMMERCIAL PAPER (0.8%)
UNITED STATES (0.8%)
Merrill Lynch & Co. Inc.
6.00%, due 1/2/98..................... $ 250,000 249,958
-----------
Total Commercial Paper
(Cost $249,958)....................... 249,958
-----------
GOVERNMENTS & FEDERAL AGENCIES (8.3%)
AUSTRALIA (0.3%)
Treasury Corp. Victoria
Series 1098
12.00%, due 10/22/98.................. A$ 165,000 113,381
-----------
CANADA (3.2%)
Canadian Treasury Bill
(zero coupon), due 1/8/98............. C$ 1,500,000 1,047,411
-----------
FRANCE (3.0%)
French Treasury Bill
(zero coupon), due 3/26/98............ FF 5,994,000 988,400
-----------
IRELAND (0.5%)
Irish Government
9.75%, due 6/1/98..................... IP 105,000 152,263
-----------
NEW ZEALAND (1.3%)
New Zealand Treasury Bill
(zero coupon), due 3/11/98............ N$ 760,000 434,036
-----------
Total Governments & Federal Agencies
(Cost $2,806,751) .................... 2,735,491
-----------
Total Short-Term Investments
(Cost $3,056,709)..................... 2,985,449
-----------
Total Investments
(Cost $32,610,163) (c)................ 96.1% 31,825,086(d)
Cash and Other Assets,
Less Liabilities ..................... 3.9 1,308,266
-------------- -----------
Net Assets............................... 100.0% $33,133,352
============== ===========
</TABLE>
- ----------
(a) Segregated or partially segregated as collateral for forward foreign
currency contracts.
(b) Floating rate. Rate shown is the rate in effect at December 31, 1997.
(c) The cost for Federal income tax purposes is $32,613,107.
(d) At December 31, 1997 net unrealized depreciation for securities was
$788,021, 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 $337,620 and aggregate gross
unrealized depreciation for all investments on which there was an excess of
cost over market value of $1,125,641.
(e) The following abbreviations are used in the above portfolio:
AP -Argentine Peso
A$ -Australian Dollar
C$ -Canadian Dollar
DK -Danish Krone
DM -Deutsche Mark
ECU -European Currency Unit
FF -French Franc
IP -Irish Punt
IL -Italian Lira
N$ -New Zealand Dollar
(pound)-Pound Sterling
ZAR -South African Rand
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.
17
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $32,610,163)................................................ $31,825,086
Cash denominated in foreign currencies (identified cost $842,939)............................................... 836,447
Cash............................................................................................................ 51,612
Receivables:
Interest...................................................................................................... 688,062
Investment securities sold.................................................................................... 175,679
Fund shares sold.............................................................................................. 160,195
Unrealized appreciation on forward foreign currency contracts................................................... 184,704
Unamortized organization expense................................................................................ 16,938
-----------
Total assets................................................................................................. 33,938,723
-----------
LIABILITIES:
Payables:
Investment securities purchased............................................................................... 488,920
Fund shares redeemed.......................................................................................... 30,469
NYLIFE Distributors........................................................................................... 20,507
MainStay Management........................................................................................... 12,315
Transfer agent................................................................................................ 9,507
Custodian..................................................................................................... 9,000
Trustees...................................................................................................... 226
Accrued expenses................................................................................................ 64,755
Unrealized depreciation on forward foreign currency contracts................................................... 169,672
-----------
Total liabilities............................................................................................ 805,371
-----------
Net assets...................................................................................................... $33,133,352
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A....................................................................................................... $ 12,140
Class B....................................................................................................... 20,622
Additional paid-in capital...................................................................................... 33,805,947
Accumulated undistributed net investment income................................................................. 80,293
Accumulated undistributed net realized gain on investments...................................................... 5,446
Net unrealized depreciation on investments...................................................................... (785,077)
Net unrealized depreciation on translation of assets and liabilities in ........................................
foreign currencies and forward foreign currency contracts...................................................... (6,019)
-----------
Net assets...................................................................................................... $33,133,352
===========
CLASS A
Net assets applicable to outstanding shares..................................................................... $12,262,939
===========
Shares of beneficial interest outstanding....................................................................... 1,213,965
===========
Net asset value per share outstanding........................................................................... $ 10.10
Maximum sales charge (4.50% of offering price).................................................................. 0.48
-----------
Maximum offering price per share outstanding.................................................................... $ 10.58
===========
CLASS B
Net assets applicable to outstanding shares..................................................................... $20,870,413
===========
Shares of beneficial interest outstanding....................................................................... 2,062,219
===========
Net asset value and offering price per share outstanding........................................................ $ 10.12
===========
</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 for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................................................... $ 2,232,189
-----------
Expenses:
Distribution--Class B............................................................................ 136,971
Advisory......................................................................................... 118,252
Transfer agent................................................................................... 84,445
Service.......................................................................................... 80,807
Administration................................................................................... 65,695
Shareholder communication........................................................................ 58,374
Management....................................................................................... 42,312
Custodian........................................................................................ 37,489
Professional..................................................................................... 35,743
Registration..................................................................................... 33,231
Recordkeeping.................................................................................... 13,966
Amortization of organization expense............................................................. 9,972
Trustees......................................................................................... 800
Miscellaneous.................................................................................... 20,022
-----------
Total expenses before waiver................................................................... 738,079
Fees waived by Administrator and Adviser or Manager................................................ (96,968)
-----------
Net expenses................................................................................... 641,111
-----------
Net investment income.............................................................................. 1,591,078
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions............................................................................ 871,829
Foreign currency transactions.................................................................... 736,097
-----------
Net realized gain on investments and foreign currency transactions................................. 1,607,926
-----------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions............................................................................ (2,552,852)
Translation of assets and liabilities in foreign currencies and forward foreign
currency contracts............................................................................. (143,251)
-----------
Net unrealized loss on investments and foreign currencies.......................................... (2,696,103)
-----------
Net realized and unrealized loss on investments and foreign currency transactions.................. (1,088,177)
-----------
Net increase in net assets resulting from operations............................................... $ 502,901
===========
</TABLE>
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,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income.............................................................. $ 1,591,078 $ 1,378,963
Net realized gain on investments................................................... 871,829 467,595
Net realized gain on foreign currency transactions................................. 736,097 1,128,390
Net change in unrealized appreciation (depreciation) on investments................ (2,552,852) 358,520
Net change in unrealized appreciation (depreciation) on translation of assets and
liabilities in foreign currencies and forward foreign currency contracts.......... (143,251) 160,131
----------- -----------
Net increase in net assets resulting from operations............................... 502,901 3,493,599
----------- -----------
Dividends and distributions to shareholders:
From net investment income and net realized gain on foreign currency transactions:
Class A........................................................................... (844,072) (794,237)
Class B........................................................................... (1,366,130) (984,527)
From net realized gain on investments:
Class A........................................................................... (327,237) (162,643)
Class B........................................................................... (559,408) (253,849)
----------- -----------
Total dividends and distributions to shareholders............................... (3,096,847) (2,195,256)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A........................................................................... 2,078,813 2,149,516
Class B........................................................................... 7,769,493 7,816,122
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions:
Class A........................................................................... 519,949 251,550
Class B........................................................................... 1,648,318 1,098,725
----------- -----------
12,016,573 11,315,913
Cost of shares redeemed:
Class A........................................................................... (1,345,653) (2,500,800)
Class B........................................................................... (5,928,756) (3,834,311)
----------- -----------
Increase in net assets derived from capital share transactions.................. 4,742,164 4,980,802
----------- -----------
Net increase in net assets...................................................... 2,148,218 6,279,145
NET ASSETS:
Beginning of year.................................................................... 30,985,134 24,705,989
----------- -----------
End of year.......................................................................... $33,133,352 $30,985,134
=========== ===========
Accumulated undistributed net investment income (excess distribution)................ $ 80,293 $ (36,679)
=========== ===========
</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 Class A Class B September 13,*
------- ------- ------- ------- ------- ------- through
Year ended Year ended Year ended December 31,
December 31, 1997 December 31, 1996 December 31, 1995 1994
--------------------- --------------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $10.95 $10.98 $10.43 $10.45 $ 9.90 $ 9.90 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income .................... 0.80 0.74 0.72 0.64 1.15 1.06 0.12
Net realized and unrealized gain (loss)
on investments ......................... (0.94) (0.96) 0.27 0.27 0.59 0.61 (0.08)
Net realized and unrealized gain (loss)
on foreign currency transactions ....... 0.33 0.34 0.41 0.42 0.07 0.07 (0.02)
------ ------ ------ ------ ------ ------ ------
Total from investment operations ......... 0.19 0.12 1.40 1.33 1.81 1.74 0.02
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income and
net realized gain on foreign
currency transactions .................. (0.76) (0.70) (0.73) (0.65) (0.61) (0.56) (0.12)
From net realized gain on investments .... (0.28) (0.28) (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 ........ (1.04) (0.98) (0.88) (0.80) (1.28) (1.19) (0.12)
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period ......... $10.10 $10.12 $10.95 $10.98 $10.43 $10.45 $ 9.90
====== ====== ====== ====== ====== ====== ======
Total investment return (a) .............. 1.83% 1.15% 13.90% 13.13% 18.68% 17.96% 0.20%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ................. 5.35% 4.69% 5.4% 4.8% 5.6% 4.9% 4.8%+
Net expenses .......................... 1.56% 2.22% 1.5% 2.1% 1.5% 2.2% 2.8%+
Expenses (before waiver) .............. 1.86% 2.52% 1.8% 2.4% 1.8% 2.5% 3.1%+
Portfolio turnover rate .................. 179% 179% 59% 59% 103% 103% 4%
Net assets at end of period (in 000's) ... $12,263 $20,870 $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.
21
<PAGE>
MainStay International Bond Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
The Fund's investment objective is to seek competitive overall return
commensurate with an acceptable level of risk by investing primarily in a
portfolio consisting 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 Sub-Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Sub-Adviser to be representative of market values at the regular close of
business of the 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 Sub-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 (foreign
exchanges and over-the-counter markets) and the regular close of the
22
<PAGE>
Notes to Financial Statements
Exchange will not be reflected in the Fund's calculation of net asset value
unless the Sub-Adviser believes that the particular event would materially
affect net asset value, in which case an adjustment would be made.
Forward Foreign Currency Contracts. A forward foreign 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
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
(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, 1997:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
---------------------- -------------------- -------------
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C>
Australian Dollar vs. U.S. Dollar, expiring 2/3/98............ A$ 120,000 $ 81,447 $ 3,194
Canadian Dollar vs. U.S. Dollar, expiring 2/23/98............. C$ 3,745,000 $ 2,618,149 (3,243)
Danish Krone vs. Deutsche Mark, expiring 1/22/98.............. DK 4,295,000 DM 1,127,800 74
Danish Krone vs. Deutsche Mark, expiring 1/22/98.............. DK 4,360,000 DM 1,143,846 (493)
Deutsche Mark vs. French Franc, expiring 2/18/98.............. DM 2,842,809 FF 9,520,000 1,452
Deutsche Mark vs. Italian Lira, expiring 1/12/98.............. DM 599,106 IL 590,000,000 508
Deutsche Mark vs. Pound Sterling, expiring 1/15/98............ DM 996,265 (pound) 345,000 12,667
Deutsche Mark vs. Pound Sterling, expiring 1/15/98............ DM 665,000 (pound) 223,906 (2,033)
Deutsche Mark vs. U.S. Dollar, expiring 1/7/98--1/20/98....... DM 4,877,684 $ 2,811,136 96,513
French Franc vs. U.S. Dollar, expiring 3/26/98................ FF 5,945,000 $ 1,005,837 12,838
Irish Punt vs. Deutsche Mark, expiring 1/15/98................ IP 492,000 DM 1,265,301 3,265
Irish Punt vs. U.S. Dollar, expiring 1/15/98.................. IP 207,000 $ 314,692 19,732
Italian Lira vs. Deutsche Mark, expiring 1/12/98.............. IL 1,181,000,000 DM 1,202,020 536
New Zealand Dollar vs. U.S. Dollar, expiring 1/26/98.......... N$ 2,285,000 $ 1,319,359 (4,419)
Pound Sterling vs. Deutsche Mark, expiring 1/15/98............ (pound) 917,000 DM 2,581,639 (70,633)
Pound Sterling vs. U.S. Dollar, expiring 1/15/98.............. (pound) 660,000 $ 1,096,920 11,768
Pound Sterling vs. U.S. Dollar, expiring 1/15/98.............. (pound) 30,000 $ 48,519 (806)
South African Rand vs. U.S. Dollar, expiring 1/29/98.......... ZAR 780,000 $ 159,216 231
Swedish Krona vs. Deutsche Mark, expiring 2/10/98............. SK 12,765,000 DM 2,922,898 18,819
Swiss Franc vs. Deutsche Mark, expiring 1/20/98............... CF 860,000 DM 1,067,130 3,107
</TABLE>
23
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Purchased Sold (Depreciation)
---------------------- -------------------- -------------
Foreign Currency Buy Contracts
- ------------------------------
<S> <C> <C> <C>
Deutsche Mark vs. U.S. Dollar, expiring 1/7/98--1/20/98........ DM 3,105,753 $ 1,800,000 $ (71,728)
Pound Sterling vs. U.S. Dollar, expiring 1/15/98.............. (pound) 183,000 $ 312,235 (11,352)
Spanish Peseta vs. U.S. Dollar, expiring 1/12/98.............. SP 36,800,000 $ 246,484 (4,965)
---------
Net unrealized appreciation on forward foreign currency contracts $ 15,032
=========
</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. A
permanent book-tax difference of $736,097 has been reclassified from accumulated
undistributed net realized gain on foreign currency transactions to accumulated
undistributed 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
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. Premiums on securities purchased are not amortized for this 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 direct allocations of expenses can 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,
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.
The Fund isolates the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term debt
securities sold during the year. Net currency gains or losses from valuing
foreign currency denominated assets and liabilities other than investments 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.
Foreign currency held at December 31, 1997:
<TABLE>
<CAPTION>
Currency Cost Value
- ---------------------------------------------- -------- --------
<S> <C> <C> <C>
Argentine Peso AP 8,312 $ 8,317 $ 8,313
Canadian Dollar C$ 271,257 190,576 189,490
Danish Krone DK 233,941 34,688 34,165
Deutsche Mark DM 26,329 14,762 14,643
French Franc FF 281,983 46,872 46,872
Italian Lira IL 153,229 88 87
New Zealand Dollar N$ 229,556 132,936 133,303
Pound Sterling (pound) 210,412 350,120 346,203
Spanish Peseta SP 1,968,446 13,106 12,915
Swedish Krona SK 400,347 51,474 50,456
-------- --------
$842,939 $836,447
======== ========
</TABLE>
25
<PAGE>
MainStay International Bond 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.70%. The Manager has agreed to waive a portion of its fee,
0.30% of the average daily net assets of the Fund, until such time as the Fund
reaches $50 million in net assets.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.45% of
the average daily net assets of the Fund. The Sub-Adviser has voluntarily agreed
to waive a portion of its fee until such time as the Fund reaches $50 million in
net assets.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors were paid a monthly fee at an annual rate of 0.45% and
0.25%, respectively, of the average daily net assets of the Fund. Since the net
assets did not reach $50 million, MacKay-Shields and NYLIFE Distributors waived
monthly fees of 0.20% and 0.10% of the average daily net assets, respectively.
As described above, MainStay Management is currently paid a fee at a rate equal
to the aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997 and the fee waivers are also the same as prior to that date.
For the period January 1, 1997, through October 26, 1997, MacKay-Shields and
NYLIFE Distributors earned fees of $118,252 and $65,695, respectively, and
waived $52,556 and $26,278 of their fees, respectively. For the period October
27, 1997, through December 31, 1997, MainStay Management earned $42,312 and
waived $18,134 of its fees.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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
26
<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
0.75% of 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $5,235 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$31,152 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$53,174 and $2,858, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors 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, 1997, NYLIFE Distributors beneficially held Class A
shares of the Fund with a net asset value of $7,786,287, which represents 63.5%
of the net assets of Class A shares at year end.
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $1,060 for the year ended December
31, 1997.
27
<PAGE>
MainStay International Bond Fund
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $2,608 and $11,358 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $56,953 and $49,261, respectively.
Note 5--Line of Credit:
The Fund and certain affiliated funds maintain a line of credit with the
Custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ...................................................... 196 726 196 725
Shares issued in reinvestment of dividends and distributions ..... 50 158 23 101
---- ---- ---- ----
246 884 219 826
Shares redeemed .................................................. (125) (555) (228) (357)
---- ---- ---- ----
Net increase (decrease) .......................................... 121 329 (9) 469
==== ==== ==== ====
</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 Bond Fund
(one of the fifteen funds constituting The MainStay Funds, hereafter referred to
as the "Fund") at December 31, 1997, 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, 1997 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 24, 1998
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
graph indicating
risk/reward of
the Fund] Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund [GRAPHIC] of companies in expanding markets and are willing to accept a higher
with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund [GRAPHIC] the makeup and returns of the participate in the growth potential
S&P 500* of stocks with the protection of a
principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Offers broad diversification into You prefer the higher return potential
International Equity Fund [GRAPHIC] international stock markets with of international equities or want to
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
graph indicating
risk/reward of
the Fund] Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) [GRAPHIC] a special blend of capital may offer growth potential if converted
appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund [GRAPHIC] return from common stocks, have undervalued and you want to
convertible securities, and high-yield manage risk through multimarket
corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Balances current income with growth You seek a combination of income and
Total Return Fund [GRAPHIC] opportunities by investing in stocks, growth potential and want to manage
bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks undervalued stocks with You seek to maximize total return from
Value Fund [GRAPHIC] attractive dividends and a stimulus securities which may have more poten-
for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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
graph indicating
risk/reward of
the Fund] Seeks a high level of current income You are seeking to combine high
Government Fund [GRAPHIC] consistent with safety of principal current income and safety of principal
primarily from U.S. government
securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
High Yield the Fund] An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund [GRAPHIC] fund that is actively managed for and can accept the higher risk of
maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks competitive total return from You prefer the higher return potential
INTERNATIONAL BOND FUND [GRAPHIC] non-U.S. bonds with an emphasis on of international bonds or want to add
risk control diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund [GRAPHIC] preservation of capital, and competitive yields on cash you're plan-
liquidity, with free checkwriting** ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund [GRAPHIC] tive overall return by investing in higher income and overall return by
a diversified portfolio of domestic investing in multiple bond market
and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks high current income exempt You are a California resident and want to
California Tax Free Fund [GRAPHIC] from both federal and California keep more of what you earn by invest-
income taxes consistent with ing for income that's double tax free+++
preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund [GRAPHIC] from federal, New York State, and and want to keep more of what you earn
New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks high current income You are in a high federal income tax
Tax Free Bond Fund [GRAPHIC] exempt from regular federal income tax bracket or want to pay less of your
with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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 Bond Fund
-------------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN10-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay International Equity Fund
Highlights 5
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index--Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Country--Top 5 9
Portfolio Composition 11
Returns & Lipper Rankings 13
Top 10 Equity Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 22
Notes to Financial Statements 26
Report of Independent Accountants 33
The MainStay Funds 34
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ---------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997 and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay International Equity Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay International Equity Fund, and MacKay Shields Financial Corporation;
amend the Plan of Distribution for Class B shares; eliminate or revise certain
fundamental investment restrictions including eliminating certain state-imposed
fundamental investment restrictions and eliminating or revising fundamental
restrictions pertaining to industry concentration and issuing senior securities;
and ratify the selection of Price Waterhouse LLP as independent certified public
accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
International Equity Fund is presented below.
PROPOSAL 1--Election of Trustees
<TABLE>
<CAPTION>
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 3,823,122 214,473 Passed
Nancy Maginnes Kissinger.................................................. 3,823,122 214,473 Passed
Donald E. Nickelson....................................................... 3,823,122 214,473 Passed
Richard S. Trutanic....................................................... 3,823,122 214,473 Passed
Harry G. Hohn............................................................. 3,823,122 214,473 Passed
Terry L. Lierman.......................................................... 3,823,122 214,473 Passed
Donald K. Ross............................................................ 3,823,122 214,473 Passed
Walter W. Ubl............................................................. 3,823,122 214,473 Passed
Alice T. Kane............................................................. 3,823,122 214,473 Passed
John B. McGuckian......................................................... 3,823,122 214,473 Passed
Stephen C. Roussin........................................................ 3,823,122 214,473 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 3,713,798.38 Against - 68,752.26 Abstain - 255,041.70 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay
Shields Financial Corporation
<S> <C> <C> <C>
For - 3,707,953.47 Against - 80,978.07 Abstain - 248,663.17 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 2,314,835.84 Against - 84,561.03 Abstain - 201,973.07 Broker Non-Vote - 347,042.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 3,274,393.20 Against - 84,527.96 Abstain - 305,859.55 Broker Non-Vote - 372,814.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A2--Oil, Gas, or Mineral Lease Interests................................... 3,271,166.67 87,754.49 Passed
A3--Real Estate Limited Partnership Interests.............................. 3,272,489.47 86,431.70 Passed
C3--Industry Concentration................................................. 3,274,393.20 84,527.96 Passed
C4--Issuing Senior Securities.............................................. 3,273,034.91 85,886.25 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent
Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 3,761,572.85 Against - 43,397.89 Abstain - 232,622.79 Result - Passed
</TABLE>
4
<PAGE>
MainStay International Equity Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] In the first quarter, the Federal Reserve Board's move to raise interest
rates in the United States impacted international markets until investors
refocused on local growth prospects, causing foreign markets to rebound in
the second quarter of 1997.
[ ] Continued movement toward European Monetary Union, including fiscal reforms
and corporate restructurings, improved the general financial backdrop for
European markets.
[ ] In the second half of the year, the Southeast Asian financial markets
suffered severe setbacks that affected currencies, real estate, and
equities and led to problems in the banking and securities industries.
[ ] Analysts around the world reacted with lower earnings estimates and a more
pessimistic investment outlook for Asian as well as other world markets.
[ ] In the fourth quarter, these factors caused the Morgan Stanley Capital
International EAFE Index* to decline 7.83%, leaving the Index up 1.78% for
the year.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 4.52% and 3.78% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] Starting in the first half of 1997, the Fund was overweighted in European
investments and decreased its Southeast Asian holdings, which helped when
Asian markets began to experience financial difficulties.
[ ] Although the Fund's portfolio managers had been bullish on Hong Kong in the
first half of the year, continuing negative signals led them to eliminate
all exposure to Southeast Asian markets and substantially reduce the Fund's
Japanese exposure in the fourth quarter.
[ ] Throughout the year, and particularly in the fourth quarter, the Fund
increased its exposure in Switzerland, Belgium, the United Kingdom, and
Portugal, which proved beneficial for the Fund's performance.
[ ] Sensing the dollar's strength, the Fund's portfolio managers used
substantial currency hedges throughout most of the year to protect
investors from losing money when local returns were translated into U.S.
dollars.
================================================================================
- ----------
* See footnote on page 6 for more information on the Morgan Stanley Capital
International EAFE Index.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index
CLASS A SHARES SEC Returns: 1-Year -1.23%, since inception 3.35%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Morgan Stanley
Year International Capital International
End Equity Fund EAFE Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $ 9,450 $10,000
12/94 $ 9,233 $ 9,586
12/95 $ 9,718 $10,661
12/96 $10,669 $11,306
12/97 $11,151 $11,507
</TABLE>
[GRAPHIC] MainStay International Equity Fund
[GRAPHIC] Morgan Stanley Capital International EAFE Index*
CLASS B SHARES SEC Returns: 1-Year -1.22%, since inception 3.85%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Morgan Stanley
Year International Capital International
End Equity Fund EAFE Index*
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $10,000 $10,000
12/94 $ 9,770 $ 9,586
12/95 $10,187 $10,661
12/96 $11,109 $11,306
12/97 $11,298 $11,507
</TABLE>
[GRAPHIC] MainStay International Equity Fund
[GRAPHIC] Morgan Stanley Capital International 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 2.0%, 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
Index--the EAFE Index--is an unmanaged, capitalization-weighted index
containing approximately 1,000 equity securities of companies located
outside the U.S.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of International Equity Fund Team
INTERNATIONAL EQUITY FUND TEAM
Shigemi Takagi, Maureen McFarland
The international equity markets were influenced by a number of important
factors throughout 1997. In the first quarter, a Federal Reserve Board move to
raise interest rates had a negative impact on investor psychology around the
globe. As investors focused on positive local market fundamentals, European
Monetary Union, and other positive factors, however, the mood became more
positive in the second quarter of the year.
By the end of the first half of the year, weaknesses in certain Southeast Asian
markets had begun to emerge, and by October, several Asian economies were
experiencing severe difficulties. Currencies, real estate, and stocks were
affected--and as the value of loan collateral dropped, banks and other financial
institutions came under pressure. Many analysts reduced their corporate earnings
estimates and several Asian markets experienced extreme volatility and major
setbacks. Problems spilled over into Australia, where declining demand for basic
commodities led to negative market returns in the fourth quarter.
Europe, on the other hand, had a strong year. Continuing work toward European
Monetary Union kept interest rates and inflation at relatively low levels and
strengthened many European economies. With borders becoming less of a business
barrier, major companies began to look for international partners, increasing
merger and acquisition activity. Portugal entered the MSCI EAFE Index,*
attracting international investors, while declining bond yields and increased
availability of mutual funds increased the country's domestic equity
participation. Overall, Portuguese stocks returned 73.8% for the year,
outperforming all other major world markets in local currency terms. Throughout
the year, a strong U.S. dollar posed additional risks for international
investors without sufficient currency hedging.
How did the MainStay International Equity Fund do in this environment?
For the year ended 12/31/97, the MainStay International Equity Fund provided
total returns of 4.52% and 3.78% for Class A and Class B shares, respectively,
excluding all sales charges. The Fund's results lagged the average Lipper+
international fund, which returned 5.44% for the same period. In 1997, the
Morgan Stanley Capital Inter-
[GRAPHIC]
Fundamentals
- ------------
Key economic factors such as interest rates, gross national product, inflation,
unemployment, and currency stability, which may affect the direction of a
country's economy--or issuer-specific factors such as assets, earnings, sales,
products, and management, which may affect the performance of a company's
securities.
European Monetary Union
- -----------------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
- ----------
* See footnote on page 6 for more information on the Morgan Stanley Capital
International EAFE Index.
+ See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[GRAPHIC]
Commodities
- -----------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Hedging/currency management
- ---------------------------
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.
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- ------------------------------------------
<S> <C>
12/94 (2.30)
12/95 5.25
12/96 9.78
12/97 4.52
</TABLE>
Returns reflect the historical performance of the Class B shares for the period
ended 12/31/94. See footnote * on page 13 for more information on performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS B SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- ------------------------------------------
<S> <C>
12/94 (2.30)
12/95 4.27
12/96 9.05
12/97 3.78
</TABLE>
See footnote * on page 13 for more information on performance.
national EAFE Index (EAFE Index) returned 1.78%.
What strategies do you feel worked well for the Fund during the year?
Certainly, our decision to reduce the Fund's exposure in Southeast Asian markets
and Japan was positive for the Fund, as was our decision to invest most of the
proceeds from those sales in Europe. There, we invested primarily in
Switzerland, Belgium, the United Kingdom, and Portugal, all of which were
positive performers and contributed significantly to the Fund's positive
returns.
Can you tell us about the Fund's investments prior to the fallout in Southeast
Asia?
Early in the year, we believed Europe would offer strong investment
opportuni-
8
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
United Kingdom 18.0%
Japan 14.3%
Germany 10.3%
France 8.1%
Switzerland 7.5%
All Other 41.8%
</TABLE>
Actual percentages will vary over time.
ties. The Fund was overweighted in France, which suffered a bit after
its elections--and underweighted in Japan, which had shown continuing weakness
over time. Throughout the first half of the year, we continued to reduce the
Fund's Japanese exposure as well as European holdings to increase
diversification across other European markets. We also detected problems in
Malaysia, where slowing technology, rising interest rates, and property
speculation had severely weakened the market's fundamentals. We sold the Fund's
holdings in Malaysia in the second quarter, which was clearly a smart move,
given subsequent developments in Southeast Asia.
Which European markets provided the best performance in 1997?
Portugal was by far the Fund's strongest performing market, both in local
currency and U.S. dollar terms. Portugal benefited from strong fiscal
consolidation and its government's efforts to bring its deficit and inflation
under control. The country reduced unemployment, increased its savings rates,
and raised wages, as part of its effort to meet European Monetary Union
criteria. Since the country was added to the MSCI EAFE Index this year, many
international investors were pouring money into stocks of Portuguese companies.
But the country also benefited from domestic investors, who saw declining bond
yields and the increased availability of mutual fund shares as a reason to
invest in equities. Recognizing these trends, over the course of the year, we
increased the Fund's Portuguese position from zero to over 1.3% of the
portfolio.
What about Switzerland?
The Fund was invested in Switzerland as part of its European diversification
strategy. The Swiss market benefited from world-class companies, low interest
rates, good monetary conditions, and a number of profitable mergers and
acquisitions. The market was up 56.7% in local terms for the year, and we had
good success with names like Novartis, a pharmaceutical giant that resulted from
a merger between Sandoz and Ciba Geigy--and from a pending financial merger
between Schweizerische Bankverein and UBS-Union Bank of Switzerland, both of
which had been significant holdings for the Fund.
[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 greater than the country's total equities relative to the
international equity markets as a whole.
9
<PAGE>
[GRAPHIC]
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 plant and equipment, engaging in mergers and
acquisitions, or taking other action to increase output or lower costs.
Privatization
- -------------
The process of converting state-run or publicly operated companies into
privately owned and operated entities. In theory, enterprises may run more
efficiently and offer better service to customers when owned by shareholders
rather than the government.
What attracted you to Belgium?
Again, our primary decision was to diversify the Fund's European holdings. We
invested in Belgium in the first half of the year, then pared back the Fund's
holdings when interest rates started to rise. Later, as problems started to
develop in Asia, however, it became clear that rates wouldn't continue to climb,
so Belgian stocks again looked attractive and we increased the Fund's holdings
there. The Belgian market is benefiting from restructuring, low interest rates,
improving retail performance, and positive economic indicators. The Fund was
invested in Belgium in the fourth quarter, increasing its position to about 3%
of the portfolio.
Can you mention some companies that did well in Belgium?
Belgium has a number of utilities and financial firms. In the utilities, we
liked Electrabel. In the financial services area, we invested in Generale de
Banque and Fortis. While some of the Fund's investments were made later in the
year, the market as a whole was up 32.4% in local currency terms in 1997, and we
think it will do well for the Fund in 1998.
You also mentioned the U.K. What happened there?
The U.K. keeps booming and we increased the Fund's exposure as we saw increasing
investor interest in the British market. Although earlier in the year we thought
interest rates might continue to rise, during the Asian difficulties we felt the
time was right to add to the Fund's British positions. During the year,
unemployment was at its lowest level since 1980, and investors poured money into
British mutual funds, which helped keep the stock market strong. The
demutualization of building societies (which are somewhat similar to the mutual
Savings & Loans in the U.S.A. in earlier years) also increased investor wealth
and helped the market.
One of the Fund's strong performers in the U.K. was Vodafone Group, whose mobile
telephone operations seemed to be taking off, with higher subscriber rates than
analysts predicted. The company has about a 33% market share and has done quite
well for the Fund.
Were there European countries that didn't do as well?
The Fund was overweighted in Austria, which wasn't as strong a performer as most
other European countries, but still provided an 18.5% return in local terms.
Fortunately, the Fund was invested in some of the market's better performers,
such as Verbund--which is the shortened name for
Verbundgesellschaft-Oesterreichische Elektrizitatswirtschafts Class A. While
that may be hard to say, the company is easy to like. It's an electrical and gas
utility that's benefiting from privatization and European Monetary Union, and
was up about 50% in the fourth quarter alone.
Obviously, the big story for the year was the Asian crisis. How did you handle
it?
We think we did relatively well, given the depth of the market difficulties. As
mentioned, we sold the Fund's Malaysian holdings early, which was a big plus for
the Fund's investment portfolio. We also eliminated the Fund's exposure to
Singapore before the October declines. Although some of the sales weren't
profitable, they
10
<PAGE>
were clearly wise. Fortunately, the Fund didn't have any holdings in Thailand,
Korea, Indonesia, or other emerging markets in Southeast Asia--which was a
decided plus for the Fund's investors.
Why wasn't the Fund invested in those markets?
We are basically risk-averse managers. While emerging markets may look terrific
when they're rising, the pain they may cause when they fall may not be worth the
risk. So while other funds may have had substantial exposure to these markets,
the MainStay International Equity Fund was invested in the more solid and
established markets, which we felt would offer investors greater strength and
stability. As the situation developed, however, even these markets had severe
setbacks.
What happened in the more developed Asian markets?
By far, the largest Asian market is Japan. We trimmed the Fund's position
substantially in the second half of the year, based on the impact of a rising
sales tax and other signs of weakness. We invested most of the proceeds in
Europe, which was positive for the Fund's performance.
Among individual Japanese companies, there were strong performers and weak ones.
Fortunately, we sought diversified exposure across well-established companies
and tried to avoid taking on high-risk investments. As a result, certain of the
Fund's multinational Japanese holdings, such as Toyota Motor and Honda Motor,
did well. Japan's domestic construction, retail, and banking firms, on the other
hand, did poorly. Fortunately, the Fund had no exposure to any of the Japanese
banks or financial firms that failed during the year, largely due to our careful
research and the Fund's focus on solid companies with strong fundamentals.
In Hong Kong, the celebration of the return to a unified country helped make the
market a strong performer for the Fund in the first half of the year. However,
as the year progressed, the problems of the Southeast Asian markets broadened in
depth and scope. We reduced the Fund's position from neutral to underweighted in
October, and after we did, the market fell 22%. Fortunately, we didn't
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Common Stocks 83.4%
Preferred Stock 0.1%
Cash & Equivalents 16.5%
</TABLE>
Actual percentages will vary over time.
[GRAPHIC]
Emerging markets
- -----------------
Countries with smaller or more recently established capital markets.
11
<PAGE>
[GRAPHIC]
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.
Past performance is no guarantee of future results.
sell immediately, but when the market came back 14%, we sold the Fund's
remaining exposure to Hong Kong, which had a negative overall impact on
performance. The decision to reinvest the proceeds in European stocks, however,
was strongly positive.
Was Australia affected by the fallout in Asia?
Absolutely. We had added to the Fund's Australian holdings in the first half of
the year expecting good performance due to robust growth and lower interest
rates. But when problems started to emerge in Southeast Asian markets, the
demand for commodities, which are a large part of the Australian economy,
started to decline. We reduced the Fund's Australian position from overweighted,
to neutral, to underweighted over the course of the second half of 1997. Some of
the Fund's Australian holdings, such as the National Australia Bank and News
Corp. have done well. But some of the Fund's resource holdings, such as Broken
Hill Proprietary, have done poorly. So, instead of a star performer, the
Australian market was up a modest 9.2% for the year in local currency terms.
How did you position the Fund to protect against currency risk?
Basically, we were bullish on the dollar, which proved correct throughout the
year. We did manage to gain a little bit through yen exposure in the first half
of 1997. But the strength of the U.S. dollar brought substantial risk to U.S.
investors in foreign securities. Recognizing this, most of the Fund's positions
were strongly hedged, which helped to protect investors from currency risk. Of
course, currency risk cannot be entirely eliminated. The Fund had some currency
exposure, which had a negative impact on performance, as virtually all foreign
currencies declined relative to the U.S. dollar in 1997.
Did the Fund have any exposure to Latin America?
No, it didn't. While Mexico and certain South American markets had excellent
returns, we preferred the strength and stability of Europe. As part of our
approach to invest in a diversified portfolio of developed countries with
high-quality stocks and shun excessive risk, we avoided emerging markets in
Central and South America entirely.
What do you see going forward?
The Asian situation is not going to go away quickly. But we will continue to
monitor the situation, because we believe that eventually there may be buying
opportunities in the stronger markets there. We still feel that Europe will
offer strong returns as long as interest rates and inflation remain low and
companies seek partners that can assist them with the challenges of European
Monetary Union. Overall, we think foreign equities will continue to offer
opportunities for investors and the Fund will continue to seek to provide
long-term growth of capital commensurate with an acceptable level of risk, with
current income as a secondary objective.
Shigemi Takagi
Portfolio Manager
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fund average annual total returns*
=====================================================================================
1 year Life of Fund through 12/31/97
<S> <C> <C>
Class A 4.52% 5.14%
Class B 3.78% 4.40%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund SEC returns*
=====================================================================================
1 year Life of Fund through 12/31/97
<S> <C> <C>
Class A -1.23% 3.35%
Class B -1.22% 3.85%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
=====================================================================================
1 year Life of Fund through 12/31/97
<S> <C> <C>
Class A 229 out of n/a
421 funds
Class B 243 out of 141 out of
421 funds 223 funds
Average Lipper
international fund 5.44% 5.92%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
=====================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.33 $0.6154 $0.0000
Class B $10.22 $0.5448 $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 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 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
12/31/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
[GRAPHIC]
13
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 12/31/97
- ---------------------------------------------------------------------------------------
HOLDING COUNTRY AMOUNT
=======================================================================================
<S> <C> <C>
Novartis S.A. Registered Switzerland $1,624,901
Toyota Motor Corp. Japan 1,466,981
Royal Dutch Petroleum Co. Netherlands 1,163,936
Glaxo Wellcome PLC United Kingdom 1,139,461
British Petroleum Co. PLC United Kingdom 1,103,728
Nestle S.A. Registered Switzerland 1,050,563
Allianz AG Registered Germany 1,010,765
Siemens AG Germany 998,043
Roche Holdings AG Genusscheine Switzerland 994,480
Ente Nazionale Idrocarburi S.p.A. Italy 896,963
=======================================================================================
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- ---------------------------------------------------------------------------------------
SECURITY COUNTRY AMOUNT OF PURCHASE
=======================================================================================
<S> <C> <C>
Novartis S.A. Registered Switzerland $1,293,978
Tenaga Nasional Berhad Malaysia 997,912
Nestle S.A. Registered Switzerland 841,897
Roche Holdings AG Genusscheine Switzerland 830,576
Fortis AG Belgium 779,450
Telecom Corp. of New Zealand Ltd. New Zealand 726,436
PetroFina, S.A. Belgium 673,941
Hutchison Whampoa, Ltd. Hong Kong 612,951
Electrabel, S.A. Belgium 596,207
Sun Hung Kai Properties, Ltd. Hong Kong 574,073
=======================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- ---------------------------------------------------------------------------------------
SECURITY COUNTRY AMOUNT OF SALE
=======================================================================================
<S> <C> <C>
Hutchison Whampoa, Ltd. Hong Kong $966,715
National Australia Bank, Ltd. Australia 962,008
Tenaga Nasional Berhad Malaysia 961,677
Cheung Kong (Holdings), Ltd. Hong Kong 940,180
Singapore Telecommunications, Ltd. Singapore 872,356
Sun Hung Kai Properties, Ltd. Hong Kong 857,616
Ente Nazionale Idrocarburi S.p.A. Italy 786,589
Hong Kong Telecommunications, Ltd. Hong Kong 741,798
Hang Seng Bank, Ltd. Hong Kong 614,807
Telefonica de Espana, S.A. Spain 613,882
=======================================================================================
</TABLE>
[GRAPHIC]
- ----------
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.
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (83.4%)+
AUSTRALIA (1.6%)
Amcor, Ltd.
(forest products & paper).................. 6,100 $ 26,828
Boral, Ltd.
(building materials & components).......... 9,500 24,017
Brambles Industries, Ltd.
(business & public services)............... 1,500 29,760
Broken Hill Proprietary Co., Ltd.
(energy sources)........................... 9,710 90,156
Coles Myer, Ltd. (merchandising).............. 7,268 34,901
CSR, Ltd. (multi-industry).................... 8,800 29,816
Foster's Brewing Group, Ltd.
(beverages & tobacco)...................... 15,280 29,071
National Australia Bank, Ltd.
(banking).................................. 6,973 97,364
News Corp., Ltd.
(broadcasting & publishing)................ 8,212 45,320
Pacific Dunlop, Ltd.
(multi-industry)........................... 8,900 18,847
Santos, Ltd. (energy sources)................. 4,800 19,766
Telstra Corp., Ltd.
(telecommunications) (a)................... 374,600 790,808
Westpac Banking Corp., Ltd.
(banking).................................. 7,600 48,608
WMC, Ltd. (metals-nonferrous)................. 8,600 29,979
-----------
1,315,241
-----------
AUSTRIA (1.9%)
Austrian Airlines Oesterreichische
Luftverkehrs AG
(transportation-airlines) (a).............. 2,350 49,969
Bank Austria AG (banking)..................... 4,000 202,358
Creditanstalt-Bankverein Stamm AG
(banking).................................. 2,300 147,263
EA-Generali AG (insurance).................... 550 144,294
Flughafen Wien AG
(transportation-airlines).................. 1,500 59,521
Oesterreichische Brau-Beteiligungs AG
(beverages & tobacco)...................... 950 47,384
OMV AG (energy sources)....................... 2,000 276,661
Verbundgesellschaft-Oesterreichische
Elektrizitatswirtschafts AG Class A
(utilities-electrical & gas)............... 2,350 248,916
Voest-Alpine Technologie AG
(machinery & engineering).................. 1,050 159,191
Wienerberger Baustoffindustrie AG
(building materials & components).......... 870 166,767
-----------
1,502,324
-----------
BELGIUM (2.9%)
Electrabel, S.A.
(utilities-electrical & gas)............... 1,770 409,424
Fortis AG (insurance)......................... 2,610 544,551
Generale de Banque, S.A.
(banking).................................. 700 304,661
Kredietbank N.V. (banking).................... 690 289,600
PetroFina, S.A. (energy sources).............. 1,140 420,776
Reunies Electrobel & Tractebel, S.A.
(multi-industry)........................... 790 68,873
Solvay, S.A. Class A (chemicals).............. 5,030 316,332
-----------
2,354,217
-----------
FRANCE (8.1%)
Alcatel Alsthom, S.A.
(electrical & electronics)................. 2,567 326,429
AXA-UAP, S.A. (insurance)..................... 5,228 404,709
Carrefour, S.A. (merchandising)............... 755 394,074
Compagnie de Saint Gobain, S.A.
(miscellaneous-materials &
commodities)............................... 2,103 298,887
Compagnie de Suez, S.A. (banking)............. 7 19
Compagnie Financiere de Paribas,
S.A. Class A (banking)..................... 2,386 207,431
Compagnie Generale des Eaux, S.A.
(business & public services)............... 3,597 502,252
Elf Aquitaine, S.A. (energy sources).......... 4,873 567,017
Eridania Beghin-Say, S.A.
(food & household products)................ 1,030 161,112
Groupe Danone, S.A.
(food & household products)................ 1,833 327,546
Havas, S.A.
(business & public services)............... 2,799 201,462
Lafarge, S.A.
(building materials & components).......... 1,550 101,747
L'Air Liquide, S.A. (chemicals)............... 3,321 520,021
L'Oreal, S.A.
(health & personal care)................... 1,127 441,181
LVMH (Moet Hennessy Louis Vuitton),
S.A. (beverages & tobacco)................. 1,820 302,231
Michelin (CGDE), S.A. Class B
(tire & rubber)............................ 2,769 139,466
Pernod-Ricard, S.A.
(beverages & tobacco)...................... 980 57,667
Pinault-Printemps-Redoute, S.A.
(building materials & components).......... 370 197,489
PSA Peugeot, S.A. (automobiles)............... 520 65,606
Rhone-Poulenc, S.A. Class A
(chemicals)................................ 3,813 170,879
Schneider, S.A.
(machinery & engineering).................. 2,987 162,263
Societe Generale, S.A. Class A
(banking).................................. 1,940 264,434
</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.
15
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
FRANCE (Continued)
Suez Lyonnaise des Eaux, S.A.
(multi-industry)........................... 1,683 $ 186,320
Thomson CSF, S.A.
(aerospace & military technology).......... 4,791 151,076
Total, S.A. Class B (energy sources).......... 3,424 372,801
-----------
6,524,119
-----------
GERMANY (10.3%)
Allianz AG Registered (insurance) ............ 3,900 1,010,765
BASF AG (chemicals) .......................... 16,100 570,829
Bayer AG (chemicals) ......................... 17,350 648,438
Daimler-Benz AG (automobiles) ................ 7,600 533,424
Deutsche Bank AG (banking) ................... 8,200 579,185
Deutsche Telekom AG
(telecommunications) ...................... 38,850 731,391
Dresdner Bank AG (banking) ................... 15,000 692,419
Karstadt AG (merchandising) .................. 200 68,308
Linde AG (machinery & engineering) ........... 550 335,865
Mannesmann AG (machinery &
engineering) .............................. 550 278,052
Muenchener Rueckversicherungs-
Gesellschaft AG Registered
(insurance) ............................... 340 128,206
Preussag AG (multi-industry) ................. 50 15,267
RWE AG (utilities-electrical & gas) .......... 6,400 343,484
Siemens AG (electrical &
electronics) .............................. 16,850 998,043
Thyssen AG (metals-steel) .................... 150 32,118
VEBA AG (utilities-electrical & gas) ......... 9,900 674,483
Viag AG (multi-industry) ..................... 750 404,189
Volkswagen AG (automobiles) .................. 400 225,134
-----------
8,269,600
-----------
ITALY (6.0%)
Assicurazioni Generali S.p.A.
(insurance)................................ 13,515 332,370
Banca Commerciale Italiana S.p.A.
(banking).................................. 75,000 261,068
Benetton Group S.p.A.
(textile & apparel)........................ 9,880 161,891
Credito Italiano S.p.A. (banking)............. 66,000 203,777
Edison S.p.A. (energy sources)................ 16,000 96,899
Ente Nazionale Idrocarburi S.p.A.
(energy sources)........................... 158,000 896,963
Fiat S.p.A. (automobiles)..................... 49,800 145,021
Fiat S.p.A. di Risp (automobiles)............. 28,600 47,349
Istituto Bancario San Paolo di
Torino S.p.A. (banking).................... 9,500 90,871
Istituto Nazionale delle Assicurazioni
S.p.A. (insurance)......................... 105,000 213,057
Italgas S.p.A.
(utilities-electrical & gas)............... 19,000 78,504
Mediobanca S.p.A.
(financial services)....................... 19,500 153,304
Montedison S.p.A.
(multi-industry)........................... 153,080 137,676
Olivetti Group S.p.A. (data
processing & reproduction) (a)............. 44,800 27,107
Parmalat Finanziaria S.p.A.
(food & household products)................ 94,000 134,606
Pirelli S.p.A.
(industrial components).................... 68,000 182,048
Riunione Adriatica di Sicurta S.p.A.
(insurance)................................ 14,325 140,673
Sirti S.p.A. (telecommunications)............. 11,500 69,646
Telecom Italia S.p.A.
(telecommunications)....................... 91,666 586,277
Telecom Italia S.p.A. di Risp
(telecommunications)....................... 25,000 110,370
Telecom Italia Mobile S.p.A.
(telecommunications)....................... 138,000 637,752
Telecom Italia Mobile S.p.A. di Risp
(telecommunications)....................... 41,000 116,726
-----------
4,823,955
-----------
JAPAN (14.3%)
Ajinomoto Co., Inc.
(food & household products) (d)............ 10,000 97,676
Asahi Glass Co., Ltd. (miscellaneous-
materials & components) (d)................ 27,000 128,747
Bank of Tokyo-Mitsubishi, Ltd.
(banking) (d).............................. 1,000 13,844
Bridgestone Corp.
(industrial components) (d)................ 1,000 21,766
Canon, Inc. (recreation & other
consumer goods) (d)........................ 23,000 537,755
Dai Nippon Printing Co., Ltd.
(business & public services) (d)........... 1,000 18,843
Daiei, Inc. (merchandising) (d)............... 14,000 58,144
Daiwa House Industry Co., Ltd.
(construction & housing) (d)............... 10,000 53,068
Denso Corp.
(industrial components) (d)................ 3,000 54,222
Fanuc, Ltd. (electronic components &
instruments) (d)........................... 4,000 151,974
Fuji Bank, Ltd. (banking) (d)................. 20,000 81,217
Fuji Photo Film, Ltd. (recreation &
other consumer goods) (d).................. 4,000 153,820
Fujitsu, Ltd. (data processing &
reproduction) (d).......................... 27,000 290,720
</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)
JAPAN (Continued)
Furukawa Electric Co., Ltd.
(industrial components) (d)................ 33,000 $ 141,876
Hankyu Corp.
(transportation-road & rail) (d)........... 16,000 75,187
Hitachi Corp., Ltd.
(electrical & electronics) (d)............. 83,000 593,668
Honda Motor Co., Ltd.
(automobiles) (d).......................... 9,000 331,559
Industrial Bank of Japan, Ltd.
(banking) (d).............................. 31,000 221,732
Itochu Corp. (wholesale &
international trade) (d)................... 62,000 97,753
Japan Airlines Co.
(transportation-airlines) (a)(d)........... 24,000 65,527
Japan Energy Corp.
(energy sources) (d)....................... 52,000 49,192
Kajima Corp.
(construction & housing) (d)............... 9,000 22,773
Kansai Electric Power Co., Inc.
