<PAGE>
Table of Contents
President's Letter 2
MainStay Capital Appreciation Fund Highlights 3
$10,000 Invested in the MainStay
Capital Appreciation Fund versus S&P 500
and Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 9
Returns & Lipper Rankings 11
Top 10 Equity Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 15
Notes to Financial Statements 19
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Capital Appreciation Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o A robust economy, with low interest rates, modest inflation, and low
unemployment moved stocks higher in the first six months of 1998.
o Weaknesses in Asian economies caused a flight to high-quality, liquid
companies that investors felt could perform relatively well in the event of
an economic downturn.
o Merger and acquisition activity was high, with several large transactions
that stimulated interest in the stock market.
o The S&P 500* advanced to record levels in June.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o The MainStay Capital Appreciation Fund returned 30.86% and 29.97% for Class
A shares and Class B shares, respectively, excluding all sales charges, for
the one-year period ended 6/30/98.
o Both share classes outperformed the S&P 500, which returned 17.71% during
the six-month reporting period.
o The Fund benefited from individual security selection among consumer retail
stocks, and a reduction in its technology and energy holdings.
o Both share classes outperformed the average Lipper+ capital appreciation
fund, which returned 12.86% for the six months ended 6/30/98.
- ----------
* See footnote on page 4 for more information on the S&P 500 Index.
+ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
Capital Appreciation Fund
versus S&P 500 and Inflation
CLASS A SHARES SEC Returns: 1-Year 23.66%, 5-Year 19.20%, 10-Year 19.48%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Capital
Period end S&P 500* Appreciation Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $ 9,450 $10,000
6/89 $12,055 $10,586 $10,517
6/90 $14,043 $12,425 $11,008
6/91 $15,081 $13,558 $11,526
6/92 $17,103 $17,550 $11,882
6/93 $19,434 $23,272 $12,238
6/94 $19,708 $23,273 $12,543
6/95 $24,846 $29,576 $12,924
6/96 $31,306 $36,916 $13,280
6/97 $42,172 $45,294 $13,585
6/98 $54,887 $59,272 $13,813
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 24.97%, 5-Year 19.90%, 10-Year 19.92%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Capital
Period end S&P 500* Appreciation Fund Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $10,000 $10,000
6/89 $12,055 $11,202 $10,517
6/90 $14,043 $13,148 $11,008
6/91 $15,081 $14,347 $11,526
6/92 $17,103 $18,571 $11,882
6/93 $19,434 $24,626 $12,238
6/94 $19,708 $24,627 $12,543
6/95 $24,846 $31,215 $12,924
6/96 $31,306 $38,776 $13,280
6/97 $42,172 $47,339 $13,585
6/98 $54,887 $61,525 $13,813
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 6/30/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
With U.S. gross domestic product increasing more than investors anticipated in
the first half of 1998, the stock market enjoyed robust returns. Low interest
rates, benign inflation, low unemployment, and a rallying bond market all
contributed to positive investor psychology during the reporting period.
A number of factors combined to focus investor attention on large-capitalization
growth stocks. Continuing difficulties in Asian markets spread to China, Latin
America, and Russia, causing a flight to quality, which attracted investors to
domestic companies and highly liquid securities. Asian difficulties also caused
problems for several technology companies. Declining oil, gold, and copper
prices caused weakness among energy and commodity-related issues and moved many
investors from undervalued securities into large, dependable growth companies.
Strong merger and acquisition activity stimulated interest in the stock market,
with several large deals in the financial sector. Problems with an earlier
merger, however, had a negative impact on Cendant Corp., which was among the
worst-performing stocks in the S&P 500* during the second quarter of 1998.
Given this context, how did the MainStay Capital Appreciation Fund perform in
the six months ended 6/30/98?
The MainStay Capital Appreciation Fund returned 19.18% and 18.71% for Class A
shares and Class B shares, respectively, excluding all sales charges for the six
months ended 6/30/98. Both share classes outperformed the S&P 500 Index, which
returned 17.71% over the same period. Both share classes also outperformed the
average Lipper+ capital appreciation fund, which returned 12.86% for the six
months ended 6/30/98.
Why was the Fund able to outperform its peers?
The Fund benefited from strong security selection, strategic sales, and strong
growth among many of its core holdings. The Fund's domestic retail holdings
provided excellent performance. We reduced the Fund's technology holdings,
particularly among commodity-type products. At the same time, the Fund benefited
from strength in companies with proprietary products, such as Microsoft and
certain pharmaceuticals. Also, our decision to reduce holdings in the oil
services sector helped us decrease the impact of declining oil prices on the
Fund.
What were some of the Fund's significant purchases during the reporting period?
The Fund purchased EMC Corp., a corporate data storage provider with a
consistent growth record. The Fund sold some 3Com stock to make the purchase, a
result of our decision to reduce commodity-based technology companies and
increase the Fund's exposure to companies that offer more proprietary products
and services. EMC rose 63%++ in the first half of 1998 and had a positive impact
on the Fund's performance.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Flight to quality
- -----------------
When investors in general move to improve the quality or liquidity of the
securities they own, because of economic, industry, or market concerns that
suggest lower quality securities or those that are less liquid are likely to be
more vulnerable to negative market events.
- ----------
* See page 4 for more information on the S&P 500 Index.
+ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
++ Returns reflect performance for the six-month period ended 6/30/98.
5
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<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
6/98 19.18
</TABLE>
Returns reflect the historical performance of the Class B shares for the periods
12/86 through 12/94.
See footnote * on page 11 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<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
6/98 18.71
</TABLE>
See footnote * on page 11 for more information on performance.
The Fund also purchased Pfizer, which had a slightly negative impact on
performance as some investors sold their positions in order to take profits in
the stock. Nevertheless, we believe that Pfizer's accelerated earnings growth,
broad product line, and direct-to-the-consumer marketing strategy may result in
strong performance over the next six to twelve months.
Another large purchase for the Fund was Disney, which the Fund quickly sold when
the stock began to decline, with a slightly negative impact on performance. A
more positive holding was Colgate, which the
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
6
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ---------------------------------------------
<S> <C>
Retail 13.7%
Financial Services 11.6%
Drugs 9.8%
Computer Software 7.7%
Medical Equipment 6.6%
All Other 50.6%
</TABLE>
Actual percentages will vary over time.
Fund bought in late April. The company benefited from its global scope, cost
cutting, and track record of generating dependable earnings.
Were there any significant sales during the reporting period?
The Fund sold Adaptec, which had a dramatically negative change in fundamentals
due to Asian difficulties and a slowdown in earnings. The stock declined 40%
during the first half of 1998. The Fund also sold 3Com, which we mentioned
earlier. The company faced Asian difficulties and suffered from inventory
problems in its U.S. Robotics unit, which we believe may have a negative impact
on earnings. The Fund also sold Compaq when our fundamental reasons for owning
it disappeared.
As interest rates declined, mortgage refinancing activity increased, which had a
negative impact on mortgage insurer MGIC. Given the stock's declining growth
profile, we decided to sell the Fund's position late in the second quarter of
1998 to take profits earned over the last several years. The Fund also took
profits in Mattel, a stock it has owned and sold over the years. We saw the
fundamentals weakening when sales of their Barbie Doll declined, Toys "R" Us cut
back on its inventory, and the company's Tyco toy division provided
lower-than-anticipated earnings estimates. The sale had a positive impact on the
Fund's performance.
Did you say you reduced holdings in the energy services sector?
Yes. We decided that because of declining oil prices and reduced demand from
Asia, we would sell the Fund's positions in Diamond Offshore and ENSCO. The
general effect of holding energy services companies was negative, so we viewed
the sales as positive for the portfolio. The Fund continued to hold Halliburton,
which is an exploration and drilling company, and reviewed the company's
prospects during the reporting period.
7
<PAGE>
Which stocks were the best performers?
Lucent Technologies was up 108.6% in the first half of the year and had a
substantial positive impact on the Fund's performance. The company has won
telecommunications contracts and continued to have an attractive cost structure
and solid earnings per share growth.
Tyco International is a conglomerate with holdings in fire retardation, security
systems, fiber-optic cable, and health care. Tyco bought ADT Limited
International and Sherwood Davis, a medical device manufacturer, and advanced
nearly 40%, with a large and positive impact on the Fund's performance.
Schering-Plough is a premier pharmaceutical company. Its Claritin product for
allergy sufferers was an excellent performer with $1.7 billion in sales and
rapid growth in sales and earnings. Once again, the portfolio benefited strongly
as the stock rose 48.3%.
Were there other names that performed well for the Fund?
Yes, there were several. Kohl's is a family apparel retailer that benefited as
many investors focused on purely domestic equities. The stock was up 52% with a
substantial positive impact on the Fund. Staples and Home Depot were other
retailers that fit a similar profile and also had a positive impact on
performance.
In the financial sector, the Fund had good success with SunAmerica, a retirement
product provider. The company sells fixed and variable annuities, which appeal
to baby boomers. The baby boom generation is nearing retirement age and their
annuity purchases have helped contribute to SunAmerica's earnings-per-share
growth during the reporting period. Although the company had faced some
questions last year about accounting practices, its stock rose 35% during the
reporting period.
Finally, the first-quarter announcement that WorldCom would purchase MCI, a
telecommunications, long-distance, local telephone, and Internet provider,
caused WorldCom to rise 60% during the first half of the year.
Were there stocks that detracted from the Fund's performance?
Cendant was a stock the Fund owned that had major problems in April. The company
was formed in the fourth quarter of 1997 from the merger of HFS and CUC
International. When certain of CUC's accounting practices came into question in
April, the stock price was cut in half. The business units appear to have robust
trends and are in sectors that we believe to be vibrant, such as housing and
travel--so at the end of June, the Fund continued to hold the stock. But the
overall impact of the news was negative for the Fund's performance.
Adaptec and MGIC declined during the reporting period, although we sold the
Fund's holdings in MGIC at a profit from the original purchase price serveral
years ago. Eli Lilly also underperformed expectations, when the benefits of an
osteoporosis drug proved less dramatic than some investors anticipated.
Earnings per share
- ------------------
The portion of a company's profit allocated to each share of outstanding common
stock.
8
<PAGE>
What do you believe were the best decisions you made for the Fund during the
first half of 1998?
Sticking to our disciplines and proactively reviewing every stock in the
portfolio. We decided to increase the Fund's weighting in the securities we felt
most confident about, within our diversification guidelines. That led us to
increase the Fund's holdings in companies such as Lucent Technologies, which
were strongly positive.
We also believe our decision to reduce technology and energy stocks helped the
Fund. Sticking with the Fund's heavy exposure to domestic retailers and
financial firms helped performance in a low interest-rate environment that
stimulated consumer spending and loan activity.
Were there any decisions you made that you now regret?
Of course, in hindsight, we wish we hadn't held the Fund's position in Cendant
in April, but we could never have foreseen the difficulties the company faced.
We would have liked for the Fund to have had zero energy exposure, but we're
glad we sold the energy services stocks we did.
Which sectors did the Fund emphasize during the first half of the year?
We're bottom-up investors who select stocks on their individual merits. As a
result of this approach, the Fund was overweighted in communications. Although
this sector underperformed as a whole, the Fund's communications holdings
returned more than 60% in the first half of the year. We were also heavy in
consumer cyclicals, such as retailers and restaurants, automotive stocks, and
housing, which, with the exception of Cendant, were generally positive for the
Fund's performance.
Being overweighted in technology stocks was beneficial, primarily because the
Fund invested in companies with proprietary products. Over the reporting period,
we decreased the Fund's technology exposure in light of declining interest in
commodity-type products such as memory chips and adapter cards and the impact
Asian difficulties had on technology production.
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------------
<S> <C>
Common Stocks 97.3%
Cash, Equivalents & Other Assets, Less Liabilities 2.7%
</TABLE>
Actual percentages will vary over 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.
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.
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>
The Fund was also overweighted in financial stocks, although the companies it
held underperformed the market in general. Several were tied up in merger
transactions and may perform well when the deals are completed.
Were there sectors where the Fund was underweighted?
During the reporting period, the Fund was underweighted in basic materials and
capital goods, which was beneficial for performance. The Fund was also
underweighted in consumer staples, since many of the companies didn't meet our
growth criteria. While this sector underperformed in general, the Fund's
holdings in consumer staples outperformed the market.
Our decision to underweight the Fund in energy, utilities, and transportation
stocks generally had a positive impact on performance.
What is your outlook for the future?
We believe the domestic economy is slowing down and may continue to do so as we
begin to feel the full impact of the Asian difficulties. That could result in
lower corporate profits, which may have a generally positive effect on companies
with dependable earnings growth, such as proprietary technology companies,
pharmaceuticals, retailers, and financial firms. Of course, it could also have a
negative effect if the impact of the Asian difficulties is severe.
We anticipate low inflation and possibly even lower interest rates. Whatever the
future brings, we will continue to apply our proprietary research disciplines as
the Fund seeks long-term growth of capital, with dividend income, if any, as an
incidental consideration.
Edmund Spelman
Rudolph Carryl
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
10
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
=====================================================================================================
Fund average annual total returns*
=====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 30.86% 20.56% 20.15% 16.43%
Class B 29.97% 20.10% 19.92% 16.25%
<CAPTION>
=====================================================================================================
Fund SEC returns*
=====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 23.66% 19.20% 19.48% 15.89%
Class B 24.97% 19.90% 19.92% 16.25%
<CAPTION>
=====================================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
=====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 66 out of n/a n/a 28 out of
231 funds 120 funds
Class B 70 out of 23 out of 3 out of 5 out of
231 funds 89 funds 56 funds 43 funds
Average Lipper
capital appreciation
fund 22.13% 16.02% 14.15% 11.94%
<CAPTION>
=====================================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
=====================================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $43.62 $0.0000 $0.0000
Class B $42.76 $0.0000 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued at any time.
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 six 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 (5/1/86)
through 6/30/98. The Fund's Class A shares were first offered to the public
on 1/3/95.
11
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
Tyco International Ltd. $92,509,200
Lucent Technologies Inc. 91,980,419
Schering-Plough Corp. 77,047,463
SunAmerica Inc. 75,817,500
Travelers Group Inc. 75,587,250
Cisco System, Inc. 70,464,638
Medtronic, Inc. 70,316,250
Lilly (Eli) & Co. 65,164,050
Microsoft Corp. 65,133,375
Compuware Corp. 60,767,175
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
EMC Corp. $33,932,562
Colgate-Palmolive Co. 30,736,589
Walt Disney Co. (The) 27,925,205
Pfizer Inc. 27,180,711
Summit Bancorp 25,091,689
Clear Channel Communications, Inc. 24,616,314
Chancellor Media Corp. 23,892,775
Conseco, Inc. 18,822,815
SouthTrust Corp. 18,381,828
USA Waste Services Inc. 14,769,968
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
MGIC Investment Corp. $35,085,018
Walt Disney Co. (The) 27,800,789
Mattel, Inc. 23,808,884
3Com Corp. 20,814,784
Green Tree Financial Corp. 19,959,145
Linear Technology Corp. 16,539,296
ENSCO International Inc. 16,368,778
Diamond Offshore Drilling, Inc. 14,981,103
Tyco International Ltd. 14,197,824
Adaptec Inc. 12,508,182
</TABLE>
- ----------
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.
12
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
================================
<S> <C> <C>
COMMON STOCKS (97.3%)+
BANKS (5.3%)
NationsBank Corp. ...................... 523,000 $ 40,009,500
Norwest Corp. .......................... 918,600 34,332,675
SouthTrust Corp. ....................... 448,750 19,520,625
Summit Bancorp ......................... 491,900 23,365,250
Washington Mutual Inc. ................. 483,900 21,019,406
---------------
138,247,456
---------------
BROADCASTING (2.7%)
Chancellor Media Corp. (a) ............. 509,400 25,294,919
Clear Channel
Communications, Inc. (a) ............. 245,600 26,801,100
Cumulus Media, Inc. (a) ................ 600,000 8,737,500
Univision Communications Inc. (a) ...... 255,000 9,498,750
---------------
70,332,269
---------------
BUILDINGS (0.6%)
Oakwood Homes Corp. .................... 518,200 15,546,000
---------------
COMPUTER SOFTWARE (7.7%)
Computer Associates
International, Inc. .................. 855,587 47,538,553
Compuware Corp. (a) .................... 1,188,600 60,767,175
Microsoft Corp. (a) .................... 601,000 65,133,375
Oracle Corp. (a) ....................... 1,041,000 25,569,562
---------------
199,008,665
---------------
COMPUTERS & OFFICE EQUIPMENT (4.4%)
EMC Corp. (a) .......................... 1,077,300 48,276,506
Hewlett-Packard Co. .................... 348,600 20,872,425
Sun Microsystems (a) ................... 1,062,000 46,130,625
---------------
115,279,556
---------------
CONSUMER DURABLES (1.8%)
Harley-Davidson, Inc. .................. 1,220,200 47,282,750
---------------
CONSUMER SERVICES (3.0%)
Cendant Corp. (a) ...................... 2,142,328 44,721,097
Service Corp. International ............ 757,000 32,456,375
---------------
77,177,472
---------------
Shares Value
================================
COSMETICS (2.8%)
Colgate-Palmolive Co. .................. 350,800 $ 30,870,400
Gillette Co. ........................... 730,000 41,381,875
---------------
72,252,275
---------------
DRUGS (9.8%)
Elan Corp. PLC ADR (a)(b) .............. 592,400 38,098,725
Lilly (Eli) & Co. ...................... 986,400 65,164,050
Merck & Co., Inc. ...................... 361,900 48,404,125
Pfizer Inc. ............................ 235,000 25,541,562
Schering-Plough Corp. .................. 840,900 77,047,463
---------------
254,255,925
---------------
ENERGY (0.2%)
British Petroleum Co., PLC ADR (b) ..... 68,158 6,014,944
---------------
FINANCIAL SERVICES (11.6%)
Associates First Capital Corp.
Class A .............................. 546,000 41,973,750
Equifax Inc. ........................... 796,200 28,912,012
Fannie Mae ............................. 544,000 33,048,000
Household International, Inc. .......... 897,900 44,670,525
MGIC Investment Corp. .................. 35,550 2,028,572
SunAmerica Inc. ........................ 1,320,000 75,817,500
Travelers Group Inc. ................... 1,246,800 75,587,250
---------------
302,037,609
---------------
HEALTH CARE (5.0%)
Cardinal Health Inc. ................... 335,000 31,406,250
HEALTHSOUTH Corp. (a) .................. 1,390,400 37,106,300
Tenet Healthcare Corp. (a) ............. 969,550 30,298,438
United Healthcare Corp. ................ 466,800 29,641,800
---------------
128,452,788
---------------
INDUSTRIAL (5.1%)
Illinois Tool Works Inc. ............... 577,400 38,505,363
Tyco International Ltd. ................ 1,468,400 92,509,200
---------------
131,014,563
---------------
INSURANCE (3.8%)
American International Group, Inc. ..... 372,075 54,322,950
Conseco, Inc. .......................... 947,500 44,295,625
---------------
98,618,575
---------------
</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 Capital Appreciation Fund
<TABLE>
<CAPTION>
Shares Value
================================
<S> <C> <C>
COMMON STOCKS (Continued)
LEISURE (0.6%)
Mirage Resorts Inc. (a) ................ 741,600 $ 15,805,350
--------------
MATERIALS/PROCESSING (1.1%)
Monsanto Co. ........................... 511,700 28,591,238
--------------
MEDICAL EQUIPMENT (6.6%)
Guidant Corp. .......................... 727,300 51,865,581
Johnson & Johnson ...................... 669,884 49,403,945
Medtronic, Inc. ........................ 1,103,000 70,316,250
--------------
171,585,776
--------------
OIL SERVICES (0.4%)
Halliburton Co. ........................ 208,000 9,269,000
--------------
POLLUTION CONTROL (1.6%)
USA Waste Services Inc. (a) ............ 832,700 41,114,562
--------------
RETAIL (13.7%)
Bed Bath & Beyond, Inc. (a) ............ 590,400 30,590,100
CVS Corp. .............................. 986,400 38,407,950
Dollar General Corp .................... 835,937 33,071,758
Home Depot, Inc. (The) ................. 669,350 55,597,884
Kohl's Corp. (a) ....................... 1,078,200 55,931,625
Kroger Co. (a) ......................... 839,000 35,972,125
Safeway Inc. (a) ....................... 1,432,000 58,264,500
Staples, Inc. (a) ...................... 1,629,000 47,139,187
--------------
354,975,129
--------------
TECHNOLOGY (3.8%)
Cisco Systems, Inc. (a) ................ 765,400 70,464,638
Intel Corp. ............................ 396,400 29,383,150
--------------
99,847,788
--------------
TELECOMMUNICATION EQUIPMENT (3.5%)
Lucent Technologies Inc. ............... 1,105,700 91,980,419
--------------
TELECOMMUNICATION SERVICES (2.2%)
WorldCom, Inc. (a) ..................... 1,191,280 57,702,625
--------------
Total Common Stocks
(Cost $1,428,292,762) ................ 2,526,392,734
--------------
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <>
SHORT-TERM INVESTMENTS (2.7%)
COMMERCIAL PAPER (2.7%)
General Electric Co.
5.70%, due 7/2/98 .................... $30,000,000 $ 29,995,250
Prudential Funding Corp.
6.30%, due 7/1/98 .................... 29,460,000 29,460,000
Salomon Smith Barney Holdings Inc.
5.60%, due 7/1/98 .................... 10,000,000 10,000,000
--------------
Total Short-Term Investments
(Cost $69,455,250) ................... 69,455,250
--------------
Total Investments
(Cost $1,497,748,012) (c) ............ 100.0% 2,595,847,984(d)
Cash and Other Assets,
Less Liabilities ..................... 0.0(e) 353,699
----------- --------------
Net Assets ............................. 100.0% $2,596,201,683
=========== ==============
</TABLE>
- ----------
(a) Non-income producing security.
(b) ADR--American Depository Receipt.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1998, net unrealized appreciation was $1,098,099,972, based on
cost for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $1,106,163,424 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $8,063,452.
(e) Less than one tenth of a percent.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,497,748,012) ... $2,595,847,984
Cash .................................................................. 337
Receivables:
Investment securities sold .......................................... 43,716,505
Dividends and interest .............................................. 9,132,576
Fund shares sold .................................................... 795,387
--------------
Total assets ...................................................... 2,649,492,789
--------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 45,183,760
Fund shares redeemed ................................................ 4,504,004
NYLIFE Distributors ................................................. 1,882,921
MainStay Management ................................................. 1,125,009
Transfer agent ...................................................... 392,675
Custodian ........................................................... 20,252
Trustees ............................................................ 11,564
Accrued expenses ...................................................... 170,921
--------------
Total liabilities ................................................. 53,291,106
--------------
Net assets ............................................................ $2,596,201,683
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 67,070
Class B ............................................................. 538,744
Additional paid-in capital ............................................ 1,430,329,507
Accumulated net investment loss ....................................... (12,061,434)
Accumulated net realized gain on investments .......................... 79,227,824
Net unrealized appreciation on investments ............................ 1,098,099,972
--------------
Net assets ............................................................ $2,596,201,683
==============
CLASS A
Net assets applicable to outstanding shares ........................... $ 292,528,183
==============
Shares of beneficial interest outstanding ............................. 6,706,968
==============
Net asset value and offering price per share outstanding .............. $ 43.62
Maximum sales charge (5.50% of offering price) ........................ 2.54
--------------
Maximum offering price per share outstanding .......................... $ 46.16
==============
CLASS B
Net assets applicable to outstanding shares ........................... $2,303,673,500
==============
Shares of beneficial interest outstanding ............................. 53,874,389
==============
Net asset value and offering price per share outstanding .............. $ 42.76
==============
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................. $ 5,658,172
Interest .................................................. 2,211,892
------------
Total income ............................................ 7,870,064
------------
Expenses:
Management ................................................ 8,385,242
Distribution--Class B ..................................... 7,781,010
Service--Class A .......................................... 317,973
Service--Class B .......................................... 2,593,569
Transfer agent ............................................ 2,314,554
Shareholder communication ................................. 164,755
Recordkeeping ............................................. 130,607
Registration .............................................. 110,265
Custodian ................................................. 106,774
Professional .............................................. 72,650
Trustees .................................................. 30,099
Miscellaneous ............................................. 44,818
------------
Total expenses before waiver ............................ 22,052,316
Fee waived by Manager ....................................... (2,120,818)
------------
Net expenses ............................................ 19,931,498
------------
Net investment loss ......................................... (12,061,434)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 60,863,968
Net change in unrealized appreciation on investments ........ 349,353,794
------------
Net realized and unrealized gain on investments ............. 410,217,762
------------
Net increase in net assets resulting from operations ........ $398,156,328
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $8,408.
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>
Six months
ended Year ended
June 30, December 31,
1998* 1997
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .............................................................. $ (12,061,434) $ (16,994,618)
Net realized gain on investments ................................................. 60,863,968 96,408,190
Net change in unrealized appreciation on investments ............................. 349,353,794 290,211,529
-------------- --------------
Net increase in net assets resulting from operations ............................. 398,156,328 369,625,101
-------------- --------------
Distributions to shareholders:
From net realized gain on investments:
Class A ........................................................................ -- (7,157,066)
Class B ........................................................................ -- (63,640,592)
-------------- --------------
Total distributions to shareholders .......................................... -- (70,797,658)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................................ 204,646,811 226,767,009
Class B ........................................................................ 291,101,910 525,712,343
Net asset value of shares issued to shareholders in reinvestment of distributions:
Class A ........................................................................ -- 6,842,740
Class B ........................................................................ -- 62,561,489
-------------- --------------
495,748,721 821,883,581
Cost of shares redeemed:
Class A ........................................................................ (172,662,572) (173,693,435)
Class B ........................................................................ (210,996,387) (330,598,281)
-------------- --------------
Increase in net assets derived from capital share transactions ............... 112,089,762 317,591,865
-------------- --------------
Net increase in net assets ................................................... 510,246,090 616,419,308
NET ASSETS:
Beginning of period ................................................................ 2,085,955,593 1,469,536,285
-------------- --------------
End of period ...................................................................... $2,596,201,683 $2,085,955,593
============== ==============
Accumulated net investment loss at end of period ................................... $ (12,061,434) $ --
============== ==============
</TABLE>
- ----------
* Unaudited.
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 A Class B Class A Class B Class A Class B
------------- ------------- ------------- ------------- ------------- -------------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
-------------------------------- ------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $36.60 $36.02 $30.56 $30.25 $25.90 $25.77
------ ------ ------ ------ ------ ------
Net investment
income (loss) (a) .... (0.07) (0.22) (0.16) (0.34) (0.08) (0.22)
Net realized and
unrealized gain (loss)
on investments ....... 7.09 6.96 7.48 7.39 5.05 5.01
------ ------ ------ ------ ------ ------
Total from investment
operations ........... 7.02 6.74 7.32 7.05 4.97 4.79
------ ------ ------ ------ ------ ------
Less distributions:
From net realized gain
on investments ..... -- -- (1.28) (1.28) (0.31) (0.31)
------ ------ ------ ------ ------ ------
Net asset value at
end of period ........ $43.62 $42.76 $36.60 $36.02 $30.56 $30.25
====== ====== ====== ====== ====== ======
Total investment
return (b) ........... 19.18% 18.71% 24.10% 23.45% 19.16% 18.56%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) .... (0.36)%+ (1.11)%+ (0.48%) (1.00%) (0.3%) (0.8%)
Expenses ........... 1.22%+ 1.97%+ 1.09% 1.61% 1.1% 1.6%
Net Expenses
(after waiver) .. 1.04%+ 1.79%+ 1.09% 1.61% 1.1% 1.6%
Portfolio turnover rate 12% 12% 35% 35% 16% 16%
Net assets at end of
period (in 000's) .... $292,528 $2,303,674 $216,292 $1,869,664 $126,958 $1,342,578
<CAPTION>
Class B
--------------------------------------------------
Class A Class B September 1
------------- ------------- through Year ended August 31
Year ended December 31 -------------------------------
December 31, 1995 1994** 1994 1993
------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $19.11 $19.11 $19.93 $19.47 $14.14
------ ------ ------ ------ ------
Net investment
income (loss) (a) .... 0.03 (0.08) (0.03) (0.12) (0.12)
Net realized and
unrealized gain (loss)
on investments ....... 6.81 6.79 (0.65) 1.13 5.64
------ ------ ------ ------ ------
Total from investment
operations ........... 6.84 6.71 (0.68) 1.01 5.52
------ ------ ------ ------ ------
Less distributions:
From net realized gain
on investments ..... (0.05) (0.05) (0.14) (0.55) (0.19)
------ ------ ------ ------ ------
Net asset value at
end of period ........ $25.90 $25.77 $19.11 $19.93 $19.47
====== ====== ====== ====== ======
Total investment
return (b) ........... 35.79% 35.11% (3.40%) 5.36% 39.25%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) .... 0.2% (0.4%) (0.5%)+ (0.6%) (0.7%)
Expenses ........... 1.1% 1.7% 1.8%+ 1.8% 1.8%
Net Expenses
(after waiver) .. 1.1% 1.7% 1.8%+ 1.8% 1.8%
Portfolio turnover rate 29% 29% 11% 31% 73%
Net assets at end of
period (in 000's) .... $44,434 $856,221 $499,133 $472,497 $279,300
</TABLE>
- ----------
* Unaudited.
** 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.
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 unaudited
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 twenty-two 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. Dividend
income, if any, is an incidental consideration.
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, and (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
19
<PAGE>
MainStay Capital Appreciation Fund
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.
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.
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of the Fund.
20
<PAGE>
Notes to Financial Statements unaudited (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%. The Manager has voluntarily established fee
breakpoints, which may be discontinued at any time, of 0.65% on assets in excess
of $200 million and 0.50% on assets in excess of $500 million. For the six
months ended June 30, 1998 the Manager earned $8,385,242 and waived $2,120,818
of its fees.
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. To the extent that the Manager has
voluntarily established fee breakpoints, the Sub-Adviser has voluntarily agreed
to do so proportionately.
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 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.
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 $131,107 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$1,020,048 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $2,359,000.
21
<PAGE>
MainStay Capital Appreciation 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 $32,857 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$130,607 for the six months ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $455,806 and $268,526,
respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 5,041 7,304 6,499 15,460
Shares issued in reinvestment of dividends and
distributions ............................................ -- -- 194 1,803
------- ------- ------- -------
5,041 7,310 6,693 17,263
Shares redeemed ............................................ (4,244) (5,335) (4,938) (9,753)
------- ------- ------- -------
Net increase ............................................... 797 1,975 1,755 7,510
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
22
<PAGE>
This page intentionally left blank
23
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
24
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
25
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
26
<PAGE>
MainStay Capital Appreciation Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MainStay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA05-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Equity Index Fund Highlights 3
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Industry--Top 5 8
Returns & Lipper Rankings 9
Top 10 Equity Holdings 10
Portfolio of Investments 11
Unaudited Financial Statements 21
Notes to Financial Statements 25
The MainStay Funds 30
<PAGE>
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at
historically high prices relative to their earnings and profit projections. If
inflation, unemployment, or wage pressures increase--or if other events upset
the economy--it's difficult to say what may lie ahead. To avoid disappointments,
you need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
July 1998
- ----------
* See page 4 for more information on the S&P 500.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
2
<PAGE>
MainStay Equity Index Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o The S&P 500* returned 17.71% in the first half of 1998, well above the
stock market's annual historical average total return of 10.7%+ for the
period from 1926 through 1997.
o The U.S. economy continued to expand with moderate growth, increasing gross
domestic product, low inflation, low unemployment, and soaring consumer
confidence.
o The Federal Reserve Board refrained from raising interest rates and the
30-year Treasury bond traded at its lowest yield since the bond was first
offered over 20 years ago.
o Investors appeared to be adopting more defensive positions as evidenced by
widening credit spreads and a willingness to pay a premium for more liquid
issues.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o For the one-year period ended 6/30/98, the MainStay Equity Index Fund
returned 28.92% for Class A shares, excluding all sales charges.
o The Fund closely tracked the performance of the S&P 500 Index and exceeded
the 11.75% return of the Lipper++ general equity average for the six months
ended 6/30/98.
o The large-capitalization stocks of which the Fund is composed retained
their leadership in the first half of the year, surpassing their mid- and
small-capitalization counterparts by an extraordinary margin of 9.1% and
11.6%, respectively, (based on the performance of the S&P 400 MidCap ss.
and S&P 600 SmallCap#).
o The Fund underperformed the average Lipper S&P 500 Index objective fund,
which returned 17.37% for the six months ended 6/30/98.
- ----------
* See footnote on page 4 for more information on the S&P 500.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
ss. S&P 400 MidCap Index is an unmanaged index consisting of 400 domestic
stocks chosen for market size, liquidity, and industry group
representation. It is a market-value weighted index that represents
approximately 10% of the aggregate market value of U.S. domestic companies.
# S&P 600 SmallCap Index is an unmanaged capitalization-weighted index that
measures the performance of selected U.S. stocks with small market
capitalizations.
3
<PAGE>
$10,000 Invested in the MainStay
Equity Index Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-Year 25.05%, 5-Year 21.21%, since inception 19.04%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Mainstay Equity
Period end S&P 500* Index Fund Inflation+
- --------------------------------------------------------------
<S> <C> <C> <C>
12/20/90 $ 10,000 $ 9,700 $ 10,000
12/91 $ 13,040 $ 12,430 $ 10,298
12/92 $ 14,032 $ 13,200 $ 10,603
12/93 $ 15,441 $ 14,391 $ 10,893
12/94 $ 15,645 $ 14,463 $ 11,177
12/95 $ 21,518 $ 19,657 $ 11,467
12/96 $ 26,454 $ 23,988 $ 11,847
12/97 $ 35,280 $ 31,728 $ 12,047
6/98 $ 41,528 $ 37,158 $ 12,129
</TABLE>
- ----------
Past performance is no guarantee of future results. 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.
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. The S&P 500 is an unmanaged index and is considered to
be generally representative of the U.S. stock market. Results assume the
reinvestment of all income and capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
A number of factors influenced stock market returns over the first half of 1998.
Primary among these was the persistence of strong economic growth and low
inflation in the United States. First quarter reports indicated that gross
domestic product (GDP) was increasing at a rate in excess of 5% a year, well
above what most economists consider sustainable. At the same time, consumer
confidence soared, capital expenditures continued unabated, and unemployment
fell to its lowest level in 20 years.
In the past, the Federal Reserve Board has reacted to such rapid growth by
raising short-term interest rates--the rates at which corporations borrow money
to fund the growth of their businesses. In so doing, the Federal Reserve Board
hopes to head off inflation by slowing the economy before price pressure has an
opportunity to mount. In the first half of 1998, however, there were few signs
of inflationary pressure. Consumer and producer prices remained in check, wage
growth was less than that of the economy, and the price of raw materials
plummeted. Since there was little or no threat of inflation and there were
concerns that a hike in rates might strengthen the dollar and compound Asia's
economic problems, the Federal Reserve Board has refrained from raising rates.
The impact of the global economy on U.S. stock prices is less easily
discernible. During the first six months of 1998, Continental Europe enjoyed
double digit gains--over 40% in many cases, both in local currency and U.S.
dollar terms. Asia on the other hand has languished amid currency devaluations,
economic turmoil, and political upheaval. For those companies that export goods
to the region, maintain facilities there, or compete with Asia's now
less-expensive products, this is certainly a negative development and may become
more so in the second half of 1998. But for manufacturers that import raw
materials and for the consumers of these goods, it has been a windfall.
The S&P 500* is a broad index, and its performance was affected by a variety of
other factors. In this overall market environment, however, the S&P 500 climbed
17.71% in the first six months of 1998, a rate well above historic norms for an
entire year.+
Given this context, how did the MainStay Equity Index Fund perform in the first
six months of 1998?
For the six months ended 6/30/98, the MainStay Equity Index Fund returned 17.11%
for Class A shares, excluding all sales charges. The Fund slightly
underperformed the average Lipper++ S&P 500 Index objective fund, which returned
17.37% for the first half of 1998, but outperformed the Lipper general equity
average, which returned 11.75%.
What was the primary reason why the Fund underperformed the Index and its peers?
The Fund performed precisely as anticipated, closely mirroring the S&P 500
Index, but trailing by a slight margin due to expenses. The Index itself is a
hypothetical investment and does not face the
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Gross domestic product
- ----------------------
The market value of the goods and services produced by labor and property in a
specific nation.
Devaluation
- -----------
A lowering of the value of a country's currency relative to gold and/or the
currencies of other nations. Devaluation can also result from a rise in the
value of other currencies relative to the currency of a particular country.
- ----------
* See page 4 for more information on the S&P 500.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
++ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
Basis point
- -----------
One hundredth of one percent in the yield or return of an investment, i.e., 100
basis points equals 1%.
Supply and demand
- -----------------
In the stock market, an oversupply of a product or service can reduce the
relative level of demand and lower stock prices. When demand increases relative
to supply, stock prices may recover.
Price-to-earnings ratio
- -----------------------
Price of a stock divided by its earnings per share.
Price to book value
- -------------------
Price of a stock relative to its book value per share.
Dividend yield
- --------------
Annual percentage of return earned by an investor on a common or preferred
stock.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
(THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.)
<TABLE>
<CAPTION>
Period end Total Return %
- ----------------------------------------------
<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
6/98 17.11
</TABLE>
See footnote * on page 9 for more information on performance.
day-to-day expenses associated with mutual fund investing. In addition, the Fund
cannot fully replicate the Index at all times, since it must make ongoing
accommodations for new investments and withdrawals. Since the Fund
underperformed its average peer fund by less than 30 basis points, we believe
the impact of these factors was minor.
During the reporting period, which industries contributed most positively to the
Fund's performance?
Makers of communications equipment (computer networking) posted the highest
industry-group return of 61.8%. With a growing domestic economy, high
employment, rising personal income, and strong consumer confidence during the
first half of 1998, companies producing goods and services also generated strong
performance. Apparel retailers were up 55.8%, with retail in general rising
50.7%, automobiles were up 50.9%, personal loans rose 37.3%, and restaurants
advanced 36.5%.
Which of the Fund's individual stocks showed the strongest performance?
Cap One Financial generated the single highest gain for the period, rising
129.2%. Other strong performers were Dell Computer, up 121.0%; Apple Computer,
up 118.6%; Lucent Technologies, up 108.3%; and Unisys, which rose 103.6% during
the first six months of 1998.
Which industries provided the worst performance during the reporting period?
Oversupply problems and shrinking global demand proved costly for oil and gas
companies in the first half of 1998. Those specializing in drilling declined
35.6%, well equipment & services stocks dropped 11.7%, and exploration &
production companies fell 9.7%. At the same time,
6
<PAGE>
declining commodity prices drove mining companies in the metals--miscellaneous
sector of the S&P 500 down 9.9%. Other industries also had disappointing
results. Tobacco lost 13.9%, specialty chemicals dropped 13.0%, and railroads
were down 11.1%.
Which individual stocks recorded major losses in the first half of the year?
With a decline of 49.2%, National Semiconductor was the worst performing stock
in the Index during the reporting period. Semiconductor manufacturers suffered
from declining demand and writeoffs on Asian operations. IKON Office Solutions
fell 48.2% when it preannounced a quarterly earnings shortfall and Cendant Corp.
dropped 39.3% when accounting practices at its CUC International subsidiary came
into question. Rounding out the five worst-performing issues were Rowan Cos.,
down 36.3%, and Helmerich and Payne, which lost 34.4% in the first half of 1998.
What is your outlook for the second half of 1998 and beyond?
Securities markets are inherently unpredictable, particularly in the short term.
But taking a longer-term perspective, the bull market we have enjoyed the last
fifteen years is without precedent. By most traditional yardsticks,
(price-to-earnings ratios, price to book values, dividend yield, and
capitalization to GDP), current stock valuations are extremely high in
historical terms. We believe it is therefore unlikely that stock returns in the
coming decade will bear much resemblance to those investors have enjoyed in
recent years.
The past six months have even provided some indications that the good times
could be coming to an end sooner than we might wish. The credit spread between
Treasury bonds and comparable-duration investment-grade debt widened noticeably,
suggesting a flight to quality. As a result, large companies which are highly
liquid and easy to sell in the event of a downturn have had stronger performance
than smaller, less liquid stocks.
The Fund will seek to track the total return performance of the S&P 500, with
dividends reinvested, whether the market moves up or down.
James A. Mehling, CFA
Portfolio Manager
Monitor Capital Advisors, Inc.
Credit spread
- -------------
The yield differential between debt securities of issuers with varying credit
ratings. The term credit spread may refer to the extra yield investors demand
for holding investment grade corporate bonds rather than the debt of the United
States Treasury (considered to be free of default risk).
Flight to quality
- -----------------
When investors in general move to improve the quality or liquidity of the
securities they own, because of economic, industry, or market concerns that
suggest lower-quality securities or those that are less liquid may likely be
more vulnerable to negative market events.
Past performance is no guarantee of future results.
7
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ----------------------------------------------------
<S> <C>
Oil--Integrated International 5.3%
Drugs 5.1%
Computer Software & Services 4.5%
Health Care--Diversified 4.5%
Major Regional Banks 4.3%
All Other 76.3%
Actual percentages will vary over time.
</TABLE>
8
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund
through 6/30/98
<S> <C> <C> <C>
Class A 28.92% 21.95% 19.52%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund
through 6/30/98
<S> <C> <C> <C>
Class A 25.05% 21.21% 19.04%
<CAPTION>
================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
================================================================================
1 year 5 years Life of Fund
through 6/30/98
<S> <C> <C> <C>
Equity Index 67 out of 33 out of 13 out of
Fund 77 funds 34 funds 13 funds
Average Lipper
S&P 500 Index
objective fund 29.39% 22.55% 20.34%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $36.20 $0.0000 $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 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 discontinued at any time. The MainStay
Equity Index Fund's expense cap was terminated on April 1, 1998. 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 6/30/98.
For the 12-month period ended 6/30/98, the Lipper general equity average
included 5,352 funds and the MainStay Equity Index Fund was ranked 923 out
of 5,352; 202 out of 1,815; and 292 out of 1,034 funds for the 1-year,
5-year, and since-inception periods, respectively.
9
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 6/30/98
================================================================================
Holding Amount
================================================================================
<S> <C>
General Electric Co. $21,018,088
Microsoft Corp. 18,935,388
Coca-Cola Co. (The) 14,967,887
Exxon Corp. 12,373,503
Merck & Co., Inc. 11,340,662
Pfizer Inc. 10,059,246
Wal-Mart Stores, Inc. 9,673,466
Intel Corp. 8,914,717
Procter & Gamble Co. (The) 8,649,572
Royal Dutch Petroleum Co. 8,334,844
</TABLE>
- ---------
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.
10
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (98.8%)+
AEROSPACE/DEFENSE (1.4%)
Boeing Co. (The) ........................... 71,636 $ 3,192,279
General Dynamics Corp. ..................... 8,911 414,362
Lockheed Martin Corp. ...................... 13,880 1,469,545
Northrop Grumman Corp. ..................... 4,704 485,100
Raytheon Co. Class B ....................... 23,977 1,417,640
Rockwell International Corp. ............... 13,913 668,694
United Technologies Corp. .................. 16,245 1,502,662
-----------
9,150,282
-----------
AIRLINES (0.4%)
AMR Corp. (a) .............................. 12,986 1,081,085
Delta Air Lines, Inc. ...................... 5,301 685,154
Southwest Airlines Co. ..................... 15,808 468,312
US Airways Group, Inc. (a) ................. 7,244 574,087
-----------
2,808,638
-----------
ALUMINUM (0.2%)
Alcan Aluminum Ltd. ........................ 16,046 443,271
Aluminum Co. of America .................... 11,925 786,305
Reynolds Metals Co. ........................ 5,145 287,798
-----------
1,517,374
-----------
AUTO PARTS & EQUIPMENT (0.2%)
Cooper Tire & Rubber Co. ................... 5,535 114,159
Echlin Inc. ................................ 4,432 217,445
Genuine Parts Co. .......................... 12,770 441,363
Goodyear Tire & Rubber Co. (The) ........... 11,158 718,994
-----------
1,491,961
-----------
AUTOMOBILES (1.7%)
Chrysler Corp. ............................. 45,763 2,579,889
Ford Motor Co. ............................. 85,959 5,071,581
General Motors Corp. ....................... 47,401 3,166,979
-----------
10,818,449
-----------
BEVERAGES--ALCOHOLIC (0.5%)
Anheuser-Busch Cos., Inc. .................. 34,474 1,626,742
Brown-Forman Corp. Class B ................. 4,814 309,299
Coors (Adolph) Co. Class B ................. 2,612 88,808
Seagram Co. Ltd. (The) ..................... 24,530 1,004,197
-----------
3,029,046
-----------
BEVERAGES--SOFT DRINKS (3.0%)
Coca-Cola Co. (The) (d) .................... 175,063 14,967,887
PepsiCo, Inc. .............................. 105,745 4,355,372
-----------
19,323,259
-----------
BROADCAST/MEDIA (1.1%)
CBS Corp. (a) .............................. 50,916 1,616,583
Clear Channel
Communications, Inc. (a) ................. 8,779 958,008
Comcast Corp. Special Class A .............. 26,219 1,064,329
MediaOne Group Inc. (a) .................... 43,214 1,898,715
Tele-Communications, Inc. Series A
TCI Group (a) ............................ 36,003 1,383,866
-----------
6,921,501
-----------
BUILDING MATERIALS (0.2%)
Masco Corp. ................................ 12,028 727,694
Owens Corning .............................. 3,648 148,884
Sherwin-Williams Co. (The) ................. 12,309 407,736
-----------
1,284,314
-----------
CHEMICALS (2.0%)
Air Products & Chemicals, Inc. ............. 16,662 666,480
Dow Chemical Co. (The) ..................... 15,940 1,541,199
Du Pont (E.I.) De Nemours & Co. ............ 80,048 5,973,582
Eastman Chemical Co. ....................... 5,592 348,102
Goodrich (B.F.) Co. (The) .................. 5,082 252,194
Hercules Inc. .............................. 6,867 282,405
Monsanto Co. ............................... 42,441 2,371,391
Praxair, Inc. .............................. 11,168 522,802
Rohm & Haas Co. ............................ 4,273 444,125
Union Carbide Corp. ........................ 9,615 513,201
-----------
12,915,481
-----------
CHEMICALS--DIVERSIFIED (0.3%)
Avery Dennison Corp. ....................... 8,340 448,275
Engelhard Corp. ............................ 10,159 205,720
FMC Corp. (a) .............................. 2,477 168,900
PPG Industries, Inc. ....................... 12,689 882,679
-----------
1,705,574
-----------
CHEMICALS--SPECIALTY (0.1%)
Grace (W.R.) & Co. (a) ..................... 5,384 91,865
Great Lakes Chemical Corp. ................. 4,240 167,225
Morton International, Inc. ................. 9,178 229,450
Nalco Chemical Co. ......................... 4,788 168,178
Sigma-Aldrich Corp. ........................ 7,133 250,547
-----------
907,265
-----------
</TABLE>
- ---------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
COMMUNICATION--EQUIPMENT MANUFACTURERS (3.2%)
Andrew Corp. (a) ........................... 6,403 $ 115,654
Ascend Communications, Inc. (a) ............ 13,676 677,817
Bay Networks, Inc. (a) ..................... 15,750 507,937
Cabletron Systems, Inc. (a) ............... 11,229 150,890
Cisco Systems, Inc. (a) .................... 72,491 6,673,702
DSC Communications Corp. (a) ............... 8,356 250,680
General Instrument Corp. (a) ............... 10,675 290,227
Lucent Technologies Inc. ................... 92,991 7,735,689
Northern Telecom Ltd. ...................... 36,852 2,091,351
Scientific-Atlanta, Inc. ................... 5,453 138,370
Tellabs, Inc. (a) .......................... 12,852 920,524
3Com Corp. (a) ............................. 25,252 774,921
-----------
20,327,762
-----------
COMPUTER SOFTWARE & SERVICES (4.5%)
Adobe Systems Inc. ......................... 4,731 200,772
Autodesk, Inc. ............................. 3,294 127,231
Automatic Data Processing, Inc. ............ 21,374 1,557,630
Ceridian Corp. (a) ......................... 5,166 303,502
Computer Associates
International, Inc. ...................... 38,758 2,153,491
Computer Sciences Corp. (a) ............... 10,986 703,104
Equifax Inc. ............................... 10,516 381,862
First Data Corp. ........................... 31,680 1,055,340
HBO & Co. .................................. 30,499 1,075,090
Microsoft Corp. (a)(d) ..................... 174,721 18,935,388
Novell, Inc. (a) ........................... 24,891 317,360
Oracle Corp. (a) ........................... 69,057 1,696,213
Parametric Technology Corp. (a) ............ 19,220 521,343
Shared Medical Systems Corp. ............... 1,894 139,091
-----------
29,167,417
-----------
COMPUTER SYSTEMS (3.8%)
Apple Computer, Inc. (a) ................... 9,364 268,630
Compaq Computer Corp. ...................... 117,142 3,323,904
Data General Corp. (a) ..................... 3,407 50,892
Dell Computer Corp. (a) .................... 45,672 4,238,932
EMC Corp. (a) .............................. 35,315 1,582,553
Gateway 2000, Inc. (a) ..................... 11,072 560,520
Hewlett-Packard Co. ........................ 73,467 4,398,837
International Business
Machines Corp. ........................... 66,864 7,676,823
Seagate Technology, Inc. (a) ............... 17,287 411,647
Silicon Graphics, Inc. (a) ................. 13,427 162,802
Sun Microsystems, Inc. (a) ................. 26,870 1,167,166
Unisys Corp. (a) ........................... 17,863 504,630
-----------
24,347,336
-----------
CONGLOMERATES (0.2%)
Tenneco Inc. ............................... 12,160 462,840
Textron Inc. ............................... 11,687 837,812
-----------
1,300,652
-----------
CONTAINERS--METAL & GLASS (0.2%)
Ball Corp. ................................. 2,168 87,126
Crown Cork & Seal Co., Inc. ................ 8,878 421,705
Owens-Illinois, Inc. (a) ................... 10,901 487,820
-----------
996,651
-----------
CONTAINERS--PAPER (0.1%)
Bemis Co., Inc. ............................ 3,775 154,303
Stone Container Corp. (a) .................. 6,976 109,000
Temple-Inland Inc. ......................... 3,929 211,675
----------
474,978
----------
COSMETICS (0.9%)
Alberto-Culver Co. Class B ................. 3,937 114,173
Avon Products, Inc. ........................ 9,335 723,463
Gillette Co. (The) ......................... 79,618 4,513,345
International Flavors &
Fragrances Inc. .......................... 7,632 331,515
----------
5,682,496
----------
DRUGS (5.1%)
Lilly (Eli) & Co. .......................... 78,536 5,188,284
Merck & Co., Inc. .......................... 84,790 11,340,662
Pfizer Inc. ................................ 92,552 10,059,246
Pharmacia & Upjohn, Inc. ................... 35,989 1,659,993
Schering-Plough Corp. ...................... 52,046 4,768,715
----------
33,016,900
----------
ELECTRIC POWER COMPANIES (2.4%)
Ameren Corp. ............................... 9,604 381,759
American Electric Power Co., Inc. .......... 13,492 612,199
Baltimore Gas & Electric Co. ............... 10,430 323,982
Carolina Power & Light Co. ................. 10,724 465,153
Central & South West Corp. ................. 15,033 404,012
Cinergy Corp. .............................. 11,154 390,390
Consolidated Edison, Inc. .................. 16,648 766,849
Dominion Resources, Inc. ................... 13,892 566,099
DTE Energy Co. ............................. 10,276 414,894
Duke Energy Corp. .......................... 25,475 1,509,394
Edison International ....................... 25,641 758,012
Entergy Corp. .............................. 17,439 501,371
FirstEnergy Corp. .......................... 16,303 501,317
FPL Group, Inc. ............................ 12,884 811,692
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Portfolio of Investments unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
ELECTRIC POWER COMPANIES (Continued)
GPU, Inc. .................................. 9,031 $ 341,485
Houston Industries Inc. .................... 20,920 645,905
Niagara Mohawk Power Corp. (a) ............. 11,823 176,606
Northern States Power Co. .................. 10,716 306,746
PacifiCorp ................................. 21,029 475,781
PECO Energy Co. ............................ 15,747 459,616
PG&E Corp. ................................. 27,055 853,923
PP&L Resources, Inc. ....................... 11,909 270,185
Public Service Enterprise
Group Inc. ............................... 16,437 566,049
Southern Co. (The) ......................... 49,469 1,369,673
Texas Utilities Co. ........................ 19,824 825,174
Unicom Corp. ............................... 15,235 534,177
-----------
15,232,443
-----------
ELECTRICAL EQUIPMENT (3.9%)
AMP Inc. ................................... 15,476 531,987
Emerson Electric Co. ....................... 31,436 1,895,984
General Electric Co. (d) ................... 230,968 21,018,088
General Signal Corp. ....................... 3,069 110,484
Grainger (W.W.), Inc. ...................... 6,965 346,944
Honeywell Inc. ............................. 9,029 754,486
Raychem Corp. .............................. 5,911 174,744
Thomas & Betts Corp. ....................... 3,881 191,139
-----------
25,023,856
-----------
ELECTRONIC--DEFENSE (0.0%) (b)
EG&G, Inc. ................................. 3,298 98,940
-----------
ELECTRONIC--INSTRUMENTATION (0.1%)
Perkin-Elmer Corp. (The) ................... 3,408 211,935
Tektronix, Inc. ............................ 3,610 127,704
-----------
339,639
-----------
ELECTRONIC--SEMICONDUCTORS (2.3%)
Advanced Micro
Devices, Inc. (a) ........................ 10,201 174,055
Applied Materials, Inc. (a) ............... 26,017 767,501
Intel Corp. ................................ 120,266 8,914,717
KLA-Tencor Corp. (a) ....................... 6,153 170,361
LSI Logic Corp. (a) ........................ 9,969 229,910
Micron Technology, Inc. (a) ............... 15,111 374,942
Motorola, Inc. ............................. 42,423 2,229,859
National Semiconductor
Corp. (a) ................................ 11,498 151,630
Texas Instruments Inc. ..................... 27,642 1,611,874
-----------
14,624,849
-----------
ENGINEERING & CONSTRUCTION (0.1%)
Fluor Corp. ................................ 5,867 299,217
Foster Wheeler Corp. ....................... 2,856 61,225
-----------
360,442
-----------
ENTERTAINMENT (1.6%)
King World Productions, Inc. (a) ........... 5,200 132,600
Time Warner Inc. ........................... 41,897 3,579,575
Viacom Inc. Class B (a) .................... 25,287 1,472,968
Walt Disney Co. (The) ...................... 48,323 5,076,935
-----------
10,262,078
-----------
FINANCIAL--MISCELLANEOUS (3.6%)
American Express Co. ....................... 32,701 3,727,914
American General Corp. ..................... 17,900 1,274,256
Associates First
Capital Corp. Class A .................... 24,526 1,885,436
Capital One Financial Corp. ................ 4,600 571,263
Fannie Mae ................................. 73,544 4,467,798
Franklin Resources Inc. .................... 17,867 964,818
Freddie Mac ................................ 48,118 2,264,553
Green Tree Financial Corp. ................. 9,463 405,135
MBIA Inc. .................................. 6,973 522,104
MBNA Corp. ................................. 35,565 1,173,645
Morgan Stanley, Dean Witter,
Discover & Co. ........................... 42,542 3,887,275
SLM Holding Corp. .......................... 11,800 578,200
SunAmerica Inc. ............................ 13,865 796,371
Transamerica Corp. ......................... 4,521 520,480
-----------
23,039,248
-----------
FOOD DISTRIBUTORS (0.2%)
Cardinal Health, Inc. ...................... 7,698 721,687
SUPERVALU Inc. ............................. 4,240 188,150
SYSCO Corp. ................................ 23,995 614,872
-----------
1,524,709
-----------
FOODS (2.4%)
Bestfoods .................................. 20,486 1,189,468
Campbell Soup Co. .......................... 32,266 1,714,131
ConAgra, Inc. .............................. 34,036 1,078,516
General Mills, Inc. ........................ 11,186 764,843
Heinz (H.J.) Co. ........................... 25,935 1,455,602
Hershey Foods Corp. ........................ 10,125 698,625
Kellogg Co. ................................ 29,063 1,091,679
Quaker Oats Co. (The) ...................... 9,732 534,652
Ralston-Ralston Purina Group ............... 7,479 873,640
Sara Lee Corp. ............................. 33,150 1,854,328
Unilever, N.V .............................. 45,249 3,571,843
Wrigley (Wm.) Jr. Co. ...................... 8,164 800,072
-----------
15,627,399
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
GOLD (0.2%)
Barrick Gold Corp. ......................... 26,441 $ 507,337
Battle Mountain Gold Co. ................... 16,304 96,805
Homestake Mining Co. ....................... 14,950 155,106
Newmont Mining Corp. ....................... 11,065 261,411
Placer Dome Inc. ........................... 17,758 208,656
-----------
1,229,315
-----------
HARDWARE & TOOLS (0.1%)
Black & Decker Corp. (The) ................. 6,626 404,186
Snap-on Inc. ............................... 4,144 150,220
Stanley Works (The) ........................ 6,266 260,431
-----------
814,837
-----------
HEALTH CARE--DIVERSIFIED (4.5%)
Abbott Laboratories ........................ 109,422 4,472,624
Allergan, Inc. ............................. 4,576 212,212
American Home Products Corp. ............... 93,065 4,816,114
Bristol-Myers Squibb Co. ................... 70,535 8,107,117
Johnson & Johnson .......................... 95,338 7,031,177
Mallinckrodt Inc. .......................... 5,208 154,613
Warner-Lambert Co. ......................... 58,081 4,029,369
-----------
28,823,226
-----------
HEALTH CARE--HMOs (0.2%)
Humana Inc. (a) ............................ 11,805 368,168
United Healthcare Corp. .................... 13,644 866,394
-----------
1,234,562
-----------
HEALTH CARE--MISCELLANEOUS (0.4%)
ALZA Corp. (a) ............................. 6,022 260,452
Amgen Inc. (a) ............................. 18,054 1,180,280
HEALTHSOUTH Corp. (a) ...................... 28,380 757,391
Manor Care, Inc. ........................... 4,459 171,393
-----------
2,369,516
-----------
HEAVY DUTY TRUCKS & PARTS (0.3%)
Cummins Engine Co., Inc. ................... 2,810 144,013
Dana Corp. ................................. 7,529 402,801
Eaton Corp. ................................ 5,078 394,815
ITT Industries, Inc. ....................... 8,352 312,156
Navistar International Corp. (a) ........... 4,895 141,343
PACCAR Inc. ................................ 5,528 288,838
-----------
1,683,966
-----------
HOMEBUILDING (0.1%)
Centex Corp. ............................... 4,234 159,833
Kaufman & Broad Home Corp. ................. 2,777 88,170
Pulte Corp. ................................ 3,034 90,641
-----------
338,644
-----------
HOSPITAL MANAGEMENT (0.3%)
Columbia/HCA Healthcare Corp. .............. 45,638 1,329,207
Tenet Healthcare Corp. (a) ................. 21,818 681,812
-----------
2,011,019
-----------
HOTEL/MOTEL (0.2%)
Harrah's Entertainment, Inc. (a) ........... 7,113 165,377
Hilton Hotels Corp. ........................ 17,491 498,494
Marriott International, Inc.