(utilities-electrical & gas) (d)........... 7,000 118,980
Kao Corp.
(food & household products) (d)............ 32,000 462,691
Kawasaki Steel Corp.
(metals-steel) (d)......................... 6,000 8,214
Kinki Nippon Railway Co., Ltd.
(transportation-road & rail) (d)........... 23,000 123,294
Kirin Brewery Co., Ltd.
(beverages & tobacco) (d).................. 30,000 219,193
Komatsu, Ltd.
(machinery & engineering) (d).............. 27,000 136,015
Kubota Corp.
(machinery & engineering) (d).............. 1,000 2,646
Marubeni Corp. (wholesale &
international trade) (d)................... 58,000 102,152
Marui Co., Ltd. (merchandising) (d)........... 10,000 156,127
Matsushita Electric Industrial Co., Ltd.
(appliances & household
durables) (d).............................. 15,000 220,347
Mitsubishi Chemical Corp.
(chemicals) (d)............................ 6,687 9,617
Mitsubishi Corp.
(multi-industry) (d)....................... 24,000 190,121
Mitsubishi Electric Corp.
(electrical & electronics) (d)............. 56,000 143,852
Mitsubishi Estate Co., Ltd.
(construction & housing) (d)............... 5,000 54,606
Mitsubishi Heavy Industries, Ltd.
(machinery & engineering) (d).............. 113,000 472,781
Mitsubishi Trust & Banking Corp.
(financial services)....................... 18,000 181,354
Mitsui Engineering & Shipbuilding
Co., Ltd. (machinery &
engineering) (a)........................... 1,000 638
Mitsui Fudosan Co., Ltd.
(construction & housing)................... 7,000 67,835
Mitsui Trust & Banking Co., Ltd.
(financial services)....................... 7,000 13,621
Mitsukoshi, Ltd. (merchandising).............. 4,000 10,675
NEC Corp. (electrical & electronics).......... 23,000 245,881
Nippon Express Co., Ltd.
(transportation-road & rail)............... 9,000 44,992
Nippon Paper Industries Co.
(forest products & paper).................. 1,000 3,938
Nippon Steel Corp. (metals-steel)............. 10,000 14,844
Nippon Yusen Kabushiki Kaisha
(transportation-shipping).................. 1,000 2,753
Nissan Motor Co., Ltd.
(automobiles).............................. 54,000 224,270
NKK Corp. (metals-steel)...................... 96,000 76,787
Nomura Securities Co., Ltd.
(financial services)....................... 16,000 214,117
Obayashi Corp.
(construction & housing)................... 1,000 3,415
Oji Paper Co., Ltd.
(forest products & paper).................. 1,000 3,992
Osaka Gas Co., Ltd.
(utilities-electrical & gas)............... 6,000 13,751
Sakura Bank, Ltd. (banking)................... 30,000 86,062
Sankyo Co., Ltd.
(health & personal care)................... 4,000 90,754
Sanyo Electric Co., Ltd.
(appliances & household
durables).................................. 19,000 49,684
Sekisui Chemical Co., Ltd.
(chemicals)................................ 1,000 5,099
Sekisui House, Ltd.
(construction & housing)................... 1,000 6,453
Sharp Corp.
(appliances & household
durables).................................. 14,000 96,691
Shimizu Corp.
(construction & housing)................... 9,000 20,904
Shiseido Co., Ltd.
(health & personal care)................... 2,000 27,380
Sony Corp.
(appliances & household
durables).................................. 6,000 535,294
Sumitomo Bank, Ltd. (banking)................. 41,000 469,843
Sumitomo Chemical Co., Ltd.
(chemicals)................................ 1,000 2,307
Sumitomo Corp.
(wholesale & international
trade)..................................... 8,000 44,915
</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 International Equity Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
JAPAN (Continued)
Sumitomo Electric Industries
(industrial components).................... 1,000 $ 13,690
Sumitomo Marine & Fire Insurance Co.
(insurance)................................ 1,000 5,307
Sumitomo Metal Mining Co.
(metals-nonferrous)........................ 1,000 3,307
Taisei Corp. (construction & housing)......... 47,000 77,356
Taisho Pharmaceutical Co., Ltd.
(health & personal care)................... 1,000 25,611
Takeda Chemical Industries, Ltd.
(health & personal care)................... 19,000 543,600
Teijin, Ltd. (chemicals)...................... 1,000 2,100
Tobu Railway Co., Ltd.
(transportation-road & rail)............... 44,000 138,069
Tohoku Electric Power Co., Inc.
(utilities-electrical & gas)............... 2,000 30,456
Tokai Bank, Ltd. (banking).................... 24,000 112,227
Tokio Marine & Fire Insurance Co.
(insurance)................................ 1,000 11,383
Tokyo Dome Corp. (leisure & tourism).......... 7,000 46,731
Tokyo Electric Power Co., Inc.
(utilities-electrical & gas)............... 28,000 512,528
Tokyo Gas Co., Ltd.
(utilities-electrical & gas)............... 37,000 84,232
Tokyu Corp.
(transportation-road & rail)............... 10,000 38,763
Toppan Printing Co., Ltd.
(business & public services)............... 1,000 13,075
Tostem Corp.
(building materials &
components)................................ 1,000 10,767
Toto, Ltd.
(building materials &
components)................................ 1,000 6,414
Toyoda Automatic Loom Works, Ltd.
(machinery & engineering).................. 1,000 18,458
Toyota Motor Corp. (automobiles).............. 51,000 1,466,981
Yamanouchi Pharmaceutical Co., Ltd.
(health & personal care)................... 5,000 107,674
Yamazaki Baking Co., Ltd.
(food & household products)................ 1,000 9,768
-----------
11,518,445
-----------
NETHERLANDS (3.2%)
Elsevier N.V.
(broadcasting & publishing)................ 6,200 100,314
ING Groep N.V. (insurance).................... 10,607 446,836
Koninklijke PTT Nederland N.V.
(forest products & paper).................. 7,065 294,836
Philips Electronics N.V.
(appliances & household
durables).................................. 2,500 149,959
Royal Dutch Petroleum Co.
(energy sources)........................... 21,200 1,163,936
Unilever CVA N.V.
(food & household products)................ 4,800 295,971
Wolters Kluwer CVA N.V.
(broadcasting & publishing)................ 1,203 155,417
-----------
2,607,269
-----------
NEW ZEALAND (1.6%)
Brierley Investments Ltd.
(multi-industry) 237,000 169,266
Carter Holt Harvey Ltd.
(forest products & paper) 144,600 223,341
Fletcher Challenge Building
(building materials &
components) 30,200 61,726
Fletcher Challenge Energy
(energy sources)........................... 30,500 106,791
Fletcher Challenge Forest
(forest products & paper).................. 4,964 4,122
Fletcher Challenge Paper
(forest products & paper).................. 63,400 82,830
Telecom Corp. of New Zealand Ltd.
(telecommunications)....................... 136,200 660,360
-----------
1,308,436
-----------
NORWAY (2.1%)
Bergesen d.y. ASA Class A
(transportation-shipping).................. 7,500 177,017
Bergesen d.y. ASA Class B
(transportation-shipping).................. 1,400 32,663
Dyno Industrier ASA (chemicals)............... 1,200 23,114
Hafslund ASA Class A
(energy sources)........................... 2,700 16,481
Hafslund ASA Class B
(energy sources)........................... 1,700 8,117
Kvaerner ASA Class B
(machinery & engineering).................. 1,100 51,179
Norsk Hydro ASA (energy sources).............. 17,800 868,006
Norske Skogindustrier ASA Class A
(forest products & paper).................. 3,400 98,695
Nycomed Amersham PLC
(health & personal care) (a)............... 1,756 65,979
Nycomed Amersham PLC Class B
(health & personal care) (a)............... 1,106 40,206
Orkla ASA Class A (multi-industry)............ 3,800 327,312
-----------
1,708,769
-----------
</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)
PORTUGAL (1.3%)
Banco Comercial Portugues, S.A.
Registered (banking)....................... 7,300 $ 149,448
Banco Espirito Santo e Comercial de
Lisboa, S.A. Registered (banking).......... 4,400 131,073
Electricidade de Portugal, S.A.
(utilities-electrical & gas)............... 16,800 318,443
Jeronimo Martins & Filho SGPS, S.A.
(food & household products)................ 2,900 92,115
Portugal Telecom, S.A. Registered
(telecommunications)....................... 8,300 385,527
-----------
1,076,606
-----------
SPAIN (4.6%)
Acerinox, S.A. (metals-steel) 406 60,121
Autopistas Concesionares Espanola,
S.A. (business & public services) 8,340 111,900
Banco de Bilbao Vizcaya, S.A.
Registered (banking) 16,980 549,231
Banco de Central Hispanoamericano,
S.A. (banking)............................. 8,420 204,954
Banco de Santander, S.A. (banking)............ 11,990 400,412
Corporacion Bancaria de Espana, S.A.
(banking).................................. 3,240 197,058
Corporacion Mapfre, S.A.
(insurance)................................ 2,060 54,603
Endesa, S.A.
(utilities-electrical & gas)............... 26,090 463,032
Fomento de Construcciones y
Contratas, S.A.
(construction & housing)................... 4,560 173,525
Gas Natural SDG, S.A.
(utilities-electrical & gas)............... 3,770 195,406
Iberdrola, S.A.
(utilities-electrical & gas)............... 23,390 307,691
Repsol, S.A. (energy sources)................. 8,740 372,731
Telefonica de Espana, S.A.
(telecommunications)....................... 22,340 637,592
-----------
3,728,256
-----------
SWITZERLAND (7.5%)
Credit Suisse Group Registered
(banking).................................. 3,200 495,835
Nestle S.A. Registered
(food & household products)................ 700 1,050,563
Novartis S.A. Registered
(health & personal care)................... 1,000 1,624,901
Roche Holdings AG Genusscheine
(health & personal care)................... 100 994,480
Schweizerische Bankverein Registered
(banking) (a).............................. 1,500 466,902
Schweizerische Rueckversicherungs
Gesellschaft Registered (insurance)........ 200 374,618
UBS-Union Bank of Switzerland Bearer
(banking).................................. 400 579,205
Zurich Versicherungs Gesellschaft
Registered (insurance)..................... 1,000 477,186
-----------
6,063,690
-----------
UNITED KINGDOM (18.0%)
Abbey National PLC (banking).................. 12,970 223,866
Barclays PLC (banking)........................ 26,797 712,084
Bass PLC (beverages & tobacco)................ 22,850 351,912
B.A.T Industries PLC
(beverages & tobacco)...................... 20,823 189,984
BG PLC (energy sources)....................... 95,030 428,434
BG PLC Class B (energy sources)............... 62,610 31,421
BOC Group PLC (chemicals)..................... 21,090 349,271
Boots Co. PLC (merchandising)................. 22,133 321,568
British Airways PLC
(transportation-airlines).................. 23,732 232,926
British Petroleum Co. PLC
(energy sources)........................... 83,797 1,103,728
British Telecommunications PLC
(telecommunications)....................... 112,720 889,791
BTR PLC (multi-industry)...................... 101,530 311,563
Cable & Wireless PLC
(telecommunications)....................... 14,447 127,057
Centrica PLC (energy sources) ................ 35,310 51,127
Commercial Union PLC (insurance).............. 32,766 484,141
Diageo PLC (beverages & tobacco).............. 74,072 680,690
EMI Group PLC (recreation & other
consumer goods)............................ 3,270 28,207
Energy Group PLC (energy sources)............. 6,283 69,730
General Electric Co. PLC
(electrical & electronics)................. 75,486 495,578
GKN PLC (machinery & engineering)............. 10,299 211,317
Glaxo Wellcome PLC
(health & personal care)................... 48,158 1,139,461
Granada Group PLC
(leisure & tourism)........................ 21,770 335,637
Great Universal Stores PLC (The)
(merchandising)............................ 12,940 159,686
Hanson PLC (multi-industry)................... 7,854 35,215
HSBC Holdings PLC
(financial services)....................... 10,013 258,829
Imperial Chemical Industries PLC
(chemicals)................................ 18,590 287,528
Imperial Tobacco Group PLC
(beverages & tobacco)...................... 6,283 39,698
Kingfisher PLC (merchandising)................ 24,417 340,691
Lloyds TSB Group PLC (banking)................ 62,406 807,089
</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 International Equity Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
COMMON STOCKS (Continued)
UNITED KINGDOM (Continued)
Marks & Spencer PLC
(merchandising)............................ 50,396 $ 496,701
MEPC PLC (real estate)........................ 22,900 191,978
National Power PLC
(utilities-electrical & gas)............... 30,620 303,553
Peninsular & Oriental Steam
Navigation Co. Deferred Stock (The)
(transportation-shipping).................. 8,611 98,401
Prudential Corp. PLC (insurance).............. 18,880 219,476
Rank Group PLC (leisure & tourism)............ 9,710 55,719
Reed International PLC
(broadcasting & publishing)................ 60,540 590,205
Reuters Holdings PLC
(broadcasting & publishing)................ 10,840 119,235
Rio Tinto PLC Registered
(metals-nonferrous)........................ 26,460 307,156
RMC Group PLC (building materials &
components)................................ 19,500 275,292
Sainsbury (J.) PLC (merchandising)............ 34,475 289,015
Scottish Power PLC
(utilities-electrical & gas)............... 23,010 203,123
Thorn PLC
(appliances & household
durables).................................. 1,405 3,629
Thorn PLC Class B (appliances &
household durables) (a).................... 1,640 513
Unilever PLC
(food & household products)................ 34,920 299,641
Vodafone Group PLC
(multi-industry)........................... 52,247 381,265
-----------
14,533,131
-----------
Total Common Stocks
(Cost $63,504,151)......................... 67,334,058
-----------
PREFERRED STOCK (0.1%)
AUSTRIA (0.1%)
Creditanstalt-Bankverein Vorzug AG
AS 12.00
(banking) (e)(h) .......................... 1,450 81,149
-----------
Total Preferred Stock
(Cost $85,241)............................. 81,149
-----------
WARRANTS (0.0%) (b)
FRANCE (0.0%) (b)
Compagnie Generale des Eaux, S.A.
Call Warrants
Strike price FF 900
Expire 5/2/01
(business & public services) (a)(h) 3,597 2,445
-----------
Total Warrants................................ 2,445
-----------
<CAPTION>
Principal
Amount
==========
<S> <C> <C>
SHORT-TERM INVESTMENTS (13.4%)
COMMERCIAL PAPER (13.4%)
UNITED STATES (13.4%)
Ford Motor Credit Co.
6.25%, due 1/2/98
(financial services)....................... $3,600,000 3,599,373
-----------
Marsh & McLennan Cos.
6.05%, due 1/5/98
(insurance) (c)............................ 3,600,000 3,597,581
Merrill Lynch & Co. Inc.
6.00%, due 1/2/98
(financial services)....................... 3,600,000 3,599,399
-----------
Total Short-Term Investments
(Cost $10,796,353)......................... 10,796,353
-----------
Total Investments
(Cost $74,385,745) (f)..................... 96.9% 78,214,005(g)
Cash and Other Assets,
Less Liabilities........................... 3.1 2,478,630
========== ===========
Net Assets.................................... 100.0% $80,692,635
========== ===========
</TABLE>
- ----------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Segregated as collateral for forward foreign currency contracts.
(e) Dividend rate shown represents the most recent annual payment.
(f) The cost for Federal income tax purposes is $75,159,880.
(g) At December 31, 1997 net unrealized appreciation for securities was
$3,054,125, 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 $11,164,238 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $8,110,113.
(h) AS--Austrian Schilling
FF--French Franc
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments continued
The table below sets forth the diversification of International Equity Fund
investments by industry.
<TABLE>
<CAPTION>
Value Percent +
==========================
<S> <C> <C>
INDUSTRY DIVERSIFICATION
Aerospace & Military Technology............... $ 151,076 0.2%
Appliances & Household Durables............... 1,056,117 1.3
Automobiles................................... 3,039,344 3.8
Banking ...................................... 9,372,286 11.6
Beverages & Tobacco........................... 1,917,832 2.4
Broadcasting & Publishing..................... 1,010,492 1.3
Building Materials & Components............... 844,220 1.1
Business & Public Services.................... 879,736 1.1
Chemicals..................................... 2,905,535 3.6
Construction & Housing........................ 479,935 0.6
Data Processing & Reproduction................ 317,826 0.4
Electrical & Electronics...................... 2,803,452 3.5
Electronic Components & Instruments........... 151,974 0.2
Energy Sources................................ 7,010,731 8.7
Financial Services............................ 8,019,997 9.9
Food & Household Products..................... 2,931,688 3.6
Forest Products & Paper....................... 738,581 0.9
Health & Personal Care........................ 5,101,227 6.3
Industrial Components......................... 413,601 0.5
Insurance..................................... 8,589,758 10.6
Leisure & Tourism............................. 438,087 0.5
Machinery & Engineering....................... 1,828,405 2.3
Merchandising................................. 2,329,891 2.9
Metals-Nonferrous............................. 340,442 0.4
Metals-Steel.................................. 192,084 0.2
Miscellaneous-Materials &
Commodities................................ 298,887 0.4
Miscellaneous-Materials &
Components................................. 128,747 0.2
Multi-Industry................................ 2,275,730 2.8
Real Estate................................... 191,978 0.2
Recreation & Other Consumer Goods............. 719,782 0.9
Telecommunications............................ 5,743,298 7.1
Textile & Apparel............................. 161,891 0.2
Tire & Rubber................................. 139,466 0.2
Transportation-Airlines....................... 407,943 0.5
Transportation-Road & Rail.................... 420,305 0.5
Transportation-Shipping....................... 310,834 0.4
Utilities-Electrical & Gas.................... 4,306,007 5.3
Wholesale & International Trade............... 244,820 0.3
----------- -----
78,214,005 96.9
Cash and Other Assets,
Less Liabilities........................... 2,478,630 3.1
----------- -----
Net Assets.................................... $80,692,635 100.0%
=========== =====
</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.
21
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $74,385,745) ................................................. $ 78,214,005
Cash denominated in foreign currencies (identified cost $95,490) ................................................. 99,615
Cash ............................................................................................................. 325,106
Receivables:
Investment securities sold ..................................................................................... 2,253,676
Dividends and interest ......................................................................................... 180,737
Fund shares sold ............................................................................................... 114,549
Unrealized appreciation on forward foreign currency contracts .................................................... 785,585
Unamortized organization expense ................................................................................. 13,604
------------
Total assets .................................................................................................. 81,986,877
------------
LIABILITIES:
Payables:
Fund shares redeemed ........................................................................................... 483,387
MainStay Management ............................................................................................ 70,813
NYLIFE Distributors ............................................................................................ 57,029
Transfer agent ................................................................................................. 34,818
Custodian ...................................................................................................... 18,226
Trustees ....................................................................................................... 563
Accrued expenses ................................................................................................. 90,436
Unrealized depreciation on forward foreign currency contracts .................................................... 538,970
------------
Total liabilities ............................................................................................. 1,294,242
------------
Net assets ....................................................................................................... $ 80,692,635
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ........................................................................................................ $ 16,893
Class B ........................................................................................................ 61,855
Additional paid-in capital ....................................................................................... 79,685,434
Accumulated distribution in excess of net investment income ...................................................... (67,560)
Accumulated net realized loss on investments ..................................................................... (3,074,800)
Net unrealized appreciation on investments ....................................................................... 3,828,260
Net unrealized appreciation on translation of assets and liabilities in
foreign currencies and forward foreign
currency contracts ............................................................................................. 242,553
------------
Net assets ....................................................................................................... $ 80,692,635
============
CLASS A
Net assets applicable to outstanding shares ...................................................................... $ 17,451,966
============
Shares of beneficial interest outstanding ........................................................................ 1,689,318
============
Net asset value per share outstanding ............................................................................ $ 10.33
Maximum sales charge (5.50% of offering price) ................................................................... 0.60
------------
Maximum offering price per share outstanding ..................................................................... $ 10.93
============
CLASS B
Net assets applicable to outstanding shares ...................................................................... $ 63,240,669
============
Shares of beneficial interest outstanding ........................................................................ 6,185,472
============
Net asset value and offering price per share outstanding ......................................................... $ 10.22
============
</TABLE>
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 Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .................................................................................... $ 1,401,417
Interest ......................................................................................... 331,495
-----------
Total income .................................................................................... 1,732,912
-----------
Expenses:
Distribution--Class B ............................................................................ 414,965
Advisory ......................................................................................... 384,003
Transfer agent ................................................................................... 282,556
Administration ................................................................................... 256,002
Service .......................................................................................... 196,459
Management ....................................................................................... 145,829
Shareholder communication ........................................................................ 98,271
Custodian ........................................................................................ 62,167
Registration ..................................................................................... 44,898
Professional ..................................................................................... 36,002
Recordkeeping .................................................................................... 30,143
Amortization of organization expense ............................................................. 8,012
Trustees ......................................................................................... 2,074
Miscellaneous .................................................................................... 36,025
-----------
Total expenses .................................................................................. 1,997,406
-----------
Net investment loss ................................................................................ (264,494)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ............................................................................ (2,546,199)
Foreign currency transactions .................................................................... 5,603,167
-----------
Net realized gain on investments and foreign currency transactions ................................. 3,056,968
-----------
Net change in unrealized appreciation on investments:
Security transactions ............................................................................ 2,314,070
Translation of assets and liabilities in foreign currencies and
forward foreign currency contracts ............................................................ (2,399,668)
-----------
Net unrealized loss on investments and foreign currencies .......................................... (85,598)
-----------
Net realized and unrealized gain on investments and foreign currency transactions .................. 2,971,370
-----------
Net increase in net assets resulting from operations ............................................... $ 2,706,876
===========
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $202,602.
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
23
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .......................................................................... $ (264,494) $ (361,140)
Net realized loss on investments ............................................................. (2,546,199) (130,336)
Net realized gain on foreign currency transactions ........................................... 5,603,167 2,153,275
Net change in unrealized appreciation on investments ......................................... 2,314,070 656,008
Net change in unrealized appreciation on translation of assets and liabilities in
foreign currencies and forward foreign currency contracts ................................... (2,399,668) 2,501,469
------------ ------------
Net increase in net assets resulting from operations ......................................... 2,706,876 4,819,276
------------ ------------
Distributions to shareholders:
From net realized gain on foreign currency transactions:
Class A ..................................................................................... (999,553) (844,610)
Class B ..................................................................................... (3,204,542) (2,225,095)
In excess of net realized gain on investments:
Class A ..................................................................................... -- (45,418)
Class B ..................................................................................... -- (135,451)
------------ ------------
Total distributions to shareholders ....................................................... (4,204,095) (3,250,574)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ..................................................................................... 7,554,344 6,802,966
Class B ..................................................................................... 35,130,288 33,209,658
Net asset value of shares issued to shareholders in reinvestment of distributions:
Class A ..................................................................................... 609,945 465,182
Class B ..................................................................................... 2,990,896 2,239,545
------------ ------------
46,285,473 42,717,351
Cost of shares redeemed:
Class A ..................................................................................... (7,941,595) (3,191,297)
Class B ..................................................................................... (26,338,394) (9,106,589)
------------ ------------
Increase in net assets derived from capital share transactions ............................ 12,005,484 30,419,465
------------ ------------
Net increase in net assets ................................................................ 10,508,265 31,988,167
NET ASSETS:
Beginning of year .............................................................................. 70,184,370 38,196,203
------------ ------------
End of year .................................................................................... $ 80,692,635 $ 70,184,370
============ ============
Accumulated distribution in excess of net investment income .................................... $ (67,560) $ (1,268,552)
============ ============
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
24
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
--------------
Class A Class B Class A Class B Class A Class B September 13,*
---------- ---------- ---------- ---------- ---------- ---------- through
Year ended Year ended Year ended December 31,
December 31, 1997 December 31, 1996 December 31, 1995 1994
------------------------- ------------------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $10.48 $10.38 $10.05 $9.97 $9.77 $9.77 $10.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment income
(loss) ...................... 0.80 0.72 0.29 0.24 0.27 0.26 (0.04)
Net realized and
unrealized gain (loss)
on investments .............. 0.03 0.03 0.07 0.07 0.10 0.07 (0.16)
Net realized and
unrealized gain (loss)
on foreign currency
transactions ................ (0.36) (0.37) 0.62 0.59 0.14 0.09 (0.03)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .................. 0.47 0.38 0.98 0.90 0.51 0.42 (0.23)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Less distributions:
From net realized gain on
foreign currency
transactions ................ (0.62) (0.54) (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 distributions ........... (0.62) (0.54) (0.55) (0.49) (0.23) (0.22) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end
of period ................... $10.33 $10.22 $10.48 $10.38 $10.05 $9.97 $9.77
========== ========== ========== ========== ========== ========== ==========
Total investment return (a) ... 4.52% 3.78% 9.78% 9.05% 5.25% 4.27% (2.30%)
Ratios (to average net assets)/
Supplemental Data:
Net investment
income (loss) .......... 0.19% (0.49%) (0.1%) (0.8%) (0.2%) (1.0%) (1.6%)+
Expenses ................. 2.01% 2.69% 2.0% 2.7% 2.2% 3.0% 3.9%+
Portfolio turnover rate ....... 43% 43% 19% 19% 25% 25% 9%
Average commission
rate paid ................... $0.0281 $0.0281 $0.0374 $0.0374 (b) (b) (b)
Net assets at end of
period (in 000's) ........... $17,452 $63,241 $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.
25
<PAGE>
MainStay International Equity Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the 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
26
<PAGE>
Notes to Financial Statements
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 Exchange
will not be reflected in the Fund's calculation of net asset value unless the
Sub-Adviser believes that the particular event would materially affect net asset
value, in which case an adjustment would be made.
Forward Foreign Currency Contracts. A forward foreign 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
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
(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, 1997:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
------------------- ------------------ --------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts
- -------------------------------
Australian Dollar vs. U.S. Dollar, expiring 2/3/98......... A$ 740,000 $ 502,257 $ 19,697
Deutsche Mark vs. Pound Sterling, expiring 1/14/98......... DM 11,712,444 (pound) 4,180,000 353,632
Deutsche Mark vs. Swedish Krone, expiring 3/16/98.......... DM 3,787,395 SK 16,610,000 (17,868)
Deutsche Mark vs. U.S. Dollar, expiring 1/2/98--1/20/98.... DM 22,368,358 $ 12,820,000 372,732
French Franc vs. Deutsche Mark, expiring 2/18/98........... FF 4,565,000 DM 1,363,175 (696)
Italian Lira vs. Deutsche Mark, expiring 1/12/98........... IL 2,485,000,000 DM 2,523,355 (2,142)
New Zealand Dollar vs. U.S. Dollar, expiring 1/26/98....... N$ 2,445,000 $ 1,411,743 (4,729)
Norwegian Krone vs. Deutsche Mark, expiring 1/30/98........ NK 8,655,000 DM 2,127,581 9,238
Pound Sterling vs. Deutsche Mark, expiring 1/14/98......... (pound) 750,000 DM 2,219,430 2,183
Pound Sterling vs. Deutsche Mark, expiring 1/15/98......... (pound) 1,618,000 DM 4,669,872 (60,782)
Spanish Peseta vs. Deutsche Mark, expiring 1/12/98......... SP 123,000,000 DM 1,452,527 1,152
Spanish Peseta vs. U.S. Dollar, expiring 1/12/98........... SP 54,373,000 $ 374,986 18,136
Swiss Franc vs. Deutsche Mark, expiring 1/20/98............ CF 2,440,000 DM 3,027,671 8,815
</TABLE>
27
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
------------------- ------------------ --------------
<S> <C> <C> <C>
Foreign Currency Buy Contracts
- ------------------------------
Australian Dollar vs. U.S. Dollar, expiring 2/3/98 ........ A$ 740,000 $ 496,399 $(13,840)
Deutsche Mark vs. U.S. Dollar, expiring 1/2/98--1/20/98 ... DM 24,817,782 $ 14,249,177 (438,913)
--------
Net unrealized appreciation on forward foreign currency contracts $246,615
========
</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 $5,603,167 and $66,414 have been reclassified
from accumulated undistributed net realized gain on foreign currency
transactions and accumulated net realized loss 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. Premiums on securities
purchased are not amortized for this 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 direct allocations of expenses can 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.
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:
28
<PAGE>
Notes to Financial Statements continued
(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,
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 foreign currency denominated assets
and liabilities other than investments 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.
Foreign currency held at December 31, 1997:
<TABLE>
<CAPTION>
Currency Cost Value
- -------------------------------------------------- ------- -------
<S> <C> <C>
Australian Dollar A$ 17,142 $11,291 $11,169
Deutsche Mark DM 3,747 2,113 2,083
French Franc FF 8,601 1,446 1,430
Japanese Yen (Y) 6,849,570 53,078 57,883
Netherland Guilder NG 3,024 1,517 1,491
New Zealand Dollar N$ 22,342 13,187 12,974
Pound Sterling (pound) 1,237 2,050 2,036
Spanish Peseta SP 1,607,798 10,808 10,549
------- -------
$95,490 $99,615
======= =======
</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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay
29
<PAGE>
MainStay International Equity Fund
Management, an indirect wholly owned subsidiary of New York Life Insurance
Company ("New York Life"), administers the Fund's business affairs and has
investment advisory responsibilities. MainStay Management has engaged the
services of MacKay-Shields Financial Corporation ("MacKay-Shields") as
sub-adviser of the Fund. MacKay-Shields, a registered investment adviser and
indirect wholly owned subsidiary of New York Life, is responsible for the
day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 1.00%.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.60% of
the average daily net assets of the Fund.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as the administrator. MacKay-Shields
and NYLIFE Distributors each were paid a monthly fee at an annual rate of the
Fund's average daily net assets of 0.60% and 0.40%, respectively. As described
above, MainStay Management is currently paid a fee at a rate equal to the
aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997. For the period January 1, 1997, through October 26, 1997,
MacKay-Shields and NYLIFE Distributors earned fees of $384,003 and $256,002,
respectively. For the period October 27, 1997, through December 31, 1997,
MainStay Management earned $145,829.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
30
<PAGE>
Notes to Financial Statements continued
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $12,009 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$88,010 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$141,832 and $10,194, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors 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, 1997, NYLIFE Distributors beneficially held Class A
shares of the Fund with a net asset value of $6,457,308, which represents 37% of
the net assets of Class A shares at year-end.
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $2,573 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $5,460 and $24,683 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Federal Income Tax:
At December 31, 1997, for Federal income tax purposes, capital loss
carryforwards of $33,129, net of losses of $2,932,489 which have been deferred
for Federal income tax purposes, are available to the extent provided by
regulations to offset future realized gains of the Fund through 2005. 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.
31
<PAGE>
MainStay International Equity Fund
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $31,954 and $29,434, respectively.
Note 6--Line of Credit:
The Fund and certain affiliated funds maintain a line of credit with the
Custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------ -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ........................................ 707 3,242 644 3,197
Shares issued in reinvestment of distributions ..... 59 296 45 217
------ ------ ------ ------
766 3,538 689 3,414
Shares redeemed .................................... (745) (2,429) (301) (878)
------ ------ ------ ------
Net increase ....................................... 21 1,109 388 2,536
====== ====== ====== ======
</TABLE>
32
<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 fifteen funds constituting The MainStay Funds, hereafter referred to
as the "Fund") at December 31, 1997, 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, 1997 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, 1998
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 showing risk/ of companies in expanding markets and are willing to accept a higher
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 showing the makeup and returns of the participate in the growth potential
risk/reward S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
INTERNATIONAL EQUITY FUND graph showing international stock markets with of international equities or want to
risk/reward an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/reward a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/reward convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/reward opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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>
<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 showing consistent with safety of principal current income and safety of principal
risk/reward primarily from U.S. government
of Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/reward fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph showing preservation of capital, and competitive yields on cash you're plan-
risk/reward liquidity, with free checkwriting** ning to spend or invest in the near future
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/reward a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph showing from both federal and California keep more of what you earn by invest-
risk/reward income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph showing from federal, New York State, and and want to keep more of what you earn
risk/reward New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks high current income You're in a high federal income tax
Tax Free Bond Fund risk/reward exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============--------------------------
International Equity Fund
-------------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved. MSAN11-02/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Money Market Fund Highlights 5
Portfolio Management Discussion and Analysis 6
Yields & Lipper Rankings 9
Portfolio of Investments 10
Financial Statements 12
Notes to Financial Statements 16
Report of Independent Accountants 19
The MainStay Funds 20
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Money Market Fund, and MainStay Management, Inc.; approve a Subadvisory
Agreement between MainStay Management, Inc., on behalf of the MainStay Money
Market Fund, and MacKay Shields Financial Corporation; eliminate or revise
certain fundamental investment restrictions including eliminating certain
state-imposed fundamental investment restrictions and eliminating or revising
fundamental restrictions pertaining to issuer concentration, borrowing money,
industry concentration, and issuing senior securities; and ratify the selection
of Price Waterhouse LLP as independent certified public accountants of the
Trust.
A summary of the proposals and the voting by shareholders of the MainStay Money
Market Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- ----------- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 193,370,818 11,635,617 Passed
Nancy Maginnes Kissinger.................................................. 193,323,429 11,683,006 Passed
Donald E. Nickelson....................................................... 193,370,818 11,635,617 Passed
Richard S. Trutanic....................................................... 193,370,818 11,635,617 Passed
Harry G. Hohn............................................................. 193,370,818 11,635,617 Passed
Terry L. Lierman.......................................................... 193,370,818 11,635,617 Passed
Donald K. Ross............................................................ 193,370,818 11,635,617 Passed
Walter W. Ubl............................................................. 193,370,818 11,635,617 Passed
Alice T. Kane............................................................. 193,375,252 11,631,183 Passed
John B. McGuckian......................................................... 193,370,818 11,635,617 Passed
Stephen C. Roussin........................................................ 193,370,818 11,635,617 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 185,777,554.51 Against - 4,776,866.50 Abstain - 14,452,012.78 Result - Passed
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 185,209,434.26 Against - 4,902,777.78 Abstain - 14,894,220.75 Result - Passed
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 177,370,423.05 Against - 6,500,720.66 Abstain - 15,997,267.08 Broker Non-Vote - 5,138,024.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- -------------- ------------ ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 177,265,219.82 6,605,923.89 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 177,178,465.63 6,692,678.08 Passed
A3--Real Estate Limited Partnership Interests.............................. 177,225,236.73 6,645,906.98 Passed
C1--Issuer Concentration................................................... 177,259,509.80 6,611,633.91 Passed
C2--Borrowing Money........................................................ 177,193,657.66 6,677,486.05 Passed
C3--Industry Concentration................................................. 177,268,889.82 6,602,253.89 Passed
C4--Issuing Senior Securities.............................................. 177,295,136.88 6,576,006.83 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 190,069,298.94 Against - 2,458,998.41 Abstain - 12,478,134.44 Result - Passed
</TABLE>
4
<PAGE>
MainStay Money Market Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] Strong economic growth led to a Federal Reserve Board (Fed) move to raise
interest rates 25 basis points at the end of March. But with the crisis in
Asia, expectations for growth slowing in the U.S. and inflation under
control, the Fed took no further action.
[ ] Throughout the year, the short-term markets were primarily driven by
investors' expectations of interest rate and inflation movements.
[ ] Longer-maturity money-market securities provided higher yields than
short-dated issues throughout most of the year.
[ ] Volatility was minimal throughout the year, but upsets in Asian markets in
the third and fourth quarters of 1997 caused a flight to high-quality
securities.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] For the 7-day period ended 12/31/97, the MainStay Money Market Fund
provided an effective yield of 5.20% and a current yield of 5.07% for both
Class A and Class B shares.
[ ] The Fund benefited from a short average maturity in the first quarter and a
neutral to long average maturity throughout the rest of the year.
[ ] Both share classes outperformed the average Lipper* money market fund for
the year ended 12/31/97.
[ ] Class B shares outperformed the average Lipper peer fund for the 5-year and
10-year periods ended 12/31/97.
================================================================================
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Tighten/Ease
- ------------
When the Federal Reserve Board moves to raise interest rates it is said to be
"tightening" or making borrowing more expensive. When it moves to lower rates,
it is said to be "easing" or making borrowing more affordable.
Average maturity
- ----------------
Maturity is the termination date of an obligation or the length of time an
income security is required to pay interest. Average maturity reflects the
average of the maturities of all fixed-income securities in a portfolio.
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Money Market Fund Team
MONEY MARKET FUND TEAM
Edward Munshower & Jessica Terc
Perhaps the single most important influence on the money market in 1997 was
investors' expectations about the direction of interest rates and inflation.
Seeking to slow rapid economic growth and ward off inflation, the Federal
Reserve Board moved to raise interest rates 25 basis points at the end of March.
While market participants speculated on whether the Federal Reserve Board would
tighten again, no other moves materialized throughout the year. As a result,
funds with a short average maturity in the first quarter and a longer average
maturity thereafter were in the best position to benefit from interest rate
opportunities.
In the third and fourth quarters, financial markets throughout Asia experienced
severe setbacks, catching many investors off guard. The resulting flight to
quality increased demand for top-tier securities.
Given this context, how did the MainStay Money Market Fund do in 1997?
For the 7-day period ended 12/31/97, the MainStay Money Market Fund provided an
effective yield of 5.20% and a current yield of 5.07% for both Class A and Class
B shares. For the 1-year period, Class A and Class B shares outperformed the
average Lipper* money market fund. Class B shares outperformed the average
Lipper peer fund over the 5- and 10-year periods ended 12/31/97.
How did the Fund manage to do so well?
We used a variety of tools to accomplish our objective. Of course, one of the
most important determinants of performance in the MainStay Money Market Fund is
average maturity. In the first quarter, we saw no yield advantage to lengthening
the Fund's maturity and stayed relatively short. That proved beneficial when the
Federal Reserve Board moved to raise interest rates in March. After that, we
lengthened our average maturity and kept it neutral to long throughout the rest
of the year.
Why did you lengthen maturities?
Despite widespread speculation about whether the Federal Reserve Board would
6
<PAGE>
tighten interest rates again, we kept our eye on the economic data and saw no
conclusive evidence that they would have to take additional action. We kept the
Fund longer than what we took to be the average number of days to maturity in
our peer group.
How much longer did you go?
Once again, it varied. Rates were not absolutely stable, so our days to maturity
varied. While the average fund may have varied from 40 to 60 days to maturity,
we tended to hold in a range from 45 to 75 days. At times, we believe we were up
to 20 days longer than the average fund, which, as it happens, was always
positive for the Fund's performance.
How did you seek to enhance yields throughout the year?
During the first half of 1997, we used our extensive research to seek out
securities with features that could offer potential yield advantages. We found
asset-backed securities, callable certificates of deposit, and Yankee
issues--dollar denominated securities issued in the United States by foreign
banks and corporations--attractive. Later in the year, however, we reduced our
positions in most of these areas.
Why did you cut back?
Yankee issues simply became less attractive. Callable CDs became less popular as
the market became more volatile and issuance declined, so in the second and
third quarters we simply let our issues mature. We've continued to invest in
some top-tier asset-backed securities, which may offer yield opportunities and
are often backed by a letter of credit from a leading bank. We continue to hold
a number of Yankee issues.
Does the Fund hold only domestic securities?
No. The Fund has a global exposure, including European, South American, and
Mexican issuers backed by European banks. We're focusing on top-tier credits and
dollar denominated issues. We didn't own anything in Thailand, Malaysia, or
Indonesia. We don't take any currency risk in the Fund. Though the Fund is
allowed to hold some split issues and second-tier credits, at year end the Fund
was invested only in top-tier securities.
How do investors benefit from global diversification?
We seek broad diversification within the range of issues and maturities that are
available to us. Using top-tier securities from around the world helps reduce
our exposure to the risks of any single issuer or market. At the same time, it
helps us pursue higher yields among top-quality securities with a high degree of
liquidity.
What do you anticipate in 1998?
Given the dynamics of the Asian crisis, consensus on Federal Reserve Board
policy changes rapidly. However, we believe U.S. monetary policy will focus on
the U.S. economy, not on bailing out of Asia. We believe the Fund is well
positioned with a broad spectrum of maturities, a wide range
[GRAPHIC]
Flight to quality
- -----------------
When investors in general move to improve the credit quality of the securities
they own, either because of credit concerns or a lack of yield advantages among
lower rated securities.
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 percentage of the fund's current price per share.
Asset-backed securities
- -----------------------
Securities backed by loan paper or an anticipated income stream from the sale of
merchandise or services. The securities are generally originated by banks,
credit card companies, or other providers of credit and often "enhanced" by a
bank letter of credit or by insurance from an institution other than the issuer.
7
<PAGE>
[GRAPHIC]
Split issues
- --------------------------------------------------------------------------------
Securities rated top tier by one credit rating agency and second tier by
another.
Past performance is no guarantee of future results.
of issuers, and a relatively long average maturity that will benefit investors
if rates continue to decline. Whatever happens, we'll continue to focus on high
quality, as we seek as high a level of current income as is considered
consistent with the preservation of capital and liquidity.
Edward Munshower
Jessica Terc
Portfolio Managers
8
<PAGE>
Yields & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC yields*
================================================================================
7-day effective yield 7-day current yield
<S> <C> <C>
Class A 5.20% 5.07%
Class B 5.20% 5.07%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 118 out of n/a n/a n/a
303 funds
Class B 118 out of 77 out of 46 out of 45 out of
303 funds 183 funds 110 funds 98 funds
Average Lipper
money market
fund 4.90% 4.31% 5.40% 5.48%
================================================================================
</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 performance figure reflects
certain fee waivers and/or expense limitations, without which the
performance figure would have been 4.77%. The current yield is based on the
latest 7-day period ending 12/31/97. The fee waivers and/or expense
limitations are voluntary and 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 12/31/97.
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 Money Market Fund
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
===================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (100.2%)+
CERTIFICATES OF DEPOSIT (5.3%)
Australia New Zealand Bank Ltd.
5.72%, due 5/11/98 (c)..................... $ 9,000,000 $ 8,998,047
Bayerische Vereinsbank AG New York
6.19%, due 9/4/98 (b)(c)................... 13,000,000 13,000,000
------------
21,998,047
------------
COMMERCIAL PAPER (87.7%)
Abbey National North America
5.53%, due 1/14/98......................... 11,350,000 11,327,335
ABN-AMRO North America Finance Inc.
5.56%, due 5/1/98.......................... 6,900,000 6,772,120
Allianz of America Finance Corp.
5.67%, due 2/9/98 (a)...................... 7,000,000 6,957,002
American Express Credit Corp.
6.25%, due 1/2/98 (c)...................... 3,173,000 3,173,000
Banca CRT Financial Corp.
5.60%, due 3/2/98.......................... 5,000,000 4,953,333
5.64%, due 1/5/98.......................... 5,000,000 4,996,867
5.65%, due 1/23/98......................... 9,000,000 8,968,925
Banco Bozano, Simonsen S.A.,
Grand Cayman Series A
5.76%, due 3/24/98......................... 20,000,000 19,737,600
Banco Bradesco S.A.,
Grand Cayman Series A
5.53%, due 6/18/98......................... 4,000,000 3,896,959
5.57%, due 6/18/98......................... 4,000,000 3,896,027
5.69%, due 6/17/98......................... 8,000,000 7,788,838
BCI Funding Corp.
5.55%, due 1/9/98.......................... 13,500,000 13,483,350
5.70%, due 2/18/98......................... 6,000,000 5,954,400
BellSouth Capital Funding Corp.
6.65%, due 1/2/98.......................... 8,925,000 8,923,351
BIL North America Inc.
5.73%, due 3/12/98......................... 5,100,000 5,043,177
BTR Dunlop Finance Inc.
5.67%, due 2/19/98 (a)..................... 8,000,000 7,938,260
Caisse Centrale Desjardins du Quebec
5.55%, due 3/30/98......................... 9,000,000 8,877,900
5.75%, due 3/2/98.......................... 7,000,000 6,932,917
China International Marine Containers
(Group) Co. Ltd.
5.57%, due 2/13/98......................... 4,500,000 4,470,061
Chinatex Capitals Inc.
5.75%, due 3/10/98......................... 2,800,000 2,769,589
Compagnie Bancaire USA
Funding Corp.
5.57%, due 2/18/98......................... 8,000,000 7,940,587
5.60%, due 3/9/98.......................... 4,350,000 4,304,663
Cregem North America Inc.
5.69%, due 2/24/98......................... 18,100,000 17,945,516
Garanti Funding Corp. I Series A
5.52%, due 4/29/98......................... 5,000,000 4,909,533
General Electric Capital Corp.
5.72%, due 3/19/98......................... 2,000,000 1,975,531
Generale Bank Inc.
5.55%, due 1/6/98.......................... 5,000,000 4,996,146
5.67%, due 2/13/98......................... 13,300,000 13,209,926
Goldman Sachs Group L.P.
5.87%, due 1/8/98.......................... 14,500,000 14,483,450
Grand Metropolitan Capital Corp. Inc.
5.65%, due 4/15/98......................... 10,000,000 9,836,778
Internationale Nederlanden
(U.S.) Funding Corp.
5.59%, due 5/12/98......................... 4,000,000 3,918,634
Island Finance Puerto Rico Inc.
5.61%, due 2/6/98.......................... 7,000,000 6,960,730
5.70%, due 2/20/98......................... 7,600,000 7,539,833
Kingdom of Sweden
5.56%, due 5/4/98.......................... 6,000,000 5,886,020
Minmetals Capital & Securities Inc.
5.70%, due 3/13/98......................... 3,000,000 2,966,275
5.80%, due 2/13/98......................... 1,950,000 1,936,491
National Rural Utilities Cooperative
Finance Corp.
5.62%, due 3/12/98......................... 7,000,000 6,923,506
Pemex Capital Inc.
5.67%, due 3/23/98......................... 10,000,000 9,872,425
5.68%, due 3/19/98......................... 10,000,000 9,878,511
Petroleo Brasileiro S.A.-Petrobras
5.70%, due 5/15/98......................... 5,000,000 4,893,917
Receivables Capital Corp.
5.75%, due 3/5/98 (a)...................... 3,750,000 3,712,266
5.90%, due 1/5/98 (a)...................... 3,837,000 3,834,485
5.95%, due 1/5/98 (a)...................... 3,616,000 3,613,609
Rio Tinto America Inc.
5.70%, due 3/6/98 (a)...................... 12,000,000 11,878,400
San Paolo U.S. Financial Co.
5.57%, due 1/5/98.......................... 5,000,000 4,996,906
5.57%, due 2/12/98......................... 10,150,000 10,084,042
Songs Fuel Co.
5.58%, due 2/10/98......................... 6,000,000 5,962,800
Svenska Handelsbanken Inc.
5.59%, due 4/16/98......................... 5,600,000 5,508,697
5.73%, due 2/17/98......................... 6,850,000 6,798,756
5.75%, due 2/17/98......................... 1,350,000 1,339,866
Transamerica Finance Corp.
5.70%, due 1/22/98......................... 4,150,000 4,136,201
Unibanco-Uniao de Bancos
Brasilieros S.A.,
Grand Cayman Series A
5.74%, due 3/18/98......................... 7,300,000 7,211,540
</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, 1997
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
===================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
COMMERCIAL PAPER (Continued)
UNIfunding Inc.
5.59%, due 2/9/98.......................... $10,000,000 $ 9,939,442
------------
366,256,493
------------
CORPORATE NOTES (2.9%) Allstate Corp.
5.88%, due 6/15/98 (c)..................... 3,610,000 3,610,079
American General Finance Corp.
8.50%, due 8/15/98 (c)..................... 3,500,000 3,553,674
Associates Corp. N.A.
6.63%, due 5/15/98 (c)..................... 2,000,000 2,005,191
Travelers Group Inc.
5.75%, due 4/15/98 (a)(c).................. 3,000,000 2,999,722
------------
12,168,666
------------
FEDERAL AGENCY (2.4%)
Federal Home Loan Bank
5.67%, due 3/5/98 (c)...................... 10,000,000 10,000,000
------------
MEDIUM-TERM NOTE (1.9%)
United States Leasing
International, Inc. Series C
6.71%, due 1/27/98 (c)..................... 8,000,000 8,005,049
------------
Total Short-Term Investments
(Amortized Cost $418,428,255) (d) ......... 100.2% 418,428,255
Liabilities in Excess of
Cash and Other Assets...................... (0.2) (881,270)
----------- ------------
Net Assets.................................... 100.0% $417,546,985
=========== ============
</TABLE>
- ----------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at December 31, 1997.
(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>
INDUSTRY DIVERSIFICATION
Banks # .................................... $287,383,706 68.8%
Brokerage................................... 14,483,450 3.5
Conglomerates............................... 1,975,531 0.5
Federal Agency.............................. 10,000,000 2.4
Finance .................................... 62,225,254 14.9
Insurance................................... 14,664,637 3.5
Sovereignty................................. 5,886,020 1.4
Telecommunication Services.................. 8,923,351 2.1
Utilities................................... 12,886,306 3.1
------------ -------
418,428,255 100.2
Liabilities in Excess of
Cash and Other Assets (881,270) (0.2)
------------ -------
Net Assets.................................. $417,546,985 100.0%
============ =======
</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.