Class A .................................. 18,089 585,631
-----------
1,249,502
-----------
HOUSEHOLD--FURNISHINGS & APPLIANCES (0.1%)
Armstrong World
Industries, Inc. ......................... 2,729 183,866
Maytag Corp. ............................... 6,761 333,824
Whirlpool Corp. ............................ 5,209 358,119
-----------
875,809
-----------
HOUSEHOLD PRODUCTS (2.1%)
Clorox Co. (The) ........................... 7,273 693,662
Colgate-Palmolive Co. ...................... 20,979 1,846,152
Fort James Corp. ........................... 15,643 696,113
Kimberly-Clark Corp. ....................... 39,497 1,811,925
Procter & Gamble Co. (The) ................. 94,985 8,649,572
-----------
13,697,424
-----------
HOUSEWARES (0.2%)
Fortune Brands, Inc. ....................... 12,219 469,668
Newell Co. ................................. 11,158 555,808
Rubbermaid Inc. ............................ 10,666 353,978
Tupperware Corp. ........................... 4,412 124,087
-----------
1,503,541
-----------
INSURANCE BROKERS (0.3%)
Aon Corp. .................................. 11,931 838,153
Marsh & McLennan Cos., Inc. ................ 18,113 1,094,704
-----------
1,932,857
-----------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
INVESTMENT BANK/BROKERAGE (0.6%)
Bear Stearns Cos., Inc. (The) .............. 7,900 $ 449,313
Lehman Brothers Holdings Inc. .............. 8,424 653,386
Merrill Lynch & Co., Inc. .................. 24,496 2,259,756
Schwab (Charles) Corp. (The) ............... 18,971 616,557
-----------
3,979,012
-----------
LEISURE TIME (0.0%) (b)
Brunswick Corp. ............................ 7,001 173,275
Mirage Resorts, Inc. (a) ................... 12,726 271,223
-----------
444,498
-----------
LIFE INSURANCE (0.5%)
Aetna Inc. ................................. 10,316 785,305
Conseco, Inc. .............................. 13,345 623,879
Jefferson-Pilot Corp. ...................... 7,556 437,776
Lincoln National Corp. ..................... 7,199 657,809
Torchmark Corp. ............................ 9,804 448,533
UNUM Corp. ................................. 9,842 546,231
-----------
3,499,533
-----------
MACHINE TOOLS (0.0%) (b)
Cincinnati Milacron Inc. ................... 2,802 68,124
-----------
MACHINERY--DIVERSIFIED (0.7%)
Briggs & Stratton Corp. .................... 1,630 61,023
Case Corp. ................................. 5,345 257,896
Caterpillar Inc. ........................... 25,977 1,373,534
Cooper Industries, Inc. .................... 8,637 474,495
Deere & Co. ................................ 17,558 928,379
Harnischfeger Industries, Inc. ............. 3,390 95,980
Ingersoll-Rand Co. ......................... 11,722 516,501
NACCO Industries, Inc. Class A ............. 599 77,421
Thermo Electron Corp. (a) .................. 11,264 385,088
Timken Co. (The) ........................... 4,442 136,869
-----------
4,307,186
-----------
MAJOR REGIONAL BANKS (4.3%)
Banc One Corp. ............................. 49,739 2,776,058
Bank of New York Co., Inc. (The) ........... 26,780 1,625,211
BankBoston Corp. ........................... 20,858 1,160,226
BB&T Corp. ................................. 10,014 677,197
Comerica Inc. .............................. 11,232 744,120
Fifth Third Bancorp ........................ 18,611 1,172,493
Fleet Financial Group, Inc. ................ 20,135 1,681,273
Huntington Bancshares Inc. ................. 13,594 455,399
KeyCorp .................................... 31,212 1,111,928
Mellon Bank Corp. .......................... 18,418 1,282,353
Mercantile Bancorp Inc. .................... 9,399 473,475
National City Corp. ........................ 23,194 1,646,774
Northern Trust Corp. ....................... 7,929 604,586
Norwest Corp. .............................. 53,627 2,004,309
PNC Bank Corp. ............................. 21,326 1,147,605
Republic New York Corp. .................... 7,671 482,794
State Street Corp. ......................... 11,387 791,396
Summit Bancorp ............................. 12,582 597,645
SunTrust Banks, Inc. ....................... 14,924 1,213,508
Synovus Financial Corp. .................... 18,624 442,320
U.S. Bancorp ............................... 52,695 2,265,885
Wachovia Corp. ............................. 14,622 1,235,559
Wells Fargo & Co. .......................... 6,034 2,226,546
-----------
27,818,660
-----------
MANUFACTURED HOUSING (0.0%) (b)
Fleetwood Enterprises, Inc. ................ 2,540 101,600
-----------
MANUFACTURING--DIVERSIFIED (1.2%)
Aeroquip-Vickers, Inc. ..................... 1,974 115,232
AlliedSignal Inc. .......................... 40,068 1,778,018
Crane Co. .................................. 3,275 159,042
Dover Corp. ................................ 15,753 539,540
Illinois Tool Works Inc. ................... 17,654 1,177,301
Johnson Controls, Inc. ..................... 5,831 332,731
Millipore Corp. ............................ 3,074 83,767
Pall Corp. ................................. 8,913 182,717
Parker-Hannifin Corp. ...................... 7,915 301,759
Sealed Air Corp. (a) ....................... 5,829 214,216
Tyco International Ltd. .................... 41,381 2,607,003
-----------
7,491,326
-----------
MEDICAL PRODUCTS (1.0%)
Bard (C.R.), Inc. .......................... 4,070 154,914
Bausch & Lomb Inc. ......................... 3,926 196,791
Baxter International Inc. .................. 19,793 1,065,111
Becton, Dickinson & Co. .................... 8,660 672,232
Biomet, Inc. ............................... 7,826 258,747
Boston Scientific Corp. (a) ............... 13,701 981,334
Guidant Corp. .............................. 10,675 761,261
Medtronic, Inc. ............................ 33,293 2,122,429
St. Jude Medical, Inc. (a) ................. 5,933 218,409
United States Surgical Corp. ............... 5,245 239,303
-----------
6,670,531
-----------
</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)
METALS--MISCELLANEOUS (0.1%)
ASARCO Inc. ................................ 2,919 $ 64,948
Cyprus Amax Minerals Co. ................... 6,652 88,139
Freeport-McMoRan
Copper & Gold Inc. Class B ............... 12,815 194,628
Inco Ltd. .................................. 11,817 161,007
Phelps Dodge Corp. ......................... 4,280 244,762
-----------
753,484
-----------
MISCELLANEOUS (1.3%)
AirTouch Communications, Inc. (a) .......... 40,594 2,372,212
American Greetings Corp. Class A ........... 5,298 269,867
Archer-Daniels-Midland Co. ................. 40,395 782,653
Corning Inc. ............................... 16,418 570,525
Harcourt General, Inc. ..................... 5,008 297,976
Harris Corp. ............................... 5,622 251,233
Jostens, Inc. .............................. 2,613 63,039
Minnesota Mining &
Manufacturing Co. ........................ 28,676 2,356,809
Nextel Communications, Inc.
Class A (a) .............................. 19,433 483,396
Pioneer Hi-Bred
International, Inc. ...................... 17,238 713,222
TRW Inc. ................................... 8,712 475,893
-----------
8,636,825
-----------
MONEY CENTER BANKS (4.2%)
BankAmerica Corp. .......................... 48,450 4,187,897
Bankers Trust Corp. ........................ 6,978 809,884
Chase Manhattan Bank (The) ................. 60,552 4,571,676
Citicorp ................................... 32,046 4,782,865
First Chicago NBD Corp. .................... 20,374 1,805,646
First Union Corp. .......................... 68,731 4,003,581
Morgan (J.P.) & Co., Inc. .................. 12,631 1,479,406
NationsBank Corp. .......................... 67,957 5,198,710
-----------
26,839,665
-----------
MULTI-LINE INSURANCE (2.2%)
American International
Group, Inc. .............................. 49,586 7,239,556
CIGNA Corp. ................................ 15,304 1,055,976
Hartford Financial Services
Group, Inc. (The) ........................ 8,328 952,515
Travelers Group Inc. ....................... 81,564 4,944,817
-----------
14,192,864
-----------
NATURAL GAS DISTRIBUTORS & PIPELINES (0.8%)
Coastal Corp. (The) ........................ 7,460 520,801
Columbia Energy Group ...................... 5,830 324,322
Consolidated Natural Gas Co. ............... 6,713 395,228
Eastern Enterprises ........................ 1,406 60,282
Enron Corp. ................................ 23,282 1,258,683
NICOR Inc. ................................. 3,415 137,027
ONEOK, Inc. ................................ 2,221 88,562
Peoples Energy Corp. ....................... 2,501 96,601
Sempra Energy (a) .......................... 17,620 488,949
Sonat Inc. ................................. 7,777 300,387
Williams Cos., Inc. (The) .................. 30,036 1,013,715
-----------
4,684,557
-----------
OFFICE EQUIPMENT & SUPPLIES (0.5%)
Moore Corp. Ltd. ........................... 6,232 82,574
Pitney Bowes Inc. .......................... 19,371 932,229
Xerox Corp. ................................ 23,301 2,367,964
---------
3,382,767
---------
OIL & GAS DRILLING (0.0%) (b)
Helmerich & Payne, Inc. .................... 3,441 76,562
Rowan Cos., Inc. (a) ....................... 6,170 119,930
---------
196,492
---------
OIL--EXPLORATION & PRODUCTION (0.2%)
Anadarko Petroleum Corp. ................... 4,244 285,144
Apache Corp. ............................... 6,983 219,965
Burlington Resources Inc. .................. 12,582 541,812
Oryx Energy Co. (a) ........................ 7,490 165,716
Union Pacific Resources
Group, Inc. .............................. 17,835 313,227
---------
1,525,864
---------
OIL--INTEGRATED DOMESTIC (0.9%)
Amerada Hess Corp. ......................... 6,493 352,651
Ashland Inc. ............................... 5,310 274,129
Atlantic Richfield Co. ..................... 22,674 1,771,406
Kerr-McGee Corp. ........................... 3,368 194,923
Occidental Petroleum Corp. ................. 26,066 703,782
Pennzoil Co. ............................... 3,353 169,746
Phillips Petroleum Co. ..................... 18,492 891,083
Sun Co., Inc. .............................. 6,650 258,103
Unocal Corp. ............................... 17,133 612,505
USX-Marathon Group ......................... 20,531 704,470
---------
5,932,798
---------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
OIL--INTEGRATED INTERNATIONAL (5.3%)
Amoco Corp. ................................ 68,066 $ 2,833,247
Chevron Corp. .............................. 46,351 3,850,030
Exxon Corp. ................................ 173,511 12,373,503
Mobil Corp. ................................ 55,559 4,257,208
Royal Dutch Petroleum Co. .................. 152,061 8,334,844
Texaco Inc. ................................ 38,352 2,289,135
-----------
33,937,967
-----------
OIL--WELL EQUIPMENT & SERVICES (0.7%)
Baker Hughes Inc. .......................... 11,909 411,605
Dresser Industries, Inc. ................... 12,380 545,494
Halliburton Co. ............................ 18,622 829,843
McDermott International, Inc. .............. 4,224 145,464
Schlumberger Ltd. .......................... 35,346 2,414,573
Western Atlas Inc. (a) ..................... 3,773 320,233
-----------
4,667,212
-----------
PAPER & FOREST PRODUCTS (0.6%)
Boise Cascade Corp. ........................ 3,895 127,561
Champion International Corp ................ 6,754 332,212
Georgia-Pacific Corp. ...................... 6,451 380,206
International Paper Co. .................... 21,799 937,357
Louisiana-Pacific Corp. .................... 7,724 140,963
Mead Corp. (The) ........................... 7,344 233,172
Potlatch Corp. ............................. 2,010 84,420
Union Camp Corp. ........................... 4,869 241,624
Westvaco Corp. ............................. 7,188 203,061
Weyerhaeuser Co. ........................... 14,009 647,041
Willamette Industries, Inc. ................ 7,820 250,240
-----------
3,577,857
-----------
PERSONAL LOANS (0.4%)
Beneficial Corp. ........................... 3,814 584,257
Countrywide Credit Industries, Inc.......... 7,603 385,852
Household International, Inc. .............. 22,816 1,135,096
Providian Financial Corp. .................. 6,786 533,125
-----------
2,638,330
-----------
PHOTOGRAPHY/IMAGING (0.3%)
Eastman Kodak Co. .......................... 22,848 1,669,332
IKON Office Solutions, Inc. ................ 9,637 140,339
Polaroid Corp. ............................. 3,221 114,547
----------
1,924,218
----------
POLLUTION CONTROL (0.3%)
Browning-Ferris Industries, Inc. ........... 13,054 453,627
Waste Management, Inc. ..................... 33,656 1,177,960
----------
1,631,587
----------
PROPERTY--CASUALTY INSURANCE (1.3%)
Allstate Corp. (The) ....................... 29,773 2,726,090
Chubb Corp. (The) .......................... 12,011 965,384
Cincinnati Financial Corp. ................. 11,822 453,669
General Re Corp. ........................... 5,416 1,372,956
Loews Corp. ................................ 8,131 708,414
MGIC Investment Corp. ...................... 8,076 460,837
Progressive Corp. (The) .................... 5,046 711,486
SAFECO Corp. ............................... 9,866 448,286
St. Paul Cos., Inc. (The) .................. 16,677 701,476
----------
8,548,598
----------
PUBLISHING (0.1%)
McGraw-Hill Cos., Inc. (The) ............... 7,065 576,239
Meredith Corp. ............................. 3,704 173,857
----------
750,096
----------
PUBLISHING--NEWSPAPER (0.6%)
Dow Jones & Co., Inc. ...................... 6,509 362,877
Gannett Co., Inc. .......................... 20,008 1,421,818
Knight-Ridder, Inc. ........................ 5,626 309,782
New York Times Co. (The) Class A ........... 6,849 542,783
Times Mirror Co. (The) Class A ............. 6,297 395,924
Tribune Co. ................................ 8,600 591,787
----------
3,624,971
----------
RAILROADS (0.5%)
Burlington Northern Santa Fe Corp. ......... 11,205 1,100,191
CSX Corp. .................................. 15,546 707,343
Norfolk Southern Corp. ..................... 26,876 801,241
Union Pacific Corp. ........................ 17,449 769,937
----------
3,378,712
----------
RESTAURANTS (0.6%)
Darden Restaurants, Inc. ................... 10,142 161,004
McDonald's Corp. ........................... 48,708 3,360,852
Tricon Global Restaurants, Inc.(a) ......... 10,811 342,574
Wendy's International, Inc. ................ 9,249 217,351
----------
4,081,781
----------
</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)
RETAIL STORES--APPAREL (0.4%)
Gap, Inc. (The) ............................ 27,884 $1,718,352
Limited, Inc. (The) ........................ 16,062 532,054
TJX Cos., Inc. (The) ....................... 22,822 550,580
----------
2,800,986
----------
RETAIL STORES--DEPARTMENT (0.6%)
Dillard's, Inc. Class A .................... 7,648 316,914
Federated Department
Stores, Inc. (a) ......................... 14,948 804,389
May Department Stores Co. (The) ............ 16,488 1,079,964
Mercantile Stores Co., Inc. ................ 2,584 203,975
Nordstrom, Inc. ............................ 5,457 421,553
Penney (J.C.) Co., Inc. .................... 17,675 1,278,123
----------
4,104,918
----------
RETAIL STORES--DRUGS (0.3%)
Longs Drug Stores Corp. .................... 2,731 78,858
Rite Aid Corp. ............................. 18,251 685,553
Walgreen Co. ............................... 35,202 1,454,282
----------
2,218,693
----------
RETAIL STORES--FOOD (0.5%)
Albertson's, Inc. .......................... 17,389 900,968
American Stores Co. ........................ 19,273 466,166
Giant Food Inc. Class A .................... 4,291 184,781
Great Atlantic & Pacific
Tea Co., Inc. (The) ...................... 2,652 87,682
Kroger Co. (The) (a) ....................... 18,190 779,896
Winn-Dixie Stores, Inc. .................... 10,540 539,516
-----------
2,959,009
-----------
RETAIL STORES--GENERAL MERCHANDISE (2.1%)
Dayton Hudson Corp. ........................ 30,962 1,501,657
Kmart Corp. (a) ............................ 34,600 666,050
Sears, Roebuck & Co. ....................... 27,730 1,693,263
Wal-Mart Stores, Inc. ...................... 159,234 9,673,466
-----------
13,534,436
-----------
RETAIL STORES--SPECIALTY (1.5%)
AutoZone, Inc. (a) ......................... 10,724 342,498
Circuit City Stores, Inc.--
Circuit City Group ....................... 6,965 326,484
Consolidated Stores Corp. (a) .............. 7,571 274,449
Costco Cos., Inc. (a) ...................... 15,255 962,018
CVS Corp. .................................. 27,231 1,060,307
Home Depot, Inc. (The) ..................... 52,089 4,326,643
Lowe's Cos., Inc. .......................... 24,878 1,009,114
Pep Boys--Manny, Moe & Jack (The) .......... 4,438 84,045
Tandy Corp. ................................ 7,137 378,707
Toys "R" Us, Inc. (a) ...................... 19,744 465,218
Venator Group, Inc. (a) .................... 9,546 182,567
-----------
9,412,050
-----------
SAVINGS & LOANS (0.3%)
Ahmanson (H.F.) & Co. ...................... 7,796 553,516
Golden West Financial Corp. ................ 4,116 437,582
Washington Mutual, Inc. .................... 27,483 1,193,793
-----------
2,184,891
-----------
SHOES (0.2%)
NIKE, Inc. Class B ......................... 20,445 995,416
Reebok International Ltd. (a) .............. 3,932 108,867
-----------
1,104,283
-----------
SPECIALIZED SERVICES (0.8%)
Block (H&R), Inc. .......................... 7,391 311,346
Cendant Corp. (a) .......................... 60,308 1,258,929
Cognizant Corp. ............................ 11,554 727,902
Dun & Bradstreet Corp. (The) ............... 12,029 434,548
Ecolab Inc. ................................ 9,069 281,139
Interpublic Group of Cos.,Inc.(The)......... 9,713 589,458
Laidlaw Inc. ............................... 23,265 283,542
National Service Industries, Inc. .......... 3,030 154,151
Omnicom Group Inc. ......................... 12,132 605,083
Service Corp. International ................ 18,161 778,653
-----------
5,424,751
-----------
SPECIALTY PRINTING (0.1%)
Deluxe Corp. ............................... 5,805 207,892
Donnelley (R.R.) & Sons Co. ................ 10,068 460,611
-----------
668,503
-----------
STEEL (0.2%)
Allegheny Teledyne Inc. .................... 13,852 316,864
Armco Inc. (a) ............................. 7,620 48,578
Bethlehem Steel Corp. (a) .................. 9,009 112,049
Nucor Corp. ................................ 6,209 285,614
USX Corp.--U.S. Steel Group, Inc. .......... 6,050 199,650
Worthington Industries, Inc. ............... 6,828 102,847
-----------
1,065,602
-----------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===========================
<S> <C> <C>
COMMON STOCKS (Continued)
TELECOMMUNICATIONS--LONG DISTANCE (2.4%)
AT&T Corp. ................................. 115,167 $ 6,578,915
MCI Communications Corp. ................... 51,333 2,983,731
Sprint Corp. ............................... 30,519 2,151,589
WorldCom, Inc. (a) ......................... 73,211 3,546,158
-----------
15,260,393
-----------
TELEPHONE (3.9%)
ALLTEL Corp. ............................... 19,062 886,383
Ameritech Corp. ............................ 78,065 3,503,167
Bell Atlantic Corp. ........................ 109,938 5,015,921
BellSouth Corp. ............................ 70,170 4,710,161
Frontier Corp. ............................. 12,176 383,544
GTE Corp. .................................. 68,238 3,795,739
SBC Communications Inc. .................... 130,367 5,214,680
US West Communications Group ............... 35,542 1,670,466
-----------
25,180,061
-----------
TEXTILES--APPAREL MANUFACTURERS (0.2%)
Fruit of the Loom, Inc.
Class A (a) .............................. 5,177 171,812
Liz Claiborne, Inc. ........................ 4,855 253,674
Russell Corp. .............................. 2,523 76,163
Springs Industries, Inc. Class A ........... 1,378 63,560
Valley Forge Corp. ......................... 8,594 442,054
-----------
1,007,263
-----------
TOBACCO (1.1%)
Philip Morris Cos. Inc. .................... 172,219 6,781,123
UST Inc. ................................... 13,094 353,538
-----------
7,134,661
-----------
TOYS (0.2%)
Hasbro, Inc. ............................... 9,357 367,847
Mattel, Inc. ............................... 20,783 879,381
-----------
1,247,228
-----------
TRANSPORTATION--MISCELLANEOUS(0.1%)
FDX Corp. (a) .............................. 10,306 646,702
Ryder System, Inc. ......................... 5,298 167,218
-----------
813,920
-----------
Total Common Stocks
(Cost $433,940,259) ...................... 636,493,920(c)
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (1.2%)
COMMERCIAL PAPER (0.4%)
Bridgestone/Firestone, Inc. ................
6.50%, due 7/1/98 (d) .................... $ 2,600,000 $ 2,600,000
-------------
Total Commercial Paper
(Cost $2,600,000) ........................ 2,600,000
-------------
U.S. GOVERNMENT (0.8%)
United States Treasury Bills
4.82%, due 8/6/98 (d) .................... 3,000,000 2,985,567
4.86%, due 8/13/98 (d) ................... 2,500,000 2,485,488
-------------
Total U.S. Government
(Cost $5,471,054) ........................ 5,471,055
-------------
Total Short-Term Investments
(Cost $8,071,054) ........................ 8,071,055
-------------
Total Investments
(Cost $442,011,313) (f) .................. 100.0% 644,564,975(g)
Liabilities in Excess of
Cash and Other Assets .................... (0.0) (175,424)
------------- -------------
Net Assets ................................. 100.0% $ 644,389,551
============= =============
</TABLE>
<TABLE>
<CAPTION>
Shares
========
<S> <C> <C>
SHORT POSITIONS (-0.0%) (b)
COMMON STOCKS (-0.0%) (b)
ADVERTISING/MARKETING (-0.0%) (b)
R.H. Donnelley Corp. W/I (e) ............... (12,029) $(36,839)
---------
BROADCAST/MEDIA (-0.0%) (b)
Nielsen Media Research, Inc. ...............
W/I (e) .................................. (11,554) (50,549)
---------
Total Short Positions
(Proceeds $96,358) (c) ................... $(87,388)
=========
</TABLE>
<TABLE>
<CAPTION>
Contracts Unrealized
Long Appreciation (h)
===================================
<S> <C> <C>
FUTURES CONTRACTS (0.0%) (b)
Standard & Poor's 500
September 1998 ........................... 16 $56,113
Mini September 1998 ...................... 2 849
-------
Total Futures Contracts
(Settlement Value $4,686,300) (c) ........ $56,962
=======
</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
- ----------
(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 99.5% of net assets.
(d) Segregated as collateral for futures contracts.
(e) W/I (when-issued security)--this security is a commitment by the Fund to
sell at a future settlement date.
(f) The cost for Federal income tax purposes is $441,981,127.
(g) At June 30, 1998, net unrealized appreciation was $202,496,460 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 $206,850,870 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $4,354,410.
(h) Represents the difference between the value of the contracts at the time
they were opened and the value at June 30, 1998.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $442,011,313) .......................................... $644,564,975
Cash ....................................................................................................... 13,137
Receivables:
Fund shares sold ......................................................................................... 3,965,277
Investment securities sold ............................................................................... 3,018,619
Dividends and interest ................................................................................... 665,272
Unamortized organization expense ........................................................................... 30,843
------------
Total assets ............................................................................................ 652,258,123
------------
LIABILITIES:
Securities sold short (proceeds $96,358) ................................................................... 87,388
Payables:
Investment securities purchased .......................................................................... 6,388,242
Fund shares redeemed ..................................................................................... 767,819
MainStay Management ...................................................................................... 253,880
NYLIFEDistributors ....................................................................................... 126,940
Transfer agent ........................................................................................... 71,628
NYLIFE Inc. .............................................................................................. 33,000
Custodian ................................................................................................ 24,111
Trustees ................................................................................................. 2,261
Accrued expenses ........................................................................................... 83,901
Variation margin payable on futures contracts .............................................................. 29,402
------------
Total liabilities ....................................................................................... 7,868,572
------------
Net Assets ................................................................................................. $644,389,551
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)unlimited number of
shares authorized .......................................................................................... $ 177,992
Additional paid-in capital ................................................................................. 430,342,790
Accumulated undistributed net investment income ............................................................ 2,246,549
Accumulated undistributed net realized gain on investments ................................................. 9,002,626
Net unrealized appreciation on investments ................................................................. 202,619,594
------------
Net assets applicable to outstanding shares ................................................................ $644,389,551
============
Shares of beneficial interest outstanding .................................................................. 17,799,204
============
Net asset value per share outstanding ...................................................................... $ 36.20
Maximum sales charge (3.00% of offering price) ............................................................. 1.12
------------
Maximum offering price per share outstanding ............................................................... $ 37.32
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .................................................................................. $ 3,781,768
Interest ....................................................................................... 892,719
------------
Total income .................................................................................. 4,674,487
------------
Expenses:
Management ..................................................................................... 1,344,405
Distribution ................................................................................... 672,202
Transfer agent ................................................................................. 362,050
Shareholder communication ...................................................................... 68,265
Registration ................................................................................... 62,801
Custodian ...................................................................................... 36,540
Professional ................................................................................... 25,256
Trustees ....................................................................................... 6,424
Amortization of organization expense ........................................................... 6,188
Miscellaneous .................................................................................. 30,886
------------
Total expenses before reimbursement ........................................................... 2,615,017
Expense reimbursement from Manager ............................................................... (172,008)
------------
Net expenses .................................................................................. 2,443,009
------------
Net investment income ............................................................................ 2,231,478
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions .......................................................................... 2,641,701
Futures transactions ........................................................................... 2,228,559
------------
Net realized gain on investments ................................................................. 4,870,260
------------
Net change in unrealized appreciation on investments:
Security transactions .......................................................................... 75,432,622
Futures transactions ........................................................................... 14,017
------------
Net unrealized gain on investments ............................................................... 75,446,639
------------
Net realized and unrealized gain on investments .................................................. 80,316,899
------------
Net increase in net assets resulting from operations ............................................. $ 82,548,377
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $28,973.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
----------- -----------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .......................................................................... $ 2,231,478 $ 4,148,994
Net realized gain on investments ............................................................... 4,870,260 8,632,619
Net change in unrealized appreciation on investments ........................................... 75,446,639 73,820,854
------------- -------------
Net increase in net assets resulting from operations ........................................... 82,548,377 86,602,467
------------- -------------
Dividends and distributions to shareholders:
From net investment income ..................................................................... -- (4,133,923)
From net realized gain on investments .......................................................... -- (5,707,208)
------------- -------------
Total dividends and distributions to shareholders ............................................. -- (9,841,131)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares ............................................................... 213,946,106 180,823,270
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions -- 9,532,058
213,946,106 190,355,328
------------- -------------
Cost of shares redeemed .......................................................................... (87,793,738) (57,177,469)
------------- -------------
Increase in net assets derived from capital share transactions ................................ 126,152,368 133,177,859
------------- -------------
Net increase in net assets .................................................................... 208,700,745 209,939,195
NET ASSETS:
Beginning of period .............................................................................. 435,688,806 225,749,611
------------- -------------
End of period .................................................................................... $ 644,389,551 $ 435,688,806
============= =============
Accumulated undistributed net investment income at end of period ................................. $ 2,246,549 $ 15,071
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Six months September 1
ended Year ended December 31 through Year ended August 31
June 30, ------------------------------------ December 31, -------------------
1998* 1997 1996 1995 1994** 1994 1993
-------- -------- -------- -------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $30.91 $23.37 $19.15 $14.09 $14.48 $13.84 $12.15
-------- -------- -------- -------- ------- ------- -------
Net investment income ................ 0.11 0.30 0.30 0.24 0.09 0.27 0.22
Net realized and unrealized
gain (loss) on investments ......... 5.18 7.24 3.92 4.82 (0.48) 0.37 1.47
-------- -------- -------- -------- ------- ------- -------
Total from investment operations ..... 5.29 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 ..... $36.20 $30.91 $23.37 $19.15 $14.09 $14.48 $13.84
======== ======== ======== ======== ======= ======= =======
Total investment return (a) .......... 17.11% 32.26% 22.04% 35.91% (2.68%) 4.59% 13.91%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ............. 0.83%+ 1.25% 1.8% 1.7% 2.0%+ 1.9% 1.9%
Expenses .......................... 0.91%+ 0.80% 0.8% 1.1% 0.9%+ 0.9% 0.9%
Expenses (before reimbursement) ... 0.97%+ 0.99% 1.0% 1.1% 0.9%+ 0.9% 0.9%
Portfolio turnover rate .............. 1% 3% 3% 4% 2% 12% 4%
Net assets at end of period (in 000's) $644,390 $435,689 $225,750 $109,308 $61,561 $62,828 $62,921
</TABLE>
- ----------
* Unaudited.
** 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.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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, and (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
25
<PAGE>
MainStay Equity Index Fund
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.
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.
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.
26
<PAGE>
Notes to Financial Statements unaudited (continued)
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. (the "Manager"), an indirect
wholly owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to Monitor Capital
Advisors, Inc. (the "Sub-Adviser"), a registered investment adviser and indirect
wholly-owned subsidiary of New York Life. Under the supervision of Trust's Board
of Trustees and the Manager, the Sub-Adviser is responsible for the day-to-day
portfolio management of 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%. For the period January 1, 1998 through March 31,
1998, 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 daily net assets. This expense limitation was
terminated on April 1, 1998. For the six months ended June 30, 1998, the Manager
earned $1,344,405 and reimbursed the Fund $172,008.
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.
Distribution Fees. The Trust, on behalf of the Fund, has a Distribution
Agreement with NYLIFE Distributors (the "Distributor"). The Fund has adopted a
Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1
under the 1940 Act.
Pursuant to the Plan, the Distributor receives payments from the Fund at an
annual rate of 0.25% of the average daily net assets of the Fund's shares, which
is an expense of the Fund for distribution or service activities as designated
by the Distributor.
The Plan provides that the distribution 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 $303,466 for the six months ended June 30, 1998.
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 share-
27
<PAGE>
MainStay Equity Index Fund
holder 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 six months
ended June 30, 1998 amounted to $350,158.
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 $7,277 for the six months ended
June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the six month period ended June 30, 1998, purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $139,757 and $5,620,
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 June 30, 1998.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
---------------- -----------------
<S> <C> <C>
Shares sold ........................................................... 6,258 6,514
Shares issued in reinvestment of dividends and distributions .......... -- 324
------ ------
6,258 6,838
Shares redeemed ....................................................... (2,553) (2,069)
Reduction of shares due to reverse shares split ....................... -- (334)
------ ------
Net increase .......................................................... 3,705 4,435
====== ======
</TABLE>
- ----------
* Unaudited.
28
<PAGE>
Notes to Financial Statements unaudited (continued)
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.
29
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY INDEX FUND To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
30
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
31
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
32
<PAGE>
MainStay Equity Index Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MainStay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA07-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay International Equity Fund Highlights 3
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Country--Top 5 7
Portfolio Composition 9
Returns & Lipper Rankings 10
Top 10 Equity Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Unaudited Financial Statements 18
Notes to Financial Statements 22
The MainStay Funds 30
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay International Equity Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o International markets were divided in the first six months of 1998, with
most Asian stock markets down and most European markets providing positive
returns.
o Australia and New Zealand stock performance deteriorated along with Asian
markets, with problems intensified by declining prices in gold and other
commodities.
o In the U.K., the central bank increased interest rates to slow economic
growth, which made it more difficult for Britain to compete in the export
market.
o Overall, the Morgan Stanley Capital International EAFE Index* was up 15.93%
for the six months ended 6/30/98.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o The MainStay International Equity Fund returned 9.49% and 8.70% for Class A
shares and Class B shares, respectively, excluding all sales charges, for
the one-year period ended 6/30/98.
o Both share classes outperformed the Morgan Stanley Capital International
EAFE Index, which returned 15.93% during the six-month reporting period.
o The Fund benefited by shifting assets out of Asian markets and increasing
its weightings in core European markets.
o Both share classes outperformed the average Lipper+ international fund,
which returned 15.50% for the six months ended 6/30/98.
- ----------
* See footnote on page 4 for more information on the Morgan Stanley Capital
International EAFE Index.
+ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index
[THE FOLLOWING TABLES WERE REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Class A Shares SEC Returns: 1-Year 3.47%, since inception 7.14%
<TABLE>
<CAPTION>
Morgan Stanley Capital
International MainStay
Period end EAFE Index* International Equity Fund
- ---------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $ 10,000 $ 9,450
12/94 $ 9,586 $ 9,233
12/95 $ 10,661 $ 9,718
12/96 $ 11,306 $ 10,669
12/97 $ 11,507 $ 11,151
6/98 $ 13,340 $ 12,997
</TABLE>
Class B Shares SEC Returns: 1-Year 3.70%, since inception 7.56%
<TABLE>
<CAPTION>
Morgan Stanley Capital
International MainStay
Period end EAFE Index* International Equity Fund
- ---------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $ 10,000 $ 10,000
12/94 $ 9,586 $ 9,770
12/95 $ 10,661 $ 10,187
12/96 $ 11,306 $ 11,109
12/97 $ 11,507 $ 11,298
6/98 $ 13,340 $ 13,122
</TABLE>
- ----------
Past performance is no guarantee of future results. 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.
* The Morgan Stanley Capital International Europe, Australia, Far East
Index--the EAFE Index--is an unmanaged, capitalization-weighted index
containing approximately 1,200 equity securities of companies located
outside the U.S.
4
<PAGE>
Portfolio Management Discussion and Analysis
International equity markets showed highly divergent performance during the
first six months of 1998, with Europe outperforming and Asian markets continuing
to deteriorate. Japan officially announced that it was in recession, and the
Hong Kong stock market fell 26% in local currency terms during the reporting
period. Asian emerging markets had even more severe setbacks. Australia and New
Zealand, whose economies are largely dependent on commodities and Asian
commerce, also fared badly.
European stocks, on the other hand, surged ahead, with several markets posting
double-digit returns in the first half of the year. Finland was up 66.8% and
Spain rose 44.5%, both in local terms, during the reporting period. Other
European markets also had excellent performance, buoyed by low interest rates,
low inflation, ongoing corporate restructuring, and merger and acquisition
activity related to European Monetary Union (EMU).
In an effort to slow rapid growth, the Bank of England raised interest rates,
which dampened the competitive environment for British exports and raised
concerns about U.K. equities. Since the U.K. will not be among the initial
participants in European Monetary Union, its market movements may be less likely
to parallel those of EMU nations, where a common currency may cause a general
market convergence. The effects of the U.K.'s independent status remain to be
seen. Over the reporting period, the U.K. stock market advanced 14.1% in local
terms.
Given this context, how did the MainStay International Equity Fund perform in
the six months ended 6/30/98?
The MainStay International Equity Fund returned 16.55% and 16.14% for Class A
shares and Class B shares, respectively, excluding all sales charges, for the
six months ended 6/30/98. Both share classes outperformed the Morgan Stanley
Capital International EAFE Index,* which returned 15.93% over the same period.
Both share classes also outperformed the average Lippert+ international fund,
which returned 15.50% for the six months ended 6/30/98.
Why was the Fund able to outperform its peers?
The Fund came into 1998 well positioned for the market environment. Given the
continuing deterioration in Asian markets during the first six months of 1998,
we decided to reduce the Fund's Asian exposure, which had a positive impact on
performance. The proceeds of those sales were invested primarily in core
European markets, which also had a positive effect. In this respect, our
investment approach of focusing on strict country selection served the Fund very
well. The Fund also benefited from individual security selection within several
European markets and Japan.
Which countries provided the best results for the Fund?
In Europe, the best performing markets in which the Fund invested were Spain, up
44.5%, Belgium, up 43.9%, France, up 39.4%, Germany, up 37%, and Italy, up
33.9%, all in local terms. Unfortunately,
Recession
- ---------
A downturn in economic activity, typically defined by at least two consecutive
quarters of decline in a country's gross domestic product.
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.
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
- ----------
* See footnote on page 4 for more information on the Morgan Stanley Capital
International EAFE Index.
+ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
European
Monetary Union
- --------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- ------------------------------------------
<S> <C>
12/94 (2.30)
12/95 5.25
12/96 9.78
12/97 4.52
6/98 16.55
</TABLE>
Returns reflect the historical performance of the Class B shares for the period
ended 12/31/94.
See footnote * on page 10 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- ------------------------------------------
<S> <C>
12/94 (2.30)
12/95 4.27
12/96 9.05
12/97 3.78
6/98 16.14
</TABLE>
See footnote * on page 10 for more information on performance.
the Fund was not invested in Finland, which was up 66.8% in local terms during
the reporting period. Finland's stock market performance was largely the result
of a single stock, Nokia, a telecommunications company. We felt that an
overheating Finnish economy and the rapid expansion of this single stock made
Finland a high-risk market. Concerned about its pace of economic growth, the
Bank of Finland raised interest rates to slow growth and control inflation.
Which markets were the worst performers during the reporting period?
Fortunately, the Fund was not invested in the worst of the Asian markets. The
Fund did, however, have substantial investments in Japan, which was up 4% in
local terms, but down 2.6% in U.S. dollar terms.
6
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Country Percentage
- --------------------------------------------------
<S> <C>
United Kingdom 23.1%
Germany 14.8%
France 12.1%
Switzerland 8.6%
Netherlands 8.5%
All Other 32.9%
</TABLE>
Actual percentages will vary over time.
Did you change the Fund's weightings significantly during the first six months
of 1998?
Yes. The Fund went from a neutral weighting in Europe to a heavily overweighted
position of about 82% of the Fund's total net assets. At the same time, we
substantially reduced Asian holdings to just 8.3% of the Fund's net assets. In
doing so, we sold 6% of the Fund's net assets, and raised German investments
from 10% to 15% of the Fund's total net assets. We increased the Fund's holdings
in the Netherlands from 3% to 9% of net assets. We also increased overall
weightings in Belgium and France.
How did the Fund's currency exposure affect performance?
As the dollar rose relative to many foreign currencies, the Fund had
opportunities and disappointments. We took advantage of some volatile periods to
increase currency exposure in selected European markets, which had a modestly
positive impact on the Fund's performance. During the first six months of 1998,
the Fund also had some exposure to the Japanese yen and Australian dollar, which
had a negative impact on performance. Foreign exchange parity levels have been
established in European Monetary Union countries, and beginning in 1999, we
believe exchange rates will generally play less of a role in investment decision
making in those nations.
Which securities in the Fund were among the best performers?
Olivetti Group is an Italian company that manufactures office and computer
equipment and provides telecommunications services in several countries. In the
second quarter of 1998, Olivetti Computers Worldwide announced two powerful new
servers, offering advantages over existing corporate computer systems. The stock
soared 195.2% in local terms over the first half of the year.
Another stellar performer was KBC Bancassurance, a Belgian financial services
holding company that moved to create a financial service giant, including
Kreditbank,
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.
7
<PAGE>
Cera Bank, and ABB, an insurance group. In the first six months of 1998, the
stock rose 114.1% in local terms.
Mannesmann, an industrial products, machinery, and equipment manufacturer, rose
104.1% in local terms after completing a $1.85 billion secondary offering to
expand its telecommunications operations in France and Italy. Other stocks that
were among the Fund's top performers included Vodafone Group, Telefonica de
Espana, and British Telecommunications, up 71.5%, 67.7%, and 54.6%,
respectively, in local terms.
Were there other outstanding performers?
Yes. News Corp. is an international media company that grew 55.6% in local
terms, benefiting from existing operations and the formation of a multimedia
distributor in the United States.
Despite setbacks in Japan, the Fund benefited from individual stock selection
with Kawasaki Steel, up 40.4% in local terms, and Teijin, which rose 53.8% in
local terms when it decided to expand its polycarbonate resin capacity in
Singapore to service the electronics industry. In this case, weaker currencies
strengthened the company's export competitiveness, turning the Asian crisis into
a positive.
Did all of the Fund's stocks do that well?
No. Japanese retailer Daiei posted its first-ever pretax loss last year and
reversed its long-standing policy of not closing stores that generated losses.
The stock fell 39.8% in local terms during the reporting period. Nissan Motor
decided to reorganize and restructure to improve productivity and product
development. But in the meantime, the stock lost 19.1% in local terms. Tokyu,
Tokyo's leading railway company, felt the pressure of the nation's recession and
fell 16.5% in local terms, with impact across all lines of business, including
realestate leasing and hotel operations.
What prompted the sale of securities in the Fund?
As previously noted, we reduced the Fund's Asian exposure and increased its
European holdings to help avoid problem areas and invest where we felt prospects
for growth were more attractive. We also reduced the Fund's holdings in
Australia as we saw the potential impact of declining gold and commodity prices.
Both of these moves were positive for the Fund's performance.
Although Spain was up 44.5% over the first six months of 1998, we decreased the
Fund's Spanish holdings to a minimal weighting in the second quarter to take
profits and invest assets where we believed they could do more good. Since Spain
only advanced 1.6% during the second quarter, the decision to decrease Spanish
holdings to a minimal weighting was also positive for the Fund's performance.
What is your outlook going forward?
We continue to view Asia as a problem area, but as we noted with Teijin, even
difficult markets can provide opportunities for forward-thinking companies. The
Japanese economy has continued to disappoint us, but we believe that the
strongest companies may be the best performers there.
As European Monetary Union approaches, we remain relatively bullish on Europe,
where we believe restructurings, mergers, and strategic acquisitions will
continue to
8
<PAGE>
abound. The Fund will continue to seek long-term growth of capital commensurate
with an acceptable level of risk by investing in a wide array of non-U.S. equity
securities. As always, current income will remain a secondary objective.
Shigemi Takagi
Portfolio Manager
MacKay Shields Financial Corporation
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- -------------------------------------------------------
<S> <C>
Common Stocks 91.7%
Cash & Equivalents 8.3%
</TABLE>
Actual percentages will vary over time.
Past performance is no guarantee of future results.
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.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
1 year Life of Fund through 6/30/98
<S> <C> <C>
Class A 9.49% 8.75%
Class B 8.70% 7.99%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
1 year Life of Fund through 6/30/98
<S> <C> <C>
Class A 3.47% 7.14%
Class B 3.70% 7.56%
<CAPTION>
================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
================================================================================
1 year Life of Fund through 6/30/98
<S> <C> <C>
Class A 201 out of 155 out of
479 funds 253 funds
Class B 226 out of 132 out of
479 funds 222 funds
Average Lipper
international fund 8.18% 9.08%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $12.04 $0.0000 $0.0000
Class B $11.87 $0.0000 $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 six 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
6/30/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 9/13/94.
10
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 6/30/98
================================================================================
HOLDING COUNTRY AMOUNT
================================================================================
<S> <C> <C>
Royal Dutch Petroleum Co. Netherlands $2,617,293
Nestle S.A. Registered Switzerland 1,819,014
Glaxo Wellcome PLC United Kingdom 1,754,757
Allianz AG Registered Germany 1,732,820
British Petroleum Co. PLC United Kingdom 1,723,586
Novartis S.A. Registered Switzerland 1,664,018
Deutsche Telekom AG Germany 1,636,600
ING Groep N.V Netherlands 1,395,172
Lloyds TSB Group PLC United Kingdom 1,390,475
British Telecommunications PLC United Kingdom 1,387,042
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
================================================================================
SECURITY COUNTRY AMOUNT OF PURCHASE
================================================================================
<S> <C> <C>
Royal Dutch Petroleum Co. Netherlands $1,441,424
SmithKline Beecham PLC United Kingdom 1,111,547
France Telecom, S.A France 1,108,754
Hutchison Whampoa, Ltd. Hong Kong 981,501
CLP Holdings, Ltd. Hong Kong 945,114
Unilever CVA N.V Netherlands 748,555
Unilever PLC United Kingdom 434,041
Sumitomo Electric Industries Japan 413,891
Sumitomo Metal Mining Co. Japan 216,965
Sumitomo Bank, Ltd. Japan 208,157
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
================================================================================
SECURITY COUNTRY AMOUNT OF SALE
================================================================================
<S> <C> <C>
Hutchison Whampoa, Ltd. Hong Kong $1,086,947
Toyota Motor Corp. Japan 1,070,098
CLP Holdings, Ltd. Hong Kong 1,002,175
Norsk Hydro AS Norway 885,898
Telecom Corp. of New Zealand Ltd. New Zealand 605,598
Takeda Chemical Industries, Ltd. Japan 514,218
Sumitomo Bank, Ltd. Japan 424,959
Sumitomo Metal Mining Co. Japan 212,045
Sumitomo Electric Industries Japan 130,935
Sumitomo Corp. Japan 39,745
</TABLE>
- ----------
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.
11
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (91.7%)+
AUSTRALIA (1.4%)
Broken Hill Proprietary Co., Ltd.
(energy sources) ............................. 9,710 $ 82,076
Coles Myer, Ltd. (merchandising) ............... 7,268 28,354
Foster's Brewing Group, Ltd.
(beverages & tobacco) ........................ 15,280 35,956
National Australia Bank, Ltd.
(banking) .................................... 6,973 91,974
News Corp., Ltd.
(broadcasting & publishing) .................. 8,212 67,024
Pacific Dunlop, Ltd.
(multi-industry) ............................. 8,900 14,385
Telstra Corp., Ltd.
(telecommunications) ......................... 374,600 960,357
WMC, Ltd. (metals--nonferrous) ................. 8,600 25,882
-----------
1,306,008
-----------
BELGIUM (4.2%)
Delhaize-Le Lion, S.A.
(merchandising) .............................. 4,240 296,259
Electrabel, S.A.
(utilities-electrical & gas) ................. 2,410 683,285
Fortis AG (insurance) .......................... 2,610 666,341
Generale de Banque, S.A.
(banking) .................................... 700 519,676
KBC Bancassurance Holding N.V.
(banking) .................................... 2,800 250,573
PetroFina, S.A. (energy sources) ............... 800 328,400
Reunies Electrobel & Tractebel, S.A.
(multi-industry) ............................. 5,050 739,640
Solvay, S.A. Class A (chemicals) ............... 7,340 581,903
-----------
4,066,077
-----------
FRANCE (12.1%)
Alcatel Alsthom, S.A.
(electrical & electronics) ................... 2,567 522,654
AXA-UAP, S.A. (insurance) ...................... 7,258 816,312
Carrefour, S.A. (merchandising) ................ 1,155 730,708
Compagnie de Saint Gobain, S.A
(miscellaneous--materials &
commodities) ................................. 2,103 389,920
Compagnie de Suez, S.A.
(banking) .................................... 7 28
Elf Aquitaine, S.A.
(energy sources) ............................. 4,873 685,087
Eridania Beghin-Say, S.A.
(food & household products) .................. 1,030 227,430
France Telecom, S.A.
(telecommunications) ......................... 17,410 1,200,785
Groupe Danone, S.A.
(food & household products) .................. 2,043 563,293
Havas, S.A.
(business & public services) ................. 2,799 237,493
Lafarge, S.A. (building materials &
components) .................................. 3,370 348,369
L'Air Liquide, S.A. (chemicals) ................ 5,822 962,947
L'Oreal, S.A.
(health & personal care) ..................... 1,767 982,865
LVMH (Moet Hennessy Louis Vuitton),
S.A. (beverages & tobacco) ................... 1,170 234,154
Michelin (CGDE), S.A. Class B
(tire & rubber) .............................. 2,769 159,837
Paribas, S.A. (banking) ........................ 2,386 255,332
Pernod-Ricard, S.A.
(beverages & tobacco) ........................ 980 67,916
Pinault-Printemps-Redoute, S.A.
(building materials & components) ............ 370 309,658
PSA Peugeot, S.A. (automobiles) ................ 520 111,809
Rhone-Poulenc, S.A. Class A
(chemicals) .................................. 5,623 317,141
Schneider, S.A.
(machinery & engineering) ................... 2,987 238,178
Societe Generale, S.A. Class A
(banking) .................................... 1,940 403,336
Suez Lyonnaise des Eaux, S.A.
(multi-industry) ............................. 2,833 466,230
Thomson CSF, S.A. (aerospace &
military technology) ......................... 4,791 182,257
Total, S.A. Class B (energy sources) ........... 3,424 445,130
Vivendi, S.A.
(business & public services) ................. 3,597 768,063
-----------
11,626,932
-----------
GERMANY (14.8%)
Allianz AG Registered (insurance) .............. 5,200 1,732,820
BASF AG (chemicals) ............................ 16,700 793,350
Bayer AG (chemicals) ........................... 21,550 1,115,087
Daimler-Benz AG (automobiles) .................. 10,800 1,062,030
Daimler-Benz AG Rights
(automobiles) (a) ............................ 7,600 8,421
Deutsche Bank AG (banking) ..................... 8,200 693,239
Deutsche Telekom AG
(telecommunications) ......................... 59,800 1,636,600
Dresdner Bank AG (banking) ..................... 18,750 1,012,792
Karstadt AG (merchandising) ................... 650 315,991
Linde AG
(machinery & engineering) ................... 550 377,832
Mannesmann AG
(machinery & engineering) ................... 5,500 565,225
Muenchener Rueckversicherungs-
Gesellschaft AG Registered
(insurance) .................................. 1,340 665,162
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
12
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (Continued)
GERMANY (Continued)
Preussag AG (multi-industry) ................... 50 $ 17,894
RWE AG (utilities--electrical & gas) ........... 16,550 979,228
Siemens AG (electrical & electronics) .......... 22,550 1,376,086
Thyssen AG (metals--steel) ..................... 150 38,143
VEBA AG (utilities--electrical & gas) .......... 9,900 665,563
Viag AG (multi-industry) ....................... 750 516,057
Volkswagen AG (automobiles) ................... 650 627,661
-----------
14,199,181
-----------
ITALY (4.7%)
Assicurazioni Generali S.p.A.
(insurance) .................................. 16,515 537,421
Banca Commerciale Italiana S.p.A.
(banking) .................................... 27,000 161,587
Benetton Group S.p.A.
(textile & apparel) .......................... 98,800 205,254
Credito Italiano S.p.A. (banking) .............. 45,000 235,742
Edison S.p.A. (energy sources) ................. 2,000 16,062
Ente Nazionale Idrocarburi S.p.A.
(energy sources) ............................. 109,000 714,926
Fiat S.p.A. (automobiles) ...................... 65,800 288,213
Fiat S.p.A. di Risp (automobiles) .............. 28,600 70,848
Istituto Bancario San Paolo di
Torino S.p.A. (banking) ...................... 15,500 223,835
Istituto Nazionale delle
Assicurazioni S.p.A. (insurance) ............. 60,000 170,589
Italgas S.p.A.
(utilities--electrical & gas) ................ 19,000 77,446
Mediobanca S.p.A.
(financial services) ......................... 5,500 69,826
Montedison S.p.A.
(multi-industry) ............................. 57,080 70,860
Olivetti Group S.p.A. (data
processing & reproduction) (a) ............... 11,800 17,572
Parmalat Finanziaria S.p.A.
(food & household products) .................. 40,000 81,635
Pirelli S.p.A.
(industrial components) ...................... 25,000 78,116
Riunione Adriatica di Sicurta S.p.A.
(insurance) .................................. 5,325 69,403
Sirti S.p.A. (telecommunications) .............. 11,500 62,609
Telecom Italia S.p.A.
(telecommunications) ......................... 65,666 483,752
Telecom Italia S.p.A. di Risp
(telecommunications) ......................... 25,000 121,115
Telecom Italia Mobile S.p.A.
(telecommunications) ......................... 82,000 501,824
Telecom Italia Mobile S.p.A. di Risp
(telecommunications) ......................... 63,000 212,814
-----------
4,471,449
-----------
JAPAN (8.3%)
Ajinomoto Co., Inc.
(food & household products) (c) .............. 10,000 87,541
Asahi Chemical Industry Co., Ltd.
(chemicals) .................................. 17,000 61,243
Asahi Glass Co., Ltd.
(miscellaneous--materials &
components) (c) .............................. 27,000 145,901
Bank of Tokyo--Mitsubishi, Ltd.
(banking) (c) ................................ 31,000 328,108
Bridgestone Corp.
(industrial components) (c) .................. 1,000 23,632
Canon, Inc. (recreation & other
consumer goods) (c) .......................... 10,000 226,958
Dai Nippon Printing Co., Ltd.
(business & public services) (c) ............. 6,000 95,754
Daiei, Inc. (merchandising) (c) ................ 14,000 32,783
Denso Corp.
(industrial components) (c) .................. 3,000 49,715
Fanuc, Ltd. (electronic
components & instruments) (c) ................ 4,000 138,336
Fuji Bank, Ltd. (banking) (c) .................. 20,000 89,198
Fuji Photo Film, Ltd. (recreation &
other consumer goods) (c) ................... 4,000 139,201
Fujitsu, Ltd. (data processing &
reproduction) (c) ............................ 2,000 21,039
Furukawa Electric Co., Ltd.
(industrial components) (c) .................. 33,000 111,036
Hankyu Corp.
(transportation--road & rail) (c) ............ 16,000 65,594
Hitachi Corp., Ltd.
(electrical & electronics) (c) ............... 48,000 312,985
Honda Motor Co., Ltd.
(automobiles) (c) ............................ 6,000 213,556
Industrial Bank of Japan, Ltd.
(banking) (c) ................................ 13,000 81,489
Ito-Yokado Co., Ltd.
(merchandising) .............................. 3,000 141,146
Itochu Corp. (wholesale &
international trade) (c) ..................... 62,000 134,013
Japan Airlines Co.
(transportation--airlines) (a)(c) ............ 11,000 30,592
Japan Energy Corp.
(energy sources) (c) ......................... 52,000 55,075
Kajima Corp.
(construction & housing) (c) ................. 9,000 24,641
Kansai Electric Power Co., Inc.
(utilities--electrical & gas) (c) ............ 7,000 121,548
Kao Corp. (food & household
products) (c) ................................ 12,000 185,024
Kawasaki Steel Corp.
(metals--steel) (c) .......................... 6,000 10,808
Kirin Brewery Co., Ltd.
(beverages & tobacco) (c) ................... 17,000 160,455
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (Continued)
JAPAN (Continued)
Komatsu, Ltd. (machinery &
engineering) (c) ............................. 27,000 $ 131,117
Kubota Corp. (machinery &
engineering) (c) ............................. 1,000 2,306
Marubeni Corp. (wholesale &
international trade) (c) ..................... 58,000 115,756
Marui Co., Ltd. (merchandising) (c) ............ 3,000 44,743
Matsushita Electric Industrial
Co., Ltd. (appliances & household
durables) (c) ................................ 15,000 241,007
Mitsubishi Chemical Corp.
(chemicals) (c) .............................. 6,687 12,093
Mitsubishi Corp. (multi-industry) (c) .......... 24,000 148,711
Mitsubishi Electric Corp.
(electrical & electronics) (a)(c) ............ 56,000 128,710
Mitsubishi Estate Co., Ltd.
(construction & housing) (c) ................. 5,000 43,951
Mitsubishi Heavy Industries, Ltd.
(machinery & engineering) (c) ................ 52,000 196,322
Mitsubishi Trust & Banking Corp.
(financial services) ......................... 4,000 33,979
Mitsui Engineering & Shipbuilding
Co., Ltd.
(machinery & engineering) (a) ................ 1,000 757
Mitsui Fudosan Co., Ltd.
(construction & housing) ..................... 7,000 55,277
Mitsui Marine & Fire Insurance Co.,
Ltd. (insurance) ............................. 12,000 60,263
Mitsui Trust & Banking Co., Ltd.
(financial services) ......................... 7,000 16,492
Mitsukoshi, Ltd. (merchandising) ............... 4,000 11,499
NEC Corp. (electrical & electronics) ........... 19,000 177,005
Nippon Express Co., Ltd.
(transportation--road & rail) ................ 9,000 48,245
Nippon Oil Co., Ltd.
(energy sources) ............................. 12,000 38,734
Nippon Paper Industries Co.
(forest products & paper) ................... 1,000 4,164
Nippon Steel Corp. (metals--steel) ............. 10,000 17,580
Nippon Telegraph & Telephone Corp.
(telecommunications) ......................... 60 497,172
Nippon Yusen Kabushiki Kaisha
(transportation--shipping) .................. 1,000 3,386
Nissan Motor Co., Ltd.
(automobiles) ................................ 23,000 72,417
NKK Corp. (metals--steel) ...................... 96,000 91,993
Nomura Securities Co., Ltd.
(financial services) ......................... 16,000 186,177
Obayashi Corp.
(construction & housing) ..................... 1,000 4,237
JAPAN (Continued)
Oji Paper Co., Ltd.
(forest products & paper) ................... 1,000 4,352
Osaka Gas Co., Ltd.
(utilities--electrical & gas) ................ 6,000 15,389
Sakura Bank, Ltd. (banking) ................... 30,000 77,814
Sankyo Co., Ltd. (health &
personal care) ............................... 6,000 136,607
Sanyo Electric Co., Ltd.
(appliances & household durables) ............ 19,000 57,496
Sekisui Chemical Co., Ltd.
(chemicals) .................................. 1,000 5,116
Sekisui House, Ltd.
(construction & housing) ..................... 1,000 7,745
Sharp Corp.
(appliances & household durables) ............ 14,000 113,378
Shimizu Corp.
(construction & housing) ..................... 9,000 25,938
Sony Corp.
(appliances & household durables) ............ 2,000 172,200
Sumitomo Bank, Ltd. (banking) .................. 17,000 165,355
Sumitomo Chemical Co., Ltd.
(chemicals) .................................. 1,000 3,084
Sumitomo Electric Industries
(industrial components) ...................... 20,000 202,172
Sumitomo Marine & Fire
Insurance Co. (insurance) ................... 1,000 5,591
Sumitomo Metal Industries, Ltd.
(metals--steel) .............................. 26,000 41,775
Sumitomo Metal Mining Co.
(metals--nonferrous) ......................... 1,000 4,056
Takeda Chemical Industries, Ltd.
(health & personal care) ..................... 8,000 212,692
Teijin, Ltd. (chemicals) ....................... 1,000 3,026
Tobu Railway Co., Ltd.
(transportation--road & rail) ................ 44,000 116,346
Tohoku Electric Power Co., Inc.
(utilities--electrical & gas) ................ 2,000 29,468
Tokio Marine & Fire Insurance Co.
(insurance) .................................. 8,000 82,195
Tokyo Dome Corp. (leisure &
tourism) ..................................... 7,000 37,826
Tokyo Electric Power Co., Inc.
(utilities--electrical & gas) ................ 8,000 156,781
Tokyo Gas Co., Ltd. (utilities--
electrical & gas) ............................ 39,000 86,827
Tokyu Corp.
(transportation--road & rail) ................ 10,000 30,333
Toppan Printing Co., Ltd.
(business & public services) ................. 1,000 10,692
Tostem Corp. (building materials &
components) .................................. 1,000 12,955
Toto, Ltd. (building materials &
components) .................................. 1,000 6,074
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (Continued)
JAPAN (Continued)
Toyoda Automatic Loom Works, Ltd.
(machinery & engineering) ................... 1,000 $ 17,652
Toyota Motor Corp. (automobiles) ............... 23,000 594,917
Yamanouchi Pharmaceutical Co., Ltd.
(health & personal care) ..................... 5,000 104,112
-----------
8,011,428
-----------
NETHERLANDS (8.5%)
ABN AMRO Holding N.V. (banking) ................ 25,000 584,990
Akzo Nobel N.V. (health &
personal care) ............................... 1,800 400,133
Elsevier N.V. (broadcasting &
publishing) .................................. 6,200 93,569
Heineken N.V. (beverages &
tobacco) ..................................... 7,100 278,873
ING Groep N.V. (insurance) ..................... 21,307 1,395,172
Koninklijke KPN N.V. (forest
products & paper) ............................ 13,065 502,889
Philips Electronics N.V.
(appliances & household durables) ............ 7,900 664,086
Royal Dutch Petroleum Co.
(energy sources) ............................. 47,200 2,617,293
TNT Post Group N.V.
(transportation--shipping) (a) ............... 13,065 333,975
Unilever CVA N.V. (food &
household products) .......................... 13,900 1,102,858
Wolters Kluwer CVA N.V.