11
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (amortized cost $418,428,255)................................... $418,428,255
Cash............................................................................................... 56,838
Receivables:
Interest......................................................................................... 1,143,875
Fund shares sold................................................................................. 444,781
------------
Total assets.................................................................................... 420,073,749
------------
LIABILITIES:
Payables:
Fund shares redeemed............................................................................. 264,146
Transfer agent .................................................................................. 190,129
MainStay Management.............................................................................. 71,656
Custodian........................................................................................ 3,793
Trustees......................................................................................... 2,601
Accrued expenses................................................................................... 109,565
Dividend payable................................................................................... 1,884,874
------------
Total liabilities............................................................................... 2,526,764
------------
Net assets......................................................................................... $417,546,985
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A.......................................................................................... $ 809,254
Class B.......................................................................................... 3,366,374
Additional paid-in capital......................................................................... 413,387,239
Accumulated net realized loss on investments....................................................... (15,882)
------------
Net assets......................................................................................... $417,546,985
============
CLASS A
Net assets applicable to outstanding shares........................................................ $ 80,925,440
============
Shares of beneficial interest outstanding.......................................................... 80,925,440
============
Net asset value and offering price per share outstanding........................................... $ 1.00
============
CLASS B
Net assets applicable to outstanding shares........................................................ $336,621,545
============
Shares of beneficial interest outstanding.......................................................... 336,637,427
============
Net asset value and offering price 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.
12
<PAGE>
Statement of Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................................................... $23,070,139
-----------
Expenses:
Transfer agent................................................................................... 1,315,039
Administration .................................................................................. 804,500
Advisory......................................................................................... 804,500
Management....................................................................................... 371,010
Shareholder communication........................................................................ 283,880
Registration..................................................................................... 84,906
Recordkeeping.................................................................................... 67,322
Professional..................................................................................... 48,334
Custodian........................................................................................ 45,966
Trustees......................................................................................... 10,622
Miscellaneous.................................................................................... 9,643
-----------
Total expenses before reimbursement............................................................. 3,845,722
Expense reimbursement from Administrator and Adviser or Manager.................................... (999,040)
-----------
Net expenses.................................................................................... 2,846,682
-----------
Net investment income.............................................................................. 20,223,457
-----------
REALIZED LOSS ON INVESTMENTS:
Net realized loss on investments................................................................... (1,381)
-----------
Net increase in net assets resulting from operations............................................... $20,222,076
===========
</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,
1997 1996
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income........................................................... $ 20,223,457 $ 17,036,859
Net realized loss on investments................................................ (1,381) (1,158)
------------- -------------
Net increase in net assets resulting from operations............................ 20,222,076 17,035,701
------------- -------------
Dividends to shareholders:
From net investment income:
Class A........................................................................ (3,484,902) (2,342,050)
Class B........................................................................ (16,738,555) (14,694,809)
------------- -------------
Total dividends to shareholders.............................................. (20,223,457) (17,036,859)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A........................................................................ 296,699,694 119,892,722
Class B........................................................................ 560,499,416 512,217,941
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A........................................................................ 3,089,563 2,188,847
Class B........................................................................ 15,596,777 13,787,949
------------- -------------
875,885,450 648,087,459
Cost of shares redeemed:
Class A........................................................................ (272,754,087) (103,071,681)
Class B........................................................................ (556,956,479) (488,364,222)
------------- -------------
Increase in net assets derived from capital share transactions............... 46,174,884 56,651,556
------------- -------------
Net increase in net assets................................................... 46,173,503 56,650,398
NET ASSETS:
Beginning of year................................................................. 371,373,482 314,723,084
------------- -------------
End of year....................................................................... $ 417,546,985 $371,373,482
============= =============
</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 Class A Class B September 1
------- ------- ------- ------- ------- ------- through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
----------------- ----------------- ----------------- ----- ---- ----
<S> <C> <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 $ 1.00
------- -------- ------- -------- ------- -------- -------- -------- --------
Net investment income ......... 0.05 0.05 0.05 0.05 0.05 0.05 0.02 0.03 0.03
------- -------- ------- -------- ------- -------- -------- -------- --------
Less dividends from
net investment income ....... (0.05) (0.05) (0.05) (0.05) (0.05) (0.05) (0.02) (0.03) (0.03)
------- -------- ------- -------- ------- -------- -------- -------- --------
Net asset value at
end of period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======= ======== ======= ======== ======== ======== ========
Total investment return (a) ... 5.08% 5.08% 4.91% 4.91% 5.51% 5.51% 1.54% 3.08% 2.71%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ..................... 4.97% 4.97% 4.8% 4.8% 5.4% 5.4% 4.6%+ 3.1% 2.7%
Net expenses ................ 0.70% 0.70% 0.7% 0.7% 0.7% 0.7% 0.7%+ 0.7% 0.7%
Expenses (before
reimbursement) ............. 0.95% 0.95% 1.0% 1.0% 0.9% 0.9% 0.9%+ 1.0% 0.9%
Net assets at end of
period (in 000's) .......... $80,925 $336,622 $53,890 $317,483 $34,880 $279,843 $221,912 $192,477 $149,907
</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.
15
<PAGE>
MainStay Money Market Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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
and premiums on securities purchased for the Fund are accreted and amortized,
respectively, 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 direct allocations of expenses can be made. The investment
income, 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.
16
<PAGE>
Notes to Financial Statements
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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.50% up to $300 million, 0.45% on assets from $300 million
to $700 million, 0.40% on assets from $700 million to $1 billion and 0.35% on
assets in excess of $1 billion. The Manager has voluntarily agreed to assume the
expenses of the Fund to the extent that such expenses would exceed on an annual
basis 0.70% of the average daily net assets of the Fund.
Pursuant to the terms of the Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee at an annual
rate of the Fund's 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 billion and 0.175% on assets in excess of $1 billion. To the extent the
Manager has agreed to reimburse expenses of the Fund, the Sub-Advisor has
voluntarily agreed to do so proportionately.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as the administrator. MacKay-Shields
and NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.25%
of the Fund's average daily net assets up to $300 million, 0.225% on assets from
$300 million to $700 million, 0.20% on assets from $700 million to $1 billion
and 0.175% on assets in excess of $1 billion and had voluntarily agreed to
assume the expenses of the Fund to the extent that such expenses would exceed
0.70% of the average daily net assets of the Fund. As described above, MainStay
Management is currently paid a fee at a rate equal to the aggregate of the
advisory and administrative fee rates in effect prior to October 27, 1997 and
the expense reimbursements also remain the same as prior to that date. For the
period January 1, 1997, through October 26, 1997, MacKay-Shields and NYLIFE
Distributors each earned fees of $804,500 and each reimbursed the Fund $396,862.
For the period October 27, 1997, through December 31, 1997, MainStay Management
earned $371,010 and reimbursed the Fund $205,316.
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
17
<PAGE>
MainStay Money Market Fund
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,
1997, in the amount of $779,844.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$738,292 and $39,154, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $13,209 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $12,407 and $54,915 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold....................................................... 296,700 560,499 119,893 512,218
Shares issued in reinvestment of dividends........................ 3,089 15,597 2,189 13,788
-------- -------- -------- --------
299,789 576,096 122,082 526,006
Shares redeemed................................................... (272,754) (556,956) (103,072) (488,364)
-------- -------- -------- --------
Net increase...................................................... 27,035 19,140 19,010 37,642
======== ======== ======== ========
</TABLE>
18
<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 fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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, 1998
19
<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 showing of companies in expanding markets and are willing to accept a higher
risk/reward with strong growth potential level of risk for higher return potential
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund graph showing the makeup and returns of the participate in the growth potential
risk/reward S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph showing international stock markets with of international equities or want to
risk/reward an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/reward a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/reward convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/reward opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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.
20
<PAGE>
<TABLE>
<CAPTION>
INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[horizontal bar Seeks a high level of current income You are seeking to combine high
Government Fund graph showing consistent with safety of principal current income and safety of principal
risk/reward primarily from U.S. government
of Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/reward fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks to provide current income, You are averse to risk or want to earn
MONEY MARKET FUND risk/reward preservation of capital, and competitive yields on cash you're plan-
of Fund] liquidity, with free checkwriting** ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/reward a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph showing from both federal and California keep more of what you earn by invest-
risk/reward income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph showing from federal, New York State, and and want to keep more of what you earn
risk/reward New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks high current income You're in a high federal income tax
Tax Free Bond Fund risk/reward exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
21
<PAGE>
===============
MAINSTAY
===============------------------
Money Market Fund
-----------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved. MSAN12-02/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay New York Tax Free Fund Highlights 5
$10,000 Invested in the MainStay New York
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification of Holdings--Top 5 9
Quality Breakdown 10
Returns & Lipper Rankings 13
Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 20
Report of Independent Accountants 26
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay New York Tax Free Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay New York Tax Free Fund, and MacKay Shields Financial Corporation; amend
the Plan of Distribution for Class B shares; eliminate or revise certain
fundamental investment restrictions including eliminating certain state-imposed
fundamental investment restrictions, making certain fundamental investment
restrictions nonfundamental, and eliminating or revising fundamental
restrictions pertaining to borrowing money, industry concentration, and issuing
senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay New
York Tax Free Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 1,178,537 22,755 Passed
Nancy Maginnes Kissinger.................................................. 1,178,537 22,755 Passed
Donald E. Nickelson....................................................... 1,178,537 22,755 Passed
Richard S. Trutanic....................................................... 1,178,537 22,755 Passed
Harry G. Hohn............................................................. 1,178,537 22,755 Passed
Terry L. Lierman.......................................................... 1,178,537 22,755 Passed
Donald K. Ross............................................................ 1,178,537 22,755 Passed
Walter W. Ubl............................................................. 1,178,537 22,755 Passed
Alice T. Kane............................................................. 1,178,537 22,755 Passed
John B. McGuckian......................................................... 1,178,537 22,755 Passed
Stephen C. Roussin........................................................ 1,178,537 22,755 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 1,138,809.33 Against - 6,074.27 Abstain - 56,404.93 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 1,139,906.79 Against - 23,505.24 Abstain - 37,878.23 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 247,325.00 Against - 2,677.13 Abstain - 18,028.87 Broker Non-Vote - 17,034.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 1,073,576.74 Against - 32,702.75 Abstain - 48,506.51 Broker Non-Vote - 46,506.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 1,070,846.96 35,432.53 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 1,073,576.74 32,702.75 Passed
A3--Real Estate Limited Partnership Interests.............................. 1,073,576.74 32,702.75 Passed
B1--Illiquid Securities and Resale under Rule 144A......................... 1,070,846.96 35,432.53 Passed
B4--Short Sales and Margin Transactions.................................... 1,073,576.74 32,702.75 Passed
B5--Purchases to Exercise Control or Management............................ 1,073,576.74 32,702.75 Passed
B6--Securities of Other Investment Companies............................... 1,073,576.74 32,702.75 Passed
C2--Borrowing Money........................................................ 1,073,576.74 32,702.75 Passed
C3--Industry Concentration................................................. 1,073,576.74 32,702.75 Passed
C4--Issuing Senior Securities.............................................. 1,073,576.74 32,702.75 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 1,134,402.09 Against - 17,936.29 Abstain - 48,948.41 Result - Passed
</TABLE>
4
<PAGE>
MainStay New York Tax Free Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] In 1997, the municipal markets experienced their best year since 1993.
[ ] After interest rates rose at the end of March, low inflation caused yields
to decline throughout the rest of the year.
[ ] Turmoil in Southeast Asian markets caused a flight to quality, which
boosted Treasury and municipal bond performance.
[ ] As the nation's number one municipal issuer, New York City benefited from
increases in tourism and booming business on Wall Street, but reached its
municipal borrowing limit during 1997.
[ ] Improved management of New York City's workforce and resources has
improved the overall impression of municipal credits.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 8.39% and 8.14% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] High-coupon, short-call bonds helped boost income but detracted from total
return in a declining rate environment.
[ ] Having a slightly longer-than-neutral duration in late March had a
negative impact on performance, while lengthening duration through the
second half of 1997 helped the Fund capture much of its total return for
the year.
[ ] Both share classes underperformed the average Lipper* New York municipal
debt fund, which returned 8.99% for the year.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper
Analytical Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
New York Tax Free Fund versus
Lehman Brothers Municipal Bond
Index and Inflation
CLASS A SHARES SEC Returns: 1-Year 3.52%, 5-Year 5.74%, since inception 6.36%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
Year New York Tax Municipal Bond
End Free Fund Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $ 9,550 $10,000 $10,000
12/91 $ 9,749 $10,335 $10,051
12/92 $10,628 $11,247 $10,349
12/93 $11,916 $12,628 $10,632
12/94 $11,353 $11,975 $10,908
12/95 $13,167 $14,066 $11,192
12/96 $13,569 $14,689 $11,563
12/97 $14,708 $16,038 $11,758
</TABLE>
[GRAPHIC] MainStay New York Tax Free Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 3.14%, 5-Year 6.26%, since inception 7.03%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
Year New York Tax Municipal Bond
End Free Fund Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
10/1/91 $10,000 $10,000 $10,000
12/91 $10,208 $10,335 $10,051
12/92 $11,128 $11,247 $10,349
12/93 $12,477 $12,628 $10,632
12/94 $11,888 $11,975 $10,908
12/95 $13,751 $14,066 $11,192
12/96 $14,145 $14,689 $11,563
12/97 $15,297 $16,038 $11,758
</TABLE>
- ----------
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 do not reflect the Contingent
Deferred Sales Charge (CDSC), as it would not 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of New York Tax Free Fund Team
NEW YORK TAX FREE FUND TEAM
James Flood and Ravi Akhoury
Domestic bond markets, including municipal bonds, benefited from positive
interest rate changes over the course of 1997. Although the Federal Reserve
Board moved to raise interest rates 25 basis points at the end of March,
continued low inflation helped bring bond yields lower throughout the remainder
of the year. The resulting increase in bond prices made 1997 the best year for
New York municipal bonds since 1993.
Although stock market gains drew money away from the municipal market through
the first half of the year, problems in Asian markets during the second half of
1997 caused just the reverse. As the Asian turmoil progressed, investors began
to reevaluate the risk parameters of their portfolios and look for high-quality
alternatives to equity investments. This flight to quality increased demand for
fixed-income securities, pushing prices even higher.
As yields declined, yield spreads narrowed, increasing the difficulty of
enhancing yields through maturity plays. Housing issues became less desirable as
yields declined and prepayment risk increased. With more than 50% of the
municipal market now in AAA-rated or insured credits, competition for
yield-enhancing securities has greatly increased.
In New York State, there were no political upsets or issuer problems that
adversely affected the municipal market. On the contrary, improved management of
New York City's work force and resources helped improve the overall perception
of municipal bonds throughout the state. During 1997, New York City reached its
municipal borrowing limit, so an alternative authority, the New York City
Transitional Finance Authority, was established.
Given this context, how did the MainStay New York Tax Free Fund do in 1997?
For the year ended 12/31/97, the MainStay New York Tax Free Fund returned 8.39%
and 8.14% for Class A and Class B shares, respectively, excluding all sales
charges. Both share classes slightly underperformed the average Lipper* New York
municipal debt fund, which returned 8.99% for the year.
[GRAPHIC]
Basis Point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<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.
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.
Total return
- ------------
The performance of an investment with all income and capital gains reinvested.
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- ------------------------------------
<S> <C>
12/91 2.08
12/92 9.01
12/93 12.11
12/94 (4.71)
12/95 15.97
12/96 3.06
12/97 8.39
</TABLE>
See footnote * on page 13 for more information on performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS B SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- ------------------------------------
<S> <C>
12/91 2.08
12/92 9.01
12/93 12.11
12/94 (4.71)
12/95 15.67
12/96 2.86
12/97 8.14
</TABLE>
Returns reflect the historical performance of the Class A shares for periods
12/91 through 12/94. See footnote * on page 13 for more information on
performance.
What were the major contributors to the Fund's performance during the year?
Duration is the most important factor in municipal bond management. Believing
that inflation would remain low and economic growth modest, we lengthened the
duration of the Fund around the time that the Federal Reserve Board moved to
raise interest rates, which negatively impacted the Fund in the first half of
the year. We quickly retreated to a neutral position, but began to lengthen the
Fund's duration again as our previous assessment began to be fulfilled in the
second half of the year. As yields declined, we continued to lengthen the Fund's
duration in November and December, which helped the Fund capture most of its
total return for the year. Zero-coupon bonds and bonds with 5.00% coupons or
8
<PAGE>
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Transportation 12.8%
Water Utility 10.4%
Other Revenue 11.7%
County/City/Special District - General Obligation 12.8%
Hospital/Nursing Home 17.5%
All Other 34.8%
</TABLE>
Actual percentage will vary over time.
less were among the Fund's longest-duration securities and did very well.
Were there other factors that influenced performance?
Obviously, the larger economic picture had a major impact on the Fund and New
York municipal bonds in general. The troubles in Asian markets benefited the
Fund by increasing demand for high-quality securities and helping quell any
inflation concerns that may have been brewing. Since the full impact of the
Asian turmoil hasn't yet been seen, it may have more positive effects in the
future as inflation continues to slow in the months ahead. While a number of
industries may be negatively impacted, the municipal market certainly benefited
as lower inflation expectations caused interest rates to decline.
How did supply and demand affect the portfolio?
Supply and demand dynamics varied with market conditions. With the possible
exception of March and April, demand for equities was drawing money away from
municipal bonds in the first half of 1997, which had a negative impact on
performance. In the second half of the year, investors became increasingly
serious about risk and decided to pursue higher-quality bond investments, which
had a positive impact on demand and on the Fund. As New York City reached its
municipal borrowing limit, short supply among New York City general obligation
bonds presented some profit opportunities for the Fund. An alternative
authority, the New York City Transitional Finance Authority, was established to
handle the City's needs and their new issues did very well. In the fourth
quarter, new issuance increased as more municipalities came to market hoping to
take advantage of lower rates.
Were you pursuing high quality in the Fund's investments throughout the year?
The overall quality rating of the Fund's investment portfolio remains AA, which
is high. The Fund seeks a high level of tax-free income for residents of New
York
[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.
9
<PAGE>
[GRAPHIC]
State and New York City. Since the highest-rated securities offer the
lowest yields, we need to take a balanced approach to risk and return within the
Fund's prospectus guidelines.
At year end, roughly 50% of the Fund's assets were invested in AAA-rated bonds,
15% were in AA-rated bonds, 15% were in bonds rated A, and 20% were in bonds
rated BBB. As you can see from this mix, we have placed less emphasis on AA and
A bonds. There are a couple of reasons for this. First, with the increased
issuance of insured bonds, over half the municipal securities available in New
York are now rated AAA or insured credits. So there's less available in the AA
and A categories. More importantly, we need to assess whether the increase in
yield offered in these categories justifies the increase in risk. By and large,
it's the BBB credits that offer the most attractive risk and return
characteristics outside of the AAA and insured-credit category. So while the
Fund as a whole has pursued quality, we've also emphasized lower-quality
investment-grade bonds in a portion of the portfolio to enhance yields.
Are there many attractive issues in the BBB category?
Unfortunately, the supply is limited. And we're not the only Fund managers that
are competing for yield. The result has been increasing competition for
lower-rated securities with yield advantages, which has caused the opportunities
to become fewer over time. Some managers find yield opportunities among below
investment-grade municipals, but the MainStay New York Tax Free Fund may not
invest in these securities. BBB-rated hospital issues had a positive impact on
the Fund's investment portfolio, and they continue to be among the Fund's more
productive securities.
Besides concentrating on higher-quality securities, what else did you do to
protect investors against risk?
The Fund used broad diversification by geographic location and types of
municipal securities to help reduce the impact of an upset in any one location
or market sector. At year end 1997, the Fund was invested from Niagara Falls,
Nassau County, and New York City to Albany, Port Jervis, and
QUALITY BREAKDOWN AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
AAA 50.2%
AA 14.9%
A 15.6%
BBB 19.9%
Cash, Equivalents & Other Assets, less Liabilities (0.6%)
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
10
<PAGE>
the Upper Mohawk Valley. It also diversified with Puerto Rican bonds, which may
offer federal, state, and local tax advantages to New York residents. In
addition, the Fund's sector diversification included everything from bridges,
tunnels, schools, and health care facilities to water, dormitories, sewers,
transportation, the environment, energy, and urban development bonds.
Were there other ways the Fund was diversified?
Yes, we bought a variety of coupons and maturities to help reduce the likelihood
of a major impact if a certain coupon or maturity goes out of favor.
What were some of the Fund's most significant purchases in 1997?
The Fund bought a wide variety of securities during the year, each contributing
proportionately to the overall performance.
In February, the Fund bought Niagara Falls Bridge Commission Toll Revenue 5 1/4%
bonds maturing in 2015, which were noncallable and offered a long duration,
which was good for the Fund. Other long-duration purchases were New York City
Water and Sewer Systems Revenue 5 1/8% bonds maturing in 2022, Upper Mohawk
Valley Regional Water bonds with the same coupon and a 2026 maturity, and
perhaps our largest purchase, New York City Transitional Finance Authority 5.00%
bonds of 2027. As interest rates declined throughout the second half of the
year, all of these bonds were strong performers.
Which securities did you sell during the year?
Again, the Fund had a variety of sales, and for a variety of reasons. In July,
the Fund sold some New York general obligation 5.80% bonds due 2026 at what we
thought was an attractive price, but they performed well after the Fund sold
them. The same was true of New York Brooklyn Union Gas 5.50% bonds due 2021 that
the Fund sold around the same time. In May, we sold some New York and New Jersey
Port Authority 5 1/8% bonds due 2014, and in July, the Fund sold some Puerto
Rico Commonwealth 5.00% bonds due 2015. Both were long-duration bonds, which
might have been good to hold, but the proceeds allowed us to make other
purchases that we felt were positive for the Fund. In the first half of the
year, the Fund benefited from prerefundings in New York State Medical Care
Facilities bonds and a New York City general obligation bond. The Fund sold
these prerefunded bonds due to the positive impact they would have on the
portfolio.
What exactly is prerefunding?
Most bonds carry a provision that allows the issuer to call the bonds, generally
about 10 years after issuance. If the issuer wants to refinance outstanding debt
to take advantage of lower interest rates before the call date, the bonds can be
prerefunded. In a prerefunding, the issuer will issue new bonds and use the
proceeds to purchase Treasury securities that mature near the same date as the
original issues' call date. The securities are placed in an escrow account that
will be used to pay the interest until the first call date at which time the
principal is paid. The effect of the entire process for the bondholder is a
large gain because the municipals are in effect tax-free Treasury bonds whose
maturity has been reduced by more than 20 years in many cases.
[GRAPHIC]
11
<PAGE>
[GRAPHIC]
Past performance is no guarantee of future results.
Which bonds didn't perform well for the Fund?
The Fund held a number of high-coupon short-call bonds that helped provide
attractive yields and maintain the Fund's dividend in a declining rate
environment. But since the bonds were so close to their 1998 call dates, they
performed more like short-term securities, which detracted from performance,
particularly when bonds with greater call protection rallied. Among the names
that fell into this category were Triborough Bridge and Tunnel Authority 8 1/8%
bonds due 2012, Puerto Rico Commonwealth Infrastructure 7.90% bonds due 2007,
New York State Medical Care 8 7/8% bonds due in the same year, and New York
State Nursing Home 8.00% bonds due 2028. There were others, but that gives you a
sampling.
What can be done to protect against call risk?
We're continually looking at call risk as we evaluate securities for the Fund.
Generally, we seek to extend call protection as we purchase new bonds for the
Fund.
Why didn't you just sell the short-call bonds?
With municipal coupons near or over 8.00% in a market where the average coupons
were considerably lower and already declining, it would be difficult to replace
these bonds. On balance, we were willing to forego total return for the income
potential these securities offered. And while they underperformed, we believe
having them in the Fund was positive in helping maintain the dividend throughout
the year.
What could you have done better in 1997?
In hindsight, we could have made better duration moves in the second quarter,
held more zero-coupon and noncallable bonds, and had more BBB securities. We
were also a little light in New York City during the year, and those bonds
rallied in the second half of the year. We could have had a heavier weighting
there. But given how things looked as we proceeded through the year, we're
pleased with the way we managed both risk and reward and feel that the Fund's
performance was competitive in a challenging year.
How was the Fund weighted at year end?
The Fund was overweighted in BBB hospitals and underweighted in housing and
utilities. We were concerned that utility deregulation could play havoc with
bond prices, and in a declining rate environment, we tried to avoid housing
issues which were increasingly subject to prepayment risk.
What's your outlook for the future?
We believe that declining inflation should be good for the bond markets, but
recognize that lower rates and tighter spreads make it more difficult to find
new opportunities. In this environment, we will continue to focus on quality,
while seeking appropriate and competitive yields. At year end, municipals
appeared to be inexpensive relative to Treasuries, and we believe New York
municipal bonds may outperform government bonds in 1998.
Ravi Akhoury
James Flood
Portfolio Managers
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Fund average annual total returns*
=================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 8.39% 6.72% 7.15%
Class B 8.14% 6.57% 7.03%
=================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------
Fund SEC returns*
=================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 3.52% 5.74% 6.36%
Class B 3.14% 6.26% 7.03%
=================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
=================================================================================
1 year 5 years Life of Fund through 12/31/97
<S> <C> <C> <C>
Class A 77 out of 25 out of 28 out of
95 funds 45 funds 41 funds
Class B 84 out of n/a n/a
95 funds
Average Lipper
NY municipal
debt fund 8.99% 6.61% 7.30%
=================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
=================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.09 $0.4930 $0.1361
Class B $10.03 $0.4535 $0.1361
=================================================================================
</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 certain fee waivers and/or expense limitations, without which total
return figures may have been lower. The fee waivers and/or expense
limitations are voluntary and may be terminated or revised at any time.
Class B shares, first offered to the public 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 .50%. Performance figures for this class include the
historical performance of the Class A shares for periods from inception
(10/1/91) up to 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
12/31/97. Class B shares were first offered to the public on 1/3/95; Class
A shares on 10/1/91.
[GRAPHIC]
13
<PAGE>
MainStay New York Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (100.6%)+
NEW YORK (97.4%)
Battery Park City Authority Revenue
Series A
5.50%, due 11/1/26........................... $ 900,000 $ 928,125
Nassau County General Obligation
Series T
5.20%, due 9/1/15............................ 650,000 659,750
New York City General Obligation
Series D
5.25%, due 8/1/21............................ 300,000 294,000
Series C
7.20%, due 8/15/15........................... 355,000 385,619
7.50%, due 8/1/20............................ 25,000 28,219
Series F
8.20%, due 11/15/04.......................... 95,000 108,538
New York City Industrial Development
Agency Revenue
Brooklyn Navy Yard Cogen Partners
5.75%, due 10/1/36 (a)....................... 750,000 754,688
New York City Municipal
Finance Authority, Water and Sewer
Systems Revenue, Series A
5.125%, due 6/15/22.......................... 875,000 865,156
New York City Transitional
Finance Authority Revenue
Series A
5.00%, due 8/15/27........................... 1,400,000 1,359,750
New York State Dormitory Authority
Revenue,
Manhattanville
(zero coupon), due 7/1/19.................... 2,175,000 725,906
(zero coupon), due 7/1/21.................... 1,175,000 353,969
Park Ridge Housing Income Project
7.85%, due 2/1/29 (b)........................ 800,000 843,152
State Service Contract, Albany County
5.25%, due 4/1/17............................ 800,000 789,000
New York State Energy Research &
Development Authority
Electric Co. Facilities Revenue
Con Edison, Project B
9.25%, due 9/15/22 (a)....................... 45,000 45,900
New York State Environmental
Facilities Corp. Pollution Control
Revenue, State Water
Series A
4.65%, due 6/15/07........................... 395,000 403,394
New York State Housing Finance
Agency Service Contract Obligation
Revenue, Series A
7.65%, due 3/15/05........................... 60,000 66,750
New York State Local Government
Assistance Corp.
(zero coupon), due 4/1/14.................... 1,500,000 660,000
New York State Medical Care Facilities
Finance Agency Revenue
7.375%, due 8/15/19.......................... 400,000 425,000
7.50%, due 2/15/21........................... 315,000 348,862
7.80%, due 2/15/19........................... 310,000 327,825
7.875%, due 8/15/20.......................... 55,000 60,706
8.875%, due 8/15/07.......................... 455,000 465,806
Hospital & Nursing Home
8.00%, due 2/15/28 (b)....................... 1,000,000 1,043,570
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 (b)...................... 1,035,000 1,087,060
New York State Urban Development
Corp. Revenue
5.375%, due 7/1/22........................... 900,000 913,500
Niagara Falls, New York, Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15........................... 715,000 743,600
Orange County General Obligation
5.125%, due 9/1/20........................... 900,000 904,500
Port Authority of New York &
New Jersey Consolidated Bonds
Series 111
5.00%, due 10/1/22........................... 725,000 716,844
Series 52
9.00%, due 11/1/14........................... 150,000 162,938
Port Jervis Industrial Development
Authority, Franciscan Health
Partnership
5.50%, due 11/1/16........................... 800,000 802,000
Triborough Bridge & Tunnel Authority
of New York, General Purpose
Revenue, Series L
8.125%, due 1/1/12........................... 850,000 867,000
Upper Mohawk Valley Regional Water
Finance Authority, New York Water
Systems Revenue
Series A
5.125%, due 10/1/26.......................... 750,000 741,562
-----------
18,882,689
-----------
</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.
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
PUERTO RICO (3.2%)
Puerto Rico Commonwealth
Infrastructure Special Financing
Authority, Series A
7.90%, due 7/1/07............................ $ 600,000 $ 623,658
---------- -----------
Total Long-Term Municipal Bonds
(Cost $19,030,371)........................... 19,506,347
-----------
SHORT-TERM INVESTMENTS (2.0%)
New York City General Obligation
Series B
2.65%, due 8/15/05 (c)....................... 100,000 100,000
New York State Energy Research &
Development Authority
Pollution Control Revenue
Electric & Gas, Series B
4.00%, due 2/1/29 (c)........................ 300,000 300,000
-----------
Total Short-Term Investments
(Cost $400,000).............................. 400,000
-----------
Total Investments
(Cost $19,430,371) (d)....................... 102.6% 19,906,347(e)
Liabilities in Excess of
Cash and Other Assets........................ (2.6) (508,031)
---------- -----------
Net Assets...................................... 100.0% $19,398,316
========== ===========
</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, 1997, net unrealized appreciation was $475,976, 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 $723,077 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $247,101.
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 as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $19,430,371) ................................ $ 19,906,347
Receivables:
Investment securities sold .................................................................... 1,324,477
Interest ...................................................................................... 310,429
Fund shares sold .............................................................................. 3,054
------------
Total assets ................................................................................. 21,544,307
------------
LIABILITIES:
Payables:
Investment securities purchased ............................................................... 2,009,753
Custodian ..................................................................................... 85,454
MainStay Management ........................................................................... 5,409
NYLIFE Distributors ........................................................................... 5,233
Transfer agent ................................................................................ 3,246
Fund shares redeemed .......................................................................... 1,467
Trustees ...................................................................................... 127
Accrued expenses ................................................................................ 35,302
------------
Total liabilities ............................................................................ 2,145,991
------------
Net assets ...................................................................................... $ 19,398,316
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ....................................................................................... $ 13,685
Class B ....................................................................................... 5,569
Additional paid-in capital ...................................................................... 18,920,687
Accumulated net realized loss on investments .................................................... (17,601)
Unrealized appreciation on investments .......................................................... 475,976
------------
Net assets ...................................................................................... $ 19,398,316
============
CLASS A
Net assets applicable to outstanding shares ..................................................... $ 13,813,811
============
Shares of beneficial interest outstanding ....................................................... 1,368,482
============
Net asset value per share outstanding ........................................................... $ 10.09
Maximum sales charge (4.50% of offering price) .................................................. 0.48
------------
Maximum offering price per share outstanding .................................................... $ 10.57
============
CLASS B
Net assets applicable to outstanding shares ..................................................... $ 5,584,505
============
Shares of beneficial interest outstanding ....................................................... 556,922
============
Net asset value and offering price per share outstanding ........................................ $ 10.03
============
</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 for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest...................................................................... $1,156,690
----------
Expenses:
Service....................................................................... 47,242
Shareholder communication..................................................... 40,389
Administration................................................................ 38,604
Advisory...................................................................... 38,604
Transfer agent................................................................ 34,078
Professional.................................................................. 22,200
Custodian..................................................................... 18,991
Management.................................................................... 17,276
Distribution--Class B.......................................................... 11,843
Registration.................................................................. 950
Trustees...................................................................... 441
Miscellaneous................................................................. 8,114
----------
Total expenses before reimbursement.......................................... 278,732
Expense reimbursement from Adviser and Administrator or Manager................. (32,571)
----------
Net expenses................................................................. 246,161
----------
Net investment income........................................................... 910,529
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions......................................................... 502,300
Futures transactions.......................................................... (112,960)
----------
Net realized gain on investments................................................ 389,340
----------
Net change in unrealized appreciation on investments:
Security transactions......................................................... 215,003
Futures transactions.......................................................... (1,125)
----------
Net unrealized gain on investments.............................................. 213,878
----------
Net realized and unrealized gain on investments................................. 603,218
----------
Net increase in net assets resulting from operations............................ $1,513,747
==========
</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,
1997 1996
------------ ------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income ................................................................ $ 910,529 $ 978,259
Net realized gain on investments ..................................................... 389,340 178,029
Net change in unrealized appreciation on investments ................................. 213,878 (553,341)
------------ ------------
Net increase in net assets resulting from operations ................................. 1,513,747 602,947
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A ............................................................................. (695,736) (860,400)
Class B ............................................................................. (218,110) (132,523)
From net realized gain on investments:
Class A ............................................................................. (184,623) --
Class B ............................................................................. (73,041) --
------------ ------------
Total dividends and distributions to shareholders ................................. (1,171,510) (992,923)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ............................................................................. 542,479 714,259
Class B ............................................................................. 1,935,502 2,775,763
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ............................................................................. 375,244 326,939
Class B ............................................................................. 184,143 87,529
------------ ------------
3,037,368 3,904,490
Cost of shares redeemed:
Class A ............................................................................. (2,924,796) (3,316,131)
Class B ............................................................................. (728,335) (362,803)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions ......... (615,763) 225,556
------------ ------------
Net decrease in net assets ........................................................ (273,526) (164,420)
NET ASSETS:
Beginning of year ...................................................................... 19,671,842 19,836,262
------------ ------------
End of year ............................................................................ $ 19,398,316 $ 19,671,842
============ ============
Accumulated undistributed net investment income ........................................ $ -- $ 3,279
============ ============
</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 A
----------------------------------
Class A Class B Class A Class B Class A Class B September 1
------- ------- ------- ------- ------- ------- through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
------------------ ------------------ ------------------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $9.91 $9.84 $10.12 $10.02 $9.20 $9.20 $9.58 $10.43 $9.95
------- ------ ------- ------ ------- ------ ------- ------- -------
Net investment income ......... 0.49 0.45 0.50 0.45 0.52 0.59 0.19 0.56 0.60
Net realized and
unrealized gain (loss)
on investments .............. 0.32 0.33 (0.21) (0.18) 0.91 0.82 (0.39) (0.59) 0.54
------- ------ ------- ------ ------- ------ ------- ------- -------
Total from investment
operations .................. 0.81 0.78 0.29 0.27 1.43 1.41 (0.20) (0.03) 1.14
------- ------ ------- ------ ------- ------ ------- ------- -------
Less dividends and
distributions:
From net investment
income ...................... (0.49) (0.45) (0.50) (0.45) (0.51) (0.59) (0.18) (0.57) (0.65)
From net realized gain
on investments .............. (0.14) (0.14) -- -- -- -- -- (0.25) (0.01)
------- ------ ------- ------ ------- ------ ------- ------- -------
Total dividends and
distributions ............... (0.63) (0.59) (0.50) (0.45) (0.51) (0.59) (0.18) (0.82) (0.66)
------- ------ ------- ------ ------- ------ ------- ------- -------
Net asset value at end
of period ................... $10.09 $10.03 $9.91 $9.84 $10.12 $10.02 $9.20 $9.58 $10.43
======= ====== ======= ====== ======= ====== ======= ======= =======
Total investment return (a) 8.39% 8.14% 3.06% 2.86% 15.97% 15.67% (2.11%) (0.35%) 11.88%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .................. 4.88% 4.63% 5.0% 4.7% 5.4% 5.1% 6.1%+ 5.7% 6.0%
Net expenses ............. 1.24% 1.49% 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99% 0.98%
Expenses (before
reimbursement) .......... 1.41% 1.66% 1.4% 1.6% 1.4% 1.6% 1.2%+ 1.1% 1.2%
Portfolio turnover rate ....... 212% 212% 114% 114% 114% 114% 39% 169% 131%
Net assets at end of
period (in 000's) .......... $13,814 $5,585 $15,572 $4,100 $18,248 $1,588 $17,106 $17,862 $15,665
</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 New York Tax Free Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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 Sub-Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Sub-Adviser to be representative of market values at the regular close of
business of the 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 Sub-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.
20
<PAGE>
Notes to Financial Statements
Events affecting the values of certain portfolio investments that occur between
the close of trading on the principal market for such investments and the
regular close of the Exchange will not be reflected in the Fund's calculation of
net asset value unless the Sub-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 and
price, 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.
21
<PAGE>
MainStay New York 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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.50% of the average
daily net assets of the Fund. The Manager has voluntarily agreed to reimburse
the expenses of the Fund to the extent that operating expenses would exceed on
an annualized basis 1.24% and 1.49% of the average daily net assets of the Class
A and Class B shares, respectively.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.25% of
the average daily net assets of the Fund. To the extent the Manager has agreed
to reimburse expenses of the Fund, the Sub-Adviser has voluntarily agreed to do
so proportionately.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.25% of
the average daily net assets of the Fund and had voluntarily agreed to reimburse
the expenses for the Fund to
22
<PAGE>
Notes to Financial Statements continued
the extent that operating expenses would exceed 1.24% and 1.49% of the average
daily net assets of the Class A and Class B shares, respectively. As described
above, MainStay Management is currently paid a fee at a rate equal to the
aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997, and the expense reimbursements also remain the same as prior
to that date. For the period January 1, 1997, through October 26, 1997,
MacKay-Shields and NYLIFE Distributors each earned fees of $38,604 and each
reimbursed the Fund $13,579. For the period October 27, 1997, through December
31, 1997, MainStay Management earned $17,276 and reimbursed the Fund $5,413.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.25%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge on sales of Class A Fund shares was $2,297 for the year ended
December 31, 1997. The Fund was also advised that NYLIFE Distributors retained
contingent deferred sales charges on redemptions of Class B shares of $2,531 for
the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS
23
<PAGE>
MainStay New York Tax Free Fund
acted as transfer, dividend disbursing and shareholder servicing agent and
NYLIFE Distributors was paid by the Fund for providing certain transfer agency
functions. Transfer agent expense paid to MSS and NYLIFE Distributors for the
year ended December 31, 1997, amounted to $22,793 and $607, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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, 1997, NYLIFE Distributors and NYLIFE Securities, an
indirect wholly owned subsidiary of New York Life, beneficially held shares of
Class A with a net asset value of $5,039,848 and $100,900, respectively, which
represents 36.5% and 0.7%, respectively, of the Class A net assets at year end.
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $625 for the year ended December
31, 1997.
Note 4--Federal Income Tax:
The Fund utilized $148,114, 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 $17,689 of qualifying
capital losses that arose during the year as if they arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $39,118 and $39,493, respectively.
Note 6--Line of Credit:
The Fund and certain affiliated funds maintain a line of credit with the
Custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
24
<PAGE>
Notes to Financial Statements continued
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
----------------- ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold......................................................... 55 195 73 286
Shares issued in reinvestment of dividends.......................... 37 18 33 9
---- --- ---- ---
92 213 106 295
Shares redeemed..................................................... (294) (73) (338) (37)
---- --- ---- ---
Net increase (decrease)............................................. (202) 140 (232) 258
==== === ==== ===
</TABLE>
25
<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 fifteen funds constituting The MainStay Funds, hereafter referred to
as the "Fund") at December 31, 1997, 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, 1997 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, 1998
26
<PAGE>
This page intentionally left blank
27
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
[horizontal bar
graph showing Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund risk/reward of companies in expanding markets and are willing to accept a higher
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 showing the makeup and returns of the participate in the growth potential
risk/reward S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph showing international stock markets with of international equities or want to
risk/reward an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/reward a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/reward convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/reward opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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> [horizontal bar <C> <C>
graph showing Seeks a high level of current income You are seeking to combine high
Government Fund risk/reward consistent with safety of principal current income and safety of principal
of Fund] primarily from U.S. government
securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/reward fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph showing preservation of capital, and competitive yields on cash you're plan-
risk/reward liquidity, with free checkwriting** ning to spend or invest in the near future
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/reward a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph showing from both federal and California keep more of what you earn by invest-
risk/reward income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You're a New York State or City resident
NEW YORK TAX FREE FUND graph showing from federal, New York State, and and want to keep more of what you earn
risk/reward New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph showing Seeks high current income You're in a high federal income tax
Tax Free Bond Fund risk/reward exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============-----------------------
New York Tax Free Fund
----------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R)
FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN13-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Tax Free Bond Fund Highlights 5
$10,000 Invested in the MainStay Tax
Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by State--Top 5 9
Quality Breakdown 10
Returns & Lipper Rankings 13
Top 10 Holdings 14
Portfolio of Investments 15
Financial Statements 20
Notes to Financial Statements 24
Report of Independent Accountants 29
The MainStay Funds 30
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Tax Free Bond Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay Tax Free Bond Fund, and MacKay Shields Financial Corporation; amend the
Plan of Distribution for Class B shares; eliminate or revise certain fundamental
investment restrictions including eliminating certain state-imposed fundamental
investment restrictions and eliminating or revising fundamental restrictions
pertaining to issuer concentration, borrowing money, industry concentration, and
issuing senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay Tax
Free Bond Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 25,662,791 1,323,038 Passed
Nancy Maginnes Kissinger.................................................. 25,662,791 1,323,038 Passed
Donald E. Nickelson....................................................... 25,662,791 1,323,038 Passed
Richard S. Trutanic....................................................... 25,662,791 1,323,038 Passed
Harry G. Hohn............................................................. 25,662,791 1,323,038 Passed
Terry L. Lierman.......................................................... 25,662,791 1,323,038 Passed
Donald K. Ross............................................................ 25,662,791 1,323,038 Passed
Walter W. Ubl............................................................. 25,662,791 1,323,038 Passed
Alice T. Kane............................................................. 25,662,791 1,323,038 Passed
John B. McGuckian......................................................... 25,662,791 1,323,038 Passed
Stephen C. Roussin........................................................ 25,662,791 1,323,038 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 24,824,515.35 Against - 469,871.25 Abstain - 1,691,440.91 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay
Shields Financial Corporation
<S> <C> <C> <C>
For - 24,866,298.37 Against - 405,760.22 Abstain - 1,713,768.92 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 23,708,689.92 Against - 474,916.02 Abstain - 1,874,877.07 Broker Non-Vote - 356,345.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 24,085,298.14 Against - 560,118.31 Abstain - 1,956,683.07 Broker Non-Vote - 383,729.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 24,079,135.13 566,281.31 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 24,048,337.12 597,079.33 Passed
A3--Real Estate Limited Partnership Interests.............................. 24,058,873.12 586,543.32 Passed
C1--Issuer Concentration................................................... 24,078,539.13 566,877.31 Passed
C2--Borrowing Money........................................................ 24,048,154.12 597,262.33 Passed
C3--Industry Concentration................................................. 24,069,843.13 575,573.31 Passed
C4--Issuing Senior Securities.............................................. 24,039,480.11 605,936.33 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent
Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 25,199,622.55 Against - 141,798.08 Abstain - 1,644,406.88 Result - Passed
</TABLE>
4
<PAGE>
MainStay Tax Free Bond Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] In 1997, the municipal markets experienced their best year since 1993.
[ ] After interest rates rose at the end of March, low inflation caused yields
to decline throughout the rest of the year.
[ ] Turmoil in Southeast Asian markets caused a flight to quality, which
boosted Treasury and municipal bond performance.
[ ] Continued issuance of insured municipal debt increased the level of
uniformity across the municipal market and made it more difficult to find
attractively priced yield-enhancing securities.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year total returns of 9.02% and 8.80% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] High-coupon, short-call bonds helped boost income but detracted from total
return in a declining rate environment.
[ ] Having a slightly longer-than-neutral portfolio duration in late March had
a negative impact on performance, while lengthening the portfolio's
duration through the second half of 1997 helped the Fund capture much of
its total return for the year.
[ ] Both share classes underperformed the average Lipper* municipal debt fund,
which returned 9.11% for the year.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Tax Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation
CLASS A SHARES SEC Returns: 1-Year 4.11%, 5-Year 5.18%, 10-Year 6.58%
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Lehman Brothers
MainStay Tax Free Municipal
Date Bond Fund Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $ 9,550 $10,000 $10,000
12/88 $10,387 $11,016 $10,441
12/89 $11,153 $12,205 $10,925
12/90 $11,675 $13,094 $11,608
12/91 $12,947 $14,684 $11,954
12/92 $14,036 $15,979 $12,308
12/93 $15,495 $17,941 $12,645
12/94 $14,562 $17,014 $12,974
12/95 $16,747 $19,984 $13,311
12/96 $17,355 $20,870 $13,752
12/97 $18,920 $22,787 $13,984
</TABLE>
[GRAPHIC] MainStay Tax Free Bond Fund
[GRAPHIC] Lehman Brothers Municipal Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 3.80%, 5-Year 5.70%, 10-Year 7.01%
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Lehman Brothers
MainStay Tax Free Municipal
Date Bond Fund Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,000 $10,000 $10,000
12/88 $10,876 $11,016 $10,441
12/89 $11,679 $12,205 $10,925
12/90 $12,225 $13,094 $11,608
12/91 $13,557 $14,684 $11,954
12/92 $14,698 $15,979 $12,308
12/93 $16,225 $17,941 $12,645
12/94 $15,248 $17,014 $12,974
12/95 $17,514 $19,984 $13,311
12/96 $18,098 $20,870 $13,752
12/97 $19,690 $22,787 $13,984
</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 12/31/87
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 12/31/87 through
12/31/94. The Class B graph assumes an initial investment of $10,000 made
on 12/31/87. 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.
* 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Tax Free Bond Fund Team
TAX FREE BOND FUND TEAM
James Flood and Ravi Akhoury
Domestic bond markets, including municipal bonds, benefited from positive
interest rate changes over the course of 1997. Although the Federal Reserve
Board moved to raise interest rates 25 basis points at the end of March,
continued low inflation helped bring bond yields lower throughout the remainder
of the year. The resulting increase in bond prices made 1997 the best year for
municipal bonds since 1993.
Although stock market gains drew money away from the municipal market through
the first half of the year, problems in Asian markets during the second half of
1997 caused just the reverse. As the Asian turmoil progressed, investors began
to reevaluate the risk parameters of their portfolios and look for high-quality
alternatives to equity investments. This flight to quality increased demand for
fixed-income securities, pushing prices even higher.
As yields declined, yield spreads narrowed, increasing the difficulty of
enhancing yields through maturity plays. Housing issues became less desirable as
yields declined and prepayment risk increased. With more than 50% of the
municipal market now in AAA-rated or insured credits, competition for
yield-enhancing securities has greatly increased.
Given this context, how did the MainStay Tax Free Bond Fund do in 1997?
For the year ended 12/31/97, the MainStay Tax Free Bond Fund returned 9.02% and
8.80% for Class A and Class B shares, respectively, excluding all sales charges.
Both share classes slightly underperformed the average Lipper* general municipal
debt fund, which returned 9.11% for the year.
What were the major contributors to the Fund's performance during the year?
Duration is the most important factor in municipal bond management. Believing
that inflation would remain low and economic growth modest, we lengthened the
duration of the Fund around the time that the Federal Reserve Board moved to
raise interest rates, which negatively impacted the Fund in the first half of
the year. We quickly retreated to a neutral position, but began to lengthen the
Fund's duration again as our previous assessment began to
[GRAPHIC]
Basis Point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<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.
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.
Total return
- ------------
The performance of an investment with all income and capital gains reinvested.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
end %
- ------------------------------------------
<S> <C>
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
12/96 3.63
12/97 9.02
</TABLE>
Returns reflect the historical performance of the Class B shares for the periods
12/86 through 12/94. See footnote * on page 13 for more information on
performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
end %
- ------------------------------------------
<S> <C>
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 14.86
12/96 3.33
12/97 8.80
</TABLE>
See footnote * on page 13 for more information on performance.
be fulfilled in the second half of the year. As yields declined, we continued to
lengthen the Fund's duration in November and December, which helped the Fund
capture most of its total return for the year. Zero-coupon bonds and bonds with
5.00% coupons or less were among the Fund's longest duration securities and did
very well.
Were there other factors that influenced performance?
Obviously, the larger economic picture had a major impact on the Fund and
municipal bonds in general. The troubles in Asian markets benefited the Fund by
increasing demand for high-quality securities and
8
<PAGE>
DIVERSIFICATION BY STATE--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
California 17.9%
New York 13.5%
Texas 9.6%
Massachusetts 9.3%
Illinois 8.0%
All Other 41.7%
</TABLE>
Actual percentages will vary over time.
helping quell any inflation concerns that may have been brewing. Since the full
impact of the Asian turmoil hasn't yet been seen, it may have more positive
effects in the future as inflation continues to slow in the months ahead. While
a number of industries may be negatively impacted, the municipal market
certainly benefited as lower inflation expectations caused interest rates to
decline.