(broadcasting & publishing) .................. 1,203 165,114
-----------
8,138,952
-----------
NEW ZEALAND (0.1%)
Telecom Corp. of New Zealand Ltd.
(telecommunications) ......................... 51,200 109,498
-----------
PORTUGAL (1.4%)
Banco Comercial Portugues, S.A.
Registered (banking) ......................... 7,300 207,294
Banco Espirito Santo e Comercial
de Lisboa, S.A. Registered
(banking) .................................... 4,400 132,138
Electricidade de Portugal, S.A.
(utilities--electrical & gas) ................ 16,800 390,562
Jeronimo Martins & Filho SGPS, S.A.
(food & household products) .................. 2,900 139,327
Portugal Telecom, S.A. Registered
(telecommunications) ......................... 8,300 439,925
-----------
1,309,246
-----------
SPAIN (4.5%)
Acerinox, S.A. (metals--steel) ................. 406 54,154
Autopistas Concesionares Espanola, S.A.
(business & public services) (a) ............. 8,340 129,383
Banco de Bilbao Vizcaya, S.A.
Registered (banking) ......................... 13,290 683,197
Banco de Central Hispanoamericano,
S.A. (banking) ............................... 8,420 265,097
Banco de Santander, S.A. (banking) ............. 18,800 481,996
Corporacion Bancaria de Espana,
S.A. (banking) ............................... 12,960 291,212
Corporacion Mapfre, S.A. (insurance) ........... 2,060 72,393
Endesa, S.A.
(utilities--electrical & gas) ................ 20,480 448,816
Fomento de Construcciones y
Contratas, S.A. (construction &
housing) ..................................... 1,710 88,352
Gas Natural SDG, S.A.
(utilities--electrical & gas) ................ 2,930 212,057
Iberdrola, S.A.
(utilities--electrical & gas) ................ 23,390 380,431
Repsol, S.A. (energy sources) .................. 7,060 389,680
Telefonica de Espana, S.A.
(telecommunications) ......................... 18,350 849,823
-----------
4,346,591
-----------
SWITZERLAND (8.6%)
Credit Suisse Group Registered
(banking) .................................... 4,500 1,001,278
Nestle S.A. Registered (food &
household products) .......................... 850 1,819,014
Novartis S.A. Registered (health &
personal care) ............................... 1,000 1,664,018
Roche Holdings AG Genusscheine
(health & personal care) ..................... 100 981,994
Schweizerische Rueckversicherungs
Gesellschaft Registered
(insurance) .................................. 320 809,277
UBS AG Registered (banking) ................... 3,615 1,344,186
Zurich Versicherungs Gesellschaft
Registered (insurance) ....................... 1,000 638,181
-----------
8,257,948
-----------
UNITED KINGDOM (23.1%)
Abbey National PLC (banking) ................... 43,210 769,985
Barclays PLC (banking) ......................... 37,017 1,069,116
Bass PLC (beverages & tobacco) ................. 20,401 381,238
B.A.T Industries PLC
(beverages & tobacco) ........................ 69,473 693,756
BG PLC (energy sources) ........................ 95,030 550,195
BOC Group PLC (chemicals) ...................... 51,000 696,066
Boots Co. PLC (merchandising) .................. 22,133 368,182
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (Continued)
UNITED KINGDOM (Continued)
British Airways PLC
(transportation--airlines) .................. 23,732 $ 255,598
British Petroleum Co. PLC
(energy sources) ............................. 118,397 1,723,586
British Telecommunications PLC
(telecommunications) ......................... 112,720 1,387,042
BTR PLC (multi-industry) ....................... 82,493 233,987
BTR PLC Class B (multi-industry) (a) ........... 101,530 58,444
Cable & Wireless PLC
(telecommunications) ......................... 14,447 175,845
Centrica PLC (energy sources) (a) .............. 35,310 59,798
CGU PLC (insurance) ............................ 32,766 611,759
Diageo PLC (beverages & tobacco) ............... 63,998 761,881
EMI Group PLC (recreation &
other consumer goods) ........................ 3,270 28,671
General Electric Co. PLC
(electrical & electronics) ................... 75,486 650,524
GKN PLC (machinery & engineering) .............. 20,598 262,398
Glaxo Wellcome PLC (health &
personal care) ............................... 58,298 1,754,757
Granada Group PLC (leisure &
tourism) ..................................... 21,770 401,009
Great Universal Stores PLC (The)
(merchandising) .............................. 33,110 436,705
Hanson PLC (multi-industry) ................... 17,924 108,784
HSBC Holdings PLC
(financial services) ......................... 10,013 254,109
Imperial Chemical Industries PLC
(chemicals) .................................. 18,590 299,629
Imperial Tobacco Group PLC
(beverages & tobacco) ........................ 6,283 46,178
Kingfisher PLC (merchandising) ................. 24,417 395,584
Lloyds TSB Group PLC (banking) ................. 99,566 1,390,475
Marks & Spencer PLC
(merchandising) .............................. 50,396 459,949
MEPC PLC (real estate) ......................... 22,900 202,124
National Power PLC
(utilities--electrical & gas) ................ 30,620 288,145
Peninsular & Oriental Steam
Navigation Co. Deferred Stock
(The) (transportation--shipping) ............. 8,611 124,207
Prudential Corp. PLC (insurance) ............... 64,300 847,549
Rank Group PLC (leisure & tourism) ............. 9,710 52,856
Reed International PLC
(broadcasting & publishing) .................. 60,540 546,975
Reuters Group PLC
(broadcasting & publishing) .................. 9,394 107,523
Rio Tinto PLC Registered
(metals--nonferrous) ......................... 26,460 298,224
Shares Value
==========================
UNITED KINGDOM (Continued)
RMC Group PLC
(building materials & components) ............ 19,500 338,698
Sainsbury (J.) PLC (merchandising) ............. 34,475 306,015
Scottish Power PLC
(utilities--electrical & gas) ................ 23,010 203,095
SmithKline Beecham PLC
(health & personal care) ..................... 95,610 1,166,929
Thorn PLC (appliances &
household durables) .......................... 1,639 6,291
Unilever PLC
(food & household products) .................. 72,500 778,419
Vodafone Group PLC
(multi-industry) ............................. 52,247 663,396
-----------
22,215,696
-----------
Total Common Stocks
(Cost $71,787,852)............................ 88,059,006
-----------
WARRANTS (0.0%) (b)
FRANCE (0.0%) (b)
Vivendi, S.A.
Call Warrants
Strike price FF 900
Expire 5/2/01
(business & public services) (a)(f) ............ 3,597 7,080
-----------
Total Warrants.................................. 7,080
-----------
<CAPTION>
Principal
Amount
=========================
<S> <C> <C>
SHORT-TERM INVESTMENTS (6.2%)
COMMERCIAL PAPER (6.2%)
UNITED STATES (6.2%)
Goldman Sachs Group L.P. (The)
6.25%, due 7/1/98
(financial services) ......................... $3,240,000 3,240,000
Merrill Lynch & Co. Inc.
6.14%, due 7/1/98
(financial services) ......................... 2,760,000 2,760,000
-----------
Total Short-Term Investments
(Cost $6,000,000)............................. 6,000,000
-----------
Total Investments
(Cost $77,787,852) (d) 97.9% 94,066,086(e)
Cash and Other Assets,
Less Liabilities ............................. 2.1 1,977,414
---------- -----------
Net Assets ..................................... 100.0% $96,043,500
========== ===========
</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 unaudited (continued)
- ----------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) Segregated or partially segregated as collateral for forward foreign
currency contracts.
(d) The cost for Federal income tax purposes is $78,391,829.
(e) At June 30, 1998 net unrealized appreciation for securities was
$15,674,257, 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 $20,894,109 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $5,219,852.
(f) FF--French Franc.
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 ................ $ 182,257 0.2%
Appliances & Household Durables ................ 1,254,458 1.3
Automobiles .................................... 3,049,872 3.2
Banking ........................................ 12,811,043 13.3
Beverages & Tobacco ............................ 2,660,408 2.8
Broadcasting & Publishing ...................... 980,204 1.0
Building Materials & Components ................ 1,015,754 1.1
Business & Public Services ..................... 1,248,465 1.3
Chemicals ...................................... 4,850,683 5.1
Construction & Housing ......................... 250,141 0.3
Data Processing & Reproduction ................. 38,610 0.0*
Electrical & Electronics ....................... 3,167,965 3.3
Electronic Components & Instruments ............ 138,336 0.1
Energy Sources ................................. 7,706,042 8.0
Financial Services ............................. 6,560,583 6.8
Food & Household Products ...................... 4,984,541 5.2
Forest Products & Paper ........................ 511,406 0.5
Health & Personal Care ......................... 7,404,106 7.7
Industrial Components .......................... 464,672 0.5
Insurance ...................................... 9,180,427 9.6
Leisure & Tourism .............................. 491,692 0.4
Machinery & Engineering ........................ 1,791,786 1.9
Merchandising .................................. 3,567,917 3.7
Metals--Nonferrous ............................. 328,162 0.3
Metals--Steel .................................. 254,453 0.3
Miscellaneous--Materials &
Commodities .................................. 389,920 0.4
Miscellaneous--Materials &
Components ................................... 145,901 0.2
Multi-Industry ................................. 3,038,387 3.2
Real Estate .................................... 202,124 0.1
Recreation & Other Consumer Goods .............. 394,829 0.4
Telecommunications ............................. 8,639,162 9.0
Textile & Apparel .............................. 205,254 0.2
Tire & Rubber .................................. 159,838 0.2
Transportation--Airlines ....................... 286,190 0.3
Transportation--Road & Rail .................... 260,518 0.3
Transportation--Shipping ....................... 461,568 0.5
Utilities--Electrical & Gas .................... 4,738,643 4.9
Wholesale & International Trade ................ 249,769 0.3
---------- ----
94,066,086 97.9
Cash and Other Assets,
Less Liabilities ............................. 1,977,414 2.1
=========== =====
Net Assets ..................................... $96,043,500 100.0%
=========== =====
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
* Less than one tenth of a percent.
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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $77,787,852) ................................................. $ 94,066,086
Cash denominated in foreign currencies (identified cost $11,865,738) ............................................. 11,840,933
Cash ............................................................................................................. 270,965
Receivables:
Investment securities sold ..................................................................................... 7,832,773
Dividends and interest ......................................................................................... 341,518
Fund shares sold ............................................................................................... 274,255
Unrealized appreciation on forward foreign currency contracts .................................................... 276,199
Unamortized organization expense ................................................................................. 9,631
------------
Total assets .................................................................................................. 114,912,360
------------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................ 18,328,453
MainStay Management ............................................................................................ 80,393
NYLIFE Distributors ............................................................................................ 64,496
Fund shares redeemed ........................................................................................... 59,867
Custodian ...................................................................................................... 32,719
Transfer agent ................................................................................................. 31,197
Trustees ....................................................................................................... 550
Accrued expenses ................................................................................................. 66,668
Unrealized depreciation on forward foreign currency contracts .................................................... 204,517
------------
Total liabilities ............................................................................................. 18,868,860
------------
Net assets ....................................................................................................... $ 96,043,500
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ........................................................................................................ $ 17,960
Class B ........................................................................................................ 62,716
Additional paid-in capital ....................................................................................... 82,002,737
Accumulated undistributed net investment income .................................................................. 64,844
Accumulated net realized loss on investments ..................................................................... (2,572,432)
Accumulated undistributed net realized gain on foreign currency transactions ..................................... 16,347
Net unrealized appreciation on investments ....................................................................... 16,278,234
Net unrealized appreciation on translation of other assets and liabilities in foreign currencies
and forward foreign currency contracts ......................................................................... 173,094
------------
Net assets ....................................................................................................... $ 96,043,500
============
CLASS A
Net assets applicable to outstanding shares ...................................................................... $ 21,616,108
============
Shares of beneficial interest outstanding ........................................................................ 1,796,008
============
Net asset value per share outstanding ............................................................................ $ 12.04
Maximum sales charge (5.50% of offering price) ................................................................... 0.70
------------
Maximum offering price per share outstanding ..................................................................... $ 12.74
============
CLASS B
Net assets applicable to outstanding shares ...................................................................... $ 74,427,392
============
Shares of beneficial interest outstanding ........................................................................ 6,271,595
============
Net asset value and offering price per share outstanding ......................................................... $ 11.87
============
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) .................................................................................................. $ 1,001,919
Interest ....................................................................................................... 279,149
------------
Total income .................................................................................................. 1,281,068
------------
Expenses:
Management ..................................................................................................... 442,716
Distribution--Class B .......................................................................................... 259,110
Transfer agent ................................................................................................. 184,564
Service--Class B ............................................................................................... 86,344
Shareholder communication ...................................................................................... 41,353
Custodian ...................................................................................................... 34,622
Service--Class A ............................................................................................... 24,335
Registration ................................................................................................... 21,883
Professional ................................................................................................... 18,833
Recordkeeping .................................................................................................. 16,480
Amortization of organization expense ........................................................................... 3,973
Trustees ....................................................................................................... 1,119
Miscellaneous .................................................................................................. 13,332
------------
Total expenses ................................................................................................ 1,148,664
------------
Net investment income ............................................................................................ 132,404
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions .......................................................................................... 502,368
Foreign currency transactions .................................................................................. 16,347
------------
Net realized gain on investments and foreign currency transactions ............................................... 518,715
------------
Net change in unrealized appreciation on investments:
Security transactions .......................................................................................... 12,449,974
Translation of other assets and liabilities in foreign currencies and forward foreign currency contracts ....... (69,459)
------------
Net unrealized gain on investments and foreign currency transactions ............................................. 12,380,515
------------
Net realized and unrealized gain on investments and foreign currency transactions ................................ 12,899,230
------------
Net increase in net assets resulting from operations ............................................................. $ 13,031,634
============
</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.
19
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------ -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income (loss) ........................................... $ 132,404 $ (264,494)
Net realized gain (loss) on investments ................................ 502,368 (2,546,199)
Net realized gain on foreign currency transactions ..................... 16,347 5,603,167
Net change in unrealized appreciation on investments ................... 12,449,974 2,314,070
Net change in unrealized appreciation on translation of other assets and
liabilities in foreign currencies
and forward foreign currency contracts ................................ (69,459) (2,399,668)
------------ ------------
Net increase in net assets resulting from operations ................... 13,031,634 2,706,876
------------ ------------
Distributions to shareholders:
From net realized gain on foreign currency transactions:
Class A ............................................................... -- (999,553)
Class B ............................................................... -- (3,204,542)
------------ ------------
Total distributions to shareholders ................................. -- (4,204,095)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ............................................................... 5,780,730 7,554,344
Class B ............................................................... 13,333,242 35,130,288
Net asset value of shares issued to shareholders in reinvestment of
distributions:
Class A ............................................................... -- 609,945
Class B ............................................................... -- 2,990,896
------------ ------------
19,113,972 46,285,473
Cost of shares redeemed:
Class A ............................................................... (4,550,797) (7,941,595)
Class B ............................................................... (12,243,944) (26,338,394)
------------ ------------
Increase in net assets derived from capital share transactions ...... 2,319,231 12,005,484
------------ ------------
Net increase in net assets .............................................. 15,350,865 10,508,265
NET ASSETS:
Beginning of period ...................................................... 80,692,635 70,184,370
------------ ------------
End of period ............................................................ $ 96,043,500 $ 80,692,635
============ ============
Accumulated undistributed net investment income
(excess distribution) at end of period ............................... $ 64,844 $ (67,560)
============ ============
</TABLE>
- ----------
* Unaudited.
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 Class A Class B September 13,**
------- ------- ------- ------- ------- ------- ------- ------- through
Six months ended Year ended Year ended Year ended December 31,
June 30, 1998* December 31, 1997 December 31, 1996 December 31, 1995 1994
------------------ ------------------ -------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ........ $10.33 $10.22 $10.48 $10.38 $10.05 $9.97 $9.77 $9.77 $10.00
------ ------ ------ ------ ------ ----- ----- ----- ------
Net investment income
(loss) ..................... 0.02 0.02 0.80 0.72 0.29 0.24 0.27 0.26 (0.04)
Net realized and
unrealized gain (loss)
on investments ............. 1.70 1.64 0.03 0.03 0.07 0.07 0.10 0.07 (0.16)
Net realized and
unrealized gain (loss)
on foreign currency
transactions ............... (0.01) (0.01) (0.36) (0.37) 0.62 0.59 0.14 0.09 (0.03)
------ ------ ------ ------ ------ ----- ----- ----- -----
Total from investment
operations ................. 1.71 1.65 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 .................. $12.04 $11.87 $10.33 $10.22 10.48 $10.38 $10.05 $9.97 $9.77
====== ====== ====== ====== ====== ====== ===== ===== =====
Total investment return (a) .. 16.55% 16.14% 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) ......... 0.88%+ 0.13%+ 0.19% (0.49%) (0.1%) (0.8%) (0.2%) (1.0%) (1.6%)+
Expenses ................ 2.01%+ 2.76%+ 2.01% 2.69% 2.0% 2.7% 2.2% 3.0% 3.9%+
Portfolio turnover rate ...... 19% 19% 43% 43% 19% 19% 25% 25% 9%
Net assets at end of
period (in 000's) .......... $21,616 $74,427 $17,452 $63,241 $17,475 $52,709 $12,856 $25,341 $20,549
</TABLE>
- ----------
* Unaudited.
** 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 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 twenty-two 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 provide 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. Current income is a
secondary objective.
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.
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, and (d) by appraising over-the-counter securities not
quoted on
22
<PAGE>
Notes to Financial Statements unaudited
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.
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 period-end
to credit loss in the event of a counterparty's failure to perform its
obligations.
Forward foreign currency contracts open at June 30, 1998:
<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 7/10/98 .............. A$ 1,275,485 $ 754,449 $(35,578)
Deutsche Mark vs. Italian Lira, expiring 7/14/98 ................. DM 3,047,358 IL 3,005,000,000 2,030
Deutsche Mark vs. Pound Sterling, expiring 7/1/98 ................ DM 18,765,798 (pound) 6,354,650 206,175
Deutsche Mark vs. Spanish Peseta, expiring 7/14/98 ............... DM 1,827,470 SP 155,135,000 461
Deutsche Mark vs. U.S. Dollar, expiring 7/24/98 .................. DM 17,849,621 $ 9,955,867 51,845
Deutsche Mark vs. U.S. Dollar, expiring 7/24/98 .................. DM 8,964,500 $ 4,947,705 (26,328)
Italian Lira vs. Deutsche Mark, expiring 7/14/98 ................. IL 3,005,000,000 DM 3,034,740 (9,027)
Pound Sterling vs. Deutsche Mark, expiring 7/1/98.................(pound) 6,354,650 DM 18,928,176 (116,215)
</TABLE>
23
<PAGE>
MainStay International Equity Fund
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
--------------------- ------------------ --------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts (continued)
- -------------------------------------------
Pound Sterling vs. Deutsche Mark, expiring 9/30/98......... (pound) 1,204,000 DM 3,587,920 $ 356
Spanish Peseta vs. Deutsche Mark, expiring 7/14/98......... SP 208,693,000 DM 2,456,599 (1,605)
Swiss Franc vs. Deutsche Mark, expiring 9/29/98............ CF 890,200 DM 1,066,274 1,692
</TABLE>
<TABLE>
<CAPTION>
Contract Contract
Amount Amount
Purchased Sold
------------------- ------------------
<S> <C> <C> <C>
Foreign Currency Buy Contracts
- ------------------------------
Australian Dollar vs. U.S. Dollar, expiring 7/10/98........ A$ 1,275,485 $ 776,388 13,640
Deutsche Mark vs. U.S. Dollar, expiring 7/24/98............ DM 3,647,836 $ 2,039,798 (15,764)
--------
Net unrealized appreciation on forward foreign currency contracts $ 71,682
========
</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.
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.
24
<PAGE>
Notes to Financial Statements unaudited (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 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,
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 period-end exchange rates are
reflected in unrealized foreign exchange gains.
Foreign currency held at June 30, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- -------------------------------------------------- ----------- -----------
<S> <C> <C> <C>
Austrian Schilling AS 49,770 $ 3,914 $ 3,919
Belgian Franc BF 2,197,170 59,497 59,047
Canadian Dollar C$ 6,914,269 4,722,700 4,701,669
Deutsche Mark DM 437,159 243,136 242,193
French Franc FF 694,419 116,059 114,856
Hong Kong Dollar HK 10,234,453 1,320,828 1,320,818
Italian Lira IL 50,852,654 28,767 28,630
Japanese Yen (Yen) 7,000,055 49,384 50,435
Netherland Guilder NG 10,024,714 4,925,274 4,928,091
New Zealand Dollar N$ 4,755 2,482 2,468
Norwegian Krone NK 5,679 772 740
Portuguese Escudo PE 14,998,718 82,161 81,203
Spanish Peseta SP 938,768 6,187 6,132
Swiss Franc CF 456,151 304,577 300,732
----------- -----------
$11,865,738 $11,840,933
=========== ===========
</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.
25
<PAGE>
MainStay International Equity Fund
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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%. For the six months ended June 30, 1998, the Manager
earned $442,716.
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.
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 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.
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 $5,931 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$54,676 for the six months ended June 30, 1998.
26
<PAGE>
Notes to Financial Statements unaudited (continued)
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 six months ended June
30, 1998 amounted to $188,602.
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 June 30, 1998, NYLIFE Distributors beneficially held Class A shares
of the Fund with a net asset value of $7,526,234, which represents 34.8% of the
net assets of Class A shares 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 $1,240 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$16,480 for the six months ended June 30, 1998.
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, were 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.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $28,163 and $13,635, respectively.
27
<PAGE>
MainStay International Equity Fund
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 June 30, 1998.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
-------------------- --------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 495 1,174 707 3,242
Shares issued in reinvestment of dividends and distributions -- -- 59 296
------ ------ ------ ------
495 1,174 766 3,538
Shares redeemed ............................................ (388) (1,088) (745) (2,429)
------ ------ ------ ------
Net increase ............................................... 107 86 21 1,109
====== ====== ====== ======
</TABLE>
- ----------
* Unaudited.
28
<PAGE>
This page intentionally left blank
29
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
30
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
31
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
32
<PAGE>
MainStay International Equity Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY (R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA11-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Government Fund Highlights 3
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Portfolio Composition 7
Returns & Lipper Rankings 9
Portfolio of Investments 10
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Government Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
. Domestic bond markets were influenced by Asian economic contractions, a
solid U.S. economy, and relatively tame inflation during the first six
months of 1998.
. During the reporting period, the market experienced low volatility and a
flattening yield curve in the second quarter.
. Although 30-year Treasury bond yields declined to record levels in June,
overall, yields tended to remain in a relatively narrow range.
. Mortgage prepayments came in waves as interest rates experienced minor
shifts over the reporting period.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
. One-year total returns of 10.81% and 10.09% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/98.
. The Fund benefited by shifting from long to neutral duration in both the
first and second quarters of 1998.
. In the Treasury market, moving between newer and older issues provided
opportunities to enhance returns.
. Shifting the Fund's concentration in mortgage-backed securities also
benefited the Fund, although being overweighted at the end of the second
quarter had a marginally negative impact on performance.
. Class A shares outperformed and Class B shares slightly underperformed the
average Lipper* general U.S. government fund, which returned 3.62% for the
six months ended 6/30/98, with Class A shares ranking in the top 16% of all
Lipper peer funds.
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
Government Fund versus Lehman Brothers
Government Bond Index and Inflation
Class A Shares SEC Returns: 1-Year 5.83%, 5-Year 4.90%, 10-Year 6.72%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
Period end Government Fund Government Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $ 9,550 $10,000 $10,000
6/89 $10,668 $11,208 $10,517
6/90 $11,070 $11,985 $11,008
6/91 $12,083 $13,200 $11,526
6/92 $13,462 $15,015 $11,882
6/93 $14,406 $16,952 $12,238
6/94 $14,204 $16,725 $12,543
6/95 $15,684 $18,742 $12,924
6/96 $16,197 $19,587 $13,280
6/97 $17,295 $21,036 $13,585
6/98 $19,165 $23,403 $13,813
</TABLE>
Class B Shares SEC Returns: 1-Year 5.09%, 5-Year 5.08%, 10-Year 6.98%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
Period end Government Fund Government Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $10,000 $10,000
6/89 $11,171 $11,208 $10,517
6/90 $11,591 $11,985 $11,008
6/91 $12,652 $13,200 $11,526
6/92 $14,096 $15,015 $11,882
6/93 $15,085 $16,952 $12,238
6/94 $14,873 $16,725 $12,543
6/95 $16,362 $18,742 $12,924
6/96 $16,798 $19,587 $13,280
6/97 $17,833 $21,036 $13,585
6/98 $19,632 $23,403 $13,813
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 the period 6/30/88 through 12/31/94. The Class B
graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* The Lehman Brothers Government Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed-rate debt issues that are
rated investment grade by Moody's, Standard & Poor's, or Fitch, in that
order, with at least one year to maturity. The Index is unmanaged and
results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
During the first half of 1998, the domestic bond markets were largely influenced
by world events. Economic contractions in Asian markets, including Japan, caused
difficulties in markets from Latin America to Russia and China. One positive
outcome has been relatively tame inflation, which has kept the Federal Reserve
from adjusting domestic interest rates. As a result, interest rates in general
have remained within a relatively narrow range, with 2-year Treasuries declining
just 16 basis points over the first half of the year, and 30-year Treasuries
remaining flat in the first quarter, but declining 30 basis points in the second
quarter of 1998.
The price rally led to a flattening yield curve, which presented some
opportunities. From a technically oriented viewpoint, supply dynamics created
trading opportunities among newer and older issues. Higher-coupon
mortgage-backed securities saw high prepayments early in the year, creating
buying opportunities. Overall, however, Treasuries tended to outperform other
sectors over the first half of the year.
The market has begun to see investors reawaken to the income-securities markets.
Broad market returns exceeded 10% over the past year, returns equity-market
participants would have expected, before the strong bull equity market of the
past three years. During two of the past three quarters, bond returns were in
line with or exceeded stock returns and investors have responded by increasing
their bond allocations.
Given this context, how did the MainStay Government Fund perform in the first
six months of 1998?
For the six months ended 6/30/98, the MainStay Government Fund returned 3.95%
and 3.57% for Class A shares and Class B shares, respectively, excluding all
sales charges. Class A shares outperformed and Class B shares slightly
underperformed the average Lipper* general U.S. government fund, which returned
3.62% for the first half of 1998, and Class A shares ranked in the top 16% of
all Lipper peer funds.
What accounted for the Fund's strong performance?
The Fund's duration strategy benefited performance throughout the reporting
period. Given our strategically bullish outlook, we kept the Fund's duration in
the neutral to long range. Over the reporting period, the Fund was neutral as
rates headed higher and longer as rates were rallying.
Another factor that helped the Fund outperform its peers was the yield curve. In
the first quarter, the yield curve was unchanged, so the Fund had no opportunity
to add value there. But in the second quarter, the curve flattened about 20
basis points. Because the Fund was very heavily concentrated in the back end of
the market, it was able to draw substantial benefit from the rally in 30-year
Treasury bonds, compared to funds with investments more evenly spread across
various maturities.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
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 9 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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.
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).
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.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- ----------------------------------------------
<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
6/98 3.95
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/86 through 12/94.
See footnote * on page 9 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- ----------------------------------------------
<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
6/98 3.57
</TABLE>
See footnote * on page 9 for more information on performance.
Were there specific strategies you used to add value to the Fund's portfolio
during the reporting period?
Yes. We added value to the Fund's portfolio through specific security selection
in the Treasury market. Using a variety of technical indicators, we moved the
Fund between newer and older issues to take advantage of shifting supply
dynamics. The result was an incremental increase in return. Older Treasuries
added value in the beginning part of both the first and second quarters, newer
securities in the latter part of each quarter. Over the period, the strategy had
a positive impact on the Fund's performance.
6
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ----------------------------------------------------
<S> <C>
U.S. Treasury Notes 19.3%
U.S. Treasury Bonds 22.0%
Federal National Mortgage Association 19.7%
Government Nationbal Mortgage Association 22.0%
Federal Home Loan Bank 5.9%
Cash, Equivalents, and Other Assets 11.1%
</TABLE>
Actual percentages will vary over time.
What happened in the market for mortgage-backed securities?
At the beginning of the year, the Fund was underweighted in higher-coupon
mortgage-backed securities. At the time, we anticipated a surge in prepayments
and believed that mortgage-related bonds would underperform. That's exactly what
happened and our decision to reduce the Fund's exposure to high-coupon mortgage
securities had a positive impact on performance.
After the prepayments rose, we increased the Fund's exposure to mortgage
securities, feeling that at their adjusted price levels they had appreciation
potential. At that point, we focused primarily on commercial mortgages for a
couple of reasons. First, new issuance was heavy, but demand was not, which
tended to force prices down to attractive levels. We also liked commercial
mortgages because we believed they carried less risk of prepayments if interest
rates continued to decline.
What was the impact on the Fund's performance?
As the market began to rally in the second quarter of 1998, we pared back on the
Fund's positions to take profits. Naturally, that was positive for the Fund's
performance. But the Fund remained overweighted in mortgage-backed securities in
the latter part of the second quarter, which hurt performance a bit when a
second wave of prepayments began.
As it happens, the Fund had invested in coupons that were relatively insensitive
to prepayment risk, but as the mortgage market in general underperformed, we
believe the Fund missed some opportunities available in the Treasury market.
Did the Fund make any dramatic shifts in its sector allocations during the
reporting period?
Not really. Overall, the Fund increased its weighting in mortgages from 23% of
net
Back end of the market
- ----------------------
Bonds are issued in a variety of maturities from very short to as long as 30
years or more. The back end of the market refers to bonds with longer
maturities, such as 30-year issues.
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be underweighted in a sector when that portion of the
portfolio is lower than the sector's general relationship to the market as a
whole.
7
<PAGE>
assets at the beginning of the year to about 25% at the end of the first
half of 1998. The allocation to Treasuries and agencies was reduced slightly,
and the Fund's weighting in variable-rate notes increased.
Has the Fund's investment portfolio maintained its high-quality rating?
Yes, it has. The overall credit quality of the securities in the Fund's
investment portfolio is Agency,+ which is better than AAA.++ As we seek
opportunities for the Fund, we try to keep it invested in the highest-quality
securities to avoid exposing the Fund's shareholders to unnecessary credit
risks. We're pleased with the Fund's recent performance, because we believe it
has provided investors higher-than-average returns with lower-than-average risk
in the government securities market.
What is your outlook for the future?
We believe that the major factors influencing our strategy over the past
year--Asian turmoil, inflation expectations, and reactions to reduced Treasury
financing--have been almost fully priced into the market. While we remain
bullish on bonds for the longer term, as we start the third quarter, we are
taking a more neutral strategy for the Fund. We believe that given the budget
surplus, the changes in the Treasury's financing calendar will provide
opportunities along the yield curve. We also see opportunities among mortgage
securities that have low probabilities of refinancing.
Whatever happens, the Fund will continue to seek securities that offer a high
level of current income, consistent with safety of principal.
Ravi Akhoury
Edward Munshower
Portfolio Managers
MacKay Shields Financial Corporation
- ----------
+ Agency rating is above AAA. 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.
++ Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
strong.
Past performance is no guarantee of future results.
8
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
=======================================================================================
Fund average annual total returns*
=======================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 10.81% 5.87% 7.21% 7.01%
Class B 10.09% 5.41% 6.98% 6.82%
<CAPTION>
=======================================================================================
Fund SEC returns*
=======================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 5.83% 4.90% 6.72% 6.60%
Class B 5.09% 5.08% 6.98% 6.82%
<CAPTION>
=======================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
=======================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<C> <C> <C> <C>
Class A 28 out of n/a n/a 70 out of
181 funds 136 funds
Class B 67 out of 65 out of 48 out of 28 out of
181 funds 96 funds 53 funds 35 funds
Average Lipper
general U.S.
government fund 10.17% 5.72% 7.88% 7.47%
<CAPTION>
=======================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
=======================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $8.35 $0.2418 $0.0000
Class B $8.33 $0.2109 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued 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 (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 six 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 (5/1/86)
through 6/30/98. The Fund's Class A shares were first offered to the public
on 1/3/95.
9
<PAGE>
MainStay Government Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM INVESTMENTS (107.7%)+
ASSET-BACKED SECURITIES (17.1%)
AIRPLANE LEASES (2.9%) AerCo Ltd.
Series 1A Class A1
5.8463%, due 7/15/23 (a)(d) ........ $ 4,185,000 $ 4,185,000
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19 (c) ............. 6,035,888 6,351,263
Morgan Stanley Aircraft Finance
Series 1A Class A1
5.8663%, due 3/15/23 (a)(d) ........ 6,915,000 6,912,580
------------
17,448,843
------------
CONSUMER LOANS (5.0%)
Chase Manhattan Recreational
Vehicle Owner Trust
Series 1997-A Class A5
6.05%, due 11/15/04 (c) ............ 7,475,000 7,483,148
Green Tree Recreational Equipment &
Consumer Trust
Series 1996-C Class A1
5.8963%, due 10/15/17 (c)(d) ....... 2,021,236 2,022,186
Series 1997-C Class A1
6.49%, due 2/15/18 (c) ............. 16,586,037 16,675,269
NationsCredit Grantor Trust
Series 1997-2 Class A2
6.25%, due 11/15/13 (c) ............ 3,608,174 3,618,421
------------
29,799,024
------------
EQUIPMENT LOANS (2.9%)
Case Equipment Loan Trust
Series 1997-A Class A3
6.45%, due 3/15/04 (c) ............. 17,600,000 17,709,472
------------
HOME EQUITY LOANS (5.6%)
Household Finance Corp.
Home Equity Loan Asset-Backed
Certificates
Series 1992-2 Class A2
6.0475%, due 10/20/07 (c)(d) ....... 8,029,325 8,041,851
Revolving Home Equity Loan Trust
Series 1994-2 Class A1
5.8863%, due 9/20/14 (c)(d) ........ 7,213,722 7,281,386
Money Store Home Equity Trust (The)
Series 1997-A Class A10
5.7862%, due 5/15/25 (c)(d) ........ 3,474,074 3,473,518
Saxon Asset Securities Trust
Series 1997-3 Class AF1
5.8163%, due 10/25/20 (c)(d) ....... 2,399,018 2,399,762
Southern Pacific Secured Asset Corp.
Series 1997-1 Class A1
5.8563%, due 4/25/27 (c)(d) ........ 12,684,512 12,686,542
------------
33,883,059
------------
STUDENT LOANS (0.7%)
Nellie Mae, Inc.
Series 1996-1 Class A1
5.8263%, due 12/15/04 (c)(d) ....... 4,142,649 4,143,933
------------
Total Asset-Backed Securities
(Cost $102,737,825) ................ 102,984,331
------------
MORTGAGE-BACKED SECURITIES (8.1%)
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS)(5.1%)
First Union-Lehman Brothers
Bank of America
Commercial Mortgage Trust
Series 1998-C2 Class A1
6.28%, due 6/18/07 ................. 5,608,386 5,645,906
FMAC Loan Receivables Trust
Series 1998-BA Class A2
6.74%, due 11/15/20 (a)(c) ......... 4,315,000 4,377,093
General Motors Acceptance Corp.
Commercial Mortgage Securities Inc.
Series 1998-C1 Class A1
6.411%, due 11/15/07 (c) ........... 5,063,146 5,127,702
Merrill Lynch Mortgage Investors, Inc.
Series 1998-C2 Class A2
6.39%, due 2/15/30 (c) ............. 3,375,000 3,408,109
Series 1998-C1 Class A2
6.48%, due 11/15/26 (c)(d) ......... 3,375,000 3,409,864
Series 1995-C2 Class A1
7.0875%, due 6/15/21 (c)(d) ........ 6,699,864 6,816,173
Mortgage Capital Funding, Inc.
Series 1998-MC1 Class A1
6.417%, due 6/18/07 (c) ............ 2,155,032 2,181,840
------------
30,966,687
------------
RESIDENTIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (3.0%)
Bear Stearns Mortgage Securities, Inc.
Series 1996-4 Class AI2
10.50%, due 9/25/27 (c) ............ 891,445 903,979
Residential Asset Securitization Trust
Series 1997-A3 Class A7
10.00%, due 5/25/27 (c) ............ 4,261,070 4,383,576
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
MORTGAGE-BACKED SECURITIES (Continued)
RESIDENTAL MORTGAGE LOANS (COLLATERIZED
MORTGAGE OBLIGATIONS) (Continued)
Residential Asset Securitization Trust
Series 1997-A5 Class A4
10.00%, due 7/25/27 (c) ............ $ 2,531,514 $ 2,588,473
Series 1997-A8 Class A2
10.00%, due 10/25/27 (c) ........... 2,162,694 2,346,523
Structured Asset Securities Corp.
Series 1998-C2A Class B
5.9763%, due 1/25/01 (a)(d) ........ 4,775,792 4,775,792
Series 1996-2 Class A1
7.00%, due 8/25/26 (c) ............. 2,915,045 2,927,259
------------
17,925,602
------------
Total Mortgage-Backed Securities
(Cost $48,951,667) ................. 48,892,289
------------
U.S. GOVERNMENT & FEDERAL AGENCIES (82.5%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (3.4%)
5.25%, due 1/15/03 ................. 21,280,000 20,877,595
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (15.8%)
6.00%, due 7/20/13 TBA (b) ......... 20,615,000 20,402,459
6.45%, due 1/1/05 (c) .............. 5,328,879 5,444,249
6.50%, due 12/1/27 (c) ............. 4,327,350 4,311,815
6.50%, due 8/13/28 TBA (b) ......... 16,265,000 16,188,717
6.54%, due 1/1/05 (c) .............. 4,976,450 5,108,973
7.00%, due 7/20/13-8/13/28 TBA (b).. 42,950,000 43,548,585
------------
95,004,798
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION I
(MORTGAGE PASS-THROUGH SECURITIES) (22.0%)
7.00%, due 8/19/28 TBA (b) ......... 49,415,000 50,156,225
7.50%, due 12/15/23 (c) ............ 7,094,220 7,298,179
8.00%, due 7/21/28 TBA (b) ......... 54,710,000 56,681,901
9.50%, due 5/15/22 (c) ............. 16,783,307 18,377,721
------------
132,514,026
------------
UNITED STATES TREASURY BONDS (22.0%)
6.125%, due 11/15/27 (e) ........... 24,380,000 26,124,633
7.625%, due 2/15/25 (e) ............ 54,360,000 68,442,502
8.875%, due 8/15/17 (e) ............ 27,882,000 38,010,973
------------
132,578,108
------------
UNITED STATES TREASURY NOTES (19.3%)
5.50%, due 11/15/98 (e) ............ 11,850,000 11,853,674
5.75%, due 4/30/03 (e) ............. 36,305,000 36,662,241
6.25%, due 2/15/03 ................ 6,635,000 6,827,813
6.625%, due 5/15/07 (e) ............ 48,915,000 52,537,645
7.875%, due 11/15/04 ............... 7,440,000 8,356,013
------------
116,237,386
------------
Total U.S. Government &
Federal Agencies
(Cost $492,443,798) ................ 497,211,913
------------
Total Long-Term Investments
(Cost $644,133,290) ................ 649,088,533
------------
SHORT-TERM INVESTMENTS (24.5%)
COMMERCIAL PAPER (18.1%)
General Electric Co.
5.62%, due 7/6/98 .................. 29,165,000 29,142,235
Goldman Sachs Group L.P.
5.52%, due 7/6/98 .................. 24,990,000 24,970,841
Merrill Lynch & Co. Inc.
5.63%, due 7/6/98 (c) .............. 20,000,000 19,984,361
Norwest Corp.
5.71%, due 7/2/98 .................. 15,000,000 14,997,621
Salomon, Smith Barney Holdings Inc.
5.56%, due 7/1/98 .................. 20,000,000 20,000,000
------------
Total Commercial Paper
(Cost $109,095,058) ................ 109,095,058
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Government Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
FEDERAL AGENCIES (6.4%)
Federal Home Loan Bank
Discount Corp.
5.55%, due 7/1/98 .................. $35,500,000 $ 35,500,000
------------
Federal National Mortgage
Association
5.55%, due 7/2/98 .................. 2,975,000 2,974,541
------------
Total Federal Agencies
(Cost $38,474,541) ................. 38,474,541
------------
Total Short-Term Investments
(Cost $147,569,599) ................ 147,569,599
------------
Total Investments
(Cost $791,702,889)(f) ............ 132.2% 796,658,132(g)
Liabilities in Excess of
Cash and Other Assets .............. (32.2) (193,975,589)
----------- ------------
Net Assets ........................... 100.0% $602,682,543
============ ============
</TABLE>
- ----------
(a) May be sold to institutional investors only.
(b) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and
maturity date will be determined upon settlement.
(c) Segregated as collateral for TBA.
(d) Floating rate. Rate shown is the rate in effect at June 30, 1998.
(e) Represents securities out on loan or a portion of which is out on loan.
(f) The cost for Federal income tax purposes is $791,746,166.
(g) At June 30, 1998 net unrealized appreciation was $4,911,966, 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 $5,703,671 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $791,705.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $791,702,889) ..... $ 796,658,132
Collateral held for securities loaned, at value (Note 5) .............. 156,513,750
Receivables:
Investment securities sold .......................................... 69,668,717
Interest ............................................................ 5,112,959
Fund shares sold .................................................... 233,741
--------------
Total assets ....................................................... 1,028,187,299
--------------
LIABILITIES:
Securities lending collateral, at value (Note 5) ...................... 156,513,750
Payables:
Investment securities purchased ..................................... 264,712,187
Fund shares redeemed ................................................ 767,033
NYLIFE Distributors ................................................. 496,507
MainStay Management ................................................. 299,559
Transfer agent ...................................................... 90,470
Custodian ........................................................... 50,162
Trustees ............................................................ 3,903
Accrued expenses ...................................................... 79,343
Dividend payable ...................................................... 2,491,842
--------------
Total liabilities .................................................. 425,504,756
--------------
Net assets ............................................................ $ 602,682,543
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 20,496
Class B ............................................................. 702,822
Additional paid-in capital ............................................ 718,128,099
Accumulated distribution in excess of net investment income ........... (1,350,187)
Accumulated net realized loss on investments .......................... (119,773,930)
Net unrealized appreciation on investments ............................ 4,955,243
--------------
Net assets ............................................................ $ 602,682,543
==============
CLASS A
Net assets applicable to outstanding shares ........................... $ 17,115,290
==============
Shares of beneficial interest outstanding ............................. 2,049,592
==============
Net asset value per share outstanding ................................. $ 8.35
Maximum sales charge (4.50% of offering price) ........................ 0.39
--------------
Maximum offering price per share outstanding .......................... $ 8.74
==============
CLASS B
Net assets applicable to outstanding shares ........................... $ 585,567,253
==============
Shares of beneficial interest outstanding ............................. 70,282,150
==============
Net asset value and offering price per share outstanding .............. $ 8.33
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest ............................................................ $ 20,322,990
--------------
Expenses:
Distribution--Class B ............................................... 2,276,157
Management .......................................................... 1,870,720
Service--Class A .................................................... 20,748
Service--Class B .................................................... 758,719
Transfer agent ...................................................... 601,038
Shareholder communication ........................................... 69,526
Recordkeeping ....................................................... 45,030
Custodian ........................................................... 43,359
Professional ........................................................ 33,366
Registration ........................................................ 19,296
Trustees ............................................................ 8,565
Miscellaneous ....................................................... 9,125
--------------
Total expenses ..................................................... 5,755,649
--------------
Net investment income ................................................. 14,567,341
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments ...................................... 18,806,587
Net change in unrealized appreciation on investments .................. (11,268,851)
--------------
Net realized and unrealized gain on investments ....................... 7,537,736
--------------
Net increase in net assets resulting from operations .................. $ 22,105,077
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------- -------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income ....................................................................... $ 14,567,341 $ 40,092,680
Net realized gain on investments ............................................................ 18,806,587 2,612,844
Net change in unrealized appreciation on investments ........................................ (11,268,851) 13,181,818
------------- -------------
Net increase in net assets resulting from operations ........................................ 22,105,077 55,887,342
------------- -------------
Dividends to shareholders:
From net investment income:
Class A .................................................................................... (486,919) (1,019,757)
Class B .................................................................................... (15,434,727) (38,267,749)
------------- -------------
Total dividends to shareholders .......................................................... (15,921,646) (39,287,506)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .................................................................................... 3,677,835 10,873,435
Class B .................................................................................... 23,936,216 47,345,675
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .................................................................................... 367,266 738,859
Class B .................................................................................... 9,873,357 28,767,769
------------- -------------
37,854,674 87,725,738
Cost of shares redeemed:
Class A .................................................................................... (4,229,114) (11,379,777)
Class B .................................................................................... (90,731,255) (238,724,333)
------------- -------------
Decrease in net assets derived from capital share transactions ........................... (57,105,695) (162,378,372)
------------- -------------
Net decrease in net assets ............................................................... (50,922,264) (145,778,536)
NET ASSETS:
Beginning of period ........................................................................... 653,604,807 799,383,343
------------- -------------
End of period ................................................................................. $ 602,682,543 $ 653,604,807
============= =============
Accumulated undistributed net investment income (excess distribution) at end of period ........ (1,350,187) $ 4,118
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
----------- ----------- ------------- ---------- ------------- -------------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
--------------------------- -------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ............... $8.27 $8.25 $8.06 $8.04 $8.41 $8.41
----------- ----------- ----------- ----------- ----------- -----------
Net investment income ............... 0.22 0.19 0.50 0.45 0.50 0.46
Net realized and
unrealized gain (loss)
on investments .................... 0.10 0.10 0.21 0.21 (0.35) (0.37)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations ........................ 0.32 0.29 0.71 0.66 0.15 0.09
----------- ----------- ----------- ----------- ----------- -----------
Less dividends and
distributions:
From net investment
income ............................ (0.24) (0.21) (0.50) (0.45) (0.50) (0.46)
In excess of net
investment income ................. -- -- -- -- -- --
Return of capital ................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ..................... (0.24) (0.21) (0.50) (0.45) (0.50) (0.46)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value at
end of period ..................... $8.35 $8.33 $8.27 $8.25 $8.06 $8.04
=========== =========== =========== =========== =========== ===========
Total investment
return (a) ........................ 3.95% 3.57% 9.12% 8.54% 1.97% 1.25%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ......................... 5.40%+ 4.65%+ 6.23% 5.67% 6.3% 5.7%
Expenses ......................... 1.12%+ 1.87%+ 1.09% 1.65% 1.0% 1.6%
Portfolio turnover rate ............. 185% 185% 338% 338% 307% 307%
Net assets at end of
period (in 000's) ................. $17,115 $585,567 $17,114 $636,491 $16,413 $782,970
<CAPTION>
Class B
--------------------------------------------------
Class A Class B September 1
------------- ------------- through
Year ended December 31 Year ended August 31
December 31, 1995 1994** 1994 1993
-------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .......... $7.76 $7.76 $8.04 $8.77 $8.88
------------- ------------- ------------- ------------- -------------
Net investment income .......... 0.58 0.54 0.19 0.57 0.68
Net realized and
unrealized gain (loss)
on investments ............... 0.65 0.65 (0.29) (0.71) (0.09)
------------- ------------- ------------- ------------- -------------
Total from investment
operations ................... 1.23 1.19 (0.10) (0.14) 0.59
------------- ------------- ------------- ------------- -------------
Less dividends and
distributions:
From net investment
income ....................... (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 ................ (0.58) (0.54) (0.18) (0.59) (0.70)
------------- ------------- ------------- ------------- -------------
Net asset value at
end of period ................ $8.41 $8.41 $7.76 $8.04 $8.77
============= ============= ============= ============= =============
Total investment
return (a) ................... 16.38% 15.69% (1.24%) (1.63%) 6.92%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .................... 7.3% 6.7% 7.1%+ 7.1% 7.8%
Expenses .................... 1.0% 1.7% 1.7%+ 1.7% 1.7%
Portfolio turnover rate ........ 540% 540% 143% 491% 629%
Net assets at end of
period (in 000's) ............ $12,784 $990,184 $1,024,492 $1,119,586 $1,210,998
</TABLE>
- ----------
* Unaudited.
** 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.
16
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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.
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
17
<PAGE>
MainStay Government Fund
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.
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.
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
18
<PAGE>
Notes to Financial Statements unaudited (continued)
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 Fund's
average daily net assets. The Manager has voluntarily established a fee
breakpoint, which may be discontinued at any time, of 0.55% on assets in excess
of $1 billion. For the six months ended June 30, 1998 the Manager earned
$1,870,720. It was not necessary for the Manager to waive part of its fee for
this period.
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. To the
extent that the Manager has voluntarily established a fee breakpoint, the
Sub-Adviser has voluntarily agreed to do so proportionately.
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 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.
19
<PAGE>
MainStay Government 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 $3,745 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$344,029 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $629,024.
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 $9,172 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$45,030 for the six months ended June 30, 1998.
Note 4--Federal Income Tax:
At December 31, 1997, for Federal income tax purposes, capital loss
carryforwards of $137,637,947 were 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>
20
<PAGE>
Notes to Financial Statements unaudited (continued)
Note 5--Portfolio Securities Loaned:
At June 30, 1998, the Fund had securities on loan with a market value of
$152,051,384 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.
Net income earned by the Fund for securities lending transactions amounted to
$254,930, net of broker fees and rebates, for the six months ended June 30,
1998, which is included as interest income on the Statement of Operations.
Note 6--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of U.S.
Government securities were $1,286,938 and $1,366,413, respectively. Purchases
and sales of securities other than U.S. Government securities, securities
subject to repurchase transactions and short-term securities, were $63,928 and
$51,017, respectively.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold .................................................. 442 2,887 1,341 5,865
Shares issued in reinvestment of dividends and distributions.. 44 1,192 91 3,568
------- ------- ------- -------
486 4,079 1,432 9,433
Shares redeemed .............................................. (506) (10,950) (1,400) (29,669)
------- ------- ------- -------
Net increase (decrease) ...................................... (20) (6,871) 32 (20,236)
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
21
<PAGE>
The MainStay(R) Funds
<TABLE>
<CAPTION>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Small Cap Growth Fund/1/ Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation/2/
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund/1/ To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund/3/ To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation/2/
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation/2/
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund/3/ To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc./2/
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index")./4/
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund/3/ To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc./2/
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation/2/
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
/1/ Stocks of small-capitalization companies may be more volatile in price
and have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than large-
capitalization companies.
/2/ An indirect wholly owned subsidiary of New York Life Insurance Company.
/3/ 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.
22
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation/2/
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund/3,5/ To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation/2/
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund/5,6/ To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation/2/
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation/2/
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund/3,5/ To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation/2/
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund/3/ To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation/2/
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund/3,5/ diversified portfolio of high-yield debt securities. Financial Corporation/2/
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund/3,5/ To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation/2/
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/4/ "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)"
are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed by Monitor Capital Advisors, Inc. The Equity Index Fund is not
sponsored, endorsed, sold, or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the Equity Index Fund. 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.
/5/ High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
/6/ As of 6/2/97, this Fund was closed to new investors.
23
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT FUND/7/ To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation/2/
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation/2/
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund/8/ To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation/2/
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund/8/ To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation/2/
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund/9/ To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation/2/
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
/7/ Although some of the instruments the Fund purchases are backed by the
U.S. government and its agencies, shares of the Fund are not guaranteed
and the Fund's net asset value will fluctuate.
/8) 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.
/9/ Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
24
<PAGE>
MainStay Government Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MainStay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA08-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Total Return Fund Highlights 3
$10,000 Invested in the MainStay Total
Return Fund versus S&P 500 and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 9
Returns & Lipper Rankings 12
Top 10 Equity Holdings 13
Top 10 Bond Holdings 13
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Unaudited Financial Statements 22
Notes to Financial Statements 26
The MainStay Funds 32
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* See page 4 for more information on the S&P 500.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Total Return Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o A robust economy, declining interest rates, modest inflation, and low
unemployment moved both stocks and bonds higher in the first six months of
1998.
o Weaknesses in Asian economies caused a flight to high-quality bonds and
highly liquid stocks that investors felt could perform relatively well in
the event of an economic downturn.
o Merger and acquisition activity was strong, helping the S&P 500* advance to
record levels in June.
o Although 30-year Treasury bond yields declined to all-time lows in June,
overall, yields in all domestic bond sectors tended to remain in a
relatively narrow range.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o The MainStay Total Return Fund returned 21.97% and 21.22% for Class A
shares and Class B shares, respectively, excluding all sales charges, for
the one-year period ended 6/30/98.
o The Fund benefited from individual security selection among financial and
consumer retail stocks and reduced its technology and energy holdings.
o The Fund enhanced returns with a shifting duration strategy and strategic
trades in Treasuries, mortgage-backed securities, and corporate bonds.
o Both share classes outperformed the average Lipper+ balanced fund, which
returned 8.95% for the six months ended 6/30/98.
- ----------
* See footnote on page 4 for more information on the S&P 500 Index.
+ See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
Total Return Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-Year 15.26%, 5-Year 13.70%, 10-Year 13.31%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Mainstay
Total Return
Period End Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $ 9,450 $10,000 $10,000
6/89 $10,590 $12,055 $10,517
6/90 $11,957 $14,043 $11,008
6/91 $13,036 $15,081 $11,526
6/92 $14,885 $17,103 $11,882
6/93 $17,346 $19,434 $12,238
6/94 $17,261 $19,708 $12,543
6/95 $20,803 $24,846 $12,924
6/96 $24,276 $31,306 $13,280
6/97 $28,595 $42,172 $13,585
6/98 $34,878 $54,887 $13,813
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 16.22%, 5-Year 14.33%, 10-Year 13.74%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Mainstay
Total Return
Period End Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $10,000 $10,000
6/89 $11,207 $12,055 $10,517
6/90 $12,653 $14,043 $11,008
6/91 $13,794 $15,081 $11,526
6/92 $15,751 $17,103 $11,882
6/93 $18,356 $19,434 $12,238
6/94 $18,266 $19,708 $12,543
6/95 $21,951 $24,846 $12,924
6/96 $25,486 $31,306 $13,280
6/97 $29,882 $42,172 $13,585
6/98 $36,221 $54,887 $13,813
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 6/30/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
With U.S. gross domestic product increasing more than anticipated in the first
half of 1998, the stock market enjoyed robust returns. Declining interest rates,
benign inflation, low unemployment, and a rallying bond market were among the
many factors that influenced investors during the reporting period.
A number of forces combined to focus investor attention on large-capitalization
growth stocks. Continuing difficulties in Asian markets spread to China, Latin
America, and Russia, causing a flight to quality in domestic issues, with
investors emphasizing highly liquid securities. Technology companies weakened on
Asian setbacks, and declining oil prices caused energy issues to underperform.
Asian problems helped keep the Federal Reserve from adjusting domestic interest
rates. As a result, interest rates in general have remained within a relatively
narrow range, with 2-year Treasuries declining just 16 basis points over the
first half of the year, and 30-year Treasuries remaining flat in the first
quarter, but declining 30 basis points in the second quarter of 1998. The price
rally led to a flattening yield curve, which presented some opportunities. The
budget surplus reduced the need for new Treasury issues, which shifted supply
dynamics in the government securities market. Mortgage-backed securities saw
high prepayments early in the year, creating buying opportunities. Corporate
bonds suffered from oversupply and widening yield spreads, which made them an
underperforming sector relative to the market as a whole.
Given this context, how did the MainStay Total Return Fund perform in the six
months ended 6/30/98?
The MainStay Total Return Fund returned 13.03% and 12.58% for Class A shares and
Class B shares, respectively, excluding all sales charges, for the six months
ended 6/30/98. Both share classes outperformed the average Lipper* balanced
fund, which returned 8.95% for the six months ended 6/30/98.
Why was the Fund able to outperform its peers?
The Fund benefited from strong security selection, strategic sales, and strong
performance among many of its core holdings in both its equity and income
components. As Asian difficulties continued, the Fund's domestic retail stocks
provided strong performance. We reduced the Fund's energy and technology
holdings, but purchased stocks for the Fund among proprietary product providers.
Reducing oil service stock holdings helped us control the impact of lower oil
prices on the Fund's performance.
In the income component, the Fund benefited from its duration strategy, moving
from slightly long to neutral in both quarters, which had a positive impact on
performance. Among Treasuries, the Fund used a variety of technical indicators
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Flight to quality
- -----------------
When investors in general move to improve the quality or liquidity of the
securities they own, because of economic, industry, or market concerns that
suggest lower-quality securities or those that are less liquid may be more
vulnerable to negative market events.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
- ----------
* See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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.
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).
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.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period End Total Return %
- ---------------------------------------------------
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 (2.41)
12/95 28.66
12/96 13.22
12/97 18.24
6/98 13.03
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/87 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>
Period End Total Return %
- ---------------------------------------------------
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 (2.41)
12/95 27.96
12/96 12.73
12/97 17.65
6/98 12.58
</TABLE>
See footnote * on page 12 for more information on performance.
for strategic trading between newer and older issues. In the mortgage market, we
successfully anticipated mortgage prepayments, which helped the Fund's
performance. In the second quarter, the yield curve flattened about 20 basis
points. The Fund's concentration in the back end of the market allowed it to
benefit strongly from the rally in 30-year Treasury bonds.
What were some of the Fund's significant stock purchases during the reporting
period?
The Fund bought EMC Corp., a corporate data storage provider that has had a
consistent growth record, selling 3Com to make the purchase. The move reduced
technology holdings that concentrated on
6
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- --------------------------------------------------
<S> <C>
U.S. Government & Federal Agencies 19.2%
Retail 10.1%
Financial Services 7.9%
Drugs 6.1%
Banks 4.2%
All Other 52.5%
</TABLE>
Actual percentages will vary over time.
commodity-type products such as memory chips and adapter cards and increased
exposure to companies with their own proprietary products and services. EMC
Corp. rose 63%+ in the first half of 1998 and had a positive impact on
performance.
The Fund also purchased Pfizer, which had a slightly negative impact on
performance as the company's shareholders took profits in the stock. We believe,
however, that the stock is well positioned for the coming months. The Fund
bought and sold Disney on changing fundamentals, with a slightly negative impact
on performance, and had positive results from Colgate, which is benefiting from
cost cutting, dependable earnings, and steady revenue growth from its toothpaste
called Total.
Were there any significant sales during the reporting period?
The Fund sold Adaptec when its fundamentals deteriorated due to Asian
difficulties and a slowdown in earnings. The stock declined 40% during the first
half of 1998. The Fund also sold Compaq when we perceived that the fundamental
reasons for owning it had disappeared.
Declining interest rates had a negative impact on mortgage insurer MGIC, and the
Fund sold the stock late in the second quarter of 1998 to take profits earned
over the years. The Fund also sold Mattel at a profit, which had a positive
impact on the Fund's performance when Barbie sales declined, Toys "R" Us cut
back its inventory, and Tyco, the company's toy division, provided disappointing
earnings estimates.
The Fund also sold Diamond Offshore and ENSCO, two oil service companies, as oil
prices continued to decline. These stocks had a negative impact on the Fund, so
we viewed the sales as a positive move.
Which stocks were the Fund's best performers?
Lucent Technologies was up 108.6% in the first half of the year and had a
positive impact on the Fund's performance, as the company won telecommunications
contracts and built on its already strong fundamentals.
Back end of the market
- ----------------------
Bonds are issued in a variety of maturities from very short to as long as 30
years or more. The back end of the market refers to bonds with longer
maturities, such as 30-year issues.
- ----------
+ Returns reflect performance for the six-month period ended 6/30/98.
7
<PAGE>
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be underweighted in a sector when that portion of the
portfolio is lower than the sector's general relationship to the market as a
whole.
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.
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.
Tyco International is a conglomerate with holdings in fire retardation, security
systems, fiber optic cable, and health care. The company bought ADT Limited and
Sherwood Davis, a medical device manufacturer, and advanced nearly 40% during
the reporting period, with a positive impact on the Fund's performance.