How did supply and demand affect the portfolio?
Supply and demand dynamics varied with market conditions. With the possible
exception of March and April, demand for equities was drawing money away from
municipal bonds in the first half of 1997, which had a negative impact on
performance. In the second half of the year, investors became increasingly
serious about risk and decided to pursue higher-quality bond investments, which
had a positive impact on demand and on the Fund. In the fourth quarter, new
issuance increased as more municipalities issued securities hoping to take
advantage of lower rates.
Were you pursuing high quality in the Fund's investments throughout the year?
The overall credit quality of the Fund's investment portfolio remains AA, which
is high. But the Fund's objective is to pursue a high level of current income
free from regular federal income tax, consistent with the preservation of
capital. Since the highest-rated securities offer the lowest yields, we need to
take a balanced approach to risk and return within the Fund's prospectus
guidelines.
At year end, roughly 55% of the Fund's assets were invested in AAA-rated bonds,
14% were in AA-rated bonds, over 6% were in bonds rated A, and 25% were in bonds
rated BBB. As you can see, we have placed less emphasis on AA and single-A
bonds. There are a couple of reasons for this. First, with the increased
issuance of insured bonds, over half the municipal securities available are now
rated AAA or insured credits. So there's less available in the AA and A
categories. More importantly, we need to assess whether the increase in yield
offered in these categories justifies the increase in risk. By and large, it's
the BBB
[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.
9
<PAGE>
[GRAPHIC]
credits that offer the most attractive risk and return characteristics outside
of the AAA and insured-credit category. So while the Fund as a whole has pursued
quality, we've also emphasized lower-quality investment-grade bonds in a portion
of the portfolio to enhance yields.
Are there many attractive issues in the BBB category?
Unfortunately, there aren't. And we're not the only Fund managers that are
competing for yield. The result has been increasing competition for lower-rated
securities with yield advantages, which has caused the opportunities to become
fewer over time. Some managers find yield opportunities among below
investment-grade municipals, but the MainStay Tax Free Bond Fund may not invest
in these securities. BBB-rated hospital issues had a positive impact on the
Fund's investment portfolio, and they continue to be among the Fund's more
productive securities.
Besides concentrating on higher-quality securities, what else did you do to
protect investors against risk?
The Fund used broad diversification by geographic location and types of
municipal securities to help reduce the impact of an upset in any one location
or market sector. At year end 1997, the Fund was invested across 26 states, the
District of Columbia, and Puerto Rico. Although there's a larger concentration
in states where there's more municipal issuance, such as New York, California,
Illinois, Massachusetts, and Texas, the Fund also owns bonds everywhere from
Alabama, Georgia, Florida, and New Mexico to New Hampshire, Minnesota, Nebraska,
and Washington State. In addition, the Fund's sector diversification included
everything from airports, schools, hospitals, and health care facilities to
water, power, sewers, transportation, pollution control, correctional
facilities, and community development bonds.
QUALITY BREAKDOWN AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
AAA 55.3%
AA 13.8%
A 6.7%
BBB 25.1%
Cash, Equivalents & Other Assets,
less Liabilities (0.9%)
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
10
<PAGE>
Were there other ways the Fund was diversified?
Yes, we bought a variety of coupons and maturities to help reduce the likelihood
of a major impact if a certain coupon or maturity goes out of favor.
What were some of the Fund's most significant purchases in 1997?
We bought a wide variety of securities during the year, each contributing
proportionately to the overall performance of the Fund.
We bought some Massachusetts Health and Educational bonds for Harvard
University, with a 5 3/8% coupon and a 2032 maturity. These were high-quality
bonds, rated AAA on their own, and we bought them at a price we believe was
inexpensive on a relative basis. In the late summer, we also purchased some
5.20% California Educational bonds for Stanford University, maturing in 2027.
And in October we bought some 5 1/8% New Hampshire Higher Educational & Health
Facilities bonds for Dartmouth College. All three bonds had similar
characteristics and a similar pricing story, and each has performed well for the
Fund.
We also bought certain bonds that helped the Fund's duration. We purchased
Massachusetts State Turnpike 5.00% bonds maturing in 2037, which were very
long-duration securities and very positive for the portfolio. And in the third
quarter, as we were lengthening the Fund's duration, we bought Dade County
Florida Special Obligation 5.00% bonds, maturing in 2035. Their longer duration
helped the portfolio throughout the end of the year.
Which securities did you sell during the year?
Again, we had a variety of sales, and for a variety of reasons. In the first
half of the year, we sold Detroit Michigan Sewer Disposal 5.00% bonds of 2025,
Texas Water Development 5 1/8% bonds of 2018, Upper Occoquan Virginia Sewer
5.00% bonds of 2025, and New York City Water 5.50% bonds of 2027. All of these
sales were designed to shorten the Fund's duration. As it happened, however, the
Fund would have been better off if it had retained the bonds, since the
direction of interest rates changed and having longer duration was positive
throughout the second half of the year.
We also purchased a Pennsylvania pooled obligation bond in the first half of the
year and sold it within two months at an attractive profit. Although the Fund
primarily invests for the long term, we're not averse to taking profits when
opportunities arise.
What were some of the portfolio's best performing bonds?
In addition to the Dade County Florida Special Obligation, Dartmouth College,
and Massachusetts State Turnpike bonds already mentioned, the following bonds
had a positive impact on the Fund's investment portfolio. Arapahoe E-470 Toll
Road 7.00% bonds, had a maturity of 2026, but were prerefunded. We sold them in
late September and early October, at a substantial gain. The Fund also did well
with Foothill Eastern Toll Road zero-coupon bonds maturing in 2027 and 2028,
which it held for the entire year. With their extremely long duration, the bonds
were positive contributors to the Fund's performance.
[GRAPHIC]
11
<PAGE>
[GRAPHIC]
Past performance is no guarantee of future results.
What exactly is prerefunding?
Most bonds carry a provision that allows the issuer to call bonds, generally
about 10 years after issuance. If the issuer wants to refinance outstanding debt
to take advantage of lower interest rates before the call date, the bonds can be
prerefunded. In a prerefunding, the issuer will issue new bonds and use the
proceeds to purchase Treasury securities that mature near the same date as the
original issue's call date. The securities are placed in an escrow account that
will be used to pay the interest until the first call date at which time the
principal is paid. The effect of the entire process for the bondholder is a
large gain because the municipals are in effect tax-free Treasury bonds whose
maturity has been reduced by more than 20 years in many cases.
Which bonds didn't perform well for the Fund?
The Fund held a number of high-coupon short-call bonds that helped provide
attractive yields and maintain the Fund's dividend in a declining rate
environment. But since the bonds were so close to their 1998 call dates, they
performed more like short-term securities, which detracted from performance,
particularly when bonds with greater call protection rallied. Among the names
that fell into this category were Georgia Municipal Electric Power 8.00% bonds
of 2015, Allegheny County Pennsylvania Airport 8.25% bonds of 2016, Illinois
Development Power 8.30% bonds of 2017, and Texas Brazos River Authority 8.10%
and 8.25% bonds of 2019.
What can be done to protect against call risk?
We're continually looking at call risk as we evaluate securities for the Fund.
Generally, we seek to extend call protection as we purchase new bonds.
Why didn't you just sell the short-call bonds?
With municipal coupons over 8.00% in a market where the average coupons were
considerably lower and already declining, it would be difficult to replace these
bonds. On balance, we were willing to forego total return for the income
potential these securities offered. And while they underperformed, we believe
having them in the Fund was positive in helping maintain the dividend throughout
the year.
What could you have done better in 1997?
In hindsight, we could have made better duration moves in the second quarter,
held more zero-coupon and noncallable bonds, and had more BBB securities. But
given how things looked as we proceeded through the year, we're pleased with the
way we managed both risk and reward and feel that the Fund's performance was
competitive in a challenging year.
What's your outlook for the future?
We believe that declining inflation should be good for the bond markets, but
recognize that lower rates and tighter spreads make it more difficult to find
new opportunities. In this environment, we will continue to focus on quality,
while seeking appropriate and competitive yields. At year end, municipals
appeared to be inexpensive relative to Treasuries, and we believe they may
outperform in 1998.
Ravi Akhoury
James Flood
Portfolio Managers
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 9.02% 6.15% 7.08% 6.61%
Class B 8.80% 6.02% 7.01% 6.56%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 4.11% 5.18% 6.58% 6.19%
Class B 3.80% 5.70% 7.01% 6.56%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 117 out of n/a n/a n/a
235 funds
Class B 149 out of 100 out of 69 out of 54 out of
235 funds 111 funds 72 funds 57 funds
Average Lipper
general municipal
debt fund 9.11% 6.84% 8.24% 7.91%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.19 $0.5112 $0.0000
Class B $10.19 $0.4914 $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 .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
12/31/97. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
[GRAPHIC]
13
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 12/31/97
- ------------------------------------------------------------------------------------------
HOLDING AMOUNT
==========================================================================================
<S> <C>
California Educational Facilities Authority Revenue,
Stanford University, Series N, 5.20%, due 12/1/27 $23,679,050
Massachusetts State Health & Education Facilities Authority Revenue,
Harvard University, Series P, 5.375%, due 11/1/32 23,361,975
Michigan State Hospital Finance Authority Revenue,
Genesys Health Systems, Series A, 7.50%, due 10/1/27 17,486,044
Dade County (Florida) Special Obligation, Series B
5.00%, due 10/1/35 15,606,563
Massachusetts State Turnpike Authority Metropolitan Highway
Systems Revenue, Series A, 5.00%, due 1/1/37 15,513,862
Georgia Municipal Electric Authority Power Revenue, Series A
8.00%, due 1/1/15 15,333,473
New Hampshire Higher Educational & Health Facilities Authority Revenue,
Dartmouth College, 5.125%, due 6/1/28 12,756,250
Louisiana Public Facilities Authority, Hospital Revenue,
Pendleton Memorial Methodist, 6.75%, due 6/1/22 12,426,500
New York State Medical Care Facilities, Finance Agency Revenue,
Hospital & Nursing Home, Series A, 8.00%, due 2/15/28 11,839,302
Texas Water Resources Finance Authority Revenue,
7.625%, due 8/15/08 11,710,400
</TABLE>
[GRAPHIC]
- ----------
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.
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
===================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (100.9%)+
ALABAMA (1.8%)
Birmingham Alabama Airport
Authority Revenue, Series A
7.375%, due 7/1/10 (a)..................... $ 3,600,000 $ 3,883,500
Mobile Alabama
General Obligation
5.00%, due 2/15/16......................... 5,000,000 5,000,000
------------
8,883,500
------------
CALIFORNIA (17.9%)
California Educational
Facilities Authority Revenue
Stanford University, Series N
5.20%, due 12/1/27......................... 23,620,000 23,679,050
University of Southern California
Series C
5.125%, due 10/1/28........................ 500,000 498,750
California State General Obligation
5.00%, due 10/1/16......................... 4,000,000 3,965,000
California Statewide Communities
Development Authority Lease
Revenue, United Airlines
Series A
5.70%, due 10/1/33 (a)..................... 1,900,000 1,921,375
Eden Township Hospital
District Revenue
7.40%, due 11/1/19......................... 5,300,000 5,644,500
Fontana Redevelopment Agency
Tax Allocation, Jurupa Hills
Project A
5.50%, due 10/1/27......................... 2,000,000 1,997,500
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/27.................. 56,105,000 11,361,262
(zero coupon), due 1/1/28.................. 23,540,000 4,502,025
Los Angeles Unified
School District, Series A
5.00%, due 7/1/21.......................... 1,500,000 1,473,750
Metropolitan Water District of
Southern California Waterworks
Revenue
Series A
5.00%, due 7/1/26-7/1/37................... 5,225,000 5,065,125
Series C
5.00%, due 7/1/27-7/1/37................... 8,325,000 8,064,875
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24.......................... 7,445,000 7,700,512
Oakland California Revenue, Series A
7.60%, due 8/1/21.......................... 10,500,000 10,924,725
Palo Alto California Unified
School District, Series B
5.375%, due 8/1/18......................... 1,275,000 1,308,469
San Diego County
Water Authority Revenue
Series A
4.75%, due 5/1/20.......................... 130,000 123,013
Simi Valley California Unified
School District
Refundable & Capital
Improvement Projects
5.25%, due 8/1/22.......................... 300,000 310,500
------------
88,540,431
------------
CONNECTICUT (2.0%)
Mashantucket Western Pequot Tribe
Connecticut Special Revenue
Series B
5.75%, due 9/1/27.......................... 9,500,000 9,832,500
------------
DISTRICT OF COLUMBIA (0.6%)
District of Columbia Revenue
Georgetown University
Series A
7.40%, due 4/1/18.......................... 2,815,000 2,990,937
------------
FLORIDA (3.1%)
Dade County
Special Obligation, Series B
5.00%, due 10/1/35......................... 16,110,000 15,606,563
------------
GEORGIA (3.1%)
Georgia Municipal Electric Authority
Power Revenue, Series A
8.00%, due 1/1/15.......................... 14,745,000 15,333,473
------------
</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.
15
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
ILLINOIS (8.0%)
Chicago Illinois Gas Supply Revenue
Peoples Gas, Light & Coke Co.
Series A
8.10%, due 5/1/20 (a)...................... $ 2,000,000 $ 2,197,500
Illinois Development Finance
Authority, Pollution Control
Revenue, Illinois Power Co.
Series A
8.30%, due 4/1/17 (b)...................... 10,000,000 10,306,900
Illinois Health Facilities Authority
Revenue
Glenoaks Hospital, Series E
9.50%, due 11/15/19........................ 850,000 983,875
Hinsdale Hospital
Series B
9.00%, due 11/15/15........................ 1,830,000 2,090,775
Series C
9.50%, due 11/15/19........................ 5,460,000 6,319,950
Loyola University Health System
Series A
5.00%, due 7/1/24.......................... 5,000,000 4,881,250
Proctor Community Hospital Project
7.375%, due 1/1/23......................... 3,700,000 3,931,250
Illinois Regional Transportation
Authority, Series C
7.10%, due 6/1/25.......................... 1,500,000 1,732,500
Kankakee Illinois Sewer Revenue
7.00%, due 5/1/16.......................... 2,000,000 2,265,000
Metropolitan Pier & Exposition
Authority, Illinois Dedicated
State Tax Revenue, Series A
(zero coupon), due 6/15/25................. 12,125,000 2,894,844
Southwestern Illinois Development
Authority, Medical Facilities
Revenue, Anderson Hospital
Project, Series A
7.00%, due 8/15/12......................... 2,000,000 2,147,500
------------
39,751,344
------------
INDIANA (2.0%)
Indiana Bond Backed Revenue
State Revolving Fund, Series A
5.25%, due 2/1/19.......................... 5,135,000 5,186,350
Indiana Health Facility Financing
Authority, Hospital Revenue
Jackson County Schneck
Memorial Hospital
7.50%, due 2/15/12......................... 2,600,000 2,863,250
Indianapolis Industrial Exempt
Facility Revenue, Mid-America
Energy Resource Income Project
7.25%, due 12/1/11 (a)..................... 2,000,000 2,115,000
------------
10,164,600
------------
LOUISIANA (3.5%)
Louisiana Public Facilities
Authority, Hospital Revenue
Pendleton Memorial Methodist
6.75%, due 6/1/22.......................... 11,600,000 12,426,500
Louisiana State Offshore Terminal
Authority, Deepwater Port Revenue
Series E
7.60%, due 9/1/10.......................... 4,480,000 4,926,119
------------
17,352,619
------------
MASSACHUSETTS (9.3%)
Massachusetts State Health &
Educational Facilities Authority
Revenue
Hallmark Health Systems
Series A
5.00%, due 7/1/27.......................... 1,500,000 1,443,750
Harvard University, Series P
5.375%, due 11/1/32 (b).................... 22,820,000 23,361,975
Medical Center of Central
Massachusetts
7.10%, due 7/1/21.......................... 2,500,000 2,756,250
Issue A
7.10%, due 7/1/21.......................... 300,000 327,750
University Hospital, Series C
7.25%, due 7/1/19 (b)...................... 2,500,000 2,725,000
Massachusetts State Turnpike
Authority Metropolitan Highway
Systems Revenue, Series A
5.00%, due 1/1/37.......................... 16,035,000 15,513,862
------------
46,128,587
------------
MICHIGAN (6.0%)
Detroit Michigan Sewer Disposal
Revenue, Series A
5.00%, due 7/1/27.......................... 5,000,000 4,893,750
Michigan Municipal Board
Authority Revenue
5.125%, due 10/1/20........................ 2,000,000 2,007,500
</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>
LONG-TERM MUNICIPAL BONDS (Continued)
MICHIGAN (Continued)
Michigan State Hospital Finance
Authority Revenue
Genesys Health Systems, Series A
7.50%, due 10/1/27......................... $15,255,000 $ 17,486,044
Pontiac Osteopathic Hospital
Series A
6.00%, due 2/1/24.......................... 5,000,000 5,150,000
------------
29,537,294
------------
MINNESOTA (0.6%)
Minneapolis & Saint Paul Minnesota
Metropolitan Airports Commission
Series 7
7.80%, due 1/1/13 (a)...................... 2,750,000 2,895,475
------------
MISSISSIPPI (1.3%)
Mississippi State General Obligation
Series C
4.75%, due 12/1/15......................... 6,355,000 6,267,619
------------
NEBRASKA (0.4%)
Nebraska Investment Finance
Authority, Single Family
Housing Revenue, Series C
6.30%, due 9/1/28 (a)...................... 2,000,000 2,130,000
------------
NEVADA (1.4%)
Clark County Airport Improvement
Revenue
8.125%, due 7/1/18 (a)..................... 6,500,000 6,763,900
------------
NEW HAMPSHIRE (4.6%)
New Hampshire Higher Educational &
Health Facilities Authority Revenue
Dartmouth College
5.125%, due 6/1/28......................... 13,000,000 12,756,250
5.70%, due 6/1/27.......................... 9,400,000 9,834,750
------------
22,591,000
------------
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 3,251,594
------------
NEW MEXICO (1.1%)
Farmington New Mexico Pollution
Control Revenue, Southern
California Edison Co.
Series A
7.20%, due 4/1/21.......................... 5,000,000 5,493,750
------------
NEW YORK (13.5%)
Battery Park City Authority
Revenue, Series A
5.50%, due 11/1/26......................... 100,000 103,125
Metropolitan Transportation
Authority, Service Contract
Commuter Facilities Revenue
Series 5
7.00%, due 7/1/12.......................... 2,265,000 2,463,188
Transport Facilities Revenue
Series 7
(zero coupon), due 7/1/14.................. 3,930,000 1,655,512
Series L
7.50%, due 7/1/17.......................... 5,950,000 6,177,707
Nassau County General Obligation
Series T
5.20%, due 9/1/15.......................... 600,000 609,000
New York City General Obligation
Series D
5.25%, due 8/1/21.......................... 700,000 686,000
Series C
5.50%, due 11/15/37........................ 2,500,000 2,500,000
7.00%, due 6/1/15.......................... 1,745,000 1,893,325
7.20%, due 8/15/15......................... 1,065,000 1,156,856
Series A
7.75%, due 8/15/07-8/15/16................. 425,000 475,237
Series D
8.00%, due 8/1/04.......................... 170,000 191,675
Series F
8.20%, due 11/15/04........................ 755,000 862,588
New York City Industrial Development
Agency Revenue
Brooklyn Navy Yard Cogen Partners
5.75%, due 10/1/36 (a)..................... 250,000 251,562
New York City Municipal Water
Finance Authority, Water & Sewer
Systems Revenue
5.75%, due 6/15/29......................... 1,000,000 1,062,500
Series C
6.20%, due 6/15/21......................... 600,000 655,500
</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 Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
New York State Dormitory Authority
Revenue
Cornell University, Series A
7.375%, due 7/1/30......................... $ 2,880,000 $ 3,153,600
Park Ridge Housing Income Project
7.85%, due 2/1/29.......................... 1,400,000 1,475,516
State Service Contract
Albany County
5.25%, due 4/1/17.......................... 200,000 197,250
State University Education Facilities
5.125%, due 5/15/21........................ 3,925,000 3,826,875
Series B
7.50%, due 5/15/11......................... 4,250,000 5,323,125
New York State Environmental
Facilities Corp. Pollution Control
Revenue, State Water
Series A
4.65%, due 6/15/07......................... 1,400,000 1,429,750
7.25%, due 6/15/10......................... 400,000 445,500
7.50%, due 6/15/12......................... 3,050,000 3,347,375
New York State Local Government
Assistance Corp.
(zero coupon), due 4/1/14.................. 1,130,000 497,200
New York State Medical Care Facilities
Finance Agency Revenue
7.375%, due 8/15/19........................ 1,615,000 1,715,938
7.80%, due 2/15/19......................... 595,000 629,213
7.875%, due 8/15/20........................ 450,000 496,687
Hospital & Nursing Home
Series A
8.00%, due 2/15/28......................... 11,345,000 11,839,302
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21........................ 3,875,000 4,069,912
New York State Urban Development
Corp. Revenue
5.375%, due 7/1/22......................... 3,600,000 3,654,000
Niagara Falls New York Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15......................... 500,000 520,000
Orange County New York
General Obligation
5.125%, due 9/1/20......................... 1,350,000 1,356,750
Port Authority of New York &
New Jersey Consolidated Bonds
Series 111
5.00%, due 10/1/22......................... 475,000 469,656
Port Jervis Industrial Development
Authority, Franciscan Health
Partnership
5.50%, due 11/1/16......................... 200,000 200,500
Upper Mohawk Valley Regional Water
Finance Authority, New York Water
Systems Revenue, Series A
5.125%, due 10/1/26........................ 1,250,000 1,235,938
------------
66,627,862
------------
OHIO (0.9%)
Cleveland Ohio Public Power
Systems Revenue, Series 1
5.00%, due 11/15/24........................ 2,000,000 1,962,500
Ohio State Air Quality Development
Authority Revenue, Pollution
Control, Cleveland County Project
8.00%, due 12/1/13......................... 2,000,000 2,332,500
------------
4,295,000
------------
OKLAHOMA (0.4%)
Tulsa Oklahoma Industrial
Authority Revenue
University of Tulsa, Series A
5.00%, due 10/1/22......................... 2,000,000 1,960,000
------------
PENNSYLVANIA (5.6%)
Allegheny County Airport Revenue
Greater Pittsburgh International
Airport, Series B
5.00%, due 1/1/19.......................... 5,000,000 4,931,250
Series C
8.25%, due 1/1/16 (a)...................... 4,800,000 4,896,000
Delaware County Pennsylvania
Industrial Development
Authority, Series A
6.20%, due 7/1/19.......................... 5,000,000 5,375,000
Emmaus Pennsylvania General
Authority Revenue, Series E
7.90%, due 5/15/18......................... 6,450,000 6,740,250
Horizon Hospital System Authority
Pennsylvania Hospital Revenue
6.35%, due 5/15/16-5/15/26................. 5,315,000 5,720,269
------------
27,662,769
------------
PUERTO RICO (1.1%)
Puerto Rico Commonwealth
Infrastructure Financing
Authority, Series A
5.00%, due 7/1/28.......................... 5,675,000 5,561,500
------------
</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>
Principal
Amount Value
===================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
SOUTH CAROLINA (0.5%)
Piedmont Municipal Power Agency
South Carolina Electric
Revenue, Series A
4.75%, due 1/1/25.......................... $ 2,885,000 $ 2,715,506
------------
TEXAS (9.6%)
Brazos River Authority Revenue
Houston Lighting &
Power Co. Project
Series C
8.10%, due 5/1/19.......................... 2,050,000 2,118,224
Series A
8.25%, due 5/1/19.......................... 2,500,000 2,582,325
Fort Worth Texas Higher Education
Finance Corp. Revenue
Texas Christian University Project
5.00%, due 3/15/27......................... 3,500,000 3,412,500
Harris County Texas Health Facilities
Development Corp. Revenue
School Healthcare System
Series B
5.75%, due 7/1/27.......................... 6,000,000 6,262,500
Texas Medical Center Project
5.90%, due 5/15/20......................... 3,000,000 3,221,250
Matagorda County Navigation
District 1, Pollution Control
Revenue
Central Power & Light Co. Project
7.50%, due 12/15/14........................ 2,400,000 2,616,000
Houston Lighting & Power Co.
Series E
7.20%, due 12/1/18 (b)..................... 3,470,000 3,730,250
South Texas Community College
District
5.75%, due 8/15/15......................... 1,500,000 1,582,500
Tarrant County Junior College
District
4.625%, due 2/15/15........................ 3,000,000 2,891,250
Texas Water Development Board
Revenue, Senior Lien B
5.00%, due 7/15/19......................... 7,500,000 7,387,500
Texas Water Resources Finance
Authority Revenue
7.625%, due 8/15/08........................ 11,260,000 11,710,400
------------
47,514,699
------------
UTAH (0.8%)
Intermountain Power Agency of Utah
Power Supply Revenue
Series A
5.00%, due 7/1/21.......................... 1,400,000 1,321,250
Utah County Hospital Revenue
IHC Health Services, Inc.
5.25%, due 8/15/26......................... 2,500,000 2,490,625
------------
3,811,875
------------
WASHINGTON (0.5%)
Washington State Public Power
Supply Systems Nuclear
Project No. 1 Revenue
Series A
5.125%, due 7/1/17......................... 2,500,000 2,450,000
------------
WEST VIRGINIA (0.7%)
West Virginia State Building
Commission Lease Revenue, West
Virginia Regional Jail & Correction
Series A
7.00%, due 7/1/15.......................... 3,000,000 3,255,000
------------
Total Long-Term Municipal Bonds
(Cost $483,542,937)........................ 499,369,397
------------
Total Investments
(Cost $483,542,937) (c).................... 100.9% 499,369,397(d)
Liabilities in Excess of Cash
and Other Assets........................... (0.9) (4,242,745)
----------- ------------
Net Assets 100.0% $495,126,652
=========== ============
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Segregated as collateral for futures contracts.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At December 31, 1997, net unrealized appreciation was $15,826,460, 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 $21,247,967 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $5,421,507.
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 as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $483,542,937).................................. $499,369,397
Cash............................................................................................... 1,189,279
Receivables:
Interest......................................................................................... 8,808,326
Investment securities sold....................................................................... 636,646
Fund shares sold................................................................................. 93,949
------------
Total assets.................................................................................... 510,097,597
------------
LIABILITIES:
Payables:
Investment securities purchased.................................................................. 14,091,741
MainStay Management.............................................................................. 257,363
Fund shares redeemed............................................................................. 248,288
NYLIFE Distributors.............................................................................. 206,953
Transfer agent................................................................................... 36,612
Custodian........................................................................................ 4,962
Trustees......................................................................................... 3,185
Accrued expenses................................................................................... 97,334
Variation margin payable on futures contracts...................................................... 24,507
------------
Total liabilities............................................................................... 14,970,945
------------
Net assets......................................................................................... $495,126,652
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A........................................................................................ $ 12,780
Class B........................................................................................ 473,028
Additional paid-in capital......................................................................... 488,459,115
Accumulated undistributed net investment income.................................................... 8,400
Accumulated net realized loss on investments....................................................... (9,653,131)
Net unrealized appreciation on investments......................................................... 15,826,460
------------
Net assets......................................................................................... $495,126,652
============
CLASS A
Net assets applicable to outstanding shares........................................................ $ 13,017,305
============
Shares of beneficial interest outstanding.......................................................... 1,277,972
============
Net asset value per share outstanding.............................................................. $ 10.19
Maximum sales charge (4.50% of offering price)..................................................... 0.48
------------
Maximum offering price per share outstanding....................................................... $ 10.67
============
CLASS B
Net assets applicable to outstanding shares........................................................ $482,109,347
============
Shares of beneficial interest outstanding.......................................................... 47,302,846
============
Net asset value and offering price per share outstanding........................................... $ 10.19
============
</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 for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest......................................................................................... $30,450,403
-----------
Expenses:
Service.......................................................................................... 1,237,025
Administration................................................................................... 1,217,473
Advisory......................................................................................... 1,217,473
Distribution--Class B............................................................................. 1,002,707
Management....................................................................................... 533,914
Transfer agent................................................................................... 373,284
Shareholder communication........................................................................ 176,944
Recordkeeping.................................................................................... 74,368
Professional..................................................................................... 60,967
Custodian........................................................................................ 52,565
Registration..................................................................................... 34,949
Trustees......................................................................................... 12,853
Miscellaneous.................................................................................... 29,340
-----------
Total expenses.................................................................................. 6,023,862
-----------
Net investment income.............................................................................. 24,426,541
-----------
REALIZED AND UNREALIZED GAINON INVESTMENTS:
Net realized gain (loss) from:
Security transactions............................................................................ 8,081,492
Futures transactions............................................................................. (1,942,168)
-----------
Net realized gain on investments................................................................... 6,139,324
-----------
Net change in unrealized appreciation on investments:
Security transactions............................................................................ 11,133,179
Futures transactions............................................................................. (48,937)
-----------
Net unrealized gain on investments................................................................. 11,084,242
-----------
Net realized and unrealized gain on investments.................................................... 17,223,566
-----------
Net increase in net assets resulting from operations............................................... $41,650,107
===========
</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 Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income........................................................... $ 24,426,541 $ 27,351,209
Net realized gain on investments................................................ 6,139,324 2,467,919
Net change in unrealized appreciation on investments............................ 11,084,242 (13,331,152)
------------ ------------
Net increase in net assets resulting from operations............................ 41,650,107 16,487,976
------------ ------------
Dividends to shareholders:
From net investment income:
Class A........................................................................ (659,120) (738,853)
Class B........................................................................ (23,759,021) (26,567,311)
------------ ------------
Total dividends to shareholders.............................................. (24,418,141) (27,306,164)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A........................................................................ 3,327,275 10,869,272
Class B........................................................................ 31,620,029 41,870,887
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A........................................................................ 503,552 551,381
Class B........................................................................ 14,892,349 16,676,585
------------ ------------
50,343,205 69,968,125
Cost of shares redeemed:
Class A........................................................................ (7,772,835) (4,558,162)
Class B........................................................................ (77,392,586) (94,941,242)
------------ ------------
Decrease in net assets derived from capital share transactions............... (34,822,216) (29,531,279)
------------ ------------
Net decrease in net assets................................................... (17,590,250) (40,349,467)
NET ASSETS:
Beginning of year................................................................. 512,716,902 553,066,369
------------ ------------
End of year....................................................................... $495,126,652 $512,716,902
============ ============
Accumulated undistributed net investment income (excess distribution)............. $ 8,400 $ (245)
============ ============
</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>
Class B
-----------------------------------
Class A Class B Class A Class B Class A Class B September 1
------ ------ ------ ------ ------ ------ through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
------------------ ------------------ ------------------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .... $ 9.84 $ 9.84 $10.02 $10.03 $ 9.20 $ 9.20 $ 9.71 $10.39 $10.21
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .... 0.51 0.49 0.54 0.51 0.52 0.51 0.17 0.51 0.57
Net realized and
unrealized gain (loss)
on investments ......... 0.35 0.35 (0.19) (0.19) 0.83 0.83 (0.51) (0.58) 0.47
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ............. 0.86 0.84 0.35 0.32 1.35 1.34 (0.34) (0.07) 1.04
------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income ................. (0.51) (0.49) (0.53) (0.51) (0.53) (0.51) (0.17) (0.53) (0.60)
From net realized gain
on investments ......... -- -- -- -- -- -- -- (0.08) (0.26)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions .......... (0.51) (0.49) (0.53) (0.51) (0.53) (0.51) (0.17) (0.61) (0.86)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end
of period .............. $10.19 $10.19 $9.84 $9.84 $10.02 $10.03 $9.20 $9.71 $10.39
====== ====== ===== ===== ====== ====== ===== ===== ======
Total investment return(a) 9.02% 8.80% 3.63% 3.33% 15.00% 14.86% (3.53%) (0.69%) 10.81%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............. 5.14% 4.93% 5.4% 5.2% 5.5% 5.2% 5.6%+ 5.4% 5.6%
Expenses ............. 1.01% 1.22% 1.0% 1.2% 1.0% 1.2% 1.2%+ 1.2% 1.2%
Portfolio turnover rate .. 119% 119% 95% 95% 110% 110% 37% 92% 138%
Net assets at end of
period (in 000's) ..... $13,017 $482,109 $16,486 $496,231 $9,752 $543,314 $513,781 $552,156 $476,761
</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.
23
<PAGE>
MainStay Tax Free Bond Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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 Sub-Adviser, whose prices reflect broker/dealer supplied
valuations and electronic data processing techniques if those prices are deemed
by the Sub-Adviser to be representative of market values at the regular close of
business of the 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 Sub-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
24
<PAGE>
Notes to Financial Statements
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 investments that occur between
the close of trading on the principal market for such investments and the
regular close of the Exchange will not be reflected in the Fund's calculation of
net asset value unless the Sub-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 and
price, 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.
25
<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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of 0.60% of the average
daily net assets of the Fund.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.30% of
the average daily net assets of the Fund.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.30% of
the average daily net assets of the Fund. As described above, MainStay
Management is currently paid a fee at a rate equal to the aggregate of the
advisory and administrative fee rates in effect paid prior to October 27, 1997.
For the period January 1, 1997, through October 26, 1997, MacKay-Shields and
NYLIFE Distributors each earned fees of $1,217,473. For the period October 27,
1997, through December 31, 1997, MainStay Management earned $533,914.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
from the Fund at an annual rate of 0.25% of the average
26
<PAGE>
Notes to Financial Statements continued
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.25%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $5,710 the year ended
December 31, 1997. The Fund was also advised that NYLIFE Distributors retained
contingent deferred sales charges on redemptions of Class B shares of $492,542
for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$236,458 and $16,906, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $16,493 for the year ended December
31, 1997.
27
<PAGE>
MainStay Tax Free Bond Fund
Fees for recordkeeping services provided to the Trust by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $13,665 and $60,703 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Federal Income Tax:
At December 31, 1997, for Federal income tax purposes, capital loss
carryforwards of $9,350,710, net of losses of $302,421 occurring after October
31, 1997, which have been deferred for Federal income tax purposes, are
available to the extent provided by regulations to offset future realized gains
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. The Fund utilized $6,392,807 of capital loss
carryforwards during the fiscal year.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $581,299 and $601,015,
respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
------------------- ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold........................................ 338 3,190 1,114 4,283
Shares issued in reinvestment of dividends......... 51 1,499 56 1,707
---- ------ ----- ------
389 4,689 1,170 5,990
Shares redeemed.................................... (787) (7,807) (467) (9,724)
---- ------ ----- ------
Net increase (decrease)............................ (398) (3,118) 703 (3,734)
==== ====== ===== ======
</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 Tax Free Bond Fund (one of
the fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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, 1998
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
graph showing Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund risk/reward of companies in expanding markets and are willing to accept a higher
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 showing the makeup and returns of the participate in the growth potential
risk/reward S&P 500* of stocks with the protection of a
of Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Offers broad diversification into You prefer the higher return potential
International Equity Fund graph showing international stock markets with of international equities or want to
risk/reward an emphasis on risk control add diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
graph showing Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/reward a special blend of capital may offer growth potential if converted
of Fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph showing return from common stocks, have undervalued and you want to
risk/reward convertible securities, and high-yield manage risk through multimarket
of Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
graph showing Balances current income with growth You seek a combination of income and
Total Return Fund risk/reward opportunities by investing in stocks, growth potential and want to manage
of Fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
graph showing Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward attractive dividends and a stimulus securities which may have more poten-
of Fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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 showing consistent with safety of principal current income and safety of principal
risk/reward primarily from U.S. government
of Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
High Yield graph showing An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/reward fund that is actively managed for and can accept the higher risk of
of Fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph showing non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward risk control diversification to your domestic
of Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph showing preservation of capital, and competitive yields on cash you're plan-
risk/reward liquidity, with free checkwriting** ning to spend or invest in the near future
of Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph showing tive overall return by investing in higher income and overall return by
risk/reward a diversified portfolio of domestic investing in multiple bond market
of Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You're a California resident and want to
California Tax Free Fund graph showing from both federal and California keep more of what you earn by invest-
risk/reward income taxes consistent with ing for income that's double tax free+++
of Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income exempt You're a New York State or City resident
New York Tax Free Fund graph showing from federal, New York State, and and want to keep more of what you earn
risk/reward New York City income taxes consis- with income that's double or triple tax
of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar
graph showing Seeks high current income You're in a high federal income tax
TAX FREE BOND FUND risk/reward exempt from regular federal income tax bracket or want to pay less of your
of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============
---------------------
Tax Free Bond Fund
---------------------
Annual Report
December 31, 1997
[LOGO]
MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E.Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
MSAN14-02/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Strategic Income Fund Highlights 5
$10,000 Invested in the MainStay Strategic
Income Fund versus Lehman Brothers
Aggregate Bond Index and Inflation--
Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Performance from 2/28/97 through 12/31/97 8
Asset Allocation as of 12/31/97 9
Portfolio Composition 11
Fund & Lipper Returns 12
Top 10 Holdings 13
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 23
Notes to Financial Statements 27
Report of Independent Accountants 35
The MainStay Funds 36
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising
first quarter rise, the stock market took a disappointing turn in April. Before
long, however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Strategic Income Fund, and MainStay Management, Inc.; approve a
Subadvisory Agreement between MainStay Management, Inc., on behalf of the
MainStay Strategic Income Fund, and MacKay Shields Financial Corporation;
eliminate or revise certain fundamental investment restrictions including
eliminating certain state-imposed fundamental investment restrictions and
eliminating or revising fundamental restrictions pertaining to industry
concentration and issuing senior securities; and ratify the selection of Price
Waterhouse LLP as independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay
Strategic Income Fund is presented below.
PROPOSAL 1--Election of Trustees
<TABLE>
<CAPTION>
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan ........................................................ 4,594,269 56,091 Passed
Nancy Maginnes Kissinger ............................................... 4,594,269 56,091 Passed
Donald E. Nickelson .................................................... 4,594,269 56,091 Passed
Richard S. Trutanic .................................................... 4,594,269 56,091 Passed
Harry G. Hohn .......................................................... 4,594,269 56,091 Passed
Terry L. Lierman ....................................................... 4,594,269 56,091 Passed
Donald K. Ross ......................................................... 4,594,269 56,091 Passed
Walter W. Ubl .......................................................... 4,594,269 56,091 Passed
Alice T. Kane .......................................................... 4,594,269 56,091 Passed
John B. McGuckian ...................................................... 4,594,269 56,091 Passed
Stephen C. Roussin ..................................................... 4,594,269 56,091 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 4,528,414.08 Against - 21,823.43 Abstain - 100,119.52 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 4,524,979.03 Against - 32,447.58 Abstain - 92,930.42 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 4,187,780.72 Against - 26,417.68 Abstain - 98,590.75 Broker Non-Vote - 337,569.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A2--Oil, Gas, or Mineral Lease Interests................................ 4,187,780.72 26,417.68 Passed
A3--Real Estate Limited Partnership Interests........................... 4,187,780.72 26,417.68 Passed
C3--Industry Concentration.............................................. 4,187,780.72 26,417.68 Passed
C4--Issuing Senior Securities........................................... 4,187,780.72 26,417.68 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 4,559,809.12 Against - 6,886.94 Abstain - 83,660.97 Result - Passed
</TABLE>
4
<PAGE>
MainStay Strategic Income Fund Highlights
- --------------------------------------------------------------------------------
MARKET HIGHLIGHTS FOR THE PERIOD ENDED 12/31/97
================================================================================
[ ] Despite a Federal Reserve Board move to raise interest rates at the end of
March, slowing economic growth and low inflation caused U.S. interest rates
to decline throughout the rest of the year.
[ ] The resulting bond rally caused U.S. bonds to outperform many international
markets, with yield-enhancing bonds, such as mortgage-backed and
asset-backed securities, performing well in March and early April, and
Treasuries outperforming for the rest of the year.
[ ] Domestic corporate bonds, which were relatively strong from the end of
February through June, performed poorly in the second half of the year.
[ ] Low inflation, low interest rates, and work toward European Monetary Union
helped most European markets provide competitive local returns, though a
strong U.S. dollar presented substantial currency risk for U.S. investors
with unhedged positions.
[ ] Financial problems in Asia in the second half of the year caused severe
setbacks for Asian investors, but resulted in a flight to quality that
helped higher-quality bonds in both the domestic high-grade and high-yield
sectors.
================================================================================
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE PERIOD ENDED 12/31/97
================================================================================
[ ] From the Fund's inception on February 28, 1997, through December 31, 1997,
the MainStay Strategic Income Fund returned 6.62% and 6.02% for Class A and
Class B shares, respectively, excluding all sales charges.
[ ] Both share classes underperformed the average Lipper* multisector income
fund, which returned 7.00% from the Fund's inception on February 28, 1997,
through December 31, 1997.
[ ] The Fund maintained a neutral to long duration throughout most of the year,
which benefited performance in both domestic and international bonds.
[ ] The Fund was overweighted in domestic bonds, with emphasis on
yield-enhancing securities from inception through June 1997, and Treasuries
in the second half of the year.
[ ] Since the Fund had little exposure to foreign currencies, the negative
effects of a strong U.S. dollar were minimized for Fund shareholders.
[ ] Among high-yield issuers, the Fund remained relatively defensive,
emphasizing higher-quality credits over middle- and lower-tier issues.
================================================================================
- ----------
* See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Strategic Income Fund versus Lehman Brothers
Aggregate Bond Index and Inflation
CLASS A SHARES SEC Return: since inception 1.83%
[THE FOLLOWING WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Strategic Lehman Brothers
Year Income Aggregate Bond
End Fund Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
2/28/97 $ 9,550 $10,000 $10,000
3/31/97 $ 9,445 $ 9,889 $10,006
6/30/97 $ 9,834 $10,252.9 $10,031
9/30/97 $10,181 $10,594.3 $10,093.2
12/31/97 $10,183 $10,906.9 $ 9,800
</TABLE>
[GRAPHIC] MainStay Strategic Income Fund
[GRAPHIC] Lehman Brothers Aggregate Bond Index*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Return: since inception 1.02%
[THE FOLLOWING WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Strategic Lehman Brothers
Year Income Aggregate Bond
End Fund Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
2/28/97 $10,000 $10,000 $10,000
3/31/97 $ 9,890 $ 9,889 $10,006
6/30/97 $10,268 $10,252.9 $10,031
9/30/97 $10,612 $10,594.3 $10,093.2
12/31/97 $10,602 $10,906.9 $10,130.5
</TABLE>
[GRAPHIC] MainStay Strategic Income Fund
[GRAPHIC] Lehman Brothers Aggregate Bond Index*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 2/28/97
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 2/28/97. Returns shown reflect a
5% Contingent Deferred Sales Charge (CDSC), which 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 Lehman Brothers Aggregate Bond Index includes fixed rate debt issues
rated investment grade or higher by Moody's Investors Service, Standard and
Poor's, or Fitch Investor's Service, in that order. All issues must have at
least one year left to maturity and have an outstanding par value of at
least $100 million. The Lehman Brothers Aggregate Bond Index is comprised
of the Lehman Brothers Government/Corporate, the Mortgage-Backed
Securities, and the Asset-Backed Securities Indices.
+ 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Strategic Income Fund Team
STRATEGIC INCOME FUND TEAM
Neil Feinberg, Edward Munshower,
Steven Tananbaum, and Joseph Portera
For U.S. bond investors, 1997 was a strong year, with shifting market conditions
creating different opportunities over time. In the first half of the year,
concerns about rapid economic growth and possible inflation led the Federal
Reserve Board to move to raise interest rates at the end of March. But as signs
of slowing economic growth and lower inflation emerged, rates gradually declined
through the rest of the year, causing a substantial rally in domestic bonds.
Yield-enhancing securities such as mortgage-backed and asset-backed securities
and collateralized mortgage obligations (CMOs) outperformed in the first half of
the year, while Treasuries provided superior returns in the second half of 1997.
Foreign markets had even more complex dynamics. In Europe, corporate
restructuring and fiscal improvements associated with European Monetary Union
benefited many bond markets. Despite competitive performance in local
currencies, however, a strengthening U.S. dollar caused most European markets to
have negative returns in U.S. dollar terms. The U.K. was the world's outstanding
performer, outpacing the U.S. market in both local and U.S. dollar terms.
Although emerging markets performed well in the first half of the year, currency
problems and fiscal difficulties throughout Asia in the second half of the year
caused investors to quickly withdraw from Asian securities and pursue
opportunities elsewhere. The ensuing interest in higher-quality securities
helped stimulate the rally in U.S. Treasuries and an influx of foreign and
domestic capital also boosted prices in the domestic high-yield market.
High-yield bonds with higher credit quality outperformed lower-quality issues,
as high levels of demand caused prices to rise across the board. This made it
more difficult to find adequate compensation for the risks involved in
lower-quality issues.
How did the MainStay Strategic Income Fund do in this market environment?
From the Fund's inception on February 28, 1997, through December 31, 1997, the
MainStay Strategic Income Fund returned 6.62% and 6.02% for Class A and Class B
shares, respectively, excluding all sales
[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).
Asset-backed
securities
- ------------
Bonds or notes backed by loans or an anticipated income stream from the sale of
merchandise or services. The bonds are generally originated by banks, credit
card companies, or other providers of credit and often "enhanced" by a bank
letter of credit or by insurance from an institution other than the issuer.
European Monetary Union
- -----------------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
7
<PAGE>
[GRAPHIC]
U.S. dollar terms/
Local currency terms
- --------------------
Returns expressed in U.S. dollar terms reflect any differences in the relative
value of the local currency and the U.S. dollar. Returns expressed in local
currency terms show what investors using that currency would have earned,
without any adjustment for differences in currency values.
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its income securities--or a measure of the general credit risk of securities in
an income portfolio.
- ----------
* See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
PERFORMANCE FROM 2/28/97 THROUGH 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Total
Year Return
End %
- -----------------------------------------
<S> <C>
12/97 6.62% - Class A
12/97 6.02% - Class B
</TABLE>
See footnote * on page 12 for more information on performance.
charges. Both share classes underperformed the average Lipper* multisector
income fund, which returned 7.00% for the Fund's since-inception period.
What caused the Fund to underperform its peers?
The Fund was defensively positioned in the high-yield market, with a relatively
small weighting in this sector through much of the year. While that helped
performance from inception through the end of June, it hurt the Fund in the
second half of the year, when high-yield bonds performed well. Within the
high-yield sector, we emphasized higher-quality bonds that offered less risk,
but also lower returns, than lower-rated issues.
Did the Fund have any successes in the high-yield sector?
Absolutely. The Fund's best-performing high-yield issuers included names such as
Affiliated Newspapers, a newspaper chain that met our expectations and performed
very well, and USN Communications, which gave the Fund exposure to the highly
competitive and rapidly growing local area telephone service market.
Were there other high-yield success stories?
Yes, there were. The Fund bought several issues that performed well, including
Extendicare, a nursing home chain, Pegasus Shipping, whose first mortgage notes
were secured by Panamax oil tankers, and Kitty Hawk, an airfreight company that
offered notes secured by aircraft. Each of these companies had strong
fundamentals and their securities offered good relative value and positive
performance.
Did all of the Fund's high-yield bonds perform well?
No, there were some difficulties. Cityscape Financial was an aggressive subprime
mortgage lender that faced prepayment problems as interest rates continued to
decline and their bonds provided negative
8
<PAGE>
ASSET ALLOCATION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Domestic Securities 44.6%
International Securities 22.7%
High-Yield Securities 22.7%
Cash, Equivalents & Other Assets, less Liabilities 10.0%
</TABLE>
Actual percentages will vary over time.
returns. Although the Fund had little exposure to Asian markets, one security we
liked was First Pacific Capital--a conglomerate with premier Asian holdings,
excellent fundamentals, a liquid balance sheet, and promising prospects. Despite
these strengths, the bonds continued to falter as the Asian difficulties
unfolded in the second half of the year. The Fund continues to hold the bonds,
hoping that they will be one of the first to recover when investors refocus on
fundamentals in Asian markets.
What happened in the domestic high-grade sector?
The Fund was overweighted in domestic high-grade issues throughout the year,
which had a generally positive impact on performance in the first half of the
year. After basic asset allocation, the most important decision we made in
domestic bonds was our duration strategy. Being short from inception through the
end of March and neutral to long through the rest of the year helped position
the Fund positively for changes that occurred in domestic interest rates.
Which securities did you emphasize?
Our decision to overweight the Fund in mortgage-backed securities from inception
through June provided yield-enhancing opportunities when the yield curve,
duration adjustments, and government securities had little to offer. At the
time, we concentrated on mortgage-backed and asset-backed bonds, and
collateralized mortgage obligations. When opportunities arose, the Fund realized
profits in CMOs and invested in low-balance loans, AAA manufactured housing
loans, and AAA-rated home equity loans. All of these investments had a positive
impact on performance.
What about the second half of the year?
During the second half of the year, declining rates raised prepayment concerns
and we moved the Fund out of mortgage-related securities and into Treasuries.
The Fund was able to capitalize on several opportunities to switch between newer
and older government issues and back again, based on technical supply and demand
factors in the market. With incremental gains
[GRAPHIC]
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.
9
<PAGE>
[GRAPHIC]
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
government and mortgage-backed securities--or between different securities in a
single sector, such as 5- and 10-year Treasuries.
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 in
other markets, including the issuer's domestic market overseas.
Hedging/Currency
management
- ----------------
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.
on each exchange and a relatively long duration, the strategy proved beneficial
for the Fund.
Were there other high-grade domestic securities you bought for the Fund during
the second half of 1997?
Yes, as yield spreads widened, we spotted some opportunities among basic 5-year
agencies and Fannie Mae paper, which offered attractive characteristics with few
prepayment worries. Both contributed positively to performance.
How did the Fund's corporate bond holdings perform?
Although corporate bonds, particularly Yankee bonds and telecommunications
issues, performed relatively well in the first half of the year, corporate bonds
were a weak spot in the portfolio during the second half. October was a
particularly bad month. The Fund had a slightly overweighted position in Korean
paper that suffered a severe downgrade. Although we sold it before the downgrade
occurred, it had a definite negative impact on the Fund's performance, even
though Yankee bonds have no currency exposure. The Fund had other Yankee
holdings that did better, but not enough to overshadow the Korean difficulty.
What about other international bonds?
The Fund had success in U.K. bonds, which outperformed all other markets,
including the U.S. in both local currency and U.S. dollar terms. Canada was the
world's second-best performing market and the Fund had some investments there.
Our decision to emphasize Europe, including several peripheral European
countries was generally positive. And the Fund had good success with Australian
bonds, taking some profits near the end of the year.
Do international bonds carry a lot of currency risk?
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. Nevertheless, the Fund's
international bonds are substantially hedged to reduce the potential risk of
shifting currency values. The wisdom of this strategy was evident in 1997, when
a strong U.S. dollar caused most markets to provide negative returns for
unhedged U.S. investors. Using substantial hedges in the Fund helped to minimize
currency risk and was positive for the Fund's overall performance.
Did the Fund own any convertible securities?
Yes, it did, and they were generally positive performers. We purchased Bethlehem
Steel preferred stock at an attractive price and sold it when it reached its
peak, which accounted for the largest overall gain in the Fund for the year. We
also invested in the convertibles of Empresas ICA, a Mexican construction
company, with strong value. These securities did very well
10
<PAGE>
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percent
-------
<S> <C>
Foreign Bonds 22.7%
Corporate Bonds 23.2%
U.S. Government & Federal Agencies 15.7%
Covertible Bonds 14.8%
Asset-Backed Securities 1.9%
Yankee Bonds 8.8%
Cash, Equivalents & Other Assets, less Liabilities 10.0%
All Other 2.9%
</TABLE>
Actual percentages will vary over time.
for the portfolio, despite weaknesses in the energy sector in general.
What is the overall quality rating of the Fund's investment portfolio?
Most of the Fund's holdings are investment grade and the Fund's investment
portfolio has an overall quality rating of BBB. With diversification across
domestic high-grade, international, and high-yield bonds, however, the Fund
holds securities with a wide range of quality ratings.
How were the Fund's assets allocated at year end?
At the end of 1997, the Fund had 45% of its assets in domestic high-grade
securities, 23% in high-yield bonds, and 23% in international bonds. Relative to
the Fund's initial allocation, we believe this allocation will allow the Fund to
take greater advantage of opportunities in the high-yield market going forward,
although we remain cautious about overpricing among high-yield bonds.
What else do you see as you look ahead?
We believe that the effects of currency and fiscal problems in Asia will
continue to impact markets around the world. With foreign goods becoming more
expensive in Asian markets, multinational companies could experience a decrease
in profits. We also believe that the Asian situation could result in lower
inflation in the United States, which could be good for the U.S. bond market.
Until the Asian difficulties begin to subside, we will continue to emphasize
Europe in the international portion of the Fund. Over time, however, we believe
that undervalued securities in Asia may provide buying opportunities. As markets
shift and opportunities arise, the Fund will continue to seek to provide current
income and competitive overall return by investing primarily in domestic and
foreign debt securities.
Neil Feinberg
Joseph Portera
Edward Munshower
Steven Tananbaum
Portfolio Managers
[GRAPHIC]
11
<PAGE>
[GRAPHIC]
Fund & Lipper Returns as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
Life of Fund
through 12/31/97
<S> <C>
Class A 6.62%
Class B 6.02%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
Life of Fund
through 12/31/97
<S> <C>
Class A 1.83%
Class B 1.02%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Lipper+ category return as of 12/31/97
================================================================================
Life of Fund
through 12/31/97
<S> <C>
Average Lipper
multisector income fund 7.00%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the period ended 12/31/97
================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $9.91 $0.5359 $0.2067
Class B $9.91 $0.4772 $0.2067
================================================================================
</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 certain fee waivers and/or expense limitations, without which total
return figures may have been lower. The fee waivers and/or expense
limitations are voluntary and may be terminated or revised at any time.
Class A shares are sold with a maximum initial sales charge of 4.5% and an
annual 12b-1 fee of .25%. Class B shares 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
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 average listed above is not class specific. Life of Fund
return is from the period of the initial offering of both share classes on
2/28/97 through 12/31/97.
12
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 12/31/97
- --------------------------------------------------------------------------------
HOLDING COUNTRY AMOUNT
================================================================================
<S> <C> <C>
Inco Ltd., 5.75%, due 7/1/04 United States $1,895,000
Nykredit, Series ANN1, 7.00%, due 10/1/29 Denmark 1,511,032
Consolidated Natural Gas Co., 7.25%
due 12/15/15 United States 1,150,000
United Kingdom Treasury Bond 7.50%
due 12/7/06 United Kingdom 1,139,112
Freeport McMoRan Copper & Gold, Inc.
7.00%, Series A United States 1,084,375
Viacom, Inc., 6.75%, due 1/15/03 United States 980,871
Inacom Corp., 4.50%, due 11/1/04 United States 955,000
United Kingdom Treasury Bond 10.00%
due 2/26/01 United Kingdom 866,504
Empresas ICA Sociedad Controladora S.A.
Series U.S. 5.00%, due 3/15/04 United States 795,000
Boston Chicken, Inc., (zero coupon), due 6/1/15 United States 775,000
================================================================================
</TABLE>
[GRAPHIC]
- ----------
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 and U.S. government and
federal agency issues are excluded. See Portfolio of Investments for specific
type of security held.
13
<PAGE>
[GRAPHIC]
- ----------
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
and U.S. government and federal agency issues are excluded. See Portfolio of
Investments for specific type of security held.
<TABLE>
<CAPTION>
10 Largest Purchases for the period ended 12/31/97
- ----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF PURCHASE
========================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds, 7.25%-10.00%
due 2/26/01-12/7/15 United Kingdom $5,260,749
Inco Ltd., 5.75%-7.75%, due 7/1/04-3/15/16 United States 4,143,750
Buoni Poliennali del Tesoro, 6.78%-12.00%
due 4/1/99-11/1/26 Italy 3,474,526
AB Spintab, 7.50%, due 8/14/49
7.9391%, beginning 8/14/06 United States 3,267,324
Republic of Colombia, 8.375%-8.70%
due 2/15/16-2/15/27 United States 3,250,620
Export-Import Bank of Korea, 6.375%-7.10%
due 2/15/06-3/15/07 United States 2,561,469
Nykredit, 6.00%-7.00%, due 10/1/26-10/1/29 Denmark 2,422,274
Republic of Argentina, 3.21%-10.95%
due 11/1/99-3/31/23 Argentina/United States 1,989,861
Republic of Brazil, 5.25%-8.875%
due 11/5/01-4/15/24 United States 1,960,569
US West, Inc. Series U.S., (zero coupon)
due 6/25/11 United States 1,868,750
========================================================================================
<CAPTION>
10 Largest Sales for the period ended 12/31/97
- ----------------------------------------------------------------------------------------
AMOUNT
SECURITY COUNTRY OF SALE
========================================================================================
<S> <C> <C>
Republic of Colombia, 8.375%-8.70%
due 2/15/16-2/15/27 United States $3,268,372
AB Spintab, 7.50%, due 8/14/49
7.9391%, beginning 8/14/06 United States 3,080,490
United Kingdom Treasury Bonds, 7.25%-10.00%
due 2/26/01-12/7/15 United Kingdom 2,964,667
Export-Import Bank of Korea, 6.375%-7.10%
due 2/15/06-3/15/07 United States 2,379,780
Inco Ltd., 5.75%-7.75%, due 7/1/04-3/15/16 United States 2,055,000
Republic of Brazil, 5.25%-8.875%
due 11/5/01-4/15/24 United States 1,896,222
United Mexican States, 6.25%-11.50%
due 12/31/19-5/15/26 United States 1,875,000
Zurich Capital I, 8.376%, due 6/1/37 United States 1,793,150
Buoni Poliennali del Tesoro, 6.78%-12.00%
due 4/1/99-11/1/26 Italy 1,743,692
Hutchinson Whampoa Financial Ltd., 6.95%-7.50%
due 8/1/07-8/1/27 United States 1,738,878
========================================================================================
</TABLE>
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM BONDS (87.2%)+
ASSET-BACKED SECURITIES (8.8%)
AUTO LOANS (0.7%)
Nissan Auto Receivables Grantor Trust
Series 1997-A Class A
6.15%, due 2/15/03........................ $ 446,540 $ 446,380
------------
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (1.8%)
Asset Securitization Corp.
Series 1997-D5 Class A1C
6.75%, due 2/14/41........................ 245,000 250,192
Commercial Mortgage
Acceptance Corp.
Series 1997-ML1 Class A3
6.57%, due 10/15/07....................... 180,000 181,580
GS Mortgage Securities Corp. II
Series 1997-GL Class A-2B
6.86%, due 7/13/30........................ 250,000 256,772
Lehman Large Loan
Series 1997-LL1 Class A1
6.79%, due 6/12/04........................ 199,278 203,666
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C2 Class A1
7.1817%, due 6/15/21 (d).................. 234,468 238,560
------------
1,130,770
------------
CONSUMER LOANS (1.7%)
BankBoston Recreational Vehicle
Asset Backed Trust
Series 1997-1 Class A10
6.39%, due 1/15/03........................ 120,000 120,406
Chase Manhattan Recreational
Vehicle Owner Trust
Series 1997-A Class A5
6.05%, due 11/15/04....................... 240,000 239,522
Green Tree Recreational
Equipment & Consumer Trust
Series 1997-C Class A1
6.49%, due 2/15/18........................ 541,428 543,399
NationsCredit Grantor Trust
Series 1997-2 Class A2
6.25%, due 11/15/13....................... 138,768 138,883
------------
1,042,210
------------
EQUIPMENT LOANS (0.5%)
Newcourt Receivables Asset Trust
Series 1996-3 Class A
6.24%, due 12/20/04....................... 185,123 184,731
Series 1996-2 Class A
6.87%, due 6/20/04........................ 182,365 183,186
------------
367,917
------------
FINANCIAL SERVICES (0.7%)
PNC Mortgage Securities Corp.
Series 1997-6 Class A
6.60%, due 7/25/27........................ 407,410 408,527
------------
MANUFACTURED HOUSING (0.8%)
Mid-State Trust VI
Class A4
7.79%, due 7/1/35......................... 483,327 500,229
------------
RESIDENTIAL MORTGAGE LOANS (2.3%)
Financial Asset Securitization Inc.
Series 1997-NAM2 Class FA8
10.00%, due 7/25/27....................... 425,769 448,351
Norwest Asset Securities Corp.
Series 1997-10 Class A2
6.50%, due 8/25/27........................ 530,000 531,087
Residential Asset Securitization Trust
Series 1997-A5 Class A4
10.00%, due 7/25/27....................... 425,560 444,484
------------
1,423,922
------------
UTILITIES (0.3%)
California Infrastructure PG & E-1
Series 1997-1 Class A3
6.15%, due 6/25/02........................ 210,000 210,517
------------
Total Asset-Backed Securities
(Cost $5,498,436)......................... 5,530,472
------------
BRADY BOND (0.1%)
FOREIGN GOVERNMENT (0.1%)
Republic of Poland
Series RSTA
3.75%, due 10/27/24 (d)................... 50,000 33,625
------------
Total Brady Bond
(Cost $31,230)............................ 33,625
------------
</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.
15
<PAGE>
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CONVERTIBLE BONDS (14.8%)
BANKS (0.3%)
MBI Finance Ltd.
(zero coupon), due 12/18/01 (k) .......... $ 390,000 $ 218,400
------------
CELLULAR TELEPHONE (0.3%)
United Communication Industry
Public Co., Ltd.
2.75%, due 4/4/06 (k)..................... 432,000 172,800
------------
CHEMICALS (0.8%)
RPM, Inc. of Ohio
(zero coupon), due 9/30/12 ............... 1,000,000 492,500
------------
COMPUTERS & OFFICE EQUIPMENT (2.5%)
Inacom Corp.
4.50%, due 11/1/04........................ 1,000,000 955,000
S3, Incorporated
5.75%, due 10/1/03........................ 1,000,000 605,000
------------
1,560,000
------------
CONGLOMERATES (0.5%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (k).... ............... 430,000 341,850
------------
CONSTRUCTION AND ENGINEERING (1.3%)
Empresas ICA Sociedad
Controladora S.A.
Series U.S.
5.00%, due 3/15/04 (f).................... 1,000,000 795,000
------------
ELECTRICAL EQUIPMENT (0.7%)
Credence Systems Corp.
5.25%, due 9/15/02 (c).................... 500,000 420,000
------------
GAS UTILITIES (1.8%)
Consolidated Natural Gas Co.
7.25%, due 12/15/15....................... 1,000,000 1,150,000
------------
MEDIA (0.2%)
Rogers Communications, Inc.
(zero coupon), due 5/20/13 (f) ........... 340,000 143,225
------------
PAPER & FOREST PRODUCTS (0.5%)
Sappi BVI Finance Ltd.
7.50%, due 8/1/02 (k)..................... 310,000 285,200
------------
RESTAURANTS & LODGING (1.2%)
Boston Chicken, Inc.
(zero coupon), due 6/1/15................. 5,000,000 775,000
------------
STEEL, ALUMINUM & OTHER METALS (3.0%)
Inco Ltd.
5.75%, due 7/1/04 (f)..................... 2,000,000 1,895,000
------------
TECHNOLOGY (1.4%)
HMT Technology Corp.
5.75%, due 1/15/04........................ 500,000 427,500
5.75%, due 1/15/04 (c).................... 500,000 437,500
------------
865,000
------------
TELECOMMUNICATION EQUIPMENT (0.3%)
Loxley Public Co.
3.50%, due 4/20/05 (k).................... 245,000 171,500
------------
Total Convertible Bonds
(Cost $10,018,915)........................ 9,285,475
------------
CORPORATE BONDS (23.2%)
AUTO PARTS (0.0%) (b)
CSK Auto, Inc.
Series A
11.00%, due 11/1/06....................... 15,000 16,500
------------
BANKS (3.1%)
AB Spintab
7.50%, due 8/14/49
7.9391%, beginning 8/14/06 (c) ........... 185,000 190,476
Bankers Trust New York Corp.
Series A
6.70%, due 10/1/07........................ 90,000 89,898
Capital One Bank
Series BKNT
7.15%, due 9/15/06........................ 400,000 407,888
Deutsche Bank Finance NV
6.375%, due 12/23/98 (k).................. 355,000 356,399
First Nationwide Holdings, Inc.
12.25%, due 5/15/01....................... 275,000 309,375
Local Financial Corp.
11.00%, due 9/5/04 (c).................... 135,000 142,425
MBNA America Bank, N.A.
7.25%, due 9/15/02........................ 200,000 205,794
Star Capital I
6.7025%, due 6/15/27 (d).................. 165,000 163,235
</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>
CORPORATE BONDS (Continued)
BANKS (Continued)
Suntrust Capital I
6.545%, due 5/15/27 (d)................... $ 50,000 $ 49,160
------------
1,914,650
------------
BUILDING MATERIALS (0.3%)
Associated Materials, Inc.
11.50%, due 8/15/03....................... 200,000 214,000
------------
BUILDINGS (0.8%)
Greystone Homes, Inc.
10.75%, due 3/1/04........................ 450,000 490,500
------------
CABLE (1.4%)
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99................. 90,000 29,700
CS Wireless Systems, Inc.
Series B
(zero coupon), due 3/1/06
11.375%, beginning 3/1/01................. 225,000 58,500
Heartland Wireless
Communications, Inc.
Series B
14.00%, due 10/15/04...................... 45,000 16,650
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99.................. 525,000 485,625
United International Holdings, Inc.
Series B
(zero coupon), due 11/15/99............... 300,000 252,000
------------
842,475
------------
CASINOS (1.2%)
El Comandante Capital Corp.
11.75%, due 12/15/03...................... 43,000 42,570
Grand Casinos, Inc.
10.125%, due 12/1/03...................... 140,000 150,500
Horseshoe Gaming LLC
Series B
12.75%, due 9/30/00....................... 125,000 137,500
Penn National Gaming, Inc.
10.625%, due 12/15/04 (c)................. 300,000 309,000
President Riverboat Casinos, Inc.
13.00%, due 9/15/01....................... 140,000 130,200
------------
769,770
------------
CELLULAR TELEPHONE (0.7%)
CCPR Services, Inc.
10.00%, due 2/1/07........................ 100,000 96,000
Centennial Cellular Corp.
8.875%, due 11/1/01....................... 300,000 307,500
------------
403,500
------------
DRUGS (0.8%)
Merck & Co., Inc.
Series B
5.76%, due 5/3/37......................... 500,000 511,995
------------
ELECTRIC UTILITIES (0.3%)
CMS Energy Corp.
8.125%, due 5/15/02....................... 150,000 154,415
------------
FINANCE (0.6%)
Associates Corp. of North America
5.96%, due 5/15/37........................ 190,000 193,428
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04........................ 170,000 78,200
Imperial Credit Industries, Inc.
Series B
9.875%, due 1/15/07....................... 120,000 117,600
------------
389,228
------------
FOOD, BEVERAGES & TOBACCO (1.2%)
Colorado Prime Corp.
12.50%, due 5/1/04 (c).................... 150,000 149,250
Philip Morris Cos., Inc.
7.25%, due 1/15/03........................ 300,000 309,507
Sparkling Spring Water Group Ltd.
11.50%, due 11/15/07 (c).................. 80,000 82,400
Standard Commercial Corp.
8.875%, due 8/1/05 (c).................... 225,000 227,250
------------
768,407
------------
HEALTH CARE (1.9%)
Abbey Healthcare Group, Inc.
9.50%, due 11/1/02........................ 480,000 502,200
Extendicare Health Services, Inc.
9.35%, due 12/15/07 (c)................... 250,000 256,250
Magellan Health Services, Inc.
Series A
11.25%, due 4/15/04....................... 170,000 188,487
Quest Diagnostics, Inc.
10.75%, due 12/15/06...................... 195,000 212,794
------------
1,159,731
------------
</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 Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
INDUSTRIAL (1.3%)
Thermadyne Holdings Corp.
10.25%, due 5/1/02........................ $ 600,000 $ 618,000
10.75%, due 11/1/03....................... 200,000 212,000
------------
830,000
------------
INSURANCE (0.7%)
American General Institutional
Capital, Series B
8.125%, due 3/15/46 (c)................... 125,000 138,604
Veritas Capital Trust
10.00%, due 1/1/28 (c)(o)................. 300,000 306,000
------------
444,604
------------
LEISURE (0.2%)
Bally Total Fitness Holdings Corp.
9.875%, due 10/15/07 (c).................. 150,000 151,125
------------
MEDIA (3.6%)
Affiliated Newspapers Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99.................. 150,000 141,750
Ascent Entertainment Group, Inc.
(zero coupon), due 12/15/04
11.875%, beginning
12/15/02 (c).............................. 400,000 229,000
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning 12/1/02................. 690,000 317,400
General Media, Inc.
10.625%, due 12/31/00..................... 50,000 44,000
SCI Television, Inc.
11.00%, due 6/30/05....................... 500,000 527,692
Viacom, Inc.
6.75%, due 1/15/03........................ 1,000,000 980,871
------------
2,240,713
------------
MEDICAL EQUIPMENT (0.1%)
Kinetic Concepts, Inc.
9.625%, due 11/1/07 (c)................... 75,000 76,219
------------
PAPER & FOREST PRODUCTS (0.2%)
Doman Industries Ltd.
9.25%, due 11/15/07 (c)................... 150,000 146,250
------------
RECREATION & ENTERTAINMENT (0.0%) (b)
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (i)(j)................ 160,000 6,400
------------
RESTAURANTS & LODGING (0.4%)
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning
6/30/99 (c)(h)............................ 320,000 271,200
------------
RETAIL (2.2%)
Barnes & Noble, Inc.
Series B
11.875%, due 1/15/03...................... 500,000 531,250
Dayton-Hudson Co.
5.895%, due 6/15/37....................... 625,000 629,987
Eckerd Corp.
9.25%, due 2/15/04........................ 200,000 214,250
------------
1,375,487
------------
STEEL, ALUMINUM & OTHER METALS (0.7%)
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05....................... 400,000 449,000
------------
TELECOMMUNICATION SERVICES (0.9%)
General Communication, Inc.
9.75%, due 8/1/07......................... 150,000 155,625
Intermedia Communications, Inc.
8.50%, due 1/15/08 (c).................... 75,000 75,000
USN Communications, Inc.
(zero coupon), due 8/15/04
14.625%, beginning 8/15/00 (c) ........... 400,000 304,000
------------
534,625
------------
TRANSPORTATION (0.6%)
Kitty Hawk, Inc.
9.95%, due 11/15/04 (c)................... 80,000 80,400
Pegasus Shipping Hellas Ltd.
11.875%, due 11/15/04 (c)................. 325,000 321,750
------------
402,150
------------
Total Corporate Bonds
(Cost $14,443,844)........................ 14,562,944
------------
</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>
Principal
Amount Value
==================================
<S> <C> <C>
FOREIGN BONDS (22.7%)
ARGENTINA (0.2%)
Argentina Bocon Previs
Series Pre 1
3.39%, due 4/1/01 (d)..................... AP 126,994 $ 111,188
------------
AUSTRALIA (0.8%)
Australian Government
Series 1002
10.00%, due 10/15/02...................... A$ 110,000 84,401
Federal National Mortgage
Association
6.375%, due 8/15/07....................... 110,000 72,104
Queensland Treasury Corp.
Series 7
8.00%, due 9/14/07........................ 177,000 129,165
Treasury Corp. of Victoria
8.25%, due 10/15/03....................... 295,000 212,985
------------
498,655
------------
CANADA (2.1%)
Alberta (Province of)
Series UB
9.60%, due 7/7/98......... ............... C$ 477,000 342,569
Canadian Government
Series WB60
7.25%, due 6/1/07......... ............... 500,000 391,574
Ontario (Province of)
7.25%, due 9/27/05........ ............... 380,000 286,533
9.75%, due 10/29/01....... ............... 60,000 47,542
United Mexican States
7.00%, due 6/2/03......... ............... 350,000 228,670
------------
1,296,888
------------
DENMARK (2.7%)
Kingdom of Denmark
7.00%, due 12/15/04....................... DK 537,000 85,485
8.00%, due 11/15/01....................... 814,000 131,280
Nykredit
Series ANN1
7.00%, due 10/1/29........................ 10,467,000 1,511,032
------------
1,727,797
------------
EUROPEAN CURRENCY UNIT (0.7%)
France Obligations Assimilables
du Tresor
8.25%, due 4/25/22........................ ECU 300,000 426,198
------------
FRANCE (0.2%)
France Obligations Assimilables
du Tresor
7.50%, due 4/25/05........................ FF 118,000 22,429
8.25%, due 2/27/04........................ 270,000 52,547
8.50%, due 3/28/00........................ 310,000 56,014
8.50%, due 12/26/12....................... 46,000 9,902
------------
140,892
------------
GERMANY (2.0%)
Bayerische VBK New York
4.50%, due 6/24/02........................ DM 370,000 202,404
Bundesobligation
4.50%, due 5/17/02........................ 430,000 236,396
Deutsche Pfandbrief Hypothekenbank
Series 436
5.75%, due 3/4/09......................... 164,000 91,225
Land Baden-Wuerttemberg
Series 38
7.50%, due 10/22/04....................... 290,000 181,258
Republic of Deutschland
Series 94
6.25%, due 1/4/24......................... 138,000 80,641
Treuhandanstalt
7.50%, due 9/9/04......................... 418,000 263,441
Venezuela Synthetic Sovereign
Investments Ltd.
10.125%, due 12/29/03..................... 400,000 228,019
------------
1,283,384
------------
IRELAND (0.4%)
Irish Government
6.50%, due 10/18/01....................... IP 110,000 164,704
8.00%, due 8/18/06........................ 64,000 106,409
------------
271,113
------------
ITALY (3.7%)
Buoni Poliennali del Tesoro
8.25%, due 7/1/01........................IL1,000,000,000 623,730
9.00%, due 11/1/23........................ 675,000,000 527,992
9.50%, due 2/1/01......................... 230,000,000 146,517
10.50%, due 7/15/00....................... 405,000,000 258,459
12.00%, due 5/1/02........................ 1,045,000,000 743,893
------------
2,300,591
------------
NEW ZEALAND (0.6%)
Federal National Mortgage
Association
7.25%, due 6/20/02........................ ND 201,000 114,203
</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 Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
FOREIGN BONDS (Continued)
NEW ZEALAND (Continued)
International Bank Reconstruction
& Development
(zero coupon), due 8/20/07 ............... ND 534,000 $ 156,473
New Zealand Government
8.00%, due 11/15/06....................... 163,000 100,436
------------
371,112
------------
SOUTH AFRICA (0.3%)
International Bank Reconstruction
& Development
(zero coupon), due 12/29/17 .............. ZAR10,000,000 171,581
------------
SPAIN (1.2%)
Spanish Government
7.35%, due 3/31/07........................ SP10,540,000 77,697
8.30%, due 12/15/98....................... 1,390,000 9,425
10.25%, due 11/30/98...................... 5,540,000 38,114
10.50%, due 10/30/03...................... 16,210,000 133,804
11.30%, due 1/15/02....................... 64,470,000 518,372
------------
777,412
------------
SWEDEN (2.4%)
AB Spintab
Series 164
8.50%, due 12/19/01....................... SK 1,000,000 136,575
Stadshypotek AB
Series 1553
10.00%, due 12/20/00...................... 4,000,000 558,817
Swedish Government
Series 1035
6.00%, due 2/9/05......................... 2,600,000 330,055
Series 1030
13.00%, due 6/15/01....................... 3,000,000 464,396
------------
1,489,843
------------
UNITED KINGDOM (4.6%)
European Investment Bank
8.75%, due 8/25/17........................(pound)210,000 426,261
Republic of Argentina
Series 53
10.00%, due 6/25/07....................... 90,000 140,313
United Kingdom Treasury Bonds
7.50%, due 12/7/06........................ 644,000 1,139,112
8.00%, due 9/27/13........................ 165,000 315,778
10.00%, due 2/26/01....................... 483,000 866,504
------------
2,887,968
------------
UNITED STATES (0.8%)
Banco Nacional De
Commerciale Exterior
Series REGS
8.00%, due 7/18/02........................ $ 150,000 145,313
Bonos Del Tesoro
Series BT02
8.75%, due 5/9/02......................... 95,000 90,250
Nacional Financiera SNC
9.375%, due 4/23/99 (c)................... 150,000 152,250
Republic of Panama
Series REGS
7.875%, due 2/13/02....................... 130,000 125,937
------------
513,750
------------
Total Foreign Bonds
(Cost $14,541,526)........................ 14,268,372
------------
U.S. GOVERNMENT &
FEDERAL AGENCIES (15.7%)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MEDIUM-TERM NOTES) (0.4%)
5.96%, due 7/23/99........................ 235,000 235,576
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE
PASS-THROUGH SECURITIES) (6.0%)
6.00%, due 10/1/08........................ 635,459 629,300
6.50%, due 12/31/30 TBA (l) .............. 1,375,000 1,357,386
6.65%, due 12/31/10 TBA (l) .............. 145,000 148,204
6.72%, due 11/1/07........................ 204,844 210,383
6.835%, due 1/1/07........................ 367,125 379,281
7.00%, due 12/31/30 TBA (l)............... 1,040,000 1,047,477
------------
3,772,031
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE
PASS-THROUGH SECURITIES) (1.3%)
7.00%, due 12/15/23....................... 405,328 409,888
7.50%, due 12/15/23....................... 401,119 412,026
------------
821,914
------------
</TABLE>
The notes to the financial statements are an integral part of, and should
be read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
U.S. GOVERNMENT &
FEDERAL AGENCIES (Continued)
UNITED STATES TREASURY BONDS (4.2%)
6.125%, due 11/15/27...................... $ 1,845,000 $ 1,896,033
7.625%, due 2/15/25....................... 635,000 770,630
------------
2,666,663
------------
UNITED STATES TREASURY NOTES (3.8%)
5.75%, due 10/31/02....................... 525,000 525,493
6.25%, due 2/28/02........................ 550,000 560,054
7.875%, due 11/15/04...................... 1,170,000 1,308,025
------------
2,393,572
------------
Total U.S. Government &
Federal Agencies
(Cost $9,793,841)......................... 9,889,756
------------
YANKEE BONDS (1.9%)
BANKS (0.4%)
Banesto Finance Ltd.
7.50%, due 3/25/07........................ 90,000 94,602
BCH Cayman Islands Ltd.
7.70%, due 7/15/06........................ 145,000 153,680
------------
248,282
------------
CABLE (0.3%)
Kabelmedia Holdings GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01................. 210,000 157,500
------------
CELLULAR TELEPHONE (0.6%)
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01.................. 500,000 366,250
------------
PAPER & FOREST PRODUCTS (0.1%)
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c)................... 75,000 78,562
Uniforet, Inc.
11.125%, due 10/15/06..................... 20,000 19,600
------------
98,162
------------
TELECOMMUNICATION SERVICES (0.5%)
Call-Net Enterprises, Inc.
(zero coupon), due 12/1/04
13.25%, beginning 12/1/99................. 250,000 227,812
Fonorola, Inc.
12.50%, due 08/15/02...................... 70,000 78,050
------------
305,862
------------
Total Yankee Bonds
(Cost $1,171,556)......................... 1,176,056
------------
Total Long-Term Bonds
(Cost $55,499,348)........................ 54,746,700
------------
Shares
======
COMMON STOCKS (0.2%)
BANKS (0.1%)
Metropolitan Bank & Trust Co. (m) .......... 5,400 36,880
------------
HEALTH CARE (0.1%)
Quest Diagnostics, Inc. (a)................. 4,500 75,937
------------
MEDIA (0.0%)(b)
Viacom, Inc.
Class B (a)............... ............... 800 33,150
------------
Total Common Stocks
(Cost $137,580)........... ............... 145,967
------------
PREFERRED STOCKS (2.6%)
CABLE (0.4%)
United International Holdings, Inc.
4.00%, Series A (a)(g)(h). ............... 1,840 257,600
------------
CASINOS (0.2%)
Station Casinos, Inc.
7.00% (g)................. ............... 3,600 147,600
------------
DOMESTIC OIL & GAS (0.2%)
EEX Capital Inc. (c)(h)..... ............... 100 102,243
------------
MEDIA (0.1%)
Paxson Communications Corp.
12.50% (e)................ ............... 37 38,475
------------
</TABLE>
The notes to the financial statements are an integral part of, and should
be read in conjunction with, the financial statements.
21
<PAGE>
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
MINING (1.7%)
Freeport McMoran
Copper & Gold, Inc.
7.00%, Series A (n)....................... 50,000 $ 1,084,375
------------
Total Preferred Stocks
(Cost $1,641,261)......................... 1,630,293
------------
WARRANTS (0.0%) (b)
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Colorado Prime Corp.
expire 12/31/03 (a)(c).................... 150 1,500
------------
TELECOMMUNICATION SERVICES (0.00%) (b)
USN Communications, Inc.
expire 8/15/04 (a)(c)..................... 4,000 40
------------
Total Warrants
(Cost $1,476)............................. 1,540
------------
<CAPTION>
Principal
Amount
=========
<S> <C> <C>
SHORT-TERM INVESTMENTS (6.9%)
COMMERCIAL PAPER (6.8%)
American Express Credit Corp.
6.16%, due 1/5/98......................... $ 3,000,000 3,000,000
Ford Motor Credit Corp.
5.86%, due 1/5/98......................... 1,284,000 1,284,000
------------
Total Commercial Paper
(Cost $4,284,000)......................... 4,284,000
------------
FOREIGN SHORT-TERM BOND (0.1%)
NEW ZEALAND (0.1%)
New Zealand Treasury Bill
(zero coupon), due 3/11/98 ............... ND 100,000 57,110
------------
Total Short-Term Bond
(Cost $57,062)............................ 57,110
------------
Total Short-Term Investments
(Cost $4,341,062)......................... 4,341,110
------------
Total Investments
(Cost $61,620,727) (p).................... 96.9% 60,865,610(q)
Cash and Other Assets,
Less Liabilities.......................... 3.1 1,928,550
------------ ------------
Net Assets.................................. 100.0% $ 62,794,160
============ ============
</TABLE>
- ----------
(a) Non-income producing security.
(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, 1997.
(e) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(f) Yankee bond.
(g) Convertible preferred stock.
(h) Restricted security.
(i) Issuer in bankruptcy.
(j) Issue in default.
(k) Euro-Dollar bond.
(l) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity date will be determined upon settlement.
(m) Philippine security.
(n) Depository Shares--each share represents 0.05 shares of a share of Series A
7.00% step-up convertible preferred stock.
(o) 10.00% Trust Preferred Securities. The Issuer Trust exists solely for the
purpose of issuing the Trust Securities and investing the proceeds thereof
in an equivalent amount of 10.00% Subordinated Deferrable Interest
Debentures due 2028 of Veritas Holdings GmbH.
(p) The cost for Federal income tax purposes is $61,637,009.
(q) At December 31, 1997 net unrealized depreciation was $771,399, 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 $768,151 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,539,550.
(r) The following abbreviations are used in the above portfolio:
AP -- Argentinean Peso
A$ -- Australian Dollar
C$ -- Canadian Dollar
DK -- Danish Krone
DM -- Deutsche Mark
ECU -- European Currency Unit
FF -- French Franc
IP -- Irish Punt
IL -- Italian Lira
ND -- New Zealand Dollar
(pound) -- Pound Sterling
ZAR -- South African Rand
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.
22
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $61,620,727) ............................................ $ 60,865,610
Cash ......................................................................................................... 27,678
Cash denominated in foreign currencies (identified cost $95,816) ............................................. 94,676
Receivables:
Investment securities sold ................................................................................. 3,672,936
Dividends and interest ..................................................................................... 921,068
Fund shares sold ........................................................................................... 522,009
MainStay Management ........................................................................................ 16,180
Unrealized appreciation on forward foreign currency contracts ................................................ 386,614
Unamortized organization expense ............................................................................. 173,433
------------
Total assets .............................................................................................. 66,680,204
------------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 3,496,455
Fund shares redeemed ....................................................................................... 92,237
NYLIFE Distributors ........................................................................................ 40,834
Custodian .................................................................................................. 9,600
Transfer agent ............................................................................................. 5,745
Trustees ................................................................................................... 438
Accrued expenses ............................................................................................. 69,074
Unrealized depreciation on forward foreign currency contracts ................................................ 171,661
------------
Total liabilities ......................................................................................... 3,886,044
------------
Net assets ................................................................................................... $ 62,794,160
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A .................................................................................................... $ 19,084
Class B .................................................................................................... 44,265
Additional paid-in capital ................................................................................... 63,410,015
Accumulated undistributed net investment income .............................................................. 15,118
Accumulated distribution in excess of net realized gain on investments ....................................... (116,065)
Net unrealized depreciation on investments ................................................................... (755,117)
Net unrealized appreciation on translation of assets and liabilities in foreign currencies
and forward foreign currency contracts ..................................................................... 176,860
------------
Net assets ................................................................................................... $ 62,794,160
============
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 18,922,022
============
Shares of beneficial interest outstanding .................................................................... 1,908,426
============
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 .................................................................. $ 43,872,138
============
Shares of beneficial interest outstanding .................................................................... 4,426,520
============
Net asset value and offering price per share outstanding ..................................................... $ 9.91
============
</TABLE>
The notes to the financial statements are an integral part of, and should
be read in conjunction with, the financial statements.
23
<PAGE>
Statement of Operations
for the period February 28* through December 31, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME:
Income:
<S> <C>
Dividends (a) ................................................................................................. $ 58,490
Interest (b) .................................................................................................. 3,458,292
-----------
Total income ................................................................................................. 3,516,782
-----------
Expenses:
Distribution--Class B ......................................................................................... 169,424
Service ....................................................................................................... 115,569
Administration ................................................................................................ 101,573
Advisory ...................................................................................................... 101,573
Shareholder communication ..................................................................................... 84,363
Management .................................................................................................... 74,218
Transfer agent ................................................................................................ 41,574
Registration .................................................................................................. 35,916
Amortization of organization expense .......................................................................... 35,053
Custodian ..................................................................................................... 31,663
Professional .................................................................................................. 30,954
Recordkeeping ................................................................................................. 18,325
Trustees ...................................................................................................... 1,400
Miscellaneous ................................................................................................. 18,275
-----------
Total expenses before reimbursement .......................................................................... 859,880
Expense reimbursement from Administrator and Adviser or Manager ................................................. (158,842)
-----------
Net expenses ................................................................................................. 701,038
-----------
Net investment income ........................................................................................... 2,815,744
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions ......................................................................................... 1,182,881
Foreign currency transactions ................................................................................. 111,334
-----------
Net realized gain on investments and foreign currency transactions .............................................. 1,294,215
-----------
Net unrealized depreciation on investments:
Security transactions ......................................................................................... (755,117)
Translation of assets and liabilities in foreign currencies and forward foreign currency contracts ............ 176,860
-----------
Net unrealized loss on investments and foreign currencies ....................................................... (578,257)
-----------
Net realized and unrealized gain on investments and foreign currency transactions ............................... 715,958
-----------
Net increase in net assets resulting from operations ............................................................ $ 3,531,702
===========
</TABLE>
- ----------
* Commencement of operations.
(a) Dividends recorded net of foreign withholding taxes of $153.
(b) Interest recorded net of foreign withholding taxes of $2,306.
The notes to the financial statements are an integral part of, and should
be read in conjunction with, the financial statements.
24
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
February 28, 1997*
through
December 31, 1997
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ....................................................................................... $ 2,815,744
Net realized gain on investments ............................................................................ 1,182,881
Net realized gain on foreign currency transactions .......................................................... 111,334
Net unrealized depreciation on investments .................................................................. (755,117)
Net unrealized appreciation on translation of assets and liabilities in foreign currencies and
forward foreign currency contracts ......................................................................... 176,860
------------
Net increase in net assets resulting from operations ........................................................ 3,531,702
------------
Dividends and distributions to shareholders:
From net investment income:
Class A .................................................................................................... (1,504,251)
Class B .................................................................................................... (1,461,165)
From net realized gain on investments and foreign currency transactions:
Class A .................................................................................................... (431,115)
Class B .................................................................................................... (871,088)
------------
Total dividends and distributions to shareholders .......................................................... (4,267,619)
------------
Capital share transactions: Net proceeds from sale of shares:
Class A .................................................................................................... 13,170,997
Class B .................................................................................................... 42,685,916
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .................................................................................................... 1,749,283
Class B .................................................................................................... 1,998,370
------------
59,604,566
Cost of shares redeemed:
Class A .................................................................................................... (16,049,724)
Class B .................................................................................................... (3,024,765)
------------
Increase in net assets derived from capital share transactions ........................................... 40,530,077
------------
Net increase in net assets ............................................................................... 39,794,160
NET ASSETS:
Beginning of period ........................................................................................... 23,000,000
------------
End of period ................................................................................................. $ 62,794,160
============
Accumulated undistributed net investment income ............................................................... $ 15,118
============
</TABLE>
- ----------
* Commencement of operations.
The notes to the financial statements are an integral part of, and should
be read in conjunction with, the financial statements.
25
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
------------ ------------
February 28, 1997*
through
December 31, 1997
====================================
<S> <C> <C>
Net asset value at beginning of period ............................................. $ 10.00 $ 10.00
------------ ------------
Net investment income .............................................................. 0.54 0.48
Net realized and unrealized gain on investments .................................... 0.07 0.07
Net realized and unrealized gain on foreign currency transactions .................. 0.05 0.05
------------ ------------
Total from investment operations ................................................... 0.66 0.60
------------ ------------
Less dividends and distributions:
From net investment income ....................................................... (0.54) (0.48)
From net realized gain on investments ............................................ (0.21) (0.21)
------------ ------------
Total dividends and distributions .................................................. (0.75) (0.69)
------------ ------------
Net asset value at end of period ................................................... $ 9.91 $ 9.91
============ ============
Total investment return (a) ........................................................ 6.62% 6.02%
Ratios (to average net assets)/Supplemental Data:
Net investment income ............................................................ 6.46%+ 5.71%+
Net expenses ..................................................................... 1.15%+ 1.90%+
Expenses (before reimbursement) .................................................. 1.49%+ 2.24%+
Portfolio turnover rate ............................................................ 323% 323%
Average commission rate paid ....................................................... $ 0.0520 $ 0.0520
Net assets at end of period (in 000's) ............................................. $ 18,922 $ 43,872
</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.
26
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to MainStay
Strategic Income Fund (the "Fund").
The Fund commenced operations on February 28, 1997, and 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 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 provide current income and competitive
overall return by investing primarily in domestic and foreign 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 common and preferred stocks which are traded on the
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are
27
<PAGE>
MainStay Strategic Income Fund
deemed by the Sub-Adviser to be representative of market values at the regular
close of business of the 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 Sub-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 Exchange will
not be reflected in the Fund's calculation of net asset value unless the
Sub-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 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 period end to credit loss in the event of a counterparty's failure
to perform its obligations.
28
<PAGE>
Notes to Financial Statements continued
Forward foreign currency contracts open at December 31, 1997:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
----------------------- --------------------- -------------
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C>
Australian Dollar vs. US$, expiring 2/3/98 A$ 259,000 $ 175,790 $ 6,894
Canadian Dollar vs. US$, expiring 2/23/98 C$ 240,000 $ 167,785 (208)
Danish Krone vs. Deutsche Mark, expiring 1/22/98 DK 3,890,000 DM 1,020,542 (440)
Deutsche Mark vs. US$, expiring 1/7/98-1/20/98 DM 14,725,827 $ 8,493,810 297,489
Deutsche Mark vs. French Francs, expiring 2/18/98 DM 3,943,204 FF 13,205,000 2,014
Deutsche Mark vs. Danish Krone, expiring 1/22/98 DM 84,871 DK 323,000 (37)
Deutsche Mark vs. Danish Krone, expiring 1/22/98 DM 185,039 DK 705,000 34
Deutsche Mark vs. Pound Sterling, expiring 1/15/98 DM 967,388 (pound) 335,000 12,300
Deutsche Mark vs. Pound Sterling, expiring 1/15/98 DM 834,032 (pound) 281,401 (1,593)
Deutsche Mark vs. Italian Lira, expiring 1/12/98 DM 198,686 IL 195,000,000 (208)
Irish Punt vs. US$, expiring 1/15/98 IP 114,000 $ 173,309 10,867
Irish Punt vs. Deutsche Mark, expiring 1/15/98 IP 340,000 DM 874,395 2,257
Italian Lira vs. Deutsche Mark, expiring 1/12/98 IL 503,000,000 DM 512,324 435
Italian Lira vs. Deutsche Mark, expiring 1/12/98 IL 570,000,000 DM 579,082 (333)
New Zealand Dollar vs. US$, expiring 1/26/98 ND 1,140,000 $ 658,236 (2,205)
Pound Sterling vs. Deutsche Mark, expiring 1/14/98 (pound) 485,000 DM 1,435,231 1,412
Pound Sterling vs. US$, expiring 1/15/98 (pound) 530,000 $ 880,860 9,450
Pound Sterling vs. Deutsche Mark, expiring 1/15/98 (pound) 471,000 DM 1,326,011 (36,279)
Pound Sterling vs. US$, expiring 1/15/98 (pound) 160,000 $ 258,768 (4,299)
Swedish Krona vs. US$, expiring 1/12/98 SK 4,000,000 $ 534,759 30,463
Swedish Krona vs. Deutsche Mark, expiring 2/10/98 SK 6,760,000 DM 1,547,387 9,686
Swiss Franc vs. Deutsche Mark, expiring 1/20/98 CF 520,000 DM 645,241 1,879
South African Rand vs. US$, expiring 1/29/98 ZAR 700,000 $ 142,886 207
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Purchased Sold (Depreciation)
----------------------- --------------------- -------------
Foreign Currency Buy Contracts
- ------------------------------
<S> <C> <C> <C>
Australian Dollar vs. US$, expiring 2/3/98 A$ 95,000 $ 62,040 $ (90)
Deutsche Mark vs. US$, expiring 1/7/98-1/20/98 DM 5,919,898 $ 3,405,250 (111,505)
Irish Punt vs. US$, expiring 1/15/98 IP 37,000 $ 53,650 (928)
Pound Sterling vs. US$, expiring 1/15/98 (pound) 266,000 $ 446,247 (8,898)
Spanish Peseta vs. US$, expiring 1/12/98 SP 12,800,000 $ 85,733 (1,727)
Swedish Krona vs. US$, expiring 1/12/98 SK 1,155,000 $ 148,526 (2,911)
New Zealand Dollars vs. US$, expiring 1/26/98 ND 320,000 $ 184,160 1,227
--------
Net Unrealized Appreciation on Forward Foreign
Currency Contracts $214,953
========
</TABLE>
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
29
<PAGE>
MainStay Strategic Income Fund
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 15% of its net assets in illiquid
securities.
Restricted securities held at December 31, 1997:
<TABLE>
<CAPTION>
Principal Percent
Acquisition Amount/ 12/31/97 of
Security Date Shares Cost Value Net Assets
-------- ---- ------ ---- ----- ----------
<S> <C> <C> <C> <C> <C>
EEX Capital Inc.
Preferred Stock 11/17/97 100 $101,170 $102,243 0.2%
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 8/12/97 $320,000 252,111 271,200 0.4
United International Holdings, Inc.
4.00%, Series A
Convertible Preferred Stock 8/1/97 1,840 250,655 257,600 0.4
-------- -------- ---
$603,936 $631,043 1.0%
======== ======== ===
</TABLE>
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 MDRs
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 liabilities for such purchase commitments are
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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $208,486 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 $56,713 and $108,077 have been reclassified
from additional paid-in capital and accumulated distribution in excess of net
realized gain on investments, respectively, to accumulated undistributed net
investment income due to certain expenses being nondeductible for tax purposes
and the tax treatment of foreign currency gains, respectively.
30
<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 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.
Premiums on securities purchased are not amortized for this Fund.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
The Fund invests 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 direct allocations of expenses can 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.
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 period. 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
31
<PAGE>
MainStay Strategic Income Fund
U.S. dollar equivalent amount actually received or paid. The Fund isolates the
effect of changes in foreign exchange rates from the fluctuations arising from
changes in the market prices of long-term debt securities sold during the year.
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.
Foreign currency held at December 31, 1997:
<TABLE>
<CAPTION>
Currency Cost Value
- ------------------------------------------ ------- -------
<S> <C> <C>
Argentinean Peso AP 3,516 $ 3,518 $ 3,517
Deutsche Mark DM 40,500 22,707 22,524
French Franc FF 3,910 656 650
New Zealand Dollar ND 30,533 17,841 17,731
Swedish Krona SK 400,000 51,094 50,254
------- -------
$95,816 $94,676
======= =======
</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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.60%. The Manager has voluntarily agreed to reduce its fee
payable to the extent necessary such that total expenses do not exceed on an
annual basis 1.15% and 1.90% of the average daily net assets of Class A and
Class B shares, respectively, until such time as the Fund reaches $100 million
in assets or one year from the date of the Fund's commencement of operations,
whichever may occur first.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.30% of
the average daily net assets of the Fund. To the extent the Manager has agreed
to reimburse expenses of the Fund, the Sub-Adviser has voluntarily agreed to do
so proportionately.
32
<PAGE>
Notes to Financial Statements continued
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.30% of
the average daily net assets of the Fund and had voluntarily agreed to assume
the expenses of the Fund to the extent necessary such that expenses would not
exceed on an annual basis 1.15% and 1.90% of the average daily net assets of
Class A and Class B shares, respectively, until such time as the Fund reached
$100 million in assets or one year from the Fund's commencement of operations,
whichever came first. As described above, MainStay Management is currently paid
a fee at a rate equal to the aggregate of the advisory and administrative fee
rates in effect prior to October 27, 1997, and the expense reimbursement
agreements also remain the same as prior to that date. For the period February
28, 1997, through October 26, 1997, MacKay-Shields and NYLIFE Distributors each
earned fees of $101,573 and each reimbursed the Fund $40,291. For the period
October 27, 1997, through December 31, 1997, MainStay Management earned $74,218
and reimbursed the Fund $78,260.
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 a monthly service fee
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 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 and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $14,008 for the period
February 28, 1997, through December 31, 1997. The Fund was also advised that
NYLIFE Distributors retained contingent deferred sales charges for redemption of
Class B shares of $11,479 for the same period.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the period ended December 31, 1997, amounted to
$39,457 and $285, respectively.