Schering-Plough is a premier pharmaceutical company, which had outstanding sales
growth from Claritin, a product for allergy sufferers. The Fund benefited as the
stock rose 48.3% during the reporting period.
Were there other stocks that performed well for the Fund?
Yes. Several of the Fund's stocks benefited from investors' focus on purely
domestic retailers. Kohl's rose 52% during the reporting period, Staples was up
56%, and Home Depot rose 41%. In the financial sector, the Fund had positive
results with SunAmerica, a retirement annuity provider that rose 35% during the
reporting period. The first-quarter announcement that WorldCom would purchase
MCI--a telecommunications, long-distance, local telephone, and Internet
provider--caused WorldCom stock to rise 60% during the first half of the year.
Were there stocks that detracted from the Fund's performance?
Cendant was a stock the Fund owned that suffered a major setback when accounting
practices at one of its component companies came into question in April. The
stock price was cut in half, which had a negative impact on performance. We
believe the business units have robust trends and are in vibrant sectors such as
housing and travel, so at the end of June, the Fund continued to hold the stock.
We already mentioned Adaptec and MGIC, which were negative performers. Eli Lilly
also underperformed expectations, when the benefits of an osteoporosis drug
proved less dramatic than investors anticipated.
What were the best decisions made in the equity portion of the Fund during the
first half of 1998?
The best decision made during the reporting period was sticking to our
disciplines and proactively reviewing every stock in the Fund's investment
portfolio. We decided to increase the Fund's weighting in the securities we felt
had the best potential--companies such as Lucent Technologies, which were
strongly positive.
We also believe our decision to reduce the Fund's technology and energy stocks,
as well as overweighting the Fund's exposure to domestic retailers and financial
stocks helped performance.
Which sectors did the Fund emphasize during the first half of the year?
We're bottom-up investors and select stocks on their individual merits. As a
result of that approach, the Fund's equity component was overweighted in
communications, which underperformed as a sector, even though the Fund's stock
holdings were up significantly in the first half of the year. The Fund was also
heavy in consumer cyclicals, such as retailers and restaurants, automotive
stocks, and housing, which, with the exception of Cendant, were generally
positive.
8
<PAGE>
Being overweighted in technology stocks was beneficial, primarily because our
security selection for the Fund emphasized companies with proprietary products,
which tended to outperform other technology issues. Over the reporting period,
we decreased the Fund's technology exposure, by selling Adaptec, 3Com, and
Compaq. The Fund was also overweighted in financial stocks, although the
companies held in the portfolio underperformed the market in general. Several
were tied up in merger transactions, and may perform well when the deals are
completed.
Were there sectors where the Fund was underweighted?
During the reporting period, the Fund was underweighted in basic materials and
capital goods, which was beneficial for performance. The Fund was also
underweighted in consumer staples, since many of the companies didn't meet our
growth criteria. While the group underperformed, the Fund's holdings
outperformed the market. Our decision to underweight the Fund in energy,
utilities, and transportation stocks generally had a positive impact on
performance.
What accounted for the performance of the Fund's income component?
Our duration strategy benefited performance throughout the period. Given our
strategically bullish outlook, we kept the Fund's duration in the neutral to
long range. Over the period, the Fund was neutral as rates headed higher and
longer as rates were rallying.
What other strategies were used in the Fund's income component?
With interest rates remaining in a relatively narrow range, we used a variety of
technical indicators to guide the Fund between newer and older issues in the
Treasury market. The result was an incremental increase in return. Older
Treasuries added value in the early part of both the first and second quar-
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- -------------------------------------------------------------------
<S> <C>
Common Stocks 61.7%
Bonds & Notes 36.8%
Cash, Equivalents & Other Assets, Less Liabilities 1.5%
</TABLE>
Actual percentages will vary over time.
Mergers and
acquisitions
- ------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
9
<PAGE>
ters, newer securities later each quarter. On the whole, the strategy had a
positive impact on the Fund's performance.
What happened in the market for mortgage-backed securities?
At the beginning of the year, the Fund was underweighted in higher-coupon
mortgage-backed securities. Anticipating prepayments and believing that
mortgage-related bonds would underperform, we reduced the Fund's exposure to
high-coupon mortgage securities, which had a positive impact on performance.
After the prepayments rose, we increased the Fund's exposure to mortgage
securities in general, focusing primarily on commercial mortgages for a couple
of reasons. First, new issuance was heavy, but demand was not, which tended to
force prices down to attractive levels. We also liked commercial mortgages
because we believed they carried less risk of prepayments if interest rates
continued to decline.
What was the impact on the Fund's investment portfolio?
As the market began to rally in the second quarter of 1998, we pared back on the
Fund's positions to take profits. But the Fund remained overweighted in
mortgage-backed securities in the latter part of the second quarter, which hurt
performance a bit when a second wave of prepayments began. Despite selecting
coupons that were relatively insensitive to prepayment risk, mortgages in
general underperformed.
How did the Fund's corporate bonds perform?
As rates rallied at the beginning of the year, the prospect of low-cost capital
attracted a number of corporations to the bond market. The oversupply of
corporates caused spreads to widen, causing the Fund's corporate bond position
to underperform in the first part of the first quarter. We increased the Fund's
exposure to strong companies whose bonds were highly liquid, selecting issues
like Coca-Cola Enterprises and Walmart, which have strong domestic markets and
do not depend on business in Asia. The Fund also sought securities with solid
collateral, such as Airplane Leases, which has actual aircraft supporting its
debt obligations. All of these securities had a positive impact on the Fund's
performance.
Did you change the Fund's asset allocation much during the first half of 1998?
Not really. The Fund sold agencies at a profit and invested a bit more in
corporates and mortgage-backed securities. But overall, the allocation remained
relatively unchanged.
In addition to Treasuries and corporate bonds, the Fund continues to invest in a
wide range of mortgage-backed and asset-backed securities, including Ginnie
Maes, Fannie Maes, collateralized mortgage obligations, low-balance loans,
manufactured-housing loans, and others. We believe that this diversification may
add value by reducing the risks associated with any single sector of the market.
10
<PAGE>
Has the portfolio maintained high-quality investments throughout the reporting
period?
Yes, it has. The MainStay Total Return Fund's income component holds securities
that are generally of very high quality. As we seek opportunities for the Fund,
we try to remain in high-quality securities to avoid exposing the Fund's
shareholders to unnecessary risks. We're pleased with the Fund's recent
performance, because we believe it has provided investors with higher-than-
average returns with lower-than-average risk.
What is your outlook for the future of the stock and bond markets?
Looking ahead, we believe that Asian difficulties may have further impact on the
U.S. economy, which may create both challenges and opportunities. While we
anticipate low inflation and lower interest rates, we believe the wide gap
between stock prices and corporate profits and earnings may eventually cause
investors to rethink the types of stocks investors want to own. Meanwhile, we
will utilize our proprietary research and careful security selection process
seeking to identify opportunities for the Fund's shareholders. No matter how the
markets and the economy may move, the Fund will continue to seek to realize
current income consistent with reasonable opportunity for future growth of
capital and income.
Ravi Akhoury
Edmund Spelman
Rudolph Carryl
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
11
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
==========================================================================================
Fund average annual total returns*
==========================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 21.97% 14.99% 13.95% 13.80%
Class B 21.22% 14.56% 13.74% 13.60%
==========================================================================================
<CAPTION>
==========================================================================================
Fund SEC returns*
==========================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 15.26% 13.70% 13.31% 13.19%
Class B 16.22% 14.33% 13.74% 13.60%
==========================================================================================
<CAPTION>
==========================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
==========================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 51 out of n/a n/a 60 out of
373 funds 232 funds
Class B 72 out of 44 out of 12 out of 21 out of
373 funds 131 funds 51 funds 47 funds
Average Lipper
balanced fund 17.58% 13.91% 12.80% 13.16%
==========================================================================================
<CAPTION>
==========================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
==========================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $24.04 $0.1903 $0.0000
Class B $24.04 $0.1071 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 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 six 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
6/30/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 12/29/87.
12
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
Tyco International Ltd. $32,955,300
Lucent Technologies Inc. 32,750,919
SunAmerica Inc. 27,483,844
Cisco Systems, Inc. 27,080,184
Schering-Plough Corp. 26,012,338
Travelers Group Inc. 25,995,818
Medtronic, Inc. 24,862,500
Microsoft Corp. 24,384,375
Kohl's Corp. 24,277,500
Lilly (Eli) & Co. 23,518,250
<CAPTION>
Top 10 Bond Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
Government National Mortgage Association I (Mortgage
Pass-Through Security), 8.00%, due 8/19/28 TBA $33,175,978
Government National Mortgage Association I (Mortgage
Pass-Through Security), 7.00%, due 8/19/28 TBA 30,419,550
United States Treasury Note 5.75%, due 4/30/03 30,335,594
United States Treasury Bond 7.625%, due 2/15/25 22,260,181
United States Treasury Note 5.625%, due 11/30/00 20,314,391
Federal National Mortgage Association (Mortgage
Pass-Through Security), 6.50%, due 8/13/28 TBA 17,228,816
Federal National Mortgage Association (Mortgage
Pass-Through Security), 7.00%, due 7/20/13 TBA 15,956,131
Government National Mortgage Association I (Mortgage
Pass-Through Security), 8.00%, due 7/21/28 TBA 15,295,050
Federal National Mortgage Association (Mortgage
Pass-Through Security), 6.00%, due 7/20/13 TBA 11,910,000
Green Tree Recreational Equipment & Consumer Trust
Series 1997-C Class A1 6.49%, due 2 /15/18 10,880,346
</TABLE>
- ----------
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.
13
<PAGE>
<TABLE>
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
United States Treasury Notes, due 11/15/99 - 5/15/07 $267,037,457
Federal National Mortgage Association (Mortgage Pass-Through
Securities), due 1/15/03 - 8/13/28 260,576,607
United States Treasury Bonds, due 8/15/13 - 11/15/27 226,422,899
Government National Mortgage Association I and II
(Mortgage Pass-Through Securities), due 7/21/28 - 8/19/28 150,212,262
EMC Corp. 11,246,262
Walt Disney Co. (The) 10,717,532
Ford Motor Credit Co. and Ford Capital B.V., due 1/14/03 - 6/1/10 10,706,069
Citibank Credit Card Master Trust I, due 1/15/10 9,592,224
Conseco, Inc., due 6/15/11 and Common Stock 9,484,399
EOP Operating LP, due 2/15/02 - 6/15/04 9,420,911
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
Federal National Mortgage Association (Mortgage Pass-Through
Securities), due 7/23/99 - 8/13/28 $315,276,079
United States Treasury Bonds, due 8/15/13 - 11/15/27 251,435,432
United States Treasury Notes, due 11/30/99 - 5/15/07 232,616,218
Government National Mortgage Association I and II (Mortgage
Pass-Through Securities), due 12/15/23 - 8/19/28 102,319,570
MGIC Investment Corp. 15,744,272
California Infrastructure & Economic Development Bank
Special Purpose Trust Rate Reduction
Certificates, due 9/25/05 - 9/25/08 13,620,270
Green Tree Financial Corp. and Green Tree Recreational Equipment
& Consumer Trust, due 2/25/18 - 11/15/28 and Common Stock 12,431,717
Walt Disney Co. (The) 10,706,588
3Com Corp. 9,882,341
Linear Technology Corp. 9,485,592
</TABLE>
- ----------
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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
LONG-TERM BONDS (36.8%)+
ASSET-BACKED SECURITIES (4.1%)
AIRLINE LEASES (0.3%)
Continental Airlines
Pass-Through Trusts
Series 1998-1A
6.648%, due 3/15/19 ................... $ 4,680,000 $ 4,701,902
--------------
AIRPLANE LEASES (1.2%) AerCo Ltd.
Series 1A Class A1
5.8463%, due 7/15/23 (c)(f) ........... 3,520,000 3,520,000
Aircraft Lease Portfolio
Securitization Ltd.
Series 1996-1 Class CX
7.0375%, due 6/15/06 (e)(f) ........... 4,085,735 4,085,735
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19 (e) ................ 4,458,496 4,691,452
Morgan Stanley Aircraft Finance
Series 1A Class A1
5.8663%, due 3/15/23 (c)(e)(f) ........ 5,190,000 5,188,184
--------------
17,485,371
--------------
CONSUMER LOANS (1.4%)
Chase Manhattan Recreational
Vehicle Owner Trust
Series 1997-A Class A5
6.05%, due 11/15/04 (e) ............... 5,390,000 5,395,875
CIT Recreational Vehicle Trust
Series 1998-A Class A2
5.92%, due 3/15/07 (e) ................ 2,460,000 2,463,173
Green Tree Recreational
Equipment & Consumer Trust
Series 1997-C Class A1
6.49%, due 2/15/18 (e) ................ 10,822,123 10,880,346
NationsCredit Grantor Trust
Series 1997-2 Class A2
6.25%, due 11/15/13 (e) ............... 2,567,092 2,574,383
--------------
21,313,777
--------------
CREDIT CARD RECEIVABLES (0.3%)
Chase Credit Card Master Trust
Series 1997-2 Class A
6.30%, due 4/15/03 (e) ................ 4,850,000 4,889,770
--------------
EQUIPMENT FINANCING (0.1%)
Atlas Air Inc. Series 1998-1C
8.01%, due 1/2/10 (c) ................. 800,000 803,152
--------------
STUDENTS LOANS (0.5%)
Brazos Student Loan Finance Corp.
Series 1997-A Class A1
5.8523%, due 12/1/04 (e)(f) ........... 2,967,000 2,968,632
PNC Student Loan Trust I
Series 1997-2 Class A8
5.7663%, due 1/25/08 (e)(f) ........... 3,741,826 3,740,666
--------------
6,709,298
--------------
UTILITY LOANS (0.3%)
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 (e) ................ 4,200,000 4,219,530
--------------
Total Asset-Backed Securities
(Cost $60,094,982) 60,122,800
--------------
CERTIFICATE OF DEPOSIT (0.1%)
BANKS (0.1%)
Mercantile Safe Deposit & Trust Co.
Baltimore, MD
6.30%, due 8/16/99 .................... 2,000,000 2,009,400
--------------
Total Certificate of Deposit
(Cost $2,000,000) 2,009,400
--------------
CORPORATE BONDS (7.8%)
AEROSPACE (0.1%)
Newport News Shipbuilding Inc.
8.625%, due 12/1/06 ................... 1,000,000 1,052,500
--------------
BANKS (0.6%)
Banc One Corp.
7.60%, due 5/1/07 ..................... 1,815,000 1,977,679
Capital One Bank
Series BKNT
6.375%, due 2/15/03 ................... 4,310,000 4,303,707
First Nationwide Holdings Inc.
12.25%, due 5/15/01 ................... 1,580,000 1,726,150
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
CORPORATE BONDS (Continued)
BANKS (Continued)
SB Treasury Company L.L.C.
Series A
9.40%, due 12/29/49 (c)(f) ............ $ 700,000 $ 694,750
Tokai Preferred Capital Co. L.L.C.
Series A
9.98%, due 12/29/49
11.0914%, beginning
6/30/08 (c)(i) ........................ 500,000 465,625
--------------
9,167,911
--------------
BROKERAGE (0.6%)
Bear Stearns Companies Inc. (The)
6.20%, due 3/30/03 .................... 1,830,000 1,832,745
Lehman Brothers Holdings, Inc.
6.25%, due 4/1/03 ..................... 1,830,000 1,831,263
Lehman Brothers, Inc.
6.50%, due 4/15/08 .................... 2,445,000 2,448,178
Merrill Lynch & Co., Inc.
6.00%, due 2/12/03 .................... 2,855,000 2,853,087
--------------
8,965,273
--------------
BUILDING MATERIALS (0.1%)
Triangle Pacific Corp.
10.50%, due 8/1/03 .................... 1,540,000 1,601,600
--------------
CASINOS (0.0%)(b)
Grand Casinos, Inc.
10.125%, due 12/1/03 .................. 475,000 520,125
--------------
CHEMICALS (0.1%)
ISP Holdings, Inc.
Series B
9.00%, due 10/15/03 ................... 500,000 518,750
Terra Industries Inc.
Series B
10.50%, due 6/15/05 ................... 470,000 506,425
--------------
1,025,175
--------------
COMPUTERS & OFFICE EQUIPMENT (0.2%)
International Business Machines Corp.
6.50%, due 1/15/28 .................... 2,460,000 2,466,371
--------------
ELECTRIC UTILITIES (0.8%)
CMS Energy Corp.
7.00%, due 1/15/05 .................... 880,000 853,638
ESI Tractebel Acquisition Corp.
7.99%, due 12/30/11 (c) ............... 800,000 800,000
Niagara Mohawk Power Corp.
Series H
(zero coupon), due 7/1/10
8.50%, beginning 7/1/03 ............... 400,000 274,000
Series B
7.00%, due 10/1/00 .................... 6,610,000 6,614,429
Public Service Electric & Gas Co.
Series UU
6.75%, due 3/1/06 ..................... 2,835,000 2,919,880
--------------
11,461,947
--------------
ENERGY (0.0%)(b)
Conproca, S.A.
12.00%, due 6/16/10 (c)(k) ............ 550,000 558,250
--------------
FINANCE (0.6%)
CB Richard Ellis Services, Inc.
8.875%, due 6/1/06 .................... 950,000 942,875
EOP Operating LP
6.50%, due 6/15/04 (c) ................ 6,300,000 6,285,888
Forest City Enterprises, Inc.
8.50%, due 3/15/08 .................... 1,400,000 1,396,500
--------------
8,625,263
--------------
FINANCIAL SERVICES (0.7%)
Conseco, Inc.
6.40%, due 6/15/11 (f) ................ 4,965,000 4,956,857
Equitable Companies, Inc. (The)
7.00%, due 4/1/28 ..................... 2,495,000 2,584,047
Travelers Group, Inc.
6.625%, due 1/15/28 ................... 3,340,000 3,363,714
--------------
10,904,618
--------------
FOOD, BEVERAGE & TOBACCO (0.6%)
Coca-Cola Enterprises Inc.
6.95%, due 11/15/26 ................... 1,910,000 1,997,535
Philip Morris Cos., Inc.
6.15%, due 3/15/10 (f) ................ 6,445,000 6,439,200
Standard Commercial Corp.
8.875%, due 8/1/05 .................... 1,115,000 1,092,700
--------------
9,529,435
--------------
HOUSING (0.1%)
Greystone Homes Inc.
10.75%, due 3/1/04 .................... 980,000 1,058,400
--------------
INDUSTRIAL (0.0%)(b)
Price Communications Wire Inc.
9.125%, due 12/15/06 (c) .............. 470,000 469,413
--------------
</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 June 30, 1998 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
CORPORATE BONDS (Continued)
MEDIA (0.4%)
Time Warner, Inc.
8.375%, due 7/1/13 .................... $3,934,000 $ 4,526,736
Viacom, Inc.
8.00%, due 7/7/06 ..................... 640,000 659,200
--------------
5,185,936
--------------
MINING (0.1%)
Great Central Mines Ltd.
8.875%, due 4/1/08 (c)(j) ............. 800,000 786,000
--------------
OTHER TRANSPORTATION (0.1%)
Ultrapetrol (Bahamas) Ltd.
10.50%, due 4/1/08 (c) ................ 790,000 772,225
--------------
PAPER & FOREST PRODUCTS (0.4%)
Georgia-Pacific Corp.
7.25%, due 6/1/28 ..................... 4,255,000 4,333,335
Pope & Talbot Inc.
8.375%, due 6/1/13 .................... 1,300,000 1,298,180
--------------
5,631,515
--------------
RETAIL (1.2%)
Albertson's, Inc.
Medium-Term Note
Series C
6.625%, due 6/1/28 .................... 4,080,000 4,077,022
Federated Department Stores, Inc.
7.00%, due 2/15/28 .................... 4,820,000 4,929,269
K Mart Corp.
8.25%, due 1/1/22 ..................... 500,000 511,250
8.375%, due 7/1/22 .................... 500,000 520,000
Sears Roebuck Acceptance Corp.
Medium-Term Note
Series IV
6.36%, due 12/4/01 .................... 3,500,000 3,530,625
Wal-Mart Stores, Inc.
5.65%, due 2/1/10 (f) ................. 3,885,000 3,872,762
--------------
17,440,928
--------------
SOFTWARE (0.4%)
Computer Associates International, Inc.
6.375%, due 4/15/05 (c) ............... 5,640,000 5,592,060
--------------
STEEL, ALUMINUM & OTHER METALS (0.1%)
Carpenter Technology Corp.
Medium-Term Note
Series B
6.275%, due 4/7/03 .................... 1,890,000 1,893,988
--------------
TELECOMMUNICATION SERVICES (0.6%)
BellSouth Telecommunications, Inc.
6.375%, due 6/1/28 .................... 4,795,000 4,778,745
GTE Corp.
6.94%, due 4/15/28 .................... 4,525,000 4,581,562
--------------
9,360,307
--------------
TRANSPORTATION (0.0%)(b)
Cenargo International PLC
9.75%, due 6/15/08 (c)(k) ............. 525,000 513,844
--------------
Total Corporate Bonds
(Cost $114,203,068) 114,583,084
--------------
MORTGAGE-BACKED SECURITIES (3.6%)
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (2.3%)
First Union-Lehman Brothers
Bank of America
Commercial Mortgage Trust
Series 1998-C2 Class A1
6.28%, due 6/18/07 (e) ................ 4,009,548 4,036,372
FMAC Loan Receivables Trust
Series 1998-BA Class A2
6.74%, due 11/15/20 (c)(e) ............ 3,635,000 3,687,308
General Motors Acceptance Corp.
Commercial Mortgage Securities, Inc.
Series 1998-C1 Class A1
6.411%, due 11/15/07 (e) .............. 4,138,053 4,190,813
GS Mortgage Securities Corp. II
Series 1997-GL II Class A1
6.312%, due 4/13/31 (e) ............... 4,732,876 4,769,224
Merrill Lynch Mortgage Investors, Inc.
Series 1998-C2 Class A2
6.39%, due 2/15/30 (e) ................ 2,580,000 2,605,310
Series 1998-C1 Class A2
6.48%, due 11/15/26 (e)(f) ............ 2,580,000 2,606,651
Series 1995-C2 Class A1
7.0875%, due 6/15/21 (e)(f) ........... 5,817,664 5,918,659
Morgan Stanley Capital I
Series 1998-WF1 Class A1
6.25%, due 7/15/07 (e) ................ 3,467,405 3,485,504
Mortgage Capital Funding, Inc.
Series 1998-MC1 Class A1
6.417%, due 6/18/07 (e) ............... 1,762,430 1,784,355
--------------
33,084,196
--------------
</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>
MORTGAGE-BACKED SECURITIES (Continued)
RESIDENTIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (1.3%)
Bear Stearns Mortgage Securities Inc.
Series 1996-4 Class AI2
10.50%, due 9/25/27 (e) ............... $ 1,051,600 $ 1,066,385
Financial Asset Securitization, Inc.
Series 1997-NAMC 2 Class FXA8
10.00%, due 7/25/27 (e) ............... 3,516,645 3,658,401
Norwest Asset Securities Corp.
Series 1997-10 Class A2
6.50%, due 8/25/27 (e) ................ 4,380,000 4,388,103
Residential Asset
Securitization Trust
Series 1997-A3 Class A7
10.00%, due 5/25/27 (e) ............... 3,131,324 3,221,349
Series 1997-A5 Class A4
10.00%, due 7/25/27 (e) ............... 1,452,998 1,485,690
Series 1997-A8 Class A2
10.00%, due 10/25/27 (e) .............. 1,707,211 1,852,324
Series 1997-A9 Class A8
10.00%, due 11/26/27 (e) .............. 1,799,375 1,869,659
Structured Asset Securities Corp.
Series 1996-2 Class A1
7.00%, due 8/25/26 (e) ................ 2,272,002 2,281,522
--------------
19,823,433
--------------
Total Mortgage-Backed Securities
(Cost $52,983,015) .................... 52,907,629
--------------
U.S. GOVERNMENT & FEDERAL AGENCIES (19.2%)
FEDERAL AGENCY (COLLATERALIZED MORTGAGE
OBLIGATION) (0.2%)
Fannie Mae
Series 1998-M1 Class A1
5.96%, due 5/25/07 .................... 2,894,885 2,882,611
--------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (3.3%)
6.00%, due 7/20/13 TBA (d) ............ 12,035,000 11,910,919
6.50%, due 12/1/27 .................... 2,875,154 2,864,832
6.50%, due 8/13/28 TBA (d) ............ 17,310,000 17,228,816
7.00%, due 7/20/13 TBA (d) ............ 15,660,000 15,956,131
--------------
47,960,698
--------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE
PASS-THROUGH SECURITIES) (6.1%)
7.00%, due 8/19/28 TBA (d) ............ 29,970,000 30,419,550
7.50%, due 12/15/23 (e) ............... 5,169,854 5,318,488
8.00%, due 7/21/28-8/19/28
TBA (d) ............................... 46,785,000 48,471,028
9.50%, due 12/15/17-5/15/22 (e) ....... 5,047,358 5,526,858
--------------
89,735,924
--------------
UNITED STATES TREASURY BONDS (2.7%)
6.125%, due 11/15/27 (g) .............. 5,525,000 5,920,369
7.625%, due 2/15/25 (g) ............... 17,680,000 22,260,181
8.875%, due 8/15/17 (g) ............... 7,775,000 10,599,502
--------------
38,780,052
--------------
UNITED STATES TREASURY NOTES (6.9%)
5.50%, due 11/15/98 (g) ............... 12,455,000 12,458,861
5.625%, due 11/30/00 (g) .............. 20,270,000 20,314,391
5.75%, due 4/30/03 .................... 30,040,000 30,335,594
6.25%, due 2/15/03 (g) ................ 9,070,000 9,333,574
6.625%, due 5/15/07 (g) ............... 8,540,000 9,172,472
7.75%, due 11/30/99 (g) ............... 6,495,000 6,688,811
7.875%, due 11/15/99-
11/15/04 (g) ........................ 12,005,000 12,950,718
--------------
101,254,421
--------------
Total U.S. Government & Federal Agencies
(Cost $279,774,135) ................... 280,613,706
--------------
YANKEE BONDS (2.0%)
CABLE (0.0%)(b)
Rogers Cablesystem Ltd.
10.125%, due 9/1/12 ................... 240,000 261,600
--------------
CONSUMER FINANCIAL SERVICES (0.4%)
Ford Capital Co. B.V.
9.50%, due 6/1/10 ..................... 4,720,000 5,911,989
--------------
ELECTRIC UTILITIES (0.4%)
Empresa Electrica del Norte Grand S.A.
10.50%, due 6/15/05 (c) ............... 1,100,000 1,122,000
United Utilities, PLC
6.45%, due 4/1/08 ..................... 4,295,000 4,303,676
--------------
5,425,676
--------------
</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 June 30, 1998 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
YANKEE BONDS (Continued)
FINANCE (0.2%)
Fairfax Financial Holdings Ltd.
6.875%, due 4/15/08 ................... $ 3,765,000 $ 3,756,529
--------------
GAS UTILITIES (0.1%)
Camuzzi Gas Pampeana S.A.
9.25%, due 12/15/01 (c) ............... 2,085,000 2,118,443
--------------
INDUSTRIAL (0.1%)
Stena Line AB
10.50%, due 12/15/05 .................. 700,000 761,250
--------------
MEDIA (0.1%)
Rogers Communications, Inc.
8.875%, due 7/15/07 ................... 1,060,000 1,067,950
--------------
MULTI-INDUSTRIAL (0.3%)
Tyco International
Group S.A.
6.125%, due 6/15/01 ................... 4,130,000 4,132,561
--------------
OIL SERVICES (0.4%)
Petroleum Geo-Services ASA
7.125%, due 3/30/28 ................... 5,695,000 5,771,939
--------------
Total Yankee Bonds
(Cost $29,075,879) .................... 29,207,937
--------------
Total Long-Term Bonds
(Cost $538,131,079) ................... 539,444,556
--------------
<CAPTION>
Shares
===========
<S> <C> <C>
COMMON STOCKS (61.7%)
BANKS (3.5%)
NationsBank Corp......................... 203,000 15,529,500
Norwest Corp............................. 343,600 12,842,050
SouthTrust Corp.......................... 137,000 5,959,500
Summit Bancorp........................... 179,000 8,502,500
Washington Mutual, Inc. (g) ............. 186,900 8,118,469
--------------
50,952,019
--------------
BUILDINGS (0.5%)
Oakwood Homes Corp....................... 225,900 6,777,000
--------------
<CAPTION>
Shares Value
================================
<S> <C> <C>
CABLE TELEVISION (0.3%)
Univision Communications Inc.
Class A (a) ........................... 100,000 $ 3,725,000
--------------
CHEMICALS (0.7%)
Monsanto Co.............................. 180,700 10,096,612
--------------
COMPUTERS & OFFICE EQUIPMENT (2.9%)
EMC Corp. (a)(g) ........................ 374,500 16,782,281
Hewlett-Packard Co....................... 125,800 7,532,275
Sun Microsystems, Inc. (a) .............. 420,000 18,243,750
--------------
42,558,306
--------------
CONSUMER DURABLES (1.2%)
Harley-Davidson, Inc..................... 455,600 17,654,500
--------------
CONSUMER SERVICES (2.0%)
Cendant Corp. (a) ....................... 794,786 16,591,158
Service Corp. International ............. 287,000 12,305,125
--------------
28,896,283
--------------
COSMETICS (1.5%)
Colgate-Palmolive Co..................... 62,200 5,473,600
Gillette Co. (The) ...................... 281,000 15,929,188
--------------
21,402,788
--------------
DRUGS (6.1%)
Elan Corp. PLC ADR (a)(g)(h) ............ 213,000 13,698,562
Lilly (Eli) & Co......................... 356,000 23,518,250
Merck & Co., Inc......................... 127,500 17,053,125
Pfizer Inc............................... 78,700 8,553,706
Schering-Plough Corp..................... 283,900 26,012,338
--------------
88,835,981
--------------
ENERGY (0.2%)
Halliburton Co........................... 71,000 3,163,937
--------------
FINANCIAL SERVICES (7.2%)
Associates First Capital Corp.