33
<PAGE>
MainStay Strategic Income Fund
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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, 1997, New York Life held shares of Class A with a net
asset value of $6,368,379, which represents 33.7% of the Class A net assets at
period end. NYLIFE Distributors held shares of Class B with a net asset value of
$5,300,961, which represents 12.1% of the Class B net assets at period end.
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $1,059 for the period February 28,
1997, through December 31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $4,701 and $13,624 for MainStay Management and NYLIFE
Distributors, respectively, for the period ended December 31, 1997.
Note 4--Federal Income Tax:
The Fund intends to elect, to the extent provided by the regulations, to treat
$100,513 of qualifying capital losses that arose during the year as if they
arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the period February 28, 1997, through December 31, 1997, purchases and
sales of U.S. Government securities were $68,847 and $58,647, respectively.
Purchases and sales of securities, other than U.S. Government securities,
securities subject to repurchase transactions and short-term securities, were
$140,477 and $94,017, respectively.
Note 6--Line of Credit:
The Fund and certain affiliated funds maintain a line of credit with the
custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
February 28* through
December 31, 1997
-------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold................................................. 1,311 4,226
Shares issued in reinvestment of dividends.................. 173 199
----- -----
1,484 4,425
Shares redeemed............................................. (1,576) (297)
----- -----
Net increase (decrease)..................................... (92) 4,128
===== =====
</TABLE>
- ----------
* Commencement of operations.
34
<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 Strategic Income Fund (one
of the fifteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the period February 28, 1997
(commencement of operations) through December 31, 1997, 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 audit. We conducted our audit
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
audit, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provides
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 25, 1998
35
<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 with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 S&P 500* of stocks with the protection of a
Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[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 an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) graph indicating a special blend of capital may offer growth potential if converted
risk/reward of appreciation and current income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph indicating return from common stocks, have undervalued and you want to
risk/reward of convertible securities, and high-yield manage risk through multimarket
Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[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 bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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.
36
<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 primarily from U.S. government
Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
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 maximum current income|| securities with high-yield potential++
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph indicating non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward of risk control diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating preservation of capital, and competitive yields on cash you're plan-
risk/reward of liquidity, with free checkwriting** ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
STRATEGIC INCOME FUND graph indicating tive overall return by investing in higher income and overall return by
risk/reward of a diversified portfolio of domestic investing in multiple bond market
Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Seeks high current income exempt You are 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 indication 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 are 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 indication New York City income taxes consis- with income that's double or triple tax
risk/reward of Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[Horizontal bar Seeks high current income You are in a high federal income tax
Tax Free Bond Fund graph indication exempt from regular federal income tax bracket or want to pay less of your
risk/reward of Fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
37
<PAGE>
================
MAINSTAY
================----------------------
Strategic Income Fund
----------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Strategic Income 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)1998. All rights reserved. MSAN17-02/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Strategic Value Fund Highlights 4
Portfolio Management Discussion and Analysis 5
Performance from 10/22/97 through 12/31/97 6
Asset Allocation as of 12/31/97 7
Portfolio Composition 9
Fund & Lipper Returns 10
Top 10 Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Financial Statements 17
Notes to Financial Statements 21
Report of Independent Accountants 26
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* "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.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund(ss.) on February
28, 1997, and the MainStay Strategic Value Fund on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782),
Option #3. Please read the prospectus carefully before you invest or
send money.
- --------------------------------------------------------------------------------
3
<PAGE>
MainStay Strategic Value Fund Highlights
- --------------------------------------------------------------------------------
MARKET HIGHLIGHTS FOR THE PERIOD ENDED 12/31/97
================================================================================
[ ] The stock and bond markets were highly volatile from October 22, 1997,
through the end of the year, largely as a result of currency problems and
financial difficulties in Asian markets.
[ ] As investors retreated from Asian securities, they sought refuge in highly
dependable stocks and higher-quality bonds in both the high-grade and
high-yield sectors.
[ ] The convertible and high-yield bond markets both benefited from declining
interest rates, which caused bonds in general to rally.
[ ] As problems in Asian markets unfolded, the likelihood of inflation
decreased and some investors began to speculate about the possibility of
deflation in 1998.
================================================================================
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS FOR THE PERIOD ENDED 12/31/97
================================================================================
[ ] The MainStay Strategic Value Fund began operations on October 22, 1997, in
the midst of Asian market difficulties.
[ ] For the period from October 22, 1997, to December 31, 1997, the Fund
returned 4.11% and 4.04% for Class A and Class B shares, respectively,
excluding all sales charges.
[ ] Both share classes outperformed the S&P 500 Index,* which returned 0.55%
for the same period.
[ ] Although the Fund began operations amid the Asian turmoil, the timing
proved opportune, since clear signs of weakness allowed the Fund to avoid
some of the worst performing securities and sectors that plagued other
funds.
================================================================================
- ----------
* "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.
4
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Strategic Value Fund Team
STRATEGIC VALUE FUND TEAM
Denis Laplaige, Steven Tananbaum, and Neil Feinberg
The period from October 22, 1997, through the end of the year was marked by
extreme volatility in the stock market, including a 554 point drop in the Dow
Jones Industrial Average* on October 27, 1997, and the largest single day point
rise in the Dow's history on the following day. One hundred point moves were the
norm rather than the exception during this difficult period, as stock and bond
markets were rocked by currency problems and financial difficulties in Asian
markets.
As these problems, referred to as the "Asian flu," spread across domestic
markets, many investors sought refuge in highly dependable stocks with
predictable earnings or higher-quality income securities. This flight to
quality, along with lowered inflation expectations and declining interest rates
increased the momentum of a bond rally that was already strong. In the
high-yield market, investors shifted their attention to securities with higher
credit quality, which offered more appealing risk/reward characteristics as
yield spreads narrowed and risks increased. Stock market volatility provided
additional profit opportunities for speculative investors in the convertible
market who alternately bought convertibles and sold the underlying stocks short
to take advantage of wide market swings.
How did the MainStay Strategic Value Fund perform in this environment?
From its inception on October 22, 1997, through December 31, 1997, the MainStay
Strategic Value Fund returned 4.11% and 4.04% for Class A and Class B shares,
respectively, excluding all sales charges. This compared very positively with
the S&P 500 Index,+ which returned only 0.55% for the same period.
What was the target asset allocation for the Fund?
The targeted asset allocation for the period ended 12/31/97 was 70% in value
stocks, 15% in high-yield bonds, and 15% in convertible securities. Although the
Fund can invest higher percentages in bonds and stocks, this allocation
reflected the belief that the greatest opportunities were in the equity
market--a reasonable assumption in a year when the S&P 500 Index returned
33.36%.
[GRAPHIC]
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
Inflation/deflation
- -------------------
Inflation is an increase in the cost of goods and services over time. As prices
rise, the purchasing power of the dollar declines. Deflation is a reduction in
the cost of goods over time. When deflation occurs, the purchasing power of the
dollar increases.
Credit quality
- --------------
A measure of an individual issuer's ability to repay principal and interest on
its income securities--or a measure of the general credit risk of securities in
an income portfolio.
- ----------
* The Dow Jones Industrial Average is a price-weighted average of 30 actively
traded blue chip stocks, primarily industrials, but also including
financial, leisure, and other service-oriented firms.
+ See footnote on page 2 for more information on the S&P 500.
5
<PAGE>
[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 intermediate-term and short-term Treasury issues.
Short sale
- ----------
Selling a security or commodity futures contract not owned by the seller. The
technique may be used to take advantage of anticipated price declines or to
protect profit in a long position.
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 larger than the sector's share of the market as a whole.
PERFORMANCE FROM 10/22/97 THROUGH 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period Total
End Return %
- ------------------------------------------------
<S> <C>
12/97 4.11 Class A
12/97 4.04 Class B
</TABLE>
See footnote * on page 10 for more information on performance.
How did you cope with market volatility from the Fund's inception through the
end of the year?
Actually, we used market volatility to the Fund's advantage. We took our time in
investing the Fund's initial assets and did so in a disciplined way that allowed
the Fund to take advantage of pricing opportunities in the highly volatile
market environment. This strategy had a positive impact on the Fund's
performance. As we saw increasingly negative developments in Asian markets
(including a major slide in the Hong Kong stock market on the second day of
trading), we were able to avoid many of the problems that stemmed from the Asian
difficulties.
In which stocks did you invest the value equity portion of the Fund?
Although we select securities one-by-one, our proprietary screening process
showed that a number of utility companies were attractively priced, had
price-to-earnings ratios about half of the average for securities in the market,
and could provide sufficient income to act as a buffer if there was a market
downturn. The Fund benefited from investments in PG&E Corp., FPL Group, Inc.,
Long Island Lighting Co., and Boston Edison Co., just to name a few of the
holdings.
What do you look for in value stocks?
By definition, value investing means looking for bargains. But not every
low-priced stock is going to provide real value to investors. Generally, we look
for liquidity first, then we look for financial strength and free cash flow.
Then we consider specific catalysts, such as dividend yield, asset sales and
management changes, that could stimulate positive change at the company and
increase investor interest in the stock.
Were there areas that you tried to avoid?
Given the problems in Asian markets, we tried to steer clear of technology
issues, which were undergoing a major setback. The equity portion of the Fund
also remained underweighted in financial stocks, since our value screening
process suggested
6
<PAGE>
ASSET ALLOCATION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Convertible Securities 16.8%
High-Yield Securities 11.2%
Common Stocks 49.8%
Cash, Equivalents & Other Assets,
less Liabilities 22.2%
</TABLE>
Actual percentages will vary over time.
that many financial issues were fully valued during the reporting period. That
proved to be a wise decision, as financial issues underperformed the market as a
whole from October 22 through the end of the year.
Did any of the Fund's stocks do particularly poorly?
The Fund did not have success with its HMO holdings, which negatively impacted
performance. The industry is undergoing a transition from a growth phase into a
mature maintenance phase, and we bought Columbia/HCA, Aetna, Inc., Foundation
Health Systems, Inc., and CIGNA Corp. for the Fund to capitalize on this shift.
We believe these companies are well positioned and that we were just ahead of
the market in recognizing their potential value.
Where did you invest the high-yield portion of the Fund?
Although high-yield bonds represented a small portion of the Fund, their high
current income and capital appreciation potential contributed positively to the
Fund's overall performance. Given the general flight to quality, we emphasized
upper-tier, longer-duration bonds and looked for companies with sufficient
strength and enough dependable cash flow to weather a market downturn.
Which high-yield securities were strong performers?
The Fund benefited from a significant holding in United Mexican States bonds.
USN Communications was a very strong performer, providing exposure to the
rapidly expanding and highly competitive market for local area telephone service
providers.
Were there any high-yield securities that didn't do well?
Cityscape Financial was an overly aggressive subprime mortgage lender that faced
some prepayment problems as interest rates declined. First Pacific is a
conglomerate of premier Asian holdings with excellent fundamentals, a liquid
balance sheet, and promising prospects. Despite these
[GRAPHIC]
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.
Prepayment risk
- ---------------
As rates decline, it becomes more likely that borrowers will repay their loans
before maturity to refinance at lower rates. Lenders or bondholders may see the
income stream from existing loans or bonds disappear and may be unable to obtain
a similar income stream at the same price in the current market--an additional
difficulty known as reinvestment risk.
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.
The potential for high yield is accompanied by higher risk and certain of the
Fund's investments are speculative. 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.
Past performance is no guarantee of future results.
strengths, the price of the bonds continued to decline through the end of the
year as investors abandoned fundamentals in their flight from Asia. While both
securities had a negative impact on performance, we're cautiously optimistic
about Cityscape Financial Corp. and believe First Pacific Capital Ltd. may
recover quickly when Asian fears subside.
What about the convertible portion of the Fund?
Once again, convertible securities accounted for only a small portion of the
Fund, but had a positive impact on performance. As concern over Asian
difficulties heightened, we felt utilities and oil drilling companies might
provide more dependable performance, but with declining oil prices and mild
weather, Apache Corp. underperformed the market as a whole. On a more positive
note, the Fund held convertibles from Consolidated Natural Gas Co., U.S. Office
Products Co., and Credence Systems Corp., all of which contributed positively to
the Fund's performance.
How did you select these securities for the Fund?
We use a disciplined "bottom-up" investment approach that evaluates the
underlying stock as well as the convertible to determine the risk and reward
characteristics of each. We're risk averse value managers and seek to sell
securities when they move outside well-defined risk/reward parameters.
What is your outlook going forward?
We believe that value stocks will continue to offer opportunities, particularly
in volatile markets. As the Asian turmoil begins to subside, we may see buying
opportunities, but will need to carefully evaluate downside potential before
putting the Fund's shareholders at risk. The possibility of lower inflation may
provide a positive backdrop for convertible and high-yield bonds, and we will
continue to evaluate both the risk and reward sides of the investment equation
in each of the Fund's three markets as we seek new opportunities to uncover
hidden value.
Denis Laplaige
Steven Tananbaum
Neil Feinberg
Portfolio Managers
8
<PAGE>
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Convertible Bonds 13.6%
Convertible Preferred Stocks 3.2%
Corporate Bonds 11.1%
Common Stocks 49.8%
Preferred Stocks 0.1%
Cash, Equivalents & Other Assets
less Liabilities 22.2%
</TABLE>
Actual percentages will vary over time.
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
Fund & Lipper Returns as of 12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fund average annual total returns*
================================================================================
Life of Fund
through 12/31/97
<S> <C>
Class A 4.11%
Class B 4.04%
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund SEC returns*
================================================================================
Life of Fund
through 12/31/97
<S> <C>
Class A (1.61%)
Class B (0.96%)
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Lipper+ category return as of 12/31/97
================================================================================
Life of Fund
through 12/31/97
<S> <C>
Average Lipper
global flexible portfolio fund (1.39%)
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Fund per share net asset values & distributions for the period ended 12/31/97
================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $10.29 $0.0282 $0.0910
Class B $10.29 $0.0211 $0.0910
================================================================================
</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 are sold with a maximum initial sales charge of 5.5% and an
annual 12b-1 fee of .25%. 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 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 initial offering of both share classes on
10/22/97 through 12/31/97.
10
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 12/31/97
- --------------------------------------------------------------------------------
HOLDING AMOUNT
================================================================================
<S> <C>
ITT Publimedia B.V., 9.375%, due 9/15/07 $1,004,530
U.S. Office Products Co., 5.50%, due 5/15/03 940,000
Microsoft Corp., $2.196, Series A 629,125
Consolidated Natural Gas Co., 7.25%, due 12/15/15 575,000
Philip Morris Cos., Inc. 543,750
Tel-Save Holdings, Inc., 4.50%, due 9/15/02 476,250
Apache Corp., 6.00%, due 1/15/02 457,000
US West Communications Group 451,250
Foundation Health Systems, Inc. Class A 434,075
UST, Inc. 432,169
================================================================================
<CAPTION>
10 Largest Purchases for the period ended 12/31/97
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
United Mexican States Series, 6.25%, due 12/31/19
and 11.50%, due 5/15/26 $1,673,750
ITT Publimedia B.V., 9.375%, due 9/15/07 1,003,685
U.S. Office Products Co., 5.50%, due 5/15/03 860,000
Microsoft Corp., $2.196, Series A 628,250
Foundation Health Systems, Inc. Class A 549,290
Consolidated Natural Gas Co., 7.25%, due 12/15/15 545,625
Tel-Save Holdings, Inc., 4.50%, due 9/15/02 541,875
Philip Morris Cos., Inc. 523,220
Synoptics Communications, Inc., 5.25% due 5/15/03 515,000
Apache Corp., 6.00%, due 1/15/02 497,044
================================================================================
<CAPTION>
10 Largest Sales for the period ended 12/31/97
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
United Mexican States Series, 6.25%, due 12/31/19
and 11.50%, due 5/15/26 $1,875,000
Synoptics Communications, Inc., 5.25%, due 5/15/03 504,900
Northeast Utilities 251,483
EVI, Inc., 5.00% 134,625
Nextel Communications, Inc., (zero coupon), due 10/31/07
9.75%, beginning 10/31/02 109,000
Comtel Brasileira Ltd., 10.75%, due 9/26/04 97,750
Ford Brasil Ltd., 9.25%, due 1/22/07 37,700
Goodyear Tire & Rubber Co. 36,955
Echo Bay Mines Ltd., 11.00%, due 4/1/27 34,000
Federated Department Stores, Inc. 33,261
================================================================================
</TABLE>
[GRAPHIC]
- ----------
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 and U.S. government and
federal agency issues are excluded. See Portfolio of Investments for specific
type of security held.
11
<PAGE>
MainStay Strategic Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CONVERTIBLE SECURITIES (16.8%)+
BONDS (13.6%)
AUTO PARTS (0.9%)
Mark IV Industries, Inc.
4.75%, due 11/1/04 (c)..................... $ 250,000 $ 231,250
-------------
COMPUTERS & OFFICE EQUIPMENT (3.6%)
U.S. Office Products Co.
5.50%, due 5/15/03......................... 1,000,000 940,000
-------------
CONGLOMERATES (0.4%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (f)..................... 130,000 103,350
-------------
ELECTRICAL EQUIPMENT (1.6%)
Credence Systems Corp.
5.25%, due 9/15/02 (c)..................... 500,000 420,000
-------------
ENERGY (1.8%)
Apache Corp.
6.00%, due 1/15/02 (f)..................... 400,000 457,000
-------------
GAS UTILITIES (2.2%)
Consolidated Natural Gas Co.
7.25%, due 12/15/15........................ 500,000 575,000
-------------
SPECIALIZED SERVICES (1.3%)
Corestaff, Inc.
2.94%, due 8/15/04......................... 400,000 335,000
-------------
TELECOMMUNICATION SERVICES (1.8%)
Tel-Save Holdings, Inc.
4.50%, due 9/15/02 (c)..................... 500,000 476,250
-------------
Total Convertible Bonds
(Cost $3,556,113).......................... 3,537,850
-------------
<CAPTION>
Shares
==========
<S> <C> <C>
PREFERRED STOCKS (3.2%)
CASINOS (0.1%)
Station Casinos, Inc.
7.00%...................................... 525 21,525
-------------
COMPUTERS & OFFICE EQUIPMENT (2.4%)
Microsoft Corp.
$2.196, Series A........................... 7,000 629,125
-------------
OIL SERVICES (0.7%)
EVI, Inc.
5.00% (c).................................. 4,000 178,000
-------------
Total Preferred Stocks
(Cost $827,431)............................ 828,650
-------------
Total Convertible Securities
(Cost $4,383,544).......................... 4,366,500
-------------
<CAPTION>
Principal
Amount
==========
CORPORATE BONDS (11.1%)
BANKS (0.1%)
First Nationwide Holdings, Inc.
12.25%, due 5/15/01........................ $ 25,000 28,125
-------------
CABLE (0.6%)
Adelphia Communications Corp.
Series B
9.25%, due 10/1/02......................... 65,000 66,300
Kabelmedia Holdings GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01 (e).............. 20,000 14,800
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99................... 65,000 60,125
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01.................. 30,000 19,800
-------------
161,025
-------------
CASINOS (0.2%)
Grand Casinos, Inc.
10.125%, due 12/1/03....................... 15,000 16,125
Penn National Gaming, Inc.
10.625%, due 12/15/04 (c).................. 25,000 25,750
-------------
41,875
-------------
CELLULAR TELEPHONE (0.3%)
Centennial Cellular Corp.
8.875%, due 11/1/01........................ 30,000 30,750
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01 (e)............... 50,000 36,625
</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, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
CELLULAR TELEPHONE (Continued)
Rogers Cantel, Inc.
8.30%, due 10/1/07 (c)..................... $ 15,000 $ 14,887
-------------
82,262
-------------
ELECTRIC UTILITIES (0.0%) (b)
CMS Energy Corp.
8.125%, due 5/15/02........................ 7,000 7,206
-------------
FINANCE (0.1%)
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04......................... 25,000 11,500
Imperial Credit Industries, Inc.
Series B
9.875%, due 1/15/07........................ 18,000 17,730
-------------
29,230
-------------
FINANCIAL SERVICES (3.9%)
ITT Publimedia B.V.
9.375%, due 9/15/07 (c).................... 950,000 1,004,530
-------------
FOOD, BEVERAGES & TOBACCO (0.2%)
Colorado Prime Corp.
12.50%, due 5/1/04......................... 15,000 14,925
Sparkling Spring Water Group Ltd.
11.50%, due 11/15/07 (c)................... 20,000 20,600
Standard Commercial Corp.
8.875%, due 8/1/05 (c)..................... 25,000 25,250
-------------
60,775
-------------
HEALTH CARE (0.6%)
Extendicare Health Services, Inc.
9.35%, due 12/15/07 (c).................... 70,000 71,750
Quest Diagnostics, Inc.
10.75%, due 12/15/06....................... 70,000 76,388
-------------
148,138
-------------
HOME BUILDING (0.1%)
Presley Companies (The)
12.50%, due 7/1/01......................... 25,000 24,219
-------------
INSURANCE (0.3%)
Superior National Capital Trust I
10.75%, due 12/1/17 (c)(h1)................ 45,000 46,012
Veritas Capital Trust
10.00%, due 1/1/28 (c)(h2)................. 40,000 40,800
-------------
86,812
-------------
LEISURE (0.2%)
Bally Total Fitness Holdings Corp.
9.875%, due 10/15/07 (c)................... 60,000 60,450
-------------
MEDIA (0.7%)
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning 12/1/02.................. 230,000 105,800
Rogers Communications, Inc.
8.875%, due 7/15/07 (e).................... 30,000 30,000
Viacom, Inc.
8.00%, due 7/7/06.......................... 50,000 50,375
-------------
186,175
-------------
MEDICAL EQUIPMENT (0.0%) (b)
Kinetic Concepts, Inc.
9.625%, due 11/1/07 (c).................... 9,000 9,146
-------------
PAPER & FOREST PRODUCTS (0.2%)
Doman Industries Ltd.
9.25%, due 11/15/07 (c).................... 20,000 19,500
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c)(e)................. 15,000 15,712
-------------
35,212
-------------
PERSONAL SERVICES (0.2%)
Loewen Group, Inc. (The)
6.70%, due 10/1/99 (c)..................... 50,000 50,196
-------------
POLLUTION & RELATED (0.3%)
Allied Waste Industries
(zero coupon), due 6/1/07
11.30%, beginning 6/1/02 (f)............... 100,000 70,000
-------------
PUBLISHING (0.5%)
Ascent Entertainment Group, Inc.
(zero coupon), due 12/15/04
11.875%, beginning 12/15/02 (c)............ 225,000 128,813
-------------
</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 Strategic Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
RESTAURANTS & LODGING (1.0%)
LA Quinta Inns, Inc.
9.25%, due 5/15/03......................... $ 150,000 $ 156,000
Perkins Family Restaurant L.P.
Perkins Finance Corp.
10.125%, due 12/15/07 (c).................. 100,000 101,250
-------------
257,250
-------------
STEEL, ALUMINUM & OTHER METALS (0.2%)
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05........................ 45,000 50,512
-------------
TELECOMMUNICATION SERVICES (0.8%)
Fonorola, Inc.
12.50%, due 8/15/02 (e).................... 7,000 7,805
GCI, Inc.
9.75%, due 8/1/07.......................... 15,000 15,563
Intermedia Communications, Inc.
8.50%, due 1/15/08 (c)..................... 10,000 10,000
Paging Network, Inc.
10.00%, due 10/15/08....................... 125,000 129,531
USN Communications, Inc.
(zero coupon), due 8/15/04
14.625%, beginning 8/15/00 (c)............. 40,000 30,400
-------------
193,299
-------------
TRANSPORTATION (0.6%)
Kitty Hawk, Inc.
9.95%, due 11/15/04 (c).................... 10,000 10,050
Pegasus Shipping Hellas Ltd.
11.875%, due 11/15/04 (c).................. 115,000 113,850
Trico Marine Services, Inc.
Series E
8.50%, due 8/1/05 (c)...................... 40,000 40,550
-------------
164,450
-------------
Total Corporate Bonds
(Cost $2,858,123).......................... 2,879,700
-------------
<CAPTION>
Shares
==========
<S> <C> <C>
COMMON STOCKS (49.8%)
AIRLINES (1.5%)
Northwest Airlines Corp....................... 8,300 397,362
-------------
AUTO MANUFACTURING (0.7%)
Ford Motor Co................................. 3,700 180,144
-------------
AUTO PARTS (3.5%)
Echlin Inc. .................................. 10,000 361,875
LucasVarity, PLC ADR (d)...................... 10,400 362,700
TRW, Inc...................................... 3,600 192,150
-------------
916,725
-------------
BANKS (2.7%)
Banc One Corp................................. 3,700 200,956
Bankers Trust New York Corp................... 1,800 202,387
Wells Fargo & Co.............................. 900 305,494
-------------
708,837
-------------
CAPITAL GOODS (1.3%)
Owens-Illinois, Inc. ......................... 9,000 341,437
-------------
CASINOS (1.1%)
Harrah's Entertainment, Inc. (a).............. 15,000 283,125
-------------
CHEMICALS (1.3%)
Imperial Chemical Industries
PLC ADR (d)................................ 5,000 324,687
-------------
COMPUTERS & OFFICE EQUIPMENT (1.0%)
Xerox Corp.................................... 3,600 265,725
-------------
CONTAINERS (0.8%)
Crown Cork & Seal Co., Inc. .................. 4,000 200,500
-------------
DOMESTIC OIL & GAS (1.4%)
Noble Affiliates, Inc......................... 10,500 370,125
-------------
DOMESTIC OILS (1.2%)
Occidental Petroleum Corp..................... 10,700 313,644
-------------
ELECTRIC UTILITIES (2.6%)
Long Island Lighting Co. ..................... 8,800 265,100
Public Service Enterprise
Group, Inc................................. 13,000 411,937
-------------
677,037
-------------
</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)
ELECTRICAL EQUIPMENT (2.4%)
Cinergy Corp. ................................ 9,500 $ 363,969
Lexmark International Group, Inc.
Class A.................................... 7,000 266,000
-------------
629,969
-------------
ENERGY (4.8%)
Boston Edison Co. ............................ 6,000 227,250
Central & South West Corp..................... 11,500 311,219
OGE Energy Corp. ............................. 4,500 246,094
PG&E Corp. ................................... 8,300 252,631
Seagull Energy Corp. ......................... 10,000 206,250
-------------
1,243,444
-------------
FOOD, BEVERAGES & TOBACCO (4.8%)
Philip Morris Cos., Inc....................... 12,000 543,750
RJR Nabisco Holdings Corp. ................... 7,000 262,500
UST, Inc. .................................... 11,700 432,169
-------------
1,238,419
-------------
GAS UTILITIES (1.1%)
Coastal Corp. (The)........................... 4,600 284,913
-------------
HEALTH CARE (2.8%)
Allegiance Corp............................... 8,000 283,500
Foundation Health Systems, Inc.
Class A.................................... 19,400 434,075
-------------
717,575
-------------
INSURANCE (2.6%)
Aetna Inc. ................................... 5,500 388,094
Chubb Corp. .................................. 1,600 121,000
CIGNA Corp. .................................. 1,000 173,063
-------------
682,157
-------------
MACHINERY (1.2%)
American Standard Cos., Inc................... 8,300 317,994
-------------
MEDICAL EQUIPMENT (1.0%)
Columbia/HCA Healthcare Corp.................. 9,000 266,625
-------------
PAPER & FOREST PRODUCTS (3.2%)
Bowater, Inc. ................................ 9,500 422,156
Georgia-Pacific Corp.......................... 3,500 212,625
Georgia-Pacific Corp.
(Timber Group)............................. 8,200 186,038
-------------
820,819
-------------
RAILROADS (1.5%)
CSX Corp...................................... 7,000 378,000
-------------
RETAIL (1.8%)
Federated Department Stores, Inc.............. 4,300 185,169
Toys "R" Us, Inc.............................. 9,000 282,937
-------------
468,106
-------------
TELEPHONE UTILITIES (1.8%)
US West Communications Group.................. 10,000 451,250
-------------
TIRE & RUBBER (0.8%)
Goodyear Tire & Rubber Co. (The).............. 3,200 203,600
-------------
UTILITIES (0.9%)
FPL Group, Inc................................ 4,000 236,750
-------------
Total Common Stocks
(Cost $12,467,189)......................... 12,918,969
-------------
PREFERRED STOCK (0.1%)
DOMESTIC OIL & GAS (0.1%)
EEX Capital Inc. (c)(g)....................... 12 12,269
-------------
Total Preferred Stock
(Cost $12,140)............................. 12,269
-------------
WARRANTS (0.0%) (b)
CABLE (0.0%) (b)
UIH Australia/Pacific, Inc.
expire 5/15/06 (a)(c)...................... 30 360
-------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Colorado Prime Corp.
expire 12/31/03 (a)(c)..................... 15 150
-------------
</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 Strategic Value Fund
<TABLE>
<CAPTION>
Shares Value
==================================
<S> <C> <C>
WARRANTS (Continued)
TELECOMMUNICATION SERVICES (0.0%) (b)
USN Communications, Inc.
expire 8/15/04 (a)(c)...................... 400 $ 4
-------------
Total Warrants
(Cost $492)................................ 514
-------------
<CAPTION>
Principal
Amount
==========
<S> <C> <C>
SHORT-TERM INVESTMENTS (22.1%)
COMMERCIAL PAPER (22.1%)
American Express Credit Corp.
6.06%, due 1/5/98.......................... $1,080,000 1,080,000
6.17%, due 1/7/98.......................... 107,000 107,000
American General Finance Corp.
6.01%, due 1/5/98.......................... 107,000 107,000
6.05%, due 1/2/98.......................... 1,065,000 1,065,000
Commercial Credit Co.
5.58%, due 1/30/98......................... 850,000 850,000
Ford Motor Credit Co.
6.02%, due 1/5/98.......................... 220,000 220,000
6.16%, due 1/5/98.......................... 368,000 368,000
General Electric Co.
6.12%, due 1/9/98.......................... 830,000 830,000
Prudential Funding Corp.
6.20%, due 1/2/98.......................... 1,115,000 1,115,000
-------------
Total Short-Term Investments
(Cost $5,742,000).......................... 5,742,000
-------------
Total Investments
(Cost $25,463,488) (i)..................... 99.9% 25,919,952(j)
Cash and Other Assets,
Less Liabilities........................... 0.1 26,358
---------- -------------
Net Assets.................................... 100.0% $ 25,946,310
========== =============
</TABLE>
- ----------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) ADR--American Depository Receipt.
(e) Yankee bond.
(f) Euro-Dollar bond.
(g) Restricted security.
(h1) 10.75% Trust Preferred Securities. The Trust exists solely for the purpose
of issuing the Trust Securities and investing the proceeds thereof in an
equivalent amount of 10.75% Senior Subordinated Notes due 2017 of the
Superior National Insurance Group, Inc.
(h2) 10.00% Trust Preferred Securities. The Issuer Trust exists solely for the
purpose of issuing the Trust Securities and investing the proceeds thereof
in an equivalent amount of 10.00% Subordinated Deferrable Interest
Debentures due 2028 of Veritas Holdings GmbH.
(i) The cost for Federal income tax purposes is $25,464,666.
(j) At December 31, 1997, net unrealized appreciation was $455,286, 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 $933,377 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $478,091.
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 Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $25,463,488) ............................................. $25,919,952
Cash ......................................................................................................... 859,572
Receivables:
Fund shares sold ........................................................................................... 885,600
Dividends and interest ..................................................................................... 119,298
Unamortized organization expense ............................................................................. 166,438
-----------
Total assets .............................................................................................. 27,950,860
-----------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 1,944,847
MainStay Management ........................................................................................ 13,958
NYLIFE Distributors ........................................................................................ 9,605
Organization ............................................................................................... 9,193
Custodian .................................................................................................. 4,500
Transfer agent ............................................................................................. 3,027
Fund shares redeemed ....................................................................................... 738
Trustees ................................................................................................... 100
Accrued expenses ............................................................................................. 18,582
-----------
Total liabilities ......................................................................................... 2,004,550
-----------
Net assets ................................................................................................... $25,946,310
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 13,232
Class B .................................................................................................... 11,979
Additional paid-in capital ................................................................................... 25,416,392
Accumulated undistributed net investment income .............................................................. 3,385
Accumulated undistributed net realized gain on investments ................................................... 44,858
Net unrealized appreciation on investments ................................................................... 456,464
-----------
Net assets ................................................................................................... $25,946,310
===========
CLASS A
Net assets applicable to outstanding shares .................................................................. $13,621,551
===========
Shares of beneficial interest outstanding .................................................................... 1,323,185
===========
Net asset value per share outstanding ........................................................................ $ 10.29
Maximum sales charge (5.50% of offering price) ............................................................... 0.60
-----------
Maximum offering price per share outstanding ................................................................. $ 10.89
===========
CLASS B
Net assets applicable to outstanding shares .................................................................. $12,324,759
===========
Shares of beneficial interest outstanding .................................................................... 1,197,908
===========
Net asset value and offering price per share outstanding ..................................................... $ 10.29
===========
</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 Operations
for the period October 22, 1997* through December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends ..................................................... $ 47,312
Interest ...................................................... 88,809
--------
Total income ................................................. 136,121
--------
Expenses:
Management .................................................... 23,276
Shareholder communication ..................................... 14,000
Professional .................................................. 10,150
Service ....................................................... 7,759
Distribution--Class B ......................................... 7,691
Transfer agent ................................................ 7,530
Amortization of organization expense .......................... 6,737
Registration .................................................. 5,955
Custodian ..................................................... 4,500
Recordkeeping ................................................. 2,323
Trustees ...................................................... 100
Miscellaneous ................................................. 2,370
--------
Total expenses ............................................... 92,391
--------
Net investment income ........................................... 43,730
--------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ................................ 243,180
Net unrealized appreciation on investments ...................... 456,464
--------
Net realized and unrealized gain on investments ................. 699,644
--------
Net increase in net assets resulting from operations ............ $743,374
========
</TABLE>
- ----------
* Commencement of operations.
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 Changes in Net Assets
<TABLE>
<CAPTION>
October 22, 1997*
through
December 31, 1997
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 43,730
Net realized gain on investments ............................................................... 243,180
Net unrealized appreciation on investments ..................................................... 456,464
------------
Net increase in net assets resulting from operations ........................................... 743,374
------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (34,556)
Class B ....................................................................................... (20,217)
From net realized gain on investments:
Class A ....................................................................................... (111,511)
Class B ....................................................................................... (86,811)
------------
Total dividends and distributions to shareholders ........................................... (253,095)
------------
Capital share transactions: Net proceeds from sale of shares:
Class A ....................................................................................... 4,223,379
Class B ....................................................................................... 11,097,588
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 120,532
Class B ....................................................................................... 96,515
------------
15,538,014
Cost of shares redeemed:
Class A ....................................................................................... (32,189)
Class B ....................................................................................... (49,794)
------------
Increase in net assets derived from capital share transactions .............................. 15,456,031
------------
Net increase in net assets .................................................................. 15,946,310
NET ASSETS:
Beginning of period .............................................................................. 10,000,000
------------
End of period .................................................................................... $ 25,946,310
============
Accumulated undistributed net investment income .................................................. $ 3,385
============
</TABLE>
- ----------
* Commencement of operations.
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
19
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
------------ ------------
October 22, 1997*
through
December 31, 1997
------------------------------
<S> <C> <C>
Net asset value at beginning of period .......... $ 10.00 $ 10.00
------------ ------------
Net investment income ........................... 0.03 0.02
Net realized and unrealized gain on investments . 0.38 0.38
------------ ------------
Total from investment operations ................ 0.41 0.40
------------ ------------
Less dividends and distributions:
From net investment income ...................... (0.03) (0.02)
From net realized gain on investments ........... (0.09) (0.09)
------------ ------------
Total dividends and distributions ............... (0.12) (0.11)
------------ ------------
Net asset value at end of period ................ $ 10.29 $ 10.29
============ ============
Total investment return (a) ..................... 4.11% 4.04%
Ratios (to average net assets)/Supplemental Data:
Net investment income ......................... 1.66%+ 0.91%+
Expenses ...................................... 2.73%+ 3.48%+
Portfolio turnover rate ......................... 29% 29%
Average commission rate paid .................... $ 0.0600 $ 0.0600
Net assets at end of period (in 000's) .......... $ 13,622 $ 12,325
</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.
20
<PAGE>
Notes to Financial Statements
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). These financial statements and notes relate only to MainStay
Strategic Value Fund (the "Fund").
The Fund commenced operations on October 22, 1997, and 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 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 1940 Act.
The Fund's investment objective is to seek maximum long-term total return from a
combination of common stocks, convertible securities and high yield 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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are deemed by the Sub-Adviser to be
representative of market values at the regular close of business of the
21
<PAGE>
MainStay Strategic Value Fund
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
Sub-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 (foreign
markets and over-the-counter markets) and the regular close of the Exchange will
not be reflected in the Fund's calculation of net asset value unless the
Sub-Adviser believes that the particular event would materially affect net asset
value, in which case an adjustment would be made.
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 15% of its net assets in illiquid
securities.
Restricted security held at December 31, 1997:
<TABLE>
<CAPTION>
Percent
Acquisition 12/31/97 of
Security Date Shares Cost Value Net Assets
- -------- ---------- ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C>
EEX Capital Inc.
Preferred Stock.................................. 11/17/97 12 $12,140 $12,269 0.1%
</TABLE>
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $173,175 and are being
amortized over a period not to exceed 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 difference of $14,428 has been reclassified from additional
paid-in capital to accumulated undistributed net investment income due to the
character of certain expenses which are nondeductible for tax purposes.
22
<PAGE>
Notes to Financial Statements continued
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 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. Premiums
on securities purchased are not amortized for this Fund.
Income from payment-in-kind securities is recorded daily based on the effective
interest method of accrual.
The Fund invests 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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
23
<PAGE>
MainStay Strategic Value Fund
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.75%.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee at the annual
rate of 0.375% of the average daily net assets of the Fund.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"), an
indirect wholly owned subsidiary of New York Life. 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 a monthly service fee 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 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 and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $344 for the period
October 22, 1997 through December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Transfer agent expense paid to MSS for the period October 22, 1997
through December 31, 1997, amounted to $8,687.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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, 1997, New York Life held shares of Class A with a net
asset value of $9,370,397, which represents 68.8% of the Class A net assets at
period end. NYLIFE Distributors held shares of Class B with a net asset value of
$1,040,525, which represents 8.4% of the Class B net assets at period end.
24
<PAGE>
Notes to Financial Statements continued
Other. Fees for recordkeeping services provided to the Fund by MainStay
Management are charged to the Fund. The fee for the period October 22, 1997
through December 31, 1997, amounted to $2,323.
Note 4--Purchases and Sales of Securities (in 000's):
During the period October 22, 1997 through December 31, 1997, purchases and
sales of securities, other than U.S. Government securities, securities subject
to repurchase transactions and short-term securities, were $22,719 and $3,250,
respectively.
Note 5--Line of Credit:
The Fund and certain affiliated funds maintain a line of credit with the
Custodian in order to secure a source of funds for temporary purposes to meet
unanticipated or excessive shareholder redemption requests. There was no
outstanding balance on this line of credit at December 31, 1997.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
October 22* through
December 31, 1997
-----------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold ................................................ 414 1,093
Shares issued in reinvestment of dividends and distributions 12 10
------ ------
426 1,103
Shares redeemed ............................................ (3) (5)
------ ------
Net increase ............................................... 423 1,098
====== ======
</TABLE>
- ----------
* Commencement of operations.
25
<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 Strategic Value Fund (one
of the fifteen funds constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the period October 22, 1997
(commencement of operations) through December 31, 1997, 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 audit. We conducted our audit
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
audit, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provides
a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
February 25, 1998
26
<PAGE>
This page intentionally left blank
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 the with strong growth potential level of risk for higher return potential
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 the S&P 500* of stocks with the protection of a
Fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[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 the an emphasis on risk control add diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) graph indicating a special blend of capital may offer growth potential if converted
risk/reward of the appreciation and current income into common stock
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
STRATEGIC VALUE FUND graph indicating return from common stocks, have undervalued and you want to
risk/reward of the convertible securities, and high-yield manage risk through multimarket
Fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[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 the bonds, and money market instruments risk through diversification
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[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 the for positive change tial than the market currently sees
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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>
[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 the primarily from U.S. government
Fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
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 the maximum current income|| securities with high-yield potential++
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph indicating non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward of the risk control diversification to your domestic
Fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating preservation of capital, and competitive yields on cash you're plan-
risk/reward of the liquidity, with free checkwriting** ning to spend or invest in the near future
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph indicating tive overall return by investing in higher income and overall return by
risk/reward of the a diversified portfolio of domestic investing in multiple bond market
Fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of the income taxes consistent with ing for income that's double tax free+++
Fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of the New York City income taxes consis- with income that's double or triple tax
Fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income You are in a high federal income tax
Tax Free Bond Fund graph indicating exempt from regular federal income tax bracket or want to pay less of your
risk/reward of the with preservation of capital+++ investment income to the IRS
Fund]
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============-----------------------
Strategic Value Fund
----------------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. NEW YORK LIFE
This report is provided for the information of shareholders of the MainStay
Strategic Value Fund. It may be given to others only when preceded or
accompanied by an effective MainStay Strategic Value Fund prospectus. This
report does not offer to sell any securities or solicit orders to buy them.
(C)1998. All rights reserved.
[GRAPHIC] MSAN18-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Total Return Fund Highlights 5
$10,000 Invested in the MainStay Total
Return Fund versus S&P 500 and
Inflation--Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Industry--Top 5 9
Portfolio Composition 11
Returns & Lipper Rankings 13
Top 10 Equity Holdings 14
Top 10 Bond Holdings 14
10 Largest Purchases 15
10 Largest Sales 15
Portfolio of Investments 16
Financial Statements 22
Notes to Financial Statements 26
Report of Independent Accountants 31
The MainStay Funds 32
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- ----------
* See page 6 for additional information on the S&P 500.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Total Return Fund, and MainStay Management, Inc.; approve a Subadvisory
Agreement between MainStay Management, Inc., on behalf of the MainStay Total
Return Fund, and MacKay Shields Financial Corporation; amend the Plan of
Distribution for Class B shares; eliminate or revise certain fundamental
investment restrictions including eliminating certain state-imposed fundamental
investment restrictions and eliminating or revising fundamental restrictions
pertaining to issuer concentration, borrowing money, industry concentration, and
issuing senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay Total
Return Fund is presented below.
PROPOSAL 1--Election of Trustees
<TABLE>
<CAPTION>
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 27,090,528 1,678,080 Passed
Nancy Maginnes Kissinger.................................................. 27,093,094 1,675,514 Passed
Donald E. Nickelson....................................................... 27,092,262 1,676,346 Passed
Richard S. Trutanic....................................................... 27,090,528 1,678,080 Passed
Harry G. Hohn............................................................. 27,093,094 1,675,514 Passed
Terry L. Lierman.......................................................... 27,093,132 1,675,476 Passed
Donald K. Ross............................................................ 27,090,528 1,678,080 Passed
Walter W. Ubl............................................................. 27,093,094 1,675,514 Passed
Alice T. Kane............................................................. 27,092,262 1,676,346 Passed
John B. McGuckian......................................................... 27,090,528 1,678,080 Passed
Stephen C. Roussin........................................................ 27,093,094 1,675,514 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 25,866,667.82 Against - 637,076.18 Abstain - 2,264,862.25 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKayShields Financial Corporation
<S> <C> <C> <C>
For - 25,771,556.79 Against - 627,392.18 Abstain - 2,369,657.28 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 22,029,995.43 Against - 825,507.02 Abstain - 2,209,350.04 Broker Non-Vote - 919,130.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 24,217,245.59 Against - 975,279.29 Abstain - 2,602,649.38 Broker Non-Vote - 973,434.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Authority Withheld Result
---------------------- --- ------------------ ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 24,205,144.59 987,380.29 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 24,144,756.57 1,047,768.31 Passed
A3--Real Estate Limited Partnership Interests.............................. 24,142,546.57 1,049,978.31 Passed
C1--Issuer Concentration................................................... 24,201,204.59 991,320.30 Passed
C2--Borrowing Money........................................................ 24,141,123.57 1,051,401.31 Passed
C3--Industry Concentration................................................. 24,202,958.59 989,566.30 Passed
C4--Issuing Senior Securities.............................................. 24,182,373.58 1,010,151.30 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 26,552,924.62 Against - 286,897.08 Abstain - 1,928,783.56 Result - Passed
</TABLE>
4
<PAGE>
MainStay Total Return Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] Following the Federal Reserve Board's rate hike in March, the equity
markets, in general, benefited from low inflation and declining domestic
interest rates.
[ ] Fiscal problems in Asia precipitated a flight to quality in both stocks
and bonds, which boosted both the equity and income portions of the Fund's
portfolio.
[ ] Over the course of the year, stock market volatility increased
substantially, creating both opportunities and pitfalls.
[ ] After the first quarter, relatively moderate economic growth and inflation
expectations caused a general decline in interest rates, which proved
beneficial for financial stocks and led to a rally in the bond market.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] For the year ended 12/31/97, the MainStay Total Return Fund returned
18.24% and 17.65% for Class A and Class B shares, respectively, excluding
all sales charges.
[ ] Both share classes underperformed the average Lipper* balanced fund, which
returned 19.00% for the year.
[ ] The Fund benefited from an overweighted position in financial services
stocks, but suffered from setbacks in technology and certain health care
issues.
[ ] The Fund benefited from a short duration in the first quarter and a
longer portfolio duration throughout the remainder of the year, with
emphasis on mortgage-backed securities in the first half of the year and
Treasuries in the second half of the year.
[ ] Corporate bonds, which were relatively strong during the first half of the
year, performed poorly in the second half of the year.
[ ] During 1997, the Fund completed its tenth year of operations.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Total Return Fund versus
S&P 500 and Inflation
CLASS A SHARES SEC Returns: 1-Year 11.74%, 5-Year 11.91%, 10-Year 12.46%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year MainStay Total S&P
End Return Fund 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,000 $ 9,450 $10,000
12/88 $11,656 $10,173 $10,441
12/89 $15,342 $11,698 $10,925
12/90 $14,866 $12,289 $11,608
12/91 $19,385 $16,816 $11,954
12/92 $20,861 $17,425 $12,308
12/93 $22,955 $19,254 $12,645
12/94 $23,528 $18,791 $12,974
12/95 $31,989 $24,176 $13,311
12/96 $39,327 $27,373 $13,752
12/97 $52,447 $32,366 $13,984
</TABLE>
[GRAPHIC] MainStay Total Return Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 12.65%, 5-Year 12.60%, 10-Year 12.93%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year MainStay Total S&P
End Return Fund 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,000 $10000 $10,000
12/88 $11,656 $10765 $10,441
12/89 $15,342 $12378 $10,925
12/90 $14,866 $13005 $11,608
12/91 $19,385 $17795 $11,954
12/92 $20,861 $18439 $12,308
12/93 $22,955 $20375 $12,645
12/94 $23,528 $19884 $12,974
12/95 $31,989 $25444 $13,311
12/96 $39,327 $28684 $13,752
12/97 $52,447 $33746 $13,984
</TABLE>
- ----------
The Class A graph assumes an initial investment of $10,000 made on 12/31/87
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 12/31/87 through
12/31/94. The Class B graph assumes an initial investment of $10,000 made
on 12/31/87. 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.
6
<PAGE>
Portfolio Management Discussion and Analysis
[GRAPHIC] Photo of Total Return Fund Team
TOTAL RETURN FUND TEAM
Edmund Spelman, Rudolph Carryl, Eileen Cook,
Christopher Harms, and Ravi Akhoury
In late March, signs of rapid growth led the Federal Reserve Board to move to
raise interest rates by 25 basis points. Throughout the rest of the year,
however, the growth rate was more moderate and inflation remained at low levels,
which was generally positive for both the stock and bond markets. Financial
stocks outperformed the market as a whole, while bonds rallied as yields
declined.
Volatility increased as the year progressed, with the Dow Jones Industrial
Average* dropping 554.26 points or 7.18% on October 27, 1997, then recording its
largest single-day gain in history the following day. In the third and fourth
quarters, weakening currencies and other financial problems in Asian markets
took a severe toll on many technology stocks. This, however, stimulated
increased interest in purely domestic issues and high-quality defensive issues
with dependable earnings, including pharmaceutical and health care stocks.
Overall, the stock market had another outstanding year--the third year in a row
with the S&P 500+ returning over 20%.
Volatility was considerably lower in the bond markets through most of the year.
Asian financial woes stimulated a flight to quality that resulted in strong
gains for long-term Treasury investors. A decline in the U.S. budget deficit had
reduced the amount of bonds the government needed to issue, shifting supply and
demand dynamics in the government security markets.
Given this context, how did the MainStay Total Return Fund do in 1997?
For the year ended 12/31/97, the MainStay Total Return Fund returned 18.24% and
17.65% for Class A and Class B shares, respectively, excluding all sales
charges. Both share classes underperformed the average Lipper++ balanced fund,
which returned 19.00% for the year.
Which areas contributed most significantly to the Fund's equity performance?
One of our decisions during the year was to keep the Fund's equity portfolio
overweighted in the financial sector. While there
[GRAPHIC]
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Defensive issues
- ----------------
Stocks chosen for their reliability of earnings, growth, and positive
performance.
Flight to quality
- -----------------
When investors in general move to improve the credit quality and liquidity of
the securities they own, either because of credit concerns or international
crisis.
- ----------
* A price-weighted average of 30 actively traded blue chip stocks, primarily
industrials, but also including financial, leisure, and other
service-oriented firms.
+ See footnote on page 6 for more information on the S&P 500.
++ See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
[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.
YEAR-BY-YEAR PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- ----------------------------------
<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
12/96 13.22
12/97 18.24
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/87 through 12/94. See footnote * on page 13 for more information on
performance.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS B SHARES
<TABLE>
<CAPTION>
Total
Year Return
End %
- ----------------------------------
<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 27.96
12/96 12.73
12/97 17.65
</TABLE>
See footnote * on page 13 for more information on performance.
were some setbacks when short-term rates rose in March, throughout much of the
rest of the year rates declined and investors focused on the group's strong
fundamentals. We had positive results from Travelers Group, SunAmerica, MGIC
Investment, and American International Group. Although each stock had a
different weighting, all were strong contributors to the overall performance of
the Fund's equity portfolio. Norwest, which we purchased in July and December
was up 27% by the end of the year, which was an impressive gain in a short
period. One negative performer was Green Tree Financial, which was down 31% for
the year after its accounting practices were questioned.
8
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
U.S. Government & Federal Agencies 21.0%
Financial Services 9.8%
Retail 8.2%
Drugs 5.3%
Banks 4.8%
All Other 50.9%
</TABLE>
Actual percentages will vary over time.
How was the Fund's equity portfolio affected by the fallout in Asia?
In a variety of ways. Technology stocks, many of which have close ties with
Asian markets, suffered as investors retreated to high-quality, dependable
stocks, such as pharmaceuticals and strong health care companies, solid domestic
financial issues, and other large capitalization names. We reduced several of
the Fund's technology holdings, including Intel, which underperformed, and
Seagate Technology and Lam Research, which suffered when commodity-type
technology stocks went out of favor. Since the market was more forgiving of
large-capitalization issues, we continued to hold Oracle, although it had
negative returns. We also had a rough ride with 3Com, a networking company that
had problems integrating an acquisition. The stock was down 52% for the year and
had the worst overall impact on the equity portion of the Fund of any of its
holdings. Of course, not all technology stocks were negative stories. Computer
Associates, which was up 60% for the year, was one of the Fund's largest
holdings and was among the leading contributors to the Fund's performance.
Which stocks benefited from the difficulties in Asia?
Actually, there were several. Although we pick stocks one-by-one, the
pharmaceuticals as a group did very well. The Fund owned Schering-Plough, which
was up 95% for the year. We purchased Eli Lilly during the year, and the stock
benefited from dependable growth and strong new product flow, gaining over 75%.
The Fund also had success with other health care-related stocks, such as Guidant
and Medtronic, both of which produce devices used in cardiovascular care. These
two stocks recorded substantial gains and ranked among the top contributors to
the Fund's performance.
Were there other areas that did well as a result of the Asian difficulties?
Yes. Purely domestic retailers did well. The Fund held Home Depot, which was
- -----------
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.
9
<PAGE>
[GRAPHIC]
up 76% for the year, and Kohl's, a specialty retailer largely in the Midwest
that gained 69%. In addition, we added CVS, another domestic retailer in the
fourth quarter. The stock performed well throughout the rest of the year and we
expect it to continue to do well in 1998.
How was the Fund affected by the volatility of the stock market in 1997?
The Fund held a number of stocks that benefited from the market's volatility as
investors sought out more dependable, defensive names. Merck, Johnson & Johnson,
Eli Lilly, and Schering-Plough were among the stocks we owned or purchased that
helped stabilize the Fund's equity portfolio despite market volatility.
Did declining oil prices affect the Fund?
Yes, they did and the impact was generally negative. Three of the Fund's
purchases, Diamond Offshore, Halliburton, and ENSCO International, all declined
in price after we bought them. The Fund continued to hold the stocks, however,
because they appear to have strong earnings potential for 1998. Nevertheless,
the purchases were ill-timed and hurt the Fund's performance.
Besides technology stocks, did you have other major sales during the year?
Yes. We sold Amgen, a leading biotechnology stock, as fundamentals weakened. The
sale was basically a neutral move for the Fund. Black & Decker appeared to be an
attractive buy, but just a few weeks later, its earnings estimates were reduced
and we sold the stock at a loss. We sold NIKE based on reduced earnings and
weaker fundamentals. But given the performance after the sale, we believe it was
a good move for the Fund. We also sold Triton Energy, a company with oil
reserves in Colombia and natural gas holdings in Thailand that did poorly after
the Asian setback started. Fortunately, our sale protected investors from even
bigger losses as the stock continued to decline.
Were there other steps you took to protect investors?
Yes. We saw costs rising rapidly for Humana. Although a new president stepped in
and tried to improve the company's profitability, we did not see an improvement
and later sold the stock. That turned out to be a wise decision given the
stock's subsequent performance. Columbia/HCA became embroiled in a federal
investigation, which made it impossible to base decisions on the fundamentals.
So we sold the stock around where we purchased it, with a neutral impact on the
Fund.
What other stocks did particularly well or poorly?
Tyco International, a diversified industrial company that exceeded earnings
expectations was one of our strongest performers as investors looked for
quality, dependability, and strength. When Aetna had faced problems with rapidly
rising costs we sold the stock which had a negative impact on the Fund's equity
portfolio. Danka Business Systems, which distributes copiers and fax machines,
suffered a setback in integrating an acquisition and hurt the Fund's equity
performance. Compuware, a technology stock that was purchased early in the year,
was among the Fund's top performers and more than doubled in price from initial
purchase.
10
<PAGE>
What happened in the Fund's income portfolio?
The most important factor influencing the Fund's income portfolio was duration.
Being short in the first quarter and longer throughout the rest of the year
helped position the Fund positively for changes that occurred in interest rates.
Our decision to be overweighted in mortgage-backed securities in the first half
also provided yield-enhancing opportunities when the yield curve, duration
adjustments, and government securities had little to offer. At the time, we
concentrated on mortgage-backed and asset-backed bonds, and collateralized
mortgage obligations (CMOs). When opportunities arose, we took profits in CMOs
and invested in low-balance loans, AAA-rated manufactured-housing loans, and
AAA-rated home equity loans. All of these investments had a positive impact on
performance.
What about the second half of the year?
During the second half of the year, declining interest rates raised prepayment
concerns and we sold mortgage-related securities and bought Treasuries. Because
of technical supply and demand factors in the market, we were able to capitalize
on several opportunities to switch between newer and older government issues and
back again. With incremental gains on each exchange and a relatively long
duration, the strategy proved beneficial for the Fund.
Were there other income securities you bought during the second half of 1997?
Yes, as yield spreads widened, we spotted some opportunities among basic 5-year
agencies and Fannie Maes, which offered attractive characteristics with few
prepayment worries. Both contributed positively to performance.
How did the Fund's corporate bonds perform?
Although corporate bonds, particularly Yankee bonds and telecommunications
issues, performed relatively well in the first
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Common Stocks 4.2%
Bonds & Notes 58.3%
Cash, Equivalents & Other Assets, less Liabilities 37.5%
</TABLE>
Actual percentages will vary over time.
[GRAPHIC]
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.
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.
Yield spread
- ------------
The difference in yield between securities in different market sectors, such as
government and mortgage-backed securities or between different securities in a
single sector, such as 5- and 10-year Treasuries.
11
<PAGE>
[GRAPHIC]
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 in
other markets, including the issuer's domestic market overseas.
Stranded assets
- ---------------
When utilities separate the cash flows on their stronger and weaker performing
assets, the underperforming assets are known as "stranded assets," and bonds
that depend on their cash flow generally sell at a discount to attract
investors.
Past performance is no guarantee of future results.
half of the year, corporate bonds were the weak spot in the portfolio during the
second half. Our best performers were banks, where we were overweighted, and
utilities, where credit concerns caused us to maintain an underweighted position
for the Fund. We did participate in stranded asset sales in California and
Texas, which had a positive impact, but represented a small portion of the
Fund's income portfolio.
Can you elaborate on the Fund's Yankee bond holdings?
The Fund's Yankee bond holdings performed relatively well in the first half of
the year. In the second half of the year, however, we had a slightly
overweighted position in Korean paper that suffered a severe downgrade. Although
we sold it before the downgrade occurred, it did have a negative impact on the
Fund's performance, even though Yankee bonds have no currency exposure. The Fund
had other Yankee holdings that did better, but not enough to overshadow the
Korean difficulty.
What is your outlook going forward?
We believe the catalysts that moved the market in 1997 are still in place.
Moderate growth, low inflation, and low interest rates are likely to continue,
and will support the long-term case for a bull market in stocks. Nevertheless,
the market is much more cautious, and for good reason. Chances are the Asian
situation may slow economic growth in the United States and demand for exports
may decline. While that may be negative for corporate earnings, it may have a
beneficial impact on inflation. If foreign influence on domestic stocks is
stronger than we anticipate, however, the bull market may well be challenged.
In the bond market, we believe rates may continue to decline, which would be
positive for long-term bonds. We see the flight to quality as good for
Treasuries, but need to keep our eye on developments on the international front.
Regardless of what emerges, we will continue seeking to realize current income
consistent with reasonable opportunity for future growth of capital and income.
Ravi Akhoury
Edmund Spelman
Rudolph Carryl
Portfolio Managers
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Fund average annual total returns*
=======================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 18.24% 13.18% 13.10% 13.14%
Class B 17.65% 12.85% 12.93% 12.97%
========================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------
Fund SEC returns*
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 11.74% 11.91% 12.46% 12.50%
Class B 12.65% 12.60% 12.93% 12.97%
========================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
========================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 207 out of n/a n/a n/a
350 funds
Class B 227 out of 64 out of 25 out of 25 out of
350 funds 109 funds 48 funds 48 funds
Average Lipper
balanced fund 19.00% 13.20% 12.92% 12.92%
========================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
========================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $21.44 $0.4011 $1.8371
Class B $21.45 $0.2921 $1.8371
========================================================================================
</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 (12/29/87) 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 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 12/31/97. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 12/29/87.
[GRAPHIC]
13
<PAGE>
[GRAPHIC]
- ----------
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.
<TABLE>
<CAPTION>
================================================================================
Top 10 Equity Holdings as of 12/31/97
- --------------------------------------------------------------------------------
HOLDING AMOUNT
================================================================================
<S> <C>
Tyco International Ltd. $27,407,012
Cendant Corp. 27,320,776
Computer Associates International, Inc. 22,124,222
Lilly (Eli) & Co. 22,001,500
Travelers Group Inc. 21,684,526
SunAmerica Inc. 20,455,875
Schering-Plough Corp. 20,122,287
Medtronic, Inc. 19,355,625
MGIC Investment Corp. 18,686,500
Household International, Inc. 18,037,337
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
Top 10 Bond Holdings as of 12/31/97
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
United States Treasury Bond 6.125%, due 11/15/27 $46,784,222
United States Treasury Note 7.75%, due 11/30/99 36,389,383
Government National Mortgage Association I (Mortgage
Pass-Through Security), 7.00%, due 12/15/23 31,937,010
Federal National Mortgage Association (Mortgage
Pass-Through Security) 6.50%, due 1/14/28 TBA 28,510,047
Fannie Mae Medium-Term Notes 5.96%, due 7/23/99 23,191,681
Federal National Mortgage Association (Mortgage
Pass-Through Security), 7.00%, due 1/14/28 TBA 19,383,371
United States Treasury Note 7.875%, due 11/15/04 14,488,891
Federal National Mortgage Association (Mortgage
Pass-Through Security) 6.00%, due 10/l/08 14,373,348
Green Tree Recreational, Equipment & Consumer Trust
Series 1997-C Class A1 6.49%, due 2/15/18 12,090,630
Nissan Auto Receivables Grantor Trust
Series 1997-A Class A 6.15%, due 2/15/03 9,559,964
================================================================================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
United States Treasury Notes, due 11/15/98 - 5/15/07 $513,045,429
Federal National Mortgage Association (Mortgage Pass-Through
Securities), due 7/23/99 - 1/14/28 493,331,983
United States Treasury Bonds, due 8/15/13 - 11/15/27 264,518,449
Government National Mortgage Association I and II
(Mortgage Pass-Through Securities), due 3/15/12 - 12/15/23 105,717,750
Residential Accredit Loans, Inc. and Residential Asset
Securitization Trust, due 6/25/26 - 11/26/27 36,195,882
Green Tree Financial Corp. and Green Tree Recreational,
Equipment & Consumer Trust, due 2/25/18 - 5/15/29 34,478,499
PNC Funding Corp., PNC Mortgage Securities Corp. and PNC
Student Loan Trust I, due 7/15/07 - 7/25/29 17,762,510
Merck & Co., Inc., due 5/3/37 and Common Stock 15,380,743
Export Import Bank Korea, due 2/15/06 - 3/15/07 14,552,461
Lilly (Eli) & Co. 14,505,190
================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- --------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
Fannie Mae and Federal National Mortgage Association
(Mortgage Pass-Through Securities), due 12/1/01 - 8/1/26 $474,199,599
United States Treasury Notes, due 2/15/98 - 5/15/06 459,890,179
United States Treasury Bonds, due 8/15/13 - 11/15/27 236,037,026
Government National Mortgage Association I and II (Mortgage
Pass-Through Securities), due 3/15/12 - 12/15/25 108,986,063
Green Tree Financial Corp. and Green Tree Recreational,
Equipment & Consumer Trust, due 6/15/27 - 5/15/29 39,381,936
Asset Securitization Corp., due 10/13/26 - 2/14/41 24,398,803
Residential Accredit Loans, Inc., due 8/25/26 - 10/25/27 23,723,263
Republic of Columbia, due 2/15/03 - 2/15/27 21,007,005
First USA Bank, due 10/19/98 and Common Stock 19,560,286
Amgen, Inc. 14,876,356
================================================================================
</TABLE>
[GRAPHIC]
- ----------
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.
15
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
LONG-TERM BONDS (37.5%)+
ASSET-BACKED SECURITIES (5.7%)
AIRPLANE LEASES (0.3%)
Aircraft Lease Portfolio
Securitization Ltd.
Series 1996-1 Class CX
7.35%, due 6/15/06 (f) ..................... $ 4,249,764 $ 4,249,764
-----------
AUTO LOANS (0.7%)
Nissan Auto Receivables Grantor Trust
Series 1997-A Class A
6.15%, due 2/15/03 ......................... 9,563,407 9,559,964
-----------
CONSUMER LOANS (1.9%)
BankBoston Recreational Vehicle
Asset-Backed Trust
Series 1997-1 Class A10
6.39%, due 1/15/03 ......................... 4,890,000 4,906,528
Chase Manhattan Recreational
Vehicle Owner Trust
Series 1997-A Class A5
6.05%, due 11/15/04 ........................ 5,390,000 5,379,274
Green Tree Recreational, Equipment
& Consumer Trust
Series 1997-C Class A1
6.49%, due 2/15/18 ......................... 12,046,779 12,090,630
NationsCredit Grantor Trust
Series 1997-2 Class A2
6.25%, due 11/15/13 ........................ 3,024,188 3,026,698
-----------
25,403,130
-----------
CREDIT CARD RECEIVABLES (0.3%)
Standard Credit Card Master Trust
Series 1995-4 Class A
5.975%, due 2/15/00 (f) .................... 3,630,000 3,630,145
-----------
EQUIPMENT LOANS (0.4%)
Newcourt Receivables Asset Trust
Series 1996-3 Class A
6.24%, due 12/20/04 ........................ 1,823,613 1,819,747
Series 1996-2 Class A
6.87%, due 6/20/04 ......................... 2,696,919 2,709,055
-----------
4,528,802
-----------
MANUFACTURED HOUSING LOANS (0.5%)
Mid-State Trust VI
Class A-4
7.79%, due 7/1/35 .......................... 5,949,755 6,157,818
-----------
STUDENT LOANS (0.5%)
Brazos Student Loan Finance Corp. ............
Series 1997-A Class A1
6.20%, due 12/1/04 (f) ..................... 3,000,000 2,997,900
PNC Student Loan Trust I
Series 1997-2 Class A8
5.76625%, due 1/25/08 (f) ................. 4,000,000 3,999,360
-----------
6,997,260
-----------
UTILITY LOANS (1.1%)
California Infrastructure &
Economic Development Bank
Special Purpose Trust
PG&E-1
Rate Reduction Certificates
Series 1997-1 Class A3
6.15%, due 6/25/02 ......................... 4,200,000 4,210,332
SCE-1
Rate Reduction Certificates
Series 1997-1 Class A5
6.28%, due 9/25/05 ......................... 3,361,000 3,382,880
SDG&E-1
Rate Reduction Certificates
Series 1997-1 Class A6
6.31%, due 9/25/08 ......................... 6,535,000 6,568,524
-----------
14,161,736
-----------
Total Asset-Backed Securities
(Cost $74,350,269) ......................... 74,688,619
-----------
BRADY BOND (0.2%)
EURO BOND (0.2%)
Poland-Global Registered
Series RSTA
3.75%, due 10/27/24
4.00%, beginning 10/27/98 ................. 3,470,000 2,333,575
-----------
Total Brady Bond
(Cost $1,992,587) .......................... 2,333,575
-----------
CERTIFICATE OF DEPOSIT (0.2%)
BANKS (0.2%)
Mercantile Safe Deposit & Trust Co.
6.30%, due 8/16/99 ......................... 2,000,000 2,007,400
-----------
Total Certificate of Deposit
(Cost $2,000,000) .......................... 2,007,400
-----------
</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.
16
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
CORPORATE BONDS (5.2%)
AEROSPACE (0.1%) Wyman-Gordon Co.
8.00%, due 12/15/07......................... $ 1,275,000 $ 1,284,563
-----------
AIRLINES (0.2%)
American Airlines Pass-Through Trusts
Series 1991-A2
10.18%, due 1/2/13 ......................... 1,880,000 2,377,316
-----------
BANKS (1.8%)
Bankers Trust New York Corp.
Medium-Term Notes
Series A
6.70%, due 10/1/07 ......................... 2,115,000 2,112,610
Capital One Bank
Medium-Term Senior Bank Notes
7.15%, due 9/15/06 ......................... 5,650,000 5,761,418
First Nationwide Holdings Inc.
12.25%, due 5/15/01 ........................ 1,580,000 1,777,500
Regions Financial Corp.
7.75%, due 9/15/24 ......................... 5,520,000 6,180,854
Southtrust Bank
Birmingham, Alabama N A
Medium-Term Notes
7.69%, due 5/15/25 ......................... 2,750,000 3,061,768
Star Capital I Guaranteed
6.7025%, due 6/15/27 (f) ................... 4,075,000 4,031,397
SunTrust Capital I
6.545%, due 5/15/27 (f) .................... 1,090,000 1,071,688
-----------
23,997,235
-----------
BROKERAGE (0.1%)
Lehman Brothers Holdings Inc.
7.375%, due 5/15/07 ........................ 940,000 984,537
-----------
BUILDING MATERIALS (0.1%) Triangle Pacific Corp.
10.50%, due 8/1/03 ......................... 1,540,000 1,617,000
-----------
BUILDINGS (0.1%)
Greystone Homes Inc.
10.75%, due 3/1/04 ......................... 980,000 1,068,200
U.S. Home Corp.
8.25%, due 8/15/04 ......................... 750,000 763,125
-----------
1,831,325
-----------
CABLE (0.1%)
Jones Intercable, Inc.
9.625%, due 3/15/02 ........................ 1,035,000 1,112,625
-----------
CASINOS (0.0%)(b)
Grand Casinos Inc. Guaranteed
10.125%, due 12/1/03 ....................... 475,000 510,625
-----------
CHEMICALS (0.2%) ISP Holdings Inc. ...........
Series B
9.00%, due 10/15/03 ........................ 1,000,000 1,036,250
Terra Industries Inc.
Series B
10.50%, due 6/15/05 ........................ 1,400,000 1,505,000
-----------
2,541,250
-----------
DRUGS (0.1%) ICN Pharmaceuticals, Inc.
Series B
9.25%, due 8/15/05 ......................... 750,000 795,000
Merck & Co., Inc.
Medium-Term Notes
Series B
5.76%, due 5/3/37 .......................... 835,000 855,032
-----------
1,650,032
-----------
ELECTRIC UTILITIES (0.0%)(b) CMS Energy Corp.
8.125%, due 5/15/02 ........................ 568,000 584,719
-----------
FINANCE (0.3%)
Associates Corp. of North America
5.96%, due 5/15/37 ......................... 4,290,000 4,367,392
-----------
FOOD, BEVERAGE & TOBACCO (0.1%)
Standard Commercial Corp. Guaranteed
8.875%, due 8/1/05 (c) ..................... 1,115,000 1,126,150
-----------
HEALTH CARE (0.1%)
Abbey Healthcare Group, Inc.
9.50%, due 11/1/02 ......................... 960,000 1,004,400
-----------
HOSPITAL MANAGEMENT & SERVICES (0.1%)
Tenet Healthcare Corp.
8.625%, due 12/1/03 ........................ 1,040,000 1,102,710
-----------
MEDIA (0.2%) Viacom Inc.
8.00%, due 7/7/06 .......................... 2,400,000 2,418,000
-----------
RETAIL (0.8%)
Dayton Hudson Corp.
5.895%, due 6/15/37 ........................ 6,385,000 6,435,952
</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 Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
CORPORATE BONDS (Continued)
RETAIL (Continued)
Sears Roebuck Acceptance Corp.
Medium-Term Notes
Series IV
6.36%, due 12/4/01.......................... $ 3,500,000 $ 3,509,310
-----------
9,945,262
-----------
SHIPBUILDING (0.1%)
Newport News Shipbuilding Inc.
8.625%, due 12/1/06 ........................ 1,000,000 1,051,250
-----------
STEEL, ALUMINUM & OTHER METALS (0.1%)
LTV Corp. (The)
8.20%, due 9/15/07 (c) ..................... 1,642,000 1,584,530
-----------
TOBACCO (0.4%)
Philip Morris Cos. Inc.
7.25%, due 1/15/03 ......................... 4,960,000 5,117,182
-----------
TRANSPORTATION (0.2%)
Trico Marine Services, Inc.
Series B
8.50%, due 8/1/05 .......................... 1,000,000 1,013,750
Series E
8.50%, due 8/1/05 (c) ...................... 1,000,000 1,013,750
-----------
2,027,500
-----------
Total Corporate Bonds
(Cost $67,306,856) ......................... 68,235,603
-----------
MORTGAGE-BACKED SECURITIES (4.7%)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.5%)
Asset Securitization Corp.
Series 1997-D5 Class A1C
6.75%, due 2/14/41 ......................... 5,150,000 5,259,129
Commercial Mortgage Acceptance Corp.
Series 1997-ML1 Class A3
6.57%, due 10/15/07 ........................ 4,040,000 4,075,471
Commercial Mortgage Pass-Through
Certificates
Series 1997-LLI Class A1
6.79%, due 6/12/04 ......................... 4,349,236 4,445,006
GS Mortgage Securitization Corp. II
Series 1997-GL Class A2B
6.86%, due 7/13/30 ......................... 4,250,000 4,365,133
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C2 Class A1
7.3437%, due 6/15/21 (f) ................... 5,534,687 5,631,268
PNC Mortgage Securities Corp.
Series 1997-6 Class A2
6.60%, due 7/25/27 ARM (e)(i) .............. 9,327,534 9,353,091
-----------
33,129,098
-----------
RESIDENTIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE OBLIGATIONS) (2.2%)
Bear Stearns Mortgage Securities Inc.
Series 1996-4 Class AI2
10.50%, due 9/25/27 ........................ $ 2,579,861 $ 2,684,655
Financial Asset Securitization, Inc.
Series 1997-NAMC 2 Class FXA8
10.00%, due 7/25/27 ........................ 5,548,736 5,843,042
Norwest Asset Securities Corp.
Series 1997-10 Class A2
6.50%, due 8/25/27 ......................... 4,380,000 4,388,979
Residential Asset
Securitization Trust
Series 1997-A3 Class A7
10.00%, due 5/25/27 ........................ 4,869,180 5,102,170
Series 1997-A5 Class A4
10.00%, due 7/25/27 ........................ 2,357,601 2,462,443
Series 1997-A8 Class A2
10.00%, due 10/25/27 ....................... 1,923,658 2,139,069
Series 1997-A9 Class A8
10.00%, due 11/26/27 ....................... 2,247,138 2,385,292
Structured Asset Securities Corp.
Series 1996-2 Class A1
7.00%, due 8/25/26 ......................... 2,906,345 2,920,644
-----------
27,926,294
-----------
Total Mortgage-Backed Securities
(Cost $60,812,135) ......................... 61,055,392
-----------
U.S. GOVERNMENT & FEDERAL AGENCIES (20.0%)
FEDERAL AGENCY (1.8%)
Fannie Mae
Medium-Term Notes
5.96%, due 7/23/99 ......................... 23,135,000 23,191,681
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (6.0%)
6.00%, due 10/1/08 (e) ..................... 14,513,988 14,373,348
6.50%, due 1/14/28 TBA (d) ................. 28,880,000 28,510,047
6.65%, due 1/30/08 TBA (d) ................. 3,000,000 3,066,300
6.72%, due 11/1/07 (e) ..................... 4,271,744 4,387,252
6.835%, due 1/1/07 (e) ..................... 8,428,999 8,708,083
7.00%, due 1/14/28 TBA (d) ................. 19,245,000 19,383,371
-----------
78,428,401
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE
PASS-THROUGH SECURITIES) (3.4%)
7.00%, due 12/15/23 (e) .................... 31,581,715 31,937,010
7.50%, due 12/15/23 (e) .................... 5,847,642 6,006,639
9.50%, due 12/15/17 -
5/15/22 (e) ................................ 5,902,173 6,457,127
-----------
44,400,776
-----------
</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>
Principal
Amount Value
============================
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL AGENCIES (Continued)
UNITED STATES TREASURY BONDS (4.7%)
6.125%, due 11/15/27 (g) ................... $45,525,000 $46,784,222
7.625%, due 2/15/25 (g) .................... 7,275,000 8,828,867
12.00%, due 8/15/13 ........................ 3,925,000 5,783,252
-----------
61,396,341
-----------
UNITED STATES TREASURY NOTES (4.1%)
6.25%, due 2/28/02 ......................... 410,000 417,495
6.625%, due 5/15/07 (g) .................... 2,600,000 2,751,944
7.75%, due 11/30/99 (g) .................... 35,090,000 36,389,383
7.875%, due 11/15/04 (g) ................... 12,960,000 14,488,891
-----------
54,047,713
-----------
Total U.S. Government & Federal Agencies
(Cost $258,292,095) ....................... 261,464,912
-----------
YANKEE BONDS (1.5%)
BANKS (0.2%)
BCH Cayman Islands Ltd.
Guaranteed
7.70%, due 7/15/06 ......................... 2,900,000 3,073,594
-----------
FINANCE (0.3%)
Spintab AB
7.50%, due 8/14/49
7.939%, beginning 8/14/06(c) ............... 3,540,000 3,644,784
-----------
FINANCIAL SERVICES (0.2%)
Banesto Finance Ltd.
Guaranteed
7.50%, due 3/25/07 ......................... 1,985,000 2,086,493
-----------
FOREIGN GOVERNMENT (0.2%)
Quebec Province of Canada
Series NN
7.125%, due 2/9/24 ......................... 2,900,000 2,995,004
-----------
MEDIA (0.1%)
Rogers Communications Inc.
8.875%, due 7/15/07 ........................ 1,600,000 1,600,000
-----------
SUPRANATIONAL (0.1%)
Corporacion Andina de Fomento
7.79%, due 3/1/17 .......................... 1,720,000 1,783,726
-----------
UTILITIES (0.4%)
Hydro-Quebec
Series IO
8.05%, due 7/7/24 .......................... 4,080,000 4,720,805
-----------
Total Yankee Bonds
(Cost $19,458,193) ......................... 19,904,406
-----------
Total Long-Term Bonds
(Cost $484,212,135) ........................ 489,689,907
-----------
<CAPTION>
Shares
===========
<S> <C> <C>
COMMON STOCKS (58.3%)
AUTO PARTS (0.1%)
Lear Corp. (a) ............................... 35,200 $ 1,672,000
-----------
BANKS (2.6%)
NationsBank Corp. ............................ 203,000 12,344,938
Norwest Corp. ................................ 343,600 13,271,550
Washington Mutual, Inc. ...................... 124,600 7,951,037
-----------
33,567,525
-----------
BUILDINGS (0.9%)
Oakwood Homes Corp. .......................... 341,800 11,343,488
-----------
COMPUTERS & OFFICE EQUIPMENT (1.9%)
Hewlett-Packard Co. .......................... 186,000 11,625,000
Sun Microsystems, Inc. (a) ................... 330,000 13,158,750
-----------
24,783,750
-----------
CONSUMER DURABLES (0.9%)
Harley-Davidson, Inc. ........................ 420,600 11,513,925
-----------
CONSUMER SERVICES (2.5%)
Cendant Corp. (a) ............................ 794,786 27,320,776
Service Corp. International .................. 136,100 5,027,194
-----------
32,347,970
-----------
COSMETICS (0.8%)
Gillette Co. (The) ........................... 106,000 10,646,375
-----------
DRUGS (5.2%)
Elan Corp. PLC ADR (a)(h) .................... 213,000 10,902,938
Lilly (Eli) & Co. ............................ 316,000 22,001,500
Merck & Co., Inc. ............................ 137,000 14,556,250
Schering-Plough Corp. ........................ 323,900 20,122,287
-----------
67,582,975
-----------
ENERGY (1.3%)
Diamond Offshore Drilling, Inc. .............. 134,100 6,453,563
ENSCO International Inc. ..................... 211,000 7,068,500
Halliburton Co. .............................. 79,000 4,103,063
-----------
17,625,126
-----------
FINANCIAL SERVICES (9.6%)
Associates First Capital Corp. Class A ....... 177,000 12,589,125
Equifax Inc. ................................. 273,000 9,674,437
Fannie Mae ................................... 272,000 15,521,000
Green Tree Financial Corp. ................... 319,000 8,353,813
Household International, Inc. ................ 141,400 18,037,337
MGIC Investment Corp. ........................ 281,000 18,686,500
SunAmerica Inc. .............................. 478,500 20,455,875
Travelers Group Inc. ......................... 402,497 21,684,526
-----------
125,002,613
-----------
</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 Ttal Return Fund
<TABLE>
<CAPTION>
Shares Value
============================
<S> <C> <C>
COMMON STOCKS (Continued)
HEALTH CARE (3.4%)
Cardinal Health, Inc. ........................ 120,000 $ 9,015,000
HEALTHSOUTH Corp. (a) ........................ 506,000 14,041,500
Tenet Healthcare Corp. (a) ................... 335,950 11,128,344
United Healthcare Corp. ...................... 200,500 9,962,344
-----------
44,147,188
-----------
INDUSTRIAL (2.9%)
Illinois Tool Works Inc. ..................... 168,200 10,113,025
Tyco International Ltd. ...................... 608,200 27,407,012
-----------
37,520,037
-----------
INSURANCE (1.9%)
American International Group, Inc. ........... 136,500 14,844,375
Conseco, Inc. ................................ 215,200 9,778,150
-----------
24,622,525
-----------
LEISURE (0.5%)
Mirage Resorts, Inc. (a) ..................... 284,400 6,470,100
-----------
MATERIALS/PROCESSING (0.6%)
Monsanto Co. ................................. 199,600 8,383,200
-----------
MEDICAL EQUIPMENT (3.7%)
Guidant Corp. ................................ 243,000 15,126,750
Johnson & Johnson ............................ 215,188 14,175,509
Medtronic, Inc. .............................. 370,000 19,355,625
-----------
48,657,884
-----------
POLLUTION & RELATED (0.5%)
USA Waste Services, Inc. (a) ................. 183,000 7,182,750
-----------
RETAIL (7.4%)
Bed Bath & Beyond Inc. (a) ................... 150,000 5,775,000
CVS Corp. .................................... 178,200 11,415,937
Dollar General Corp. ......................... 238,750 8,654,688
Home Depot, Inc. (The) ....................... 258,950 15,245,681
Kohl's Corp. (a) ............................. 234,000 15,941,250
Kroger Co. (The) (a) ......................... 358,000 13,223,625
Safeway Inc. (a) ............................. 273,400 17,292,550
Staples, Inc. (a) ............................ 320,300 8,888,325
-----------
96,437,056
-----------
SOFTWARE (4.5%)
Computer Associates
International, Inc. ........................ 418,425 $22,124,222
Compuware Corp. (a) .......................... 399,000 12,768,000
Microsoft Corp. (a) .......................... 108,000 13,959,000
Oracle Corp. (a) ............................. 457,750 10,213,547
-----------
59,064,769
-----------
TECHNOLOGY (4.4%)
Adaptec, Inc. (a) ............................ 220,600 8,189,775
Cisco Systems, Inc. (a) ...................... 272,250 15,177,937
Intel Corp. .................................. 198,800 13,965,700
Linear Technology Corp. ...................... 174,000 10,026,750
3Com Corp. (a) ............................... 306,000 10,690,875
-----------
58,051,037
-----------
TELECOMMUNICATION EQUIPMENT (1.3%)
Lucent Technologies Inc. ..................... 207,000 16,534,125
-----------
TELECOMMUNICATION SERVICES (1.1%)
WorldCom, Inc. (a) ........................... 455,728 13,785,772
-----------
TOYS (0.3%)
Mattel, Inc. ................................. 120,000 4,470,000
-----------
Total Common Stocks
(Cost $417,840,806) ........................ 761,412,190
-----------
<CAPTION>
Principal
Amount
===========
<S> <C> <C>
SHORT-TERM INVESTMENTS (7.5%)
COMMERCIAL PAPER (5.9%)
American Express Credit Corp.
6.10%, due 1/2/98 .......................... $23,450,000 23,450,000
6.25%, due 1/2/98 .......................... 20,000,000 20,000,000
American General Corp.
6.65%, due 1/2/98 .......................... 3,085,000 3,085,000
American General Finance Corp.
6.65%, due 1/2/98 .......................... 31,330,000 31,330,000
-----------
Total Commercial Paper
(Cost $77,865,000) ......................... 77,865,000
-----------
U.S. GOVERNMENT (1.0%)
United States Treasury Note
5.50%, due 11/15/98 (g) .................... 12,455,000 12,441,424
-----------
Total U. S. Government
(Cost $12,431,833) ......................... 12,441,424
-----------
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
20
<PAGE>
Portfolio of Investments continued
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
YANKEE BOND (0.6%)
Deutsche Bank Finance NV
Guaranteed
6.375%, due 12/23/98 ..................... $ 7,625,000 $ 7,655,042
--------------
Total Yankee Bond
(Cost $7,649,705) ........................ 7,655,042
--------------
Total Short-Term Investments
(Cost $97,946,538) ....................... 97,961,466
--------------
Total Investments
(Cost $999,999,479)(j) ................... 103.3% 1,349,063,563(k)
Liabilities in Excess of
Cash and Other Assets .................... (3.3) (42,528,875)
----------- --------------
Net Assets ................................. 100.0% $1,306,534,688
=========== ==============
</TABLE>
- ----------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) 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.
(e) Segregated or partially segregated as collateral for TBA.
(f) Floating rate. Rate shown is the rate in effect at December 31, 1997.
(g) Represent securities out on loan or a portion which is out on loan.
(h) ADR--American Depository Receipt.
(i) ARM--Adjustable Rate Mortgage. Resets annually.
(j) The cost for Federal income tax purposes is $1,000,880,848.
(k) At December 31, 1997 net unrealized appreciation was $348,182,715, 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 $353,119,762 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $4,937,047.
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 Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $999,999,479) ............................................ $1,349,063,563
Collateral held for securites loaned, at value ............................................................... 96,538,694
Receivables:
Investment securities sold ................................................................................. 39,422,140
Dividends and interest ..................................................................................... 5,150,817
Fund shares sold ........................................................................................... 3,061,987
--------------
Total assets .............................................................................................. 1,493,237,201
--------------
LIABILITIES:
Securities lending collateral, at value ...................................................................... 96,538,694
Payables:
Investment securities purchased ............................................................................ 85,224,019
Fund shares redeemed ....................................................................................... 2,730,998
NYLIFE Distributors ........................................................................................ 1,022,751
MainStay Management ........................................................................................ 682,999
Transfer agent ............................................................................................. 261,772
Custodian .................................................................................................. 13,696
Trustees ................................................................................................... 8,353
Accrued expenses ............................................................................................. 219,231
--------------
Total liabilities ......................................................................................... 186,702,513
--------------
Net assets ................................................................................................... $1,306,534,688
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 50,516
Class B .................................................................................................... 558,634
Additional paid-in capital ................................................................................... 945,379,531
Accumulated undistributed net investment income .............................................................. 56,945
Accumulated undistributed net realized gain on investments ................................................... 11,424,978
Net unrealized appreciation on investments ................................................................... 349,064,084
--------------
Net assets ................................................................................................... $1,306,534,688
==============
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 108,328,859
==============
Shares of beneficial interest outstanding .................................................................... 5,051,632
==============
Net asset value per share outstanding ........................................................................ $ 21.44
Maximum sales charge (5.50% of offering price) ............................................................... 1.25
--------------
Maximum offering price per share outstanding ................................................................. $ 22.69
==============
CLASS B
Net assets applicable to outstanding shares .................................................................. $1,198,205,829
==============
Shares of beneficial interest outstanding .................................................................... 55,863,355
==============
Net asset value and offering price per share outstanding ..................................................... $ 21.45
==============
</TABLE>
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 Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ....................................................................................... $ 3,751,490
Interest ............................................................................................ 32,749,855
--------------
Total income ....................................................................................... 36,501,345
--------------
Expenses:
Distribution--Class B ............................................................................... 5,571,342
Service ............................................................................................. 3,033,969
Administration ...................................................................................... 3,025,045
Advisory ............................................................................................ 3,025,045
Transfer agent ...................................................................................... 2,292,152
Management .......................................................................................... 1,431,434
Shareholder communication ........................................................................... 552,112
Custodian ........................................................................................... 148,528
Recordkeeping ....................................................................................... 147,983
Professional ........................................................................................ 101,765
Registration ........................................................................................ 88,006
Trustees ............................................................................................ 32,140
Miscellaneous ....................................................................................... 31,296
--------------
Total expenses ..................................................................................... 19,480,817
--------------
Net investment income ................................................................................. 17,020,528
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ...................................................................... 109,727,203
Net change in unrealized appreciation on investments .................................................. 69,750,696
--------------
Net realized and unrealized gain on investments ....................................................... 179,477,899
--------------
Net increase in net assets resulting from operations .................................................. $ 196,498,427
==============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $16,804.
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
23
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 17,020,528 $ 14,310,063
Net realized gain on investments ............................................................... 109,727,203 27,774,121
Net change in unrealized appreciation on investments ........................................... 69,750,696 78,230,207
-------------- --------------
Net increase in net assets resulting from operations ........................................... 196,498,427 120,314,391
-------------- --------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................................... (1,703,308) (997,501)
Class B ....................................................................................... (14,973,462) (13,385,811)
From net realized gain on investments:
Class A ....................................................................................... (8,289,909) (1,702,480)
Class B ....................................................................................... (94,264,958) (25,348,019)
-------------- --------------
Total dividends and distributions to shareholders ........................................... (119,231,637) (41,433,811)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................................... 40,593,664 63,597,398
Class B ....................................................................................... 149,185,825 191,433,792
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ....................................................................................... 9,901,054 2,679,639
Class B ....................................................................................... 107,180,050 37,951,434
-------------- --------------
306,860,593 295,662,263
Cost of shares redeemed:
Class A ....................................................................................... (16,589,193) (20,159,616)
Class B ....................................................................................... (159,856,590) (135,617,553)
-------------- --------------
Increase in net assets derived from capital share transactions .............................. 130,414,810 139,885,094
-------------- --------------
Net increase in net assets .................................................................. 207,681,600 218,765,674
NET ASSETS:
Beginning of year ................................................................................ 1,098,853,088 880,087,414
-------------- --------------
End of year ...................................................................................... $1,306,534,688 $1,098,853,088
============== ==============
Accumulated undistributed net investment income .................................................. $ 56,945 $ --
============== ==============
</TABLE>
The notes to the financial statements are an integral part of,
and should be read in conjunction with, the financial statements.
24
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class B
--------------------------------
Class A Class B Class A Class B Class A Class B September 1
------------------ ------------------ ------------------ through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
------------------ ------------------ ------------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $20.09 $20.10 $18.53 $18.53 $14.76 $14.76 $15.28 $15.42 $13.37
----- ----- ----- ----- ----- ----- ----- ----- -------
Net investment income ..... 0.40 0.29 0.37 0.27 0.42 0.33 0.11 0.38 0.33
Net realized and
unrealized gain (loss)
on investments .......... 3.19 3.19 2.07 2.08 3.77 3.77 (0.52) (0.02) 2.31
----- ----- ----- ----- ----- ----- ----- ----- ----
Total from investment
operations .............. 3.59 3.48 2.44 2.35 4.19 4.10 (0.41) 0.36 2.64
----- ----- ----- ----- ----- ----- ----- ----- ----
Less dividends and
distributions:
From net investment
income .................. (0.40) (0.29) (0.37) (0.27) (0.42) (0.33) (0.11) (0.37) (0.36)
From net realized gain
on investments .......... (1.84) (1.84) (0.51) (0.51) -- -- -- (0.13) (0.23)
----- ----- ----- ----- ----- ----- ----- ----- ----
Total dividends and
distributions ........... (2.24) (2.13) (0.88) (0.78) (0.42) (0.33) (0.11) (0.50) (0.59)
----- ----- ----- ----- ----- ----- ----- ----- ---
Net asset value at end
of period ............... $21.44 $21.45 $20.09 $20.10 $18.53 $18.53 $14.76 $15.28 $15.42
====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment return (a) 18.24% 17.65% 13.22% 12.73% 28.66% 27.96% (2.65%) 2.41% 20.09%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .............. 1.86% 1.36% 1.9% 1.4% 2.5% 2.0% 2.5%+ 2.5% 2.4%
Expenses ............. 1.15% 1.65% 1.1% 1.6% 1.1% 1.7% 1.7%+ 1.7% 1.8%
Portfolio turnover rate ... 182% 182% 173% 173% 228% 228% 74% 273% 340%
Average commission
rate paid......... $ 0.0598 $ 0.0598 $0.0599 $0.0599 (b) (b) (b) (b) (b)
Net assets at end of
period (in 000's) ....... $108,329 $1,198,206 $68,975 $1,029,878 $19,206 $860,881 $648,725 $639,619 $486,959
</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.
25
<PAGE>
MainStay Total Return Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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
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 1940 Act.
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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
whose prices reflect broker/dealer supplied valuations and electronic data
processing techniques if those prices are deemed by the Sub-Adviser to be
representative of market values at the regular close of business of the Exchange
and (f) by
26
<PAGE>
Notes to Financial Statements
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
Sub-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 MDRs 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 liabilities for such purchase
commitments are 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.
Securities Lending. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are secured by collateral (cash or securities)
at least equal at all times to the market value of the securities loaned. The
Fund may bear the risk of delay in recovery of, or loss of rights in, the
securities loaned should the borrower of the securities fail financially. The
Fund receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
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. A
permanent book-tax difference of $286,813 has been reclassified from accumulated
undistributed net realized gain on investments to accumulated undistributed net
investment income due to the treatment of gains (losses) on paydowns.
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.
27
<PAGE>
MainStay Total Return Fund
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.
Premiums on securities purchased are not amortized for this 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 direct allocations of expenses can 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:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.64% on assets up to $500 million and 0.60% on assets in
excess of $500 million.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee of 0.32% of
the average daily net assets of the Fund on assets up to $500 million and 0.30%
on assets in excess of $500 million.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of New York Life, acted as administrator. MacKay-Shields and
NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.32% of
the average daily net assets of the Fund up to $500 million and 0.30% on assets
in excess of $500 million. As
28
<PAGE>
Notes to Financial Statements continued
described above, MainStay Management is currently paid a fee at a rate equal to
the aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997. For the period January 1, 1997, through October 26, 1997,
MacKay-Shields and NYLIFE Distributors each earned $3,025,045. For the period
October 27, 1997, through December 31, 1997, MainStay Management earned
$1,431,434.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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 was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to
NYLIFEDistributors regardless of the amounts actually expended by NYLIFE
Distributors for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $50,232 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$871,336 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$1,267,743 and $93,511, respectively.
29
<PAGE>
MainStay Total Return Fund
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $38,728 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $28,016 and $119,967 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
Note 4--Portfolio Securities Loaned:
At December 31, 1997, the Fund had portfolio securities with a fair market value
of $102,844,380 on loan to broker-dealers and government securities dealers.
Cash collateral received by the Fund is invested in investment grade commercial
paper, or other securities in accordance with the Fund's securities lending
procedures. Such investments are included as an asset and a corresponding
liability in the Statement of Assets and Liabilities. While the Fund invests
cash collateral in investment grade securities or other "high quality"
investment vehicles, the Fund bears the risk that liability for the collateral
may exceed the value of the investment. Non-cash collateral received and held by
the Fund, in the form of U.S. Government obligations, had a value of $8,715,000
at December 31, 1997.
Net income earned on securities lending amounted to $126,975, net of broker fees
and rebates, for the year ended December 31, 1997, which is included as interest
income on the Statement of Operations.
Note 5--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of U.S. Government
securities, other than short-term securities, were $1,384,655 and $1,292,737,
respectively. Purchases and sales of securities, other than U.S. Government
securities, securities subject to repurchase transactions and short-term
securities, were $793,748 and $859,540, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ...................................................... 1,913 6,882 3,241 9,841
Shares issued in reinvestment of dividends and distributions ..... 471 5,106 170 1,889
----- ------ ------ ------
2,384 11,988 3,411 11,730
Shares redeemed ................................................. (766) (7,372) (1,015) (6,942)
----- ------ ------ ------
Net increase .................................................... 1,618 4,616 2,396 4,788
===== ====== ====== ======
</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 Total Return Fund (one of
the fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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 24, 1998
31
<PAGE>
THE MAINSTAY FUNDS
<TABLE>
<CAPTION>
GROWTH FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
<S> [horizontal bar <C> <C>
graph indicating Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund risk/reward of of companies in expanding markets and are willing to accept a higher
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 S&P 500* of stocks with the protection of a
fund] principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[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 an emphasis on risk control add diversification to your domestic
fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH & INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) risk/reward of a special blend of capital may offer growth potential if converted
fund] appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund graph indicating return from common stocks, have undervalued and you want to
risk/reward of convertible securities, and high-yield manage risk through multimarket
fund] corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Balances current income with growth You seek a combination of income and
TOTAL RETURN FUND risk/reward of opportunities by investing in stocks, growth potential and want to manage
fund] bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks undervalued stocks with You seek to maximize total return from
Value Fund risk/reward of attractive dividends and a stimulus securities which may have more poten-
fund] for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 primarily from U.S. government
fund] securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
High Yield graph indicating An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund risk/reward of fund that is actively managed for and can accept the higher risk of
fund] maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks competitive total return from You prefer the higher return potential
International Bond Fund graph indicating non-U.S. bonds with an emphasis on of international bonds or want to add
risk/reward of risk control diversification to your domestic
fund] investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund graph indicating preservation of capital, and competitive yields on cash you're plan-
risk/reward of liquidity, with free checkwriting** ning to spend or invest in the near future
fund]
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund graph indicating tive overall return by investing in higher income and overall return by
risk/reward of a diversified portfolio of domestic investing in multiple bond market
fund] and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a California resident and want to
California Tax Free Fund graph indicating from both federal and California keep more of what you earn by invest-
risk/reward of income taxes consistent with ing for income that's double tax free+++
fund] preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund graph indicating from federal, New York State, and and want to keep more of what you earn
risk/reward of New York City income taxes consis- with income that's double or triple tax
fund] tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating Seeks high current income You are in a high federal income tax
Tax Free Bond Fund risk/reward of exempt from regular federal income tax bracket or want to pay less of your
fund] with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============-------------
Total Return Fund
------------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN15-02/98
<PAGE>
Table of Contents
President's Letter 2
Results of Proxy Vote 4
MainStay Value Fund Highlights 5
$10,000 Invested in the MainStay
Value Fund versus S&P 500 and
Inflation--Class A & Class B Shares 6
Portfolio Management Discussion and Analysis 7
Year-by-Year Performance 8
Diversification by Industry--Top 5 9
Portfolio Composition 10
Returns & Lipper Rankings 13
Top 10 Equity Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 18
Notes to Financial Statements 22
Report of Independent Accountants 27
The MainStay Funds 28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC]
President's Letter
Investors will likely remember 1997 with mixed emotions. After a promising first
quarter rise, the stock market took a disappointing turn in April. Before long,
however, a recovery became apparent, and the momentum created by investor
enthusiasm drove prices to record highs in early August. Then, in October,
financial problems brewing in Asia culminated in a frenzy of short-term
volatility. Yet, while the choppy seas which often characterized last year's
financial markets left many investors feeling somewhat uncertain, overall, 1997
was a positive year.
The Dow Jones Industrial Average, a price-weighted average of 30 actively traded
blue chip stocks, swung over 100 points up or down on numerous occasions. Most
notable was a 554 point decline on October 27, 1997, and a 337 point rise the
following day--the Dow's largest single day point rise in history. Despite this
emotional roller coaster, in the end optimism reigned, with the Dow up 24.91%
and the S&P 500 Index* up 33.36% at year end.
Domestic bond markets also had a good year. After the Federal Reserve Board
moved to raise interest rates at the end of March, slowing economic growth and
continued low inflation caused yields to decline throughout the rest of the
year. The resulting bond rally caused domestic investment grade bonds+ to return
9.64% in 1997.
As MainStay(R) has often noted, 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. In
1997, some of these conditions actually occurred and several international
markets experienced downturns. Most western European stock markets provided
double-digit returns both in local currency and U.S. dollar terms. In the third
and fourth quarters, however, Asian markets suffered from currency problems and
difficulties at some Japanese financial firms, which sent shock waves into stock
and bond markets around the globe. A strong U.S. dollar compounded the hazards
for many investors in Asian markets.
Concerned about volatility?
Just as experienced sailors know to stay focused on their direction and
destination during rough seas, investors who stay focused on their goals in
turbulent markets may be more likely to keep their investments on course.
After seven years of relatively steady stock price increases, sudden declines
may seem somewhat unfamiliar, but they may not be unexpected. Indeed, despite a
strong economy, tame inflation, and rising corporate earnings, many financial
"experts" are anticipating some kind of market correction.
Should you expect further market setbacks? Only time will tell. But it may help
to bear in mind that downward shifts aren't necessarily bad. When the market
rises beyond its sustainable capacity, adjustments that move it to more
- -----------
* See page 6 for additional information on the S&P 500.
+ As measured by the Salomon Brothers Broad Investment Grade Bond Index, an
unmanaged index considered representative of the U.S. bond market.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
realistic levels should be viewed as positive, despite any short-term setbacks
they may cause.
Good news from Congress
While both domestic and European stock markets did well in 1997, some of the
best investment news came from Congress. Lower long-term capital gains tax rates
may reduce the tax consequences of realizing gains on appreciated assets. And
with the new IRA provisions, including the introduction of Roth IRAs and
Education IRAs, you have additional ways to save for retirement and your
children's education.
These new IRA provisions place additional emphasis on the value of saving and
investing for the long term. Fortunately, these are priorities that MainStay
investors have shared for many years. Overall, MainStay investors redeem shares
at a rate that is substantially lower than the mutual fund industry as a whole,
and almost half the rate of all mutual funds sold by a sales force.++
MainStay expands your opportunities
At MainStay, we are working to expand our mutual fund choices so you can choose
those investments that are most suitable for your particular needs. As you may
know, we proudly introduced the MainStay Strategic Income Fund on February 28,
1997, and the MainStay Strategic Value Fund(ss.) on October 22, 1997.
The MainStay Strategic Income Fund seeks to provide current income and
competitive overall return by investing primarily in domestic and foreign debt
securities. This Fund may be suitable for investors who seek an opportunity for
potentially higher income and overall return by investing in multiple bond
market sectors.
The MainStay Strategic Value Fund seeks maximum long-term total return from a
combination of common stocks, convertible securities, and high-yield securities.
Certain of the Fund's investments are speculative. Investors who seek maximum
total return by investing in multiple market sectors may be interested in this
Fund.
Providing the information and the support you need to stay focused through any
market environment is our priority at MainStay. We have been dedicated to
serving the needs of MainStay Funds' shareholders from the very beginning.
That's why we're proud to announce that Dalbar, a well-known monitor of mutual
fund service, has awarded the MainStay Funds Key Honors for 1997, acknowledging
this commitment to shareholder service. And as always, we recommend that you
work closely with your Registered Representative as you chart a course toward
your financial goals. We appreciate your confidence in MainStay and hope that
the information on the following pages will help you make the most productive
use of the opportunities that may lie ahead.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1998
- ----------
++ Source: Investment Company Institute, 1997.
(ss.) To obtain a free prospectus which includes more complete information
including advisory fees, other expenses, and share classes, contact your
Registered Representative or call 1-800-MAINSTAY (1-800-624-6782), Option
#3. Please read the prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
3
<PAGE>
Results of Proxy Vote
A Special Meeting of Shareholders of the MainStay Funds was held on October 24,
1997 to: elect Edward J. Hogan, Nancy Maginnes Kissinger, Donald E. Nickelson,
Richard S. Trutanic, Harry G. Hohn, Terry L. Lierman, Donald K. Ross, Walter W.
Ubl, Alice T. Kane, John B. McGuckian, and Stephen C. Roussin Trustees of the
Trust; approve a Management Agreement between the Trust, on behalf of the
MainStay Value Fund, and MainStay Management, Inc.; approve a Subadvisory
Agreement between MainStay Management, Inc., on behalf of the MainStay Value
Fund, and MacKay Shields Financial Corporation; amend the Plan of Distribution
for Class B shares; eliminate or revise certain fundamental investment
restrictions including eliminating certain state-imposed fundamental investment
restrictions and eliminating or revising fundamental restrictions pertaining to
issuer concentration, borrowing money, industry concentration, and issuing
senior securities; and ratify the selection of Price Waterhouse LLP as
independent certified public accountants of the Trust.
A summary of the proposals and the voting by shareholders of the MainStay Value
Fund is presented below.
<TABLE>
<CAPTION>
PROPOSAL 1--Election of Trustees
Proposed Trustee For Authority Withheld Result
---------------- --- ------------------ ------
<S> <C> <C> <C>
Edward J. Hogan........................................................... 29,368,194 1,375,793 Passed
Nancy Maginnes Kissinger.................................................. 29,364,568 1,379,419 Passed
Donald E. Nickelson....................................................... 29,367,953 1,376,034 Passed
Richard S. Trutanic....................................................... 29,368,194 1,375,793 Passed
Harry G. Hohn............................................................. 29,336,107 1,377,880 Passed
Terry L. Lierman.......................................................... 29,369,763 1,374,224 Passed
Donald K. Ross............................................................ 29,367,291 1,376,696 Passed
Walter W. Ubl............................................................. 29,367,000 1,376,987 Passed
Alice T. Kane............................................................. 29,367,275 1,376,712 Passed
John B. McGuckian......................................................... 29,368,194 1,375,793 Passed
Stephen C. Roussin........................................................ 29,365,231 1,378,756 Passed
<CAPTION>
PROPOSAL 2--Approval of Management Agreement
<S> <C> <C> <C>
For - 28,354,441.89 Against - 628,301.18 Abstain - 1,761,243.50 Result - Passed
<CAPTION>
PROPOSAL 3A--Approval of Subadvisory Agreement between the Manager and MacKay Shields Financial Corporation
<S> <C> <C> <C>
For - 28,379,155.90 Against - 548,352.16 Abstain - 1,816,477.51 Result - Passed
<CAPTION>
PROPOSAL 4--Approval of Amendment to Plan of Distribution for Class B Shares
<S> <C> <C> <C> <C>
For - 21,497,078.41 Against - 1,204,654.02 Abstain - 1,826,594.03 Broker Non-Vote - 3,575,403.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
<S> <C> <C> <C> <C>
For - 24,013,029.65 Against - 819,870.27 Abstain - 2,019,664.65 Broker Non-Vote - 3,891,423.00 Result - Passed
<CAPTION>
PROPOSAL 5--Elimination or Revision of Certain Fundamental Investment Restrictions
Investment Restriction For Against Result
---------------------- --- ------- ------
<S> <C> <C> <C>
A1--Asset Pledges, Mortgages, Hypothecation................................ 23,996,504.65 836,395.27 Passed
A2--Oil, Gas, or Mineral Lease Interests................................... 23,982,107.64 850,792.27 Passed
A3--Real Estate Limited Partnership Interests.............................. 23,978,646.64 854,253.28 Passed
C1--Issuer Concentration................................................... 23,995,030.64 837,869.27 Passed
C2--Borrowing Money........................................................ 23,985,075.64 847,824.27 Passed
C3--Industry Concentration................................................. 23,998,753.65 834,146.27 Passed
C4--Issuing Senior Securities.............................................. 23,967,635.64 865,264.28 Passed
<CAPTION>
PROPOSAL 6--Ratification of the Selection of Price Waterhouse LLP as Independent Certified Public Accountants of the Trust
<S> <C> <C> <C>
For - 28,917,317.05 Against - 267,666.08 Abstain - 1,559,001.44 Result - Passed
</TABLE>
4
<PAGE>
MainStay Value Fund Highlights
- --------------------------------------------------------------------------------
1997 MARKET HIGHLIGHTS
================================================================================
[ ] The stock market experienced its third consecutive year of over 20%
returns, with large-capitalization, high price-to-earnings stocks
accounting for a large percentage of the gains.
[ ] The stock market saw expanding volatility, including two corrections of
about 10% in 1997, with certain sectors or industries correcting even
more.
[ ] Asian turmoil dominated the news in the third and fourth quarters, causing
equity investors to reassess risk and reevaluate earnings prospects going
forward.
[ ] Large financial and pharmaceutical companies generally performed well,
while some HMOs and basic materials companies underperformed.
[ ] With greater attention to the risk side of the investment equation, value
stocks did well in the fourth quarter and may provide attractive
opportunities going forward.
[ ] The prospects of lower inflation or possible deflation may pose
difficulties for commodity-oriented companies in the future.
================================================================================
- --------------------------------------------------------------------------------
1997 FUND HIGHLIGHTS
================================================================================
[ ] One-year returns of 21.88% and 21.29% for Class A and Class B shares,
respectively, excluding all sales charges, as of 12/31/97.
[ ] The Fund reduced its position in financial stocks through the first half
of the year, missing part of the second quarter rally, with proceeds
invested largely in utilities.
[ ] The Fund's top 10 holdings were also its top 10 performers, including
names such as AT&T, Ford Motor Company, and PG&E, all of which earned more
than 50% for the Fund.
[ ] Both share classes underperformed the average Lipper* growth & income
fund, which returned 27.14% for the year.
================================================================================
- ----------
* See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
[GRAPHIC]
$10,000 Invested in the MainStay
Value Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-Year 15.18%, 5-Year 15.40%, 10-Year 16.43%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year S&P MainStay
End 500* Value Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,000 $ 9,450 $10,000
12/88 $11,656 $10,972 $10,441
12/89 $15,342 $13,318 $10,925
12/90 $14,866 $12,513 $11,608
12/91 $19,385 $17,675 $11,954
12/92 $20,861 $21,126 $12,308
12/93 $22,955 $23,988 $12,645
12/94 $23,258 $23,935 $12,974
12/95 $31,989 $30,813 $13,311
12/96 $39,327 $37,543 $13,752
12/97 $52,447 $45,759 $13,984
</TABLE>
[GRAPHIC] MainStay Value Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
CLASS B SHARES SEC Returns: 1-Year 16.29%, 5-Year 16.11%, 10-Year 16.89%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Year S&P MainStay
End 500* Value Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
12/87 $10,000 $10,000 $10,000
12/88 $11,656 $11,611 $10,441
12/89 $15,342 $14,093 $10,925
12/90 $14,866 $13,241 $11,608
12/91 $19,385 $18,704 $11,954
12/92 $20,861 $22,355 $12,308
12/93 $22,955 $25,384 $12,645
12/94 $23,258 $25,328 $12,974
12/95 $31,989 $32,423 $13,311
12/96 $39,327 $39,269 $13,752
12/97 $52,447 $47,627 $13,984
</TABLE>
[GRAPHIC] MainStay Value Fund
[GRAPHIC] S&P 500*
[GRAPHIC] Inflation+
- ----------
The Class A graph assumes an initial investment of $10,000 made on 12/31/87
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 12/31/87 through 12/31/94.
The Class B graph assumes an initial investment of $10,000 made on 12/31/87.
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.
6
<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
In the third consecutive year with stock market returns of over 20%, ten
large-capitalization stocks with high price-to-earnings (P/E) ratios accounted
for about 26% of the S&P 500's* total return. At the same time, volatility
increased and the stock market underwent two corrections of about 10%--one in
the six weeks prior to the end of April, the other from the market's peak in
July through the last week of October. Despite broad market gains, many
individual stocks and sectors experienced even larger corrections.
As interest rates declined after peaking in April, interest-sensitive issues
tended to outperform, with financial stocks providing robust returns, especially
during the second quarter of 1997. Communications stocks and high P/E
pharmaceuticals were also outstanding performers. Other sectors, including basic
materials, such as chemicals, paper, forest products, and agriculture, provided
positive returns (some in the double digits), but still underperformed the
market as a whole.
As Asian turmoil developed later in the year, investors began to focus more on
the risk side of the investment equation, and value stocks generally did well in
the fourth quarter. The fallout from the Asian situation may include lower
inflation or possibly even deflation, which may be good for bonds, but bad for
commodity-oriented equities. While volatility is likely to remain high, if the
market moves toward more historical return levels in 1998, a value investment
approach may provide opportunities for investors.
Given this context, how did the MainStay Value Fund perform in 1997?
For the year ended 12/31/97, the MainStay Value Fund returned 21.88% and 21.29%
for Class A and Class B shares, respectively, excluding all sales charges. Both
share classes underperformed the average Lipper+ growth & income fund, which
returned 27.14% for the year.
Why do you think the Fund underperformed its peers in 1997?
Several factors impacted the Fund over the course of the year in a negative way.
The Fund started 1997 heavily overweighted in the financial sector. As those
stocks began
[GRAPHIC]
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.
Price-to-earnings ratio
- -----------------------
The price of a stock divided by its earnings per share.
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
- ----------
* See page 6 for more information on the S&P 500 Index.
+ See footnote and table on page 13 for more information on Lipper Analytical
Services, Inc.
7
<PAGE>
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
End %
- ------------------------------------
<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
12/96 21.84
12/97 21.88
</TABLE>
Returns reflect the historical performance of the Class B shares for the periods
12/86 through 12/94. See footnote * on page 13 for more information on
performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total
Year Return
End %
- ------------------------------------
<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 28.01
12/96 21.11
12/97 21.29
</TABLE>
See footnote * on page 13 for more information on performance.
to reach our valuation targets, we decreased the Fund's positions
over the first half of the year. Interest-sensitive issues, however, and
financial stocks in particular, had an outstanding second quarter, so we ended
up selling as prices were rising. While all of the sales were positive for the
portfolio, the overall decision to sell when we did contributed negatively to
the Fund's performance relative to its peers. Nevertheless, the Fund benefited
from its reduced positions in financial stocks in the fourth quarter, when they
underperformed.
[GRAPHIC]
Correction
- ----------
A shift in security prices that brings them more in line with historically
appropriate levels.
Inflation/deflation
- -------------------
Inflation is an increase in the cost of goods and services over time. As prices
rise, the purchasing power of the dollar declines. Deflation is a reduction in
the cost of goods over time. When deflation occurs, the purchasing power of the
dollar increases.
8
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Utilities 12.3%
Banks 7.2%
Health Care 6.1%
Retail 5.3%
Insurance 5.1%
All Others 64.0%
</TABLE>
Actual percentages will vary over time.
What did you do with the proceeds of the Fund's financial stock sales?
We invested most of the proceeds into utility stocks. For the first three
quarters of the year, that also penalized the Fund. But our proprietary research
showed that utilities were generally undervalued and likely to outperform over
time. With some utilities providing about 30% higher yields than Treasuries, we
felt that they were a solid, conservative, and attractive investment. In the
fourth quarter, Asian market turmoil caused investors to rethink their risk
taking and there was a renewed interest in utilities. The Fund's utility stocks
made up for lost ground, with PG&E up 52% for the year and Long Island Lighting
up 46%. Both were among the Fund's top ten holdings and the Fund's top ten
performers.
Did you continue to hold any financial stocks that did well?
Yes. PNC Bank Corp. was up 57%. PNC is a regional bank the Fund held for its
above-average earnings growth. The stock has been reevaluated based on its asset
value and we've reduced the Fund's position since.
Among insurance issues, we owned Equitable, which benefited from restructuring,
was reevaluated in the marketplace, and returned 103% for the Fund in 1997. We
had identified capital appreciation potential in Allstate, and when earnings
accelerated faster than analysts anticipated, the stock returned 58% for the
Fund. The Fund also held a large position in Travelers through most of the year
and the stock was up 80%. As the stock outperformed the market, however, we cut
back the Fund's position to look for other issues that hadn't reached their full
potential.
Were there new value-driven sectors where the Fund was invested?
Yes, the Fund had success in telecommunications in 1997. We had sold the Fund's
holdings of AT&T several years ago, when the stock was an underperformer. But
with recent management shifts, the company appeared to be focusing more closely
on providing shareholder value, and that cap-
[GRAPHIC]
9
<PAGE>
[GRAPHIC]
Price to cash flow ratio
- ------------------------
The relationship between the price of a stock and the amount of free cash flow
the company is able to generate.
tured our attention. At the beginning of the year the Fund didn't own any AT&T.
At year end 1997, AT&T was the Fund's largest holding and had provided a 90%
return for the Fund. GTE was another telecommunications company we bought for
the Fund that did well, although its progress was stalled midyear by its entry
into the bidding war for MCI. We believe that over time, the company's asset
value will be unlocked for shareholders, either through proactive management or
other market forces.
Did being value-oriented hurt the Fund in a strong year for growth stocks?
It may have. Some value managers saw opportunities in growth stocks with high
price-to-earnings ratios and simply abandoned value investing to improve their
performance. We saw the tremendous rise in pharmaceuticals, technology stocks,
and large-capitalization issues, but these stocks didn't fit the Fund's
investment disciplines, so we didn't pursue them. Of course, being out of
technology helped in the fourth quarter, when many of the largest names suffered
severe setbacks.
In any event, we stuck closely to the Fund's value approach throughout the year.
We found what we believed to be promising undervalued opportunities among HMOs,
with names like Aetna, Foundation Health, and CIGNA. Our process showed each of
these issues to have positive value characteristics and we added the stocks or
increased the Fund's positions in them at various points in the year. But the
market is still adjusting to the HMO industry's transition from a growth phase
into a more mature management phase. Despite low P/E ratios, low price to cash
flow, significant free cash flow, proactive management, and other positive
characteristics, Aetna was down 11%, Foundation Health declined 10%, and CIGNA
was flat for the year. Nevertheless, we still believe these stocks offer
positive potential going forward.
PORTFOLIO COMPOSITION AS OF 12/31/97
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Common Stocks 92.1%
Preferred Stock 0.6%
Cash, Equivalents & Other Assets, less Liabilities 7.3%
</TABLE>
Actual percentages will vary over time.
10
<PAGE>
Were there other factors that negatively impacted performance?
Our decision to continue overweighting basic materials had a negative impact on
the Fund's performance. Although fertilizers were a small portion of the Fund,
Agrium and IMC Global had a negative impact on performance. While we are used to
fertilizers having cyclical performance, 1997 was the second year in a row
fertilizers provided negative returns.
Chemical stocks and paper and forest products had two significant rallies during
the year, but were underperformers as a class. Many of the Fund's stocks
provided double-digit returns, but did not excel in a market that was up more
than 33%.
Georgia Pacific was a good example. Their proactive management agreed to split
the company into two parts to unlock value for shareholders. That's the kind of
value catalyst that we look for, and we bought Georgia Pacific during the year.
Yet even though the stock did well, it underperformed the market as a whole.
What other stocks did you buy for the Fund in 1997?
We mentioned that we bought utilities for the Fund. In fact, we increased
utilities from 4% at the end of 1996 to 12% at year end. As noted, we saw real
value in the group and recognized that segmenting and separating underperforming
assets would help investors identify where the real opportunities could be
found. As mentioned above, the sector as a whole did very well for the Fund's
investment portfolio in the fourth quarter, even though we lost some opportunity
by being overweighted in utilities earlier in the year when they were
underperforming.
What were the Fund's most significant sales during the year?
The Fund had two types of sales. First were stocks that approached or met the
Fund's valuation targets and were sold as part of the Fund's investment
discipline to seek better opportunities. Others were stocks that performed below
expectations or whose fundamentals had changed.
In the first category, the Fund had names like Chubb, Travelers, Wells Fargo,
Allstate, Equitable, NationsBank, Banc One, and PNC. All of them were strong
performers for the Fund that we sold as they increased in value. Because of
their strength, we generally reduced the Fund's position rather than eliminate
them entirely. AIG, however, fully reached our target price and had increased
its price-to-earnings ratio to the point where it looked more like a growth
stock than a value stock. As a result, we sold the Fund's entire position with a
very positive impact on performance.
Among cyclical stocks, we saw some companies with fundamentals that were
starting to dissipate. We reduced the Fund's position in Tenneco and Goodyear
Tire. In paper products, we sold Temple Inland and Rayonier, and among chemical
firms, we cut back on Lyondell. All of these sales had a positive impact and
were appropriate given their changing value characteristics.
[GRAPHIC]
Cyclical stock
- --------------
A stock that tends to rise quickly with economic upturns and fall quickly when
the economy slows. Noncyclical industries, such as food, insurance, and
pharmaceuticals, are likely to have more consistent performance regardless of
economic changes.
11
<PAGE>
Were there other positive value stories among stocks the Fund held throughout
the year?
Yes. Ford Motor Company is one of the Fund's largest holdings, based on the same
value criteria we use for all of the Fund's stocks. As earnings estimates were
revised upward during the year by more than 50%, the stock brought in a 57%
return for the Fund, which included an attractive 5% dividend yield.
Owens-Illinois is another large holding that did exceptionally well, and we
added to the Fund's position during the year. Their strategy of acquiring
companies that add to earnings paid off in 1997 with a 67% return for the year.
What's your outlook for 1998?
We believe the Asian turmoil may have a positive impact on value investing by
making investors more aware of the risk side of the investment equation. We're
still attracted to utility stocks, which we continue to believe are undervalued.
The impact of Asian difficulties may be greater than we originally anticipated
in the basic materials markets, and particularly for commodity companies, so
we're reevaluating our exposure in those areas. On the whole, however, we remain
bullish on deep value stocks, not only for their capital appreciation potential,
but also for the income many provide, which could act as a cushion if the market
should decline or remain flat. While we're not making any predictions, we feel
these are scenarios worth considering after a seven-year bull market and three
consecutive years of equity market returns over 20%.
Denis Laplaige
Jeffrey A. Simon
Portfolio Managers
[GRAPHIC]
Past performance is no guarantee of future results.
12
<PAGE>
Returns & Lipper Rankings as of 12/31/97
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Fund average annual total returns*
=====================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 21.88% 16.72% 17.09% 13.23%
Class B 21.29% 16.33% 16.89% 13.07%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund SEC returns*
=====================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 15.18% 15.40% 16.43% 12.68%
Class B 16.29% 16.11% 16.89% 13.07%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund Lipper+ rankings & Lipper category returns as of 12/31/97
=====================================================================================
Life of Fund
1 year 5 years 10 years through 12/31/97
<S> <C> <C> <C> <C>
Class A 535 out of n/a n/a n/a
611 funds
Class B 547 out of 176 out of 34 out of 80 out of
611 funds 240 funds 136 funds 112 funds
Average Lipper
growth &
income fund 27.14% 17.53% 15.71% 13.50%
=====================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------
Fund per share net asset values & distributions for the 12 months ended 12/31/97
=====================================================================================
NAV 12/31/97 Income Capital Gains
<S> <C> <C> <C>
Class A $21.76 $0.2657 $2.6784
Class B $21.74 $0.1508 $2.6784
=====================================================================================
</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 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 12/31/97. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
[GRAPHIC]
13
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 12/31/97
- ---------------------------------------------------------------------------------------
HOLDING AMOUNT
=======================================================================================
<S> <C>
AT&T Corp. $48,913,025
Ford Motor Co. 36,742,022
FPL Group, Inc. 32,943,763
RJR Nabisco Holdings Corp. 31,716,750
PG&E Corp. 31,329,319
Long Island Lighting Co. 30,920,300
Central & South West Corp. 30,794,419
Columbia/HCA Healthcare Corp. 27,095,914
Federated Department Stores, Inc. 26,960,139
Bowater Inc. 26,828,474
=======================================================================================
<CAPTION>
10 Largest Purchases for the year ended 12/31/97
- ---------------------------------------------------------------------------------------
SECURITY AMOUNT OF PURCHASE
=======================================================================================
<S> <C>
Columbia/HCA Healthcare Corp. $35,876,291
Foundation Health Systems, Inc. Class A 33,737,367
GTE Corp. 31,639,664
AT&T Corp. 29,551,551
FPL Group, Inc. 29,039,570
American Standard Cos. Inc. 27,915,350
PG&E Corp. 27,096,046
Banc One Corp. 25,979,441
Time Warner Inc. 25,525,500
Central & South West Corp. 25,247,725
=======================================================================================
<CAPTION>
10 Largest Sales for the year ended 12/31/97
- ---------------------------------------------------------------------------------------
SECURITY AMOUNT OF SALE
=======================================================================================
<S> <C>
Time Warner Inc. $28,556,430
International Business Machines Corp. 26,958,150
American International Group, Inc. 25,430,328
Xerox Corp. 23,733,482
Humana Inc. 23,676,895
Elf Aquitaine ADR 18,945,190
General Motors Corp. 18,008,968
WellPoint Health Networks Inc. 17,740,815
Burlington Resources, Inc. 17,020,433
Dow Chemical Co. 16,571,963
=======================================================================================
</TABLE>
[GRAPHIC]
- ----------
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.
14
<PAGE>
Portfolio of Investments December 31, 1997
<TABLE>
<CAPTION>
Shares Value
===================================
<S> <C> <C>
COMMON STOCKS (92.1%)+
AIRLINES (2.4%)
AMR Corp. (a) ............................... 159,500 $ 20,495,750
Northwest Airlines Corp. Class A (a).......... 325,200 15,568,950
--------------
36,064,700
--------------
AUTO MANUFACTURING (2.4%)
Ford Motor Co. ............................... 754,650 36,742,022
--------------
AUTO PARTS (3.7%)
Echlin Inc.................................... 674,820 24,420,049
LucasVarity PLC ADR (b)....................... 538,000 18,762,750
Mark IV Industries, Inc....................... 616,355 13,482,765
--------------
56,665,564
--------------
BANKS (7.2%)
Banc One Corp................................. 412,570 22,407,708
Bankers Trust New York Corp................... 148,090 16,650,870
Chase Manhattan Corp.......................... 153,000 16,753,500
NationsBank Corp.............................. 302,586 18,401,011
PNC Bank Corp................................. 341,200 19,469,725
Wells Fargo & Co.............................. 47,200 16,021,450
--------------
109,704,264
--------------
CAPITAL GOODS (1.6%)
Xerox Corp.................................... 323,790 23,899,749
--------------
CHEMICALS (3.8%)
Agrium Inc.................................... 1,064,500 12,973,594
Georgia Gulf Corp............................. 470,850 14,419,781
IMC Global Inc................................ 591,810 19,381,778
Imperial Chemical Industries, PLC
ADR (b).................................... 95,167 6,179,907
PPG Industries, Inc........................... 94,600 5,404,025
--------------
58,359,085
--------------
COMPUTERS & OFFICE EQUIPMENT (2.0%)
Ceridian Corp. (a)............................ 244,000 11,178,250
Lexmark International Group, Inc.
Class A (a)................................ 524,300 19,923,400
--------------
31,101,650
--------------
CONGLOMERATES (2.7%)
American Standard Cos. Inc. (a)............... 573,700 21,979,881
Tenneco Inc. ................................. 470,630 18,589,885
--------------
40,569,766
--------------
CONTAINERS (2.7%)
Crown Cork & Seal Co., Inc.................... 318,000 15,939,750
Owens-Illinois Inc. (a)....................... 646,610 24,530,767
--------------
40,470,517
--------------
DOMESTIC OIL (2.2%)
Amerada Hess Corp............................. 92,100 5,053,987
Noble Affiliates, Inc......................... 259,400 9,143,850
Unocal Corp. ................................. 494,550 19,194,722
--------------
33,392,559
--------------
ENERGY (3.8%)
Coastal Corp. (The)........................... 307,450 19,042,684
MAPCO Inc. ................................... 493,400 22,819,750
Seagull Energy Corp. (a)...................... 768,870 15,857,944
--------------
57,720,378
--------------
FINANCE (2.8%)
Transamerica Corp............................. 243,160 25,896,540
Travelers Group Inc........................... 313,180 16,872,573
--------------
42,769,113
--------------
FOOD (0.9%)
IBP, Inc...................................... 623,300 13,050,344
--------------
FOOD, BEVERAGES & TOBACCO (4.6%)
Philip Morris Cos............................. 385,760 17,479,750
RJR Nabisco Holdings Corp..................... 845,780 31,716,750
UST Inc....................................... 561,100 20,725,631
--------------
69,922,131
--------------
HEALTH CARE (6.1%)
Aetna Inc..................................... 351,160 24,778,727
Allegiance Corp............................... 478,000 16,939,125
Columbia/HCA Healthcare Corp.................. 914,630 27,095,914
Foundation Health Systems, Inc.
Class A (a)................................ 1,096,340 24,530,608
--------------
93,344,374
--------------
HOUSEHOLD PRODUCTS (0.9%)
Premark International, Inc.................... 458,800 13,305,200
--------------
INSURANCE (5.1%)
Allstate Corp. (The).......................... 264,690 24,053,704
Chubb Corp. .................................. 209,145 15,816,591
CIGNA Corp. .................................. 84,100 14,554,556
Equitable Cos., Inc. (The).................... 467,750 23,270,562
--------------
77,695,413
--------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Value Fund
<TABLE>
<CAPTION>
Shares Value
===================================
<S> <C> <C>
COMMON STOCKS (Continued)
INTERNATIONAL OIL (2.3%)
British Petroleum Co., PLC ADR (b)............ 188,000 $ 14,981,250
Occidental Petroleum Corp..................... 695,440 20,385,085
--------------
35,366,335
--------------
PAPER & FOREST PRODUCTS (4.6%)
Bowater Inc................................... 603,735 26,828,474
Chesapeake Corp............................... 255,050 8,767,344
Georgia-Pacific Corp.......................... 264,760 16,084,170
Georgia-Pacific Corp.
(Timber Group) (a)......................... 488,760 11,088,742
Rayonier Inc.................................. 185,797 7,907,985
--------------
70,676,715
--------------
RAILROADS (3.7%)
CSX Corp...................................... 490,975 26,512,650
Illinois Central Corp......................... 461,940 15,734,831
Union Pacific Corp............................ 231,800 14,473,013
--------------
56,720,494
--------------
RECREATION & ENTERTAINMENT (1.3%)
Harrah's Entertainment, Inc. (a).............. 1,023,700 19,322,338
--------------
RETAIL (5.3%)
Federated Department Stores,
Inc. (a)................................... 626,070 26,960,139
Kroger Co. (a)................................ 463,400 17,116,837
Penney (J.C.) Co., Inc........................ 161,760 9,756,150
Toys "R" Us, Inc. (a)......................... 836,670 26,302,813
--------------
80,135,939
--------------
TECHNOLOGY (1.1%)
International Business Machines
Corp....................................... 167,375 17,501,148
--------------
TELECOMMUNICATION (3.2%)
AT&T Corp..................................... 798,580 48,913,025
--------------
TELECOMMUNICATION SERVICES (1.3%)
GTE Corp...................................... 372,000 19,437,000
--------------
TEXTILE & APPAREL (0.9%)
Burlington Industries, Inc. (a)............... 453,631 6,265,778
Reebok International Ltd. (a)................. 277,744 8,002,499
--------------
14,268,277
--------------
TIRE & RUBBER (1.0%)
Goodyear Tire & Rubber Co. (The).............. 237,490 15,110,301
--------------
TRANSPORTATION (0.2%)
Arkansas Best Corp. (a)....................... 333,900 3,255,525
--------------
UTILITIES (12.3%)
Boston Edison Co. ............................ 584,000 22,119,000
Central & South West Corp..................... 1,137,900 30,794,419
FPL Group, Inc................................ 556,600 32,943,763
GPU, Inc...................................... 64,301 2,708,680
Long Island Lighting Co. ..................... 1,026,400 30,920,300
Northeast Utilities........................... 88,900 1,050,131
PECO Energy Co................................ 673,010 16,320,492
PG&E Corp..................................... 1,029,300 31,329,319
Pinnacle West Capital Corp.................... 318,600 13,500,675
Public Service Enterprise
Group Inc.................................. 180,100 5,706,919
--------------
187,393,698
--------------
Total Common Stocks
(Cost $1,148,280,093)...................... 1,402,877,624
--------------
PREFERRED STOCK (0.6%)
INTERNATIONAL OIL (0.6%) Occidental Petroleum Corp.
$3.875 (c)................................. 130,000 8,190,000
--------------
Total Preferred Stock
(Cost $6,938,750).......................... 8,190,000
--------------
</TABLE>
The notes to 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 (8.2%)
COMMERCIAL PAPER (8.2%)
American Express Credit Corp.
6.05%, due 1/5/98.......................... $29,820,000 $ 29,820,000
6.10%, due 1/2/98.......................... 29,765,000 29,765,000
Ford Motor Credit Co.
5.95%, due 1/8/98.......................... 25,270,000 25,270,000
General Electric Capital Corp.
5.90%, due 1/7/98.......................... 20,000,000 20,000,000
Prudential Funding Corp.
6.08%, due 1/6/98.......................... 20,694,000 20,694,000
--------------
Total Short-Term Investments
(Cost $125,549,000)........................ 125,549,000
--------------
Total Investments
(Cost $1,280,767,843) (d) 100.9% 1,536,616,624(e)
Liabilities in Excess of Cash
and Other Assets........................... (0.9) (13,016,817)
----------- --------------
Net Assets.................................... 100.0% $1,523,599,807
=========== ==============
</TABLE>
- ----------
(a) Non-income producing security.
(b) ADR--American Depository Receipt.
(c) May be sold to institutional investors only.
(d) The cost for Federal income tax purposes is $1,281,373,686.
(e) At December 31, 1997, net unrealized appreciation was $255,242,938, 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 $286,852,201 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $31,609,263.
The notes to financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
Statement of Assets and Liabilities as of December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,280,767,843) .............................................. $1,536,616,624
Cash ............................................................................................................. 972
Receivables:
Fund shares sold ............................................................................................... 4,113,242
Dividends and interest ......................................................................................... 3,766,371
--------------
Total assets .................................................................................................. 1,544,497,209
--------------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................ 15,321,630
Fund shares redeemed ........................................................................................... 3,087,954
NYLIFE Distributors ............................................................................................ 1,181,797
MainStay Management ............................................................................................ 718,377
Transfer agent ................................................................................................. 292,989
Custodian ...................................................................................................... 14,872
Trustees ....................................................................................................... 9,355
Accrued expenses ................................................................................................. 270,428
--------------
Total liabilities ............................................................................................. 20,897,402
--------------
Net assets ....................................................................................................... $1,523,599,807
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ........................................................................................................ $ 56,997
Class B ........................................................................................................ 643,680
Additional paid-in capital ....................................................................................... 1,231,503,300
Accumulated undistributed net investment income .................................................................. 246,475
Accumulated undistributed net realized gain on investments ....................................................... 35,300,574
Net unrealized appreciation on investments ....................................................................... 255,848,781
--------------
Net assets ....................................................................................................... $1,523,599,807
==============
CLASS A
Net assets applicable to outstanding shares ...................................................................... $ 124,010,862
==============
Shares of beneficial interest outstanding ........................................................................ 5,699,746
==============
Net asset value per share outstanding ............................................................................ $ 21.76
Maximum sales charge (5.50% of offering price) ................................................................... 1.27
--------------
Maximum offering price per share outstanding ..................................................................... $ 23.03
==============
CLASS B
Net assets applicable to outstanding shares ...................................................................... $1,399,588,945
==============
Shares of beneficial interest outstanding ........................................................................ 64,367,971
==============
Net asset value and offering price per share outstanding ......................................................... $ 21.74
==============
</TABLE>
The notes to financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE>
Statement of Operations for the year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .............................................. $ 26,394,320
Interest ................................................... 4,046,225
------------
Total income .............................................. 30,440,545
------------
Expenses:
Distribution--Class B ...................................... 6,326,349
Service .................................................... 3,271,438
Administration ............................................. 2,976,469
Advisory ................................................... 2,976,469
Transfer agent ............................................. 2,589,743
Management ................................................. 1,479,934
Shareholder communication .................................. 591,822
Registration ............................................... 161,608
Recordkeeping .............................................. 156,683
Custodian .................................................. 137,058
Professional ............................................... 109,405
Trustees ................................................... 35,882
Miscellaneous .............................................. 36,457
------------
Total expenses ............................................ 20,849,317
------------
Net investment income ........................................ 9,591,228
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 181,024,677
Net change in unrealized appreciation on investments ......... 61,934,892
------------
Net realized and unrealized gain on investments .............. 242,959,569
------------
Net increase in net assets resulting from operations ......... $252,550,797
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $71,759.
The notes to 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,
1997 1996
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................... $ 9,591,228 $ 9,701,611
Net realized gain on investments ............................................... 181,024,677 92,855,281
Net change in unrealized appreciation on investments ........................... 61,934,892 75,689,305
--------------- ---------------
Net increase in net assets resulting from operations ........................... 252,550,797 178,246,197
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ....................................................................... (1,202,485) (748,274)
Class B ....................................................................... (8,257,288) (8,838,317)
From net realized gain on investments:
Class A ....................................................................... (13,228,344) (5,171,720)
Class B ....................................................................... (152,902,098) (73,072,126)
--------------- ---------------
Total dividends and distributions to shareholders ........................... (175,590,215) (87,830,437)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ....................................................................... 55,171,252 54,270,033
Class B ....................................................................... 316,208,814 263,788,646
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions:
Class A ....................................................................... 14,100,085 5,840,804
Class B ....................................................................... 157,601,498 80,291,437
--------------- ---------------
543,081,649 404,190,920
Cost of shares redeemed:
Class A ....................................................................... (23,231,392) (16,170,142)
Class B ....................................................................... (165,777,574) (119,967,686)
--------------- ---------------
Increase in net assets derived from capital share transactions .............. 354,072,683 268,053,092
--------------- ---------------
Net increase in net assets .................................................. 431,033,265 358,468,852
NET ASSETS:
Beginning of year ................................................................ 1,092,566,542 734,097,690
--------------- ---------------
End of year ...................................................................... $ 1,523,599,807 $ 1,092,566,542
=============== ===============
Accumulated undistributed net investment income .................................. $ 246,475 $ 115,020
=============== ===============
</TABLE>
The notes to 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 Class A Class B September 1
--------- -------- -------- ---------- -------- -------- through Year ended August 31
Year ended Year ended Year ended December 31 --------------------
December 31, 1997 December 31, 1996 December 31, 1995 1994* 1994 1993
--------------------- --------------------- ------------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..... $20.34 $20.32 $18.25 $18.25 $14.66 $14.66 $16.30 $15.90 $13.82
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income ..... 0.27 0.15 0.30 0.20 0.29 0.19 0.04 0.06 0.07
Net realized and
unrealized gain (loss)
on investments .......... 4.10 4.10 3.66 3.64 3.91 3.91 (1.03) 1.04 3.40
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .............. 4.37 4.25 3.96 3.84 4.20 4.10 (0.99) 1.10 3.47
------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income .................. (0.27) (0.15) (0.30) (0.20) (0.29) (0.19) (0.03) (0.06) (0.10)
From net realized gain on
investments ............. (2.68) (2.68) (1.57) (1.57) (0.32) (0.32) (0.62) (0.64) (1.29)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions ........... (2.95) (2.83) (1.87) (1.77) (0.61) (0.51) (0.65) (0.70) (1.39)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value at end
of period ............... $21.76 $21.74 $20.34 $20.32 $18.25 $18.25 $14.66 $16.30 $15.90
====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment return (a) 21.88% 21.29% 21.84% 21.11% 28.74% 28.01% (6.03%) 7.26% 26.58%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .............. 1.22% 0.70% 1.6% 1.1% 1.5% 0.9% 0.8%+ 0.5% 0.5%
Expenses .............. 1.11% 1.63% 1.1% 1.6% 1.2% 1.8% 1.8%+ 1.9% 1.9%
Portfolio turnover rate ... 61% 61% 47% 47% 48% 48% 11% 53% 77%
Average commission
rate paid ............... $ 0.0592 $ 0.0592 $0.0595 $ 0.0595 (b) (b) (b) (b) (b)
Net assets at end of
period (in 000's) ...... $124,011 $1,399,589 $73,259 $1,019,307 $25,258 $708,840 $472,365 $449,789 $226,524
</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 financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
MainStay Value Fund
Note 1--Organization and Business:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts Business Trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of fifteen funds (collectively referred to
as the "Funds"). 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 1940 Act.
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
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 Sub-Adviser, if these prices are deemed to be representative of market
values at the regular close of business of the 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
22
<PAGE>
Notes to Financial Statements
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 Exchange
will not be reflected in the Fund's calculation of net asset value unless the
Sub-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 direct allocations of expenses can 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.
23
<PAGE>
MainStay Value Fund
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. ("MainStay Management") acts
as manager to the Fund under a Management Agreement. Pursuant to the Management
Agreement for the Funds, MainStay Management, an indirect wholly owned
subsidiary of New York Life Insurance Company ("New York Life"), administers the
Fund's business affairs and has investment advisory responsibilities. MainStay
Management has engaged the services of MacKay-Shields Financial Corporation
("MacKay-Shields") as sub-adviser of the Fund. MacKay-Shields, a registered
investment adviser and indirect wholly owned subsidiary of New York Life, is
responsible for the day-to-day portfolio management for the Fund.
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed and the facilities furnished at an annual rate of the Fund's average
daily net assets of 0.72% on assets up to $200 million, 0.65% on assets from
$200 million to $500 million and 0.50% on assets in excess of $500 million.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee at an annual
rate 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.
Prior to October 27, 1997, MacKay-Shields acted as investment adviser to the
Fund and NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly
owned subsidiary of the New York Life, acted as administrator. MacKay-Shields
and NYLIFE Distributors each were paid a monthly fee at an annual rate of 0.36%
of the Fund's average daily net 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. As
described above, MainStay Management is currently paid a fee at a rate equal to
the aggregate of the advisory and administrative fee rates in effect prior to
October 27, 1997. For the period January 1, 1997, through October 26, 1997,
MacKay-Shields and NYLIFE Distributors each earned fees of $2,976,469. For the
period October 27, 1997, through December 31, 1997, MainStay Management earned
$1,479,934.
Distribution and Service Fees. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors (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 a monthly service fee
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 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.
24
<PAGE>
Notes to Financial Statements continued
The Plan was amended and restated on October 27, 1997. Prior to that date, the
Fund's Class B shares were subject to the payment of a distribution fee of 0.75%
per annum of the lesser of (i) aggregate gross sales of Fund Class B shares
since the Fund's inception (not including reinvestment of dividends and capital
gains distributions from the Fund), less the aggregate net asset value of the
shares exchanged or redeemed since the Fund's inception upon which a contingent
deferred sales charge was imposed (or waived) or (ii) the Fund's average daily
net assets attributable to the Fund's Class B shares. The amended Plan varies
from the pre-existing Plan only in the manner in which the distribution fee is
calculated as noted above.
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by NYLIFE Distributors
for distribution of the Fund's shares and service activities.
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $112,844 for the year
ended December 31, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$996,052 for the year ended December 31, 1997.
Transfer, Dividend Disbursing and Shareholder Servicing Agent. MainStay
Shareholder Services Inc. ("MSS"), an indirect wholly owned subsidiary of New
York Life, is the Fund's transfer, dividend disbursing and shareholder servicing
agent. MSS has entered into an agreement with Boston Financial Data Services
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Prior to May 1, 1997, BFDS acted as transfer, dividend disbursing
and shareholder servicing agent and NYLIFE Distributors was paid by the Fund for
providing certain transfer agency functions. Transfer agent expense paid to MSS
and NYLIFE Distributors for the year ended December 31, 1997, amounted to
$1,429,744 and $96,851, respectively.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, 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. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $41,242 for the year ended December
31, 1997.
Fees for recordkeeping services provided to the Fund by MainStay Management, or
NYLIFE Distributors prior to October 27, 1997, were charged to the Fund. The
fees amounted to $31,142 and $125,541 for MainStay Management and NYLIFE
Distributors, respectively, for the year ended December 31, 1997.
25
<PAGE>
MainStay Value Fund
Note 4--Purchases and Sales of Securities (in 000's):
During the year ended December 31, 1997, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $891,575 and $749,628,
respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Year ended December 31
1997 1996
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold......................................................... 2,485 14,271 2,750 13,467
Shares issued in reinvestment of dividends and distributions........ 661 7,405 287 3,942
------ ------ ----- ------
3,146 21,676 3,037 17,409
Shares redeemed..................................................... (1,049) (7,460) (818) (6,103)
------ ------ ----- ------
Net increase........................................................ 2,097 14,216 2,219 11,306
====== ====== ===== ======
</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 Value Fund (one of the
fifteen funds constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1997, 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, 1997 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, 1998
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
graph indicating
risk/reward of
the Fund] Invests primarily in common stocks You want your investments to grow
Capital Appreciation Fund [GRAPHIC] of companies in expanding markets and are willing to accept a higher
with strong growth potential level of risk for higher return potential
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Invests in a portfolio that tracks You seek a conservative way to
Equity Index Fund [GRAPHIC] the makeup and returns of the participate in the growth potential
S&P 500* of stocks with the protection of a
principal guarantee+
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Offers broad diversification into You prefer the higher return potential
International Equity Fund [GRAPHIC] international stock markets with of international equities or want to
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
graph indicating
risk/reward of
the Fund] Invests in convertible securities for You want income from securities that
Convertible Fund(ss.) [GRAPHIC] a special blend of capital may offer growth potential if converted
appreciation and current income into common stock
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks maximum long-term total You seek opportunities the markets may
Strategic Value Fund [GRAPHIC] return from common stocks, have undervalued and you want to
convertible securities, and high-yield manage risk through multimarket
corporate bonds|| diversification++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Balances current income with growth You seek a combination of income and
Total Return Fund [GRAPHIC] opportunities by investing in stocks, growth potential and want to manage
bonds, and money market instruments risk through diversification
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks undervalued stocks with You seek to maximize total return from
VALUE FUND [GRAPHIC] attractive dividends and a stimulus securities which may have more poten-
for positive change tial than the market currently sees
- ------------------------------------------------------------------------------------------------------------------------------------
</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.) As of 6/2/97, this Fund was closed to new investors.
# 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.
|| High-yield securities carry higher risks and certain of the Fund's
investments are 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>
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks a high level of current income You are seeking to combine high
Government Fund [GRAPHIC] consistent with safety of principal current income and safety of principal
primarily from U.S. government
securities.#
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
High Yield the Fund] An aggressive high-yield bond You want to maximize current income
Corporate Bond Fund [GRAPHIC] fund that is actively managed for and can accept the higher risk of
maximum current income|| securities with high-yield potential++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks competitive total return from You prefer the higher return potential
International Bond Fund [GRAPHIC] non-U.S. bonds with an emphasis on of international bonds or want to add
risk control diversification to your domestic
investments++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks to provide current income, You are averse to risk or want to earn
Money Market Fund [GRAPHIC] preservation of capital, and competitive yields on cash you're plan-
liquidity, with free checkwriting** ning to spend or invest in the near future
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks current income and competi- You seek an opportunity for potentially
Strategic Income Fund [GRAPHIC] tive overall return by investing in higher income and overall return by
a diversified portfolio of domestic investing in multiple bond market
and foreign debt securities++ sectors||
- ------------------------------------------------------------------------------------------------------------------------------------
TAX-FREE INCOME FUNDS
- ------------------------------------------------------------------------------------------------------------------------------------
FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND IF...
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks high current income exempt You are a California resident and want to
California Tax Free Fund [GRAPHIC] from both federal and California keep more of what you earn by invest-
income taxes consistent with ing for income that's double tax free+++
preservation of capital+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks high current income exempt You are a New York State or City resident
New York Tax Free Fund [GRAPHIC] from federal, New York State, and and want to keep more of what you earn
New York City income taxes consis- with income that's double or triple tax
tent with preservation of capital+++ free+++
- ------------------------------------------------------------------------------------------------------------------------------------
[horizontal bar
graph indicating
risk/reward of
the Fund] Seeks high current income You are in a high federal income tax
Tax Free Bond Fund [GRAPHIC] exempt from regular federal income tax bracket or want to pay less of your
with preservation of capital+++ investment income to the IRS
- ------------------------------------------------------------------------------------------------------------------------------------
</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
===============-----------
Value Fund
----------------
Annual Report
December 31, 1997
[LOGO] MAINSTAY(R)
FUNDS
OFFICERS & TRUSTEES*
Donald K. Ross Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Richard M. Kernan, Jr. Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Frank A. Mistero 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
* As of January 26, 1998.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
300 Interpace Parkway, Building A
Parsippany, New Jersey 07054
Distributor of the MainStay Funds
www.mainstayfunds.com
NYLIFE Distributors Inc., member NASD, is an indirect wholly [LOGO]
owned subsidiary of New York Life Insurance Company. 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)1998. All rights reserved.
[GRAPHIC] MSAN16-02/98