Class A ............................... 177,000 13,606,875
Equifax Inc.............................. 273,000 9,913,312
Fannie Mae .............................. 214,300 13,018,725
Household International, Inc............. 305,700 15,208,575
MGIC Investment Corp..................... 12,700 724,694
SunAmerica, Inc.......................... 478,500 27,483,844
Travelers Group Inc. (g) ................ 428,797 25,995,818
--------------
105,951,843
--------------
</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 Total Return Fund
<TABLE>
<CAPTION>
Shares Value
=================================
<S> <C> <C>
COMMON STOCKS (Continued)
HEALTH CARE (3.4%)
Cardinal Health, Inc..................... 120,000 $ 11,250,000
HEALTHSOUTH Corp. (a) ................... 534,500 14,264,469
Tenet Healthcare Corp. (a) .............. 358,150 11,192,187
United Healthcare Corp................... 200,500 12,731,750
--------------
49,438,406
--------------
INDUSTRIAL (1.0%)
Illinois Tool Works Inc.................. 224,500 14,971,344
--------------
INSURANCE (2.3%)
American International Group, Inc. ...... 136,500 19,929,000
Conseco, Inc. (g) ....................... 308,400 14,417,700
--------------
34,346,700
--------------
LEISURE (0.2%)
Mirage Resorts, Inc. (a)(g) ............. 164,400 3,503,775
--------------
MEDIA (1.0%)
Chancellor Media Corp. (a)(g) ........... 140,500 6,976,710
Clear Channel
Communications, Inc. (a)(g) ........... 73,000 7,966,125
--------------
14,942,835
--------------
MEDICAL EQUIPMENT (4.1%)
Guidant Corp............................. 243,000 17,328,938
Johnson & Johnson ....................... 242,188 17,861,365
Medtronic, Inc........................... 390,000 24,862,500
--------------
60,052,803
--------------
MULTI-INDUSTRIAL (2.3%)
Tyco International Ltd................... 523,100 32,955,300
--------------
POLLUTION & RELATED (1.1%)
USA Waste Services, Inc. (a) ............ 318,400 15,721,000
--------------
RETAIL (8.9%)
Bed Bath & Beyond, Inc. (a) ............. 150,000 7,771,875
CVS Corp................................. 396,400 15,434,825
Dollar General Corp...................... 298,437 11,806,914
Home Depot, Inc. (The) .................. 218,950 18,186,534
Kohl's Corp. (a) ........................ 468,000 24,277,500
Kroger Co. (The) (a) .................... 303,000 12,991,125
Safeway, Inc. (a)(g) .................... 550,000 22,378,125
Staples, Inc. (a) ....................... 626,000 18,114,875
--------------
130,961,773
--------------
SOFTWARE (5.1%)
Computer Associates
International, Inc..................... 328,825 18,270,339
Compuware Corp. (a) ..................... 397,900 20,342,638
Microsoft Corp. (a) ..................... 225,000 24,384,375
Oracle Corp. (a) ........................ 457,750 11,243,484
--------------
74,240,836
--------------
TECHNOLOGY (2.6%)
Cisco Systems, Inc. (a) ................. 294,150 27,080,184
Intel Corp............................... 151,700 11,244,763
--------------
38,324,947
--------------
TELECOMMUNICATION EQUIPMENT (2.2%)
Lucent Technologies Inc.................. 393,700 32,750,919
--------------
TELECOMMUNICATION SERVICES (1.4%)
WorldCom, Inc. (a)(g) ................... 410,728 19,894,637
--------------
Total Common Stocks
(Cost $458,270,958) ................... 902,119,544
--------------
PREFERRED STOCK (0.0%)(b)
PAPER & FOREST PRODUCTS (0.0%)(b)
Paperboard Industries
International, Inc.
5.00% Class A (c)(i)(k) ............... 40,000 654,495
--------------
Total Preferred Stock
(Cost $665,691) ....................... 654,495
--------------
<CAPTION>
Principal
Amount
===========
<S> <C> <C>
SHORT-TERM INVESTMENTS (10.1%)
COMMERCIAL PAPER (9.8%)
Deutsche Bank Financial Inc.
5.57%, due 7/10/98 (e) ................ $10,925,000 10,909,787
Ford Motor Credit Co.
5.63%, due 7/2/98 ..................... 24,630,000 24,626,148
</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 June 30, 1998 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
COMMERCIAL PAPER (continued)
General Electric Corp.
5.62%, due 7/6/98 ..................... $ 24,650,000 $ 24,630,759
Goldman Sachs Group L.P.
5.52%, due 7/6/98 (e) ................. 5,255,000 5,250,971
6.25%, due 7/1/98 ..................... 115,000 115,000
Merrill Lynch & Co. Inc.
5.63%, due 7/6/98 ..................... 25,000,000 24,980,452
Morgan Stanley, Dean Witter & Co.
Discover & Co.
6.25%, due 7/1/98 ..................... 790,000 790,000
Norwest Corp.
5.71%, due 7/2/98 ..................... 20,000,000 19,996,828
Prudential Funding Corp.
6.30%, due 7/1/98 ..................... 31,680,000 31,680,000
--------------
Total Commercial Paper
(Cost $142,979,945) ................... 142,979,945
--------------
U.S. GOVERNMENT (0.3%)
United States Treasury Note
5.50%, due 11/15/98 (g) ............... 4,220,000 4,221,308
--------------
Total U.S. Government
(Cost $4,219,669) ..................... 4,221,308
--------------
Total Short-Term Investments
(Cost $147,199,614) ................... 147,201,253
--------------
Total Investments
(Cost $1,144,267,342) (l) ............. 108.6% 1,589,419,848(m)
Liabilities in Excess of
Cash and Other Assets ................. (8.6) (126,008,337)
----- --------------
Net Assets .............................. 100.0% $1,463,411,511
===== ==============
</TABLE>
- ----------
(a) Non-income producing securities.
(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 as collateral for TBA.
(f) Floating rate. Rate shown is the rate in effect at June 30, 1998.
(g) Represent securities out on loan or a portion which is out on loan.
(h) ADR--American Depository Receipt.
(i) Restricted security.
(j) Euro-Dollar bond.
(k) Canadian Security.
(l) The cost for Federal income tax purposes is $1,145,142,856.
(m) At June 30, 1998 net unrealized appreciation was $444,276,992, 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 $447,797,582 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $3,520,590.
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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,144,267,342) ... $ 1,589,419,84
Cash .................................................................. 5,963
Collateral held for securites loaned, at value (Note 4) ............... 204,141,218
Receivables:
Investment securities sold .......................................... 65,931,903
Dividends and interest .............................................. 5,113,921
Fund shares sold .................................................... 1,908,815
Other Assets .......................................................... 5,523
--------------
Total assets ...................................................... $1,866,527,191
--------------
LIABILITIES:
Securities lending collateral, at value (Note 4) ...................... 204,141,218
Payables:
Investment securities purchased ..................................... 191,925,949
Fund shares redeemed ................................................ 1,691,653
NYLIFE Distributors ................................................. 1,097,596
MainStay Management ................................................. 737,008
Transfer agent ...................................................... 209,613
Custodian ........................................................... 14,141
Trustees ............................................................ 7,468
Accrued expenses ...................................................... 131,030
Dividend Payable ...................................................... 3,160,004
--------------
Total liabilities ................................................. 403,115,680
--------------
Net assets ............................................................ $1,463,411,511
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 55,111
Class B ............................................................. 553,733
Additional paid-in capital ............................................ 944,630,333
Accumulated undistributed net investment income ....................... 36,193
Accumulated undistributed net realized gain on investments ............ 72,983,635
Net unrealized appreciation on investments ............................ 445,152,506
--------------
Net assets ............................................................ $1,463,411,511
==============
CLASS A
Net assets applicable to outstanding shares ........................... $ 132,460,743
==============
Shares of beneficial interest outstanding ............................. 5,511,092
==============
Net asset value per share outstanding ................................. $ 24.04
Maximum sales charge (5.50% of offering price) ........................ 1.40
--------------
Maximum offering price per share outstanding .......................... $ 25.44
==============
CLASS B
Net assets applicable to outstanding shares ........................... $1,330,950,768
==============
Shares of beneficial interest outstanding ............................. 55,373,268
==============
Net asset value and offering price per share outstanding .............. $ 24.04
==============
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ............................................. $ 2,129,815
Interest .................................................... 17,493,648
-------------
Total income ............................................ 19,623,463
-------------
Expenses:
Distribution--Class B ..................................... 4,724,876
Management ................................................ 4,422,421
Service--Class A .......................................... 152,550
Service--Class B .......................................... 1,574,958
Transfer agent ............................................ 1,528,315
Shareholder communication ................................. 129,224
Recordkeeping ............................................. 83,002
Custodian ................................................. 77,888
Registration .............................................. 52,614
Professional .............................................. 50,469
Trustees .................................................. 18,208
Miscellaneous ............................................. 27,172
-------------
Total expenses before waiver ............................ 12,841,697
Fee waived by Manager ....................................... (177,223)
-------------
Net expenses ............................................ 12,664,474
-------------
Net investment income ....................................... 6,958,989
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 61,558,657
Net change in unrealized appreciation on investments ........ 96,088,422
-------------
Net realized and unrealized gain on investments ............. 157,647,079
-------------
Net increase in net assets resulting from operations ........ $ 164,606,068
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $3,716.
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>
Six months
ended Year ended
June 30, December 31,
1998* 1997
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ....................................................... $ 6,958,989 $ 17,020,528
Net realized gain on investments ............................................ 61,558,657 109,727,203
Net change in unrealized appreciation on investments ........................ 96,088,422 69,750,696
--------------- ---------------
Net increase in net assets resulting from operations ........................ 164,606,068 196,498,427
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ................................................................... (1,035,218) (1,703,308)
Class B ................................................................... (5,944,523) (14,973,462)
From net realized gain on investments:
Class A ................................................................... -- (8,289,909)
Class B ................................................................... -- (94,264,958)
--------------- ---------------
Total dividends and distributions to shareholders ....................... (6,979,741) (119,231,637)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................................... 18,743,372 40,593,664
Class B ................................................................... 86,550,987 149,185,825
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A ................................................................... 530,760 9,901,054
Class B ................................................................... 3,203,438 107,180,050
--------------- ---------------
109,028,557 306,860,593
Cost of shares redeemed:
Class A ................................................................... (8,989,811) (16,589,193)
Class B ................................................................... (100,788,250) (159,856,590)
--------------- ---------------
Increase (decrease) in net assets derived from capital share transactions (749,504) 130,414,810
--------------- ---------------
Net increase in net assets .............................................. 156,876,823 207,681,600
NET ASSETS:
Beginning of period ........................................................... 1,306,534,688 1,098,853,088
--------------- ---------------
End of period ................................................................. $ 1,463,411,511 $ 1,306,534,688
=============== ===============
Accumulated undistributed net investment income at end of period .............. $ 36,193 $ 56,945
=============== ===============
</TABLE>
- ----------
* Unaudited.
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 A Class B Class A Class B Class A Class B
------------- ------------- ------------- ------------- ------------- -------------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $21.44 $21.45 $20.09 $20.10 $18.53 $18.53
------------- ------------- ------------- ------------- ------------- -------------
Net investment income .. 0.19 0.11 0.40 0.29 0.37 0.27
Net realized and
unrealized gain (loss)
on investments ....... 2.60 2.59 3.19 3.19 2.07 2.08
------------- ------------- ------------- ------------- ------------- -------------
Total from investment
operations ........... 2.79 2.70 3.59 3.48 2.44 2.35
------------- ------------- ------------- ------------- ------------- -------------
Less dividends and
distributions:
From net investment
income ............... (0.19) (0.11) (0.40) (0.29) (0.37) (0.27)
From net realized gain
on investments ....... -- -- (1.84) (1.84) (0.51) (0.51)
------------- ------------- ------------- ------------- ------------- -------------
Total dividends and
distributions ........ (0.19) (0.11) (2.24) (2.13) (0.88) (0.78)
------------- ------------- ------------- ------------- ------------- -------------
Net asset value at end
of period ............ $24.04 $24.04 $21.44 $21.45 $20.09 $20.10
============= ============= ============= ============= ============= =============
Total investment
return (a) ........... 13.03% 12.58% 18.24% 17.65% 13.22% 12.73%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ........... 1.69%+ 0.94%+ 1.86% 1.36% 1.9% 1.4%
Net expenses ....... 1.14%+ 1.89%+ 1.15% 1.65% 1.1% 1.6%
Expenses (before
waiver) .......... 1.17%+ 1.92%+ 1.15% 1.65% 1.1% 1.6%
Portfolio turnover rate 95% 95% 182% 182% 173% 173%
Net assets at end of
period (in 000's) .... $132,461 $1,330,951 $108,329 $1,198,206 $68,975 $1,029,878
<CAPTION>
Class B
----------------------------------------------
Class A Class B September 1
------------- ----------- through Year ended August 31
Year ended December 31 -----------------------------
December 31, 1995 1994** 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $14.76 $14.76 $15.28 $15.42 $13.37
------------- ------------- ------------- ------------- -------------
Net investment income .. 0.42 0.33 0.11 0.38 0.33
Net realized and
unrealized gain (loss)
on investments ....... 3.77 3.77 (0.52) (0.02) 2.31
------------- ------------- ------------- ------------- -------------
Total from investment
operations ........... 4.19 4.10 (0.41) 0.36 2.64
------------- ------------- ------------- ------------- -------------
Less dividends and
distributions:
From net investment
income ............... (0.42) (0.33) (0.11) (0.37) (0.36)
From net realized gain
on investments ....... -- -- -- (0.13) (0.23)
------------- ------------- ------------- ------------- -------------
Total dividends and
distributions ........ (0.42) (0.33) (0.11) (0.50) (0.59)
------------- ------------- ------------- ------------- -------------
Net asset value at end
of period ............ $18.53 $18.53 $14.76 $15.28 $15.42
============= ============= ============= ============= =============
Total investment
return (a) ........... 28.66% 27.96% (2.65%) 2.41% 20.09%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ........... 2.5% 2.0% 2.5%+ 2.5% 2.4%
Net expenses ....... 1.1% 1.7% 1.7%+ 1.7% 1.8%
Expenses (before
waiver) .......... 1.1% 1.7% 1.7% 1.7% 1.8%
Portfolio turnover rate 228% 228% 74% 273% 340%
Net assets at end of
period (in 000's) .... $19,206 $860,881 $648,725 $639,619 $486,959
</TABLE>
- ----------
* Unaudited.
** 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.
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 twenty-two 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 appraising all other securities and other assets, including debt
securities for which prices
26
<PAGE>
Notes to Financial Statements unaudited
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.
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 June 30, 1998:
<TABLE>
<CAPTION>
Percent
Acquisition 6/30/98 of
Security Date Shares Cost Value Net Assets
- -------- ----------- ------ -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Paperboard Industries International, Inc.
5.00%, Class A
Preferred Stock.............................. 5/4/98 40,000 $665,691 $654,495 0.0%(a)
======== ======== ========
</TABLE>
- ----------
(a) Less than one tenth of a percent.
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.
27
<PAGE>
MainStay Total Return 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
Dividends and Distributions to Shareholders. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
Security Transactions and Investment Income. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. Dividend
income is recognized on the ex-dividend date and interest income is accrued
daily except when collection is not expected. Discounts on securities purchased
for the Fund are accreted on the constant yield method over the life of the
respective securities or, if applicable, over the period to the first call date.
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of the Fund.
28
<PAGE>
Notes to Financial Statements unaudited (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 0.64% of the Fund's
average daily net assets. The Manager has voluntarily established a fee
breakpoint, which may be discontinued at any time, of 0.60% on assets in excess
of $500 million. For the six months ended June 30, 1998 the Manager earned
$4,422,421 and waived $177,223 of its fees.
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. To the
extent that the Manager has voluntarily established a fee breakpoint, the
Sub-Adviser has voluntarily agreed to do so proportionately.
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 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.
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 $34,672 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$539,103 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $1,603,432.
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.
29
<PAGE>
MainStay Total Return Fund
Other. Fees for the cost of legal services provided to the Fund by the Office of
General Counsel of New York Life amounted to $19,784 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$83,002 for the six months ended June 30, 1998.
Note 4--Portfolio Securities Loaned:
At June 30, 1998, the Fund had portfolio securities with a fair market value of
$196,626,505 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.
Net income earned on securities lending amounted to $176,471, net of broker fees
and rebates, for the six months ended June 30, 1998, which is included as
interest income on the Statement of Operations.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of U.S.
Government securities, other than short-term securities, were $913,305 and
$911,188, respectively. Purchases and sales of securities, other than U.S.
Government securities, securities subject to repurchase transactions and
short-term securities, were $399,460 and $371,343, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
---------------------- -----------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ............................................................ 828 3,781 1,913 6,882
Shares issued in reinvestment of dividends and distributions ........... 23 137 471 5,106
------- ------- ------- -------
851 3,918 2,384 11,988
Shares redeemed ........................................................ (392) (4,408) (766) (7,372)
------- ------- ------- -------
Net increase (decrease) ................................................ 459 (490) 1,618 4,616
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
30
<PAGE>
[THIS PAGE IS INTENTIONALLY LEFT BLANK]
31
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
32
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN FUND To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
33
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
34
<PAGE>
MainStay Total Return Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA15-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Tax Free Bond Fund Highlights 3
$10,000 Invested in the MainStay Tax
Free Bond Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by State--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 10
Top 10 Holdings 11
Portfolio of Investments 12
Unaudited Financial Statements 17
Notes to Financial Statements 21
The MainStay Funds 26
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Tax Free Bond Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o During the first half of 1998, the municipal bond market was relatively
uneventful, with virtually no change in the yield to maturity of the
average municipal bond.
o Although the yield on 30-year Treasuries dropped significantly, oversupply
in the municipal market helped keep municipal bond prices relatively
stable.
o As a result, municipal bonds substantially underperformed Treasury
securities during the first six months of the year.
o Insured issues continued to dominate the market, reducing opportunities to
benefit from quality differences among newly issued securities.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o The MainStay Tax Free Bond Fund returned 7.99% and 7.77% for Class A shares
and Class B shares, respectively, excluding all sales charges, for the
one-year period ended 6/30/98.
o The Fund used diversification by issuer, coupon, maturity, geographic area,
municipal sector, and call date to help reduce portfolio risk.
o With a relatively steady yield curve and municipal bonds trading in a tight
price range, the Fund found few opportunities to provide yield advantages.
o The Fund's long duration hurt performance in the first quarter and did not
help when the market failed to rally in the second quarter.
o Both share classes underperformed the average Lipper* general municipal
debt fund, which returned 2.26% for the six months ended 6/30/98.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$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 3.13%, 5-Year 4.20%, 10-Year 6.42%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Tax Free Lehman Brothers
Period end Bond Fund Municipal Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $ 9,550 $10,000 $10,000
6/89 $10,595 $11,139 $10,517
6/90 $10,900 $11,898 $11,008
6/91 $11,676 $12,970 $11,526
6/92 $13,038 $14,496 $11,882
6/93 $14,479 $16,230 $12,238
6/94 $14,315 $16,257 $12,543
6/95 $15,142 $17,691 $12,924
6/96 $15,967 $18,866 $13,280
6/97 $17,246 $20,422 $13,585
6/98 $18,624 $22,191 $13,813
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 2.77%, 5-Year 4.70%, 10-Year 6.84%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Tax Free Lehman Brothers
Period end Bond Fund Municipal Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $10,000 $10,000
6/89 $11,094 $11,139 $10,517
6/90 $11,414 $11,898 $11,008
6/91 $12,226 $12,970 $11,526
6/92 $13,652 $14,496 $11,882
6/93 $15,161 $16,230 $12,238
6/94 $14,989 $16,257 $12,543
6/95 $15,852 $17,691 $12,924
6/96 $16,678 $18,866 $13,280
6/97 $17,981 $20,422 $13,585
6/98 $19,378 $22,191 $13,813
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 6/30/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds rated Baa or better
by Moody's with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
The first half of 1998 was a quiet period for the municipal markets, without
significant issuer or market events that could create opportunities for
investors. The Bond Buyer's Index* yield to maturity was 5.22% on 1/2/98, and
unchanged on 6/30/98. While there were minor variations in between, the
municipal market was about as uneventful as it has been in any recent period.
Although the yield on 30-year Treasury bonds dropped to record lows, supply and
demand imbalances caused municipal prices to remain relatively stable over the
reporting period. Most of the imbalance came from excessive supply, which was
prompted by issuers seeking to take advantage of lower long-term rates. With
oversupply causing prices to remain stable in a declining rate environment,
municipals substantially underperformed Treasury securities during the reporting
period.
As has been the case in recent years, the vast majority of new issues carried
insurance or were rated AAA,+ providing few opportunities to benefit from
quality differences. Due to a relatively stable yield curve and limited
opportunities, participation in attractively priced offerings became more
important. This gave an advantage to larger municipal bond buyers who often
received a more favorable response to their requests for participation in these
offerings than smaller funds.
Given this context, how did the MainStay Tax Free Bond Fund perform in the first
six months of 1998?
For the six months ended 6/30/98, the MainStay Tax Free Bond Fund returned 1.95%
and 1.92% for Class A shares and Class B shares, respectively, excluding all
sales charges. Both share classes underperformed the average Lipper++ general
municipal debt fund, which returned 2.26% for the first half of 1998.
What were the primary reasons for the Fund's underperformance?
In the first quarter, we lengthened the Fund's duration before the market began
to decline. Although the Fund maintained its long duration in the second quarter
as long-term interest rates declined, oversupply left the municipal market flat,
so the longer-duration strategy failed to provide the anticipated benefits. In
addition, funds that could enhance yields by investing in lower-grade securities
enjoyed a competitive advantage.
What strategies did you use to enhance yields during the reporting period?
There were few steps we could take, since the yield curve remained relatively
stable, and most new issues were either top-quality or insured credits. We did
seek opportunities for the Fund among BBBss. hospital bonds and the Fund
invested in some New York City General Obligation split-rated bonds rated
A3/A-,# which provided solid performance for the Fund.
The Fund also seeks attractive prerefunding candidates as a part of its regular
security selection process. The Fund's Foothill Transportation Bonds may be
prerefunded, and they showed strength as a result of this potential. In fact,
the Fund's portfolio has several prerefunding candidates, but municipal yields
would have to
- ----------
* The Bond Buyer's Index is an index published daily by the Bond Buyer, a
newspaper covering the municipal bond market. The Index provides the
yardsticks against which municipal bond yields are measured. The Index is
composed of 40 actively traded general obligation and revenue issues rated
A or better with a term portion of at least $50 million ($75 million for
housing issues) and having at least 19 years remaining to maturity, a first
call date between 7 and 16 years, and at least one call at par before
redemption.
+ Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
strong.
++ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
(S) Debt rated BBB by Standard & Poor's exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
# Bonds which are rated A by Moody's Investors Service, Inc. possess many
favorable investment attributes and are to be considered as
upper-medium-grade obligations. The modifier 3 indicates that the issue
ranks in the lower end of its
5
<PAGE>
generic rating category. Debt rated A by Standard & Poor's is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories. A rating may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.
Yield to maturity
- -----------------
A concept that reflects the rate of return an investor would receive if an
interest-bearing security were held to its maturity date.
Supply and demand
- -----------------
In the bond market, supply is influenced by the amount of new securities issued
and the amount of bonds investors wish to sell. Demand reflects the amount of
bonds investors wish to buy, which may decrease when other markets offer greater
opportunities.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<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
6/98 1.95
</TABLE>
Returns reflect the historical performance of the Class B shares for the periods
12/86 through 12/94.
See footnote * on page 10 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<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
6/98 1.92
</TABLE>
See footnote * on page 10 for more information on performance.
decline further before the issues would be prerefunded.
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 issue's call date. The securities are placed in an
6
<PAGE>
DIVERSIFICATION BY STATE--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
State Percentage
- ---------------------------------------------
<S> <C>
New York 23.3%
California 14.9%
Illinois 11.3%
Michigan 5.9%
Massachusetts 5.9%
All Other 38.7%
</TABLE>
Actual percentages will vary over time.
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, in many cases, has been reduced by more than 20
years.
What were some of the Fund's larger purchases during the first six months of
1998?
The Fund bought Chicago Board of Education 5.75% bonds maturing in December of
2020. The bonds were purchased for their high coupon and prerefunding potential
if interest rates should fall. The Fund also bought New York City Water
Authority 5.5% bonds due June 2027 for their relatively high coupon. Both bonds
performed well for the Fund.
Metropolitan Transit Authority 4.75% bonds due July 2026 gave us an opportunity
to extend the call date on the Fund's existing MTA bonds, which had the same
coupon and a slightly longer maturity. The Fund sold the older issue to purchase
the new one.
A Florida Department of Transportation 5.375% State General Obligation bond was
a positive performer for the Fund that will also mature in July of 2026. The
Fund also bought Illinois Metropolitan Pier zero-coupon bonds due June 2029. As
you may know, zero-coupon bonds have long duration and we purchased these bonds
for the Fund in order to extend duration during the reporting period.
What were some of the Fund's largest sales?
The Fund sold Texas Water 5.0% bonds due in July 2019. As the price approached
the bond's par value we were concerned about a sudden drop in duration. The Fund
also sold a Massachusetts Health and Education bond for Harvard College with a
5.375% coupon and an October 2032 maturity because it carried a short call in
2005.
Other sales included a Massachusetts Turnpike Authority 5.0% coupon bond due
January 2037, which was a liquid
Insured credits
- ---------------
Bonds that carry insurance or other guarantees that interest and principal
payments will be met. Although such insurance may increase the cost of the bond,
it also reduces the risk of default, regardless of the issuer's credit quality.
Yield 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.
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.
7
<PAGE>
issue the Fund sold to raise cash, and a Massachusetts 4.75% Water bond due
August 2037, which the Fund sold to bring its duration closer to our target.
It sounds like duration strategy and call protection were major initiatives
during the reporting period.
We believe lengthening the call protection of the Fund's underlying portfolio
securities is important to avoid reinvestment risk. We also wanted to keep the
Fund near its target duration, even though this positioning didn't produce the
results we hoped for during the reporting period. Certainly, if interest rates
move, or if the oversupply declines, as we think it will, we believe the Fund's
duration could help performance.
Why do you think the oversupply will decline?
Many issuers have a fiscal year that ends in June. We believe many of the new
issues were designed to improve reporting in these municipalities, so issuance
should taper off in the coming months.
Which of the Fund's holdings were strong performers during the reporting period?
Michigan Hospital Authority/Genesys Hospital 7.5% bonds of October 2027 were
prerefunded during the first six months. The Fund owned a large block of this
issue, which suddenly moved from a 29-year BBB bond to an 8-year municipal
backed by Treasury bonds. This was the Fund's top performer.
The Fund's Foothill/Eastern Corridor Agency zero-coupon bonds of January 2027
and January 2028 both performed very well, even though municipal rates didn't
decline. The reason is because zeroes have generally outperformed regular-coupon
bonds. The possibility that these bonds may be prerefunded also contributed to
their superior performance.
Long Island Power Authority 5.25% bonds of December 2026 were also strong
per-
QUALITY BREAKDOWN AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
AAA 66.0%
AA 8.0%
A 8.9%
BBB 16.7%
Cash, Equivalent & Other Assets,
Less Liabilities 0.4%
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's.
See the prospectus for details.
8
<PAGE>
formers. The deal came at an attractive price and we bought the bonds for the
Fund just as the market began to rally.
Which bonds were among the Fund's worst performers?
We purchased two Massachusetts Water Authority issues for the Fund with
different coupons and maturity dates in 2037 at the peak of the market rally in
mid-January and sold them at a loss in late January.
Another ill-timed purchase and sale was a Gulf Breeze Florida 4.5% bond due in
October 2027. This was a long-duration bond that should perform well in a rally,
but was bought in mid-January when the market peaked. Hoping to cut losses, the
Fund sold the bond in May, just before the market began an upturn.
The Fund purchased Neuces Texas 5.5% bonds of March 2027 for their relatively
high coupon, but after holding them in the portfolio for a while, they failed to
perform, so we sold the Fund's position. Shortly thereafter, investors started
to pay a premium for the bonds for the very reason the Fund originally bought
them.
How have you sought to protect investors from potential hazards in the municipal
market?
The Fund continues to focus primarily on higher-quality securities. The overall
credit quality of the securities in the Fund's investment portfolio is AA.|| We
also use broad diversification by type of issuer, geographic region, municipal
sector, coupon, and call date to keep the portfolio from being affected by
weakness in any single region or market sector.
Of course, we seek opportunities for higher yield whenever they're available.
The Fund has had good success with BBB hospital bonds in the past, but may
lighten up on them going forward. We also try to avoid sectors with inherent
weaknesses, such as the uncertainty surrounding utility deregulation.
What is your outlook for the future?
Basically, we're bullish on municipals. We believe their substantial
underperformance relative to Treasuries is a cyclical trend that is likely to
reverse in the months ahead. Since we anticipate slower growth in the second
half of the year and subdued inflation in the wake of the Asian crisis, we think
interest rates may go lower. That could cause municipals to rally.
Whatever happens in the municipal markets, the Fund will continue to seek a high
level of current income that's substantially free from regular federal income
tax, consistent with the preservation of capital.
Ravi Akhoury
James Flood
Portfolio Managers
MacKay Shields Financial Corporation
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.
- ----------
|| Debt rated AA by Standard & Poor's differs from the highest rated issues
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is strong.
Past performance is no guarantee of future results.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
======================================================================================================================
Fund average annual total returns*
======================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 7.99% 5.16% 6.91% 6.50%
Class B 7.77% 5.03% 6.84% 6.45%
<CAPTION>
======================================================================================================================
Fund SEC returns*
======================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 3.13% 4.20% 6.42% 6.10%
Class B 2.77% 4.70% 6.84% 6.45%
<CAPTION>
======================================================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
======================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 154 out of n/a n/a 131 out of
233 funds 180 funds
Class B 177 out of 112 out of 68 out of 53 out of
233 funds 124 funds 70 funds 55 funds
Average Lipper
general municipal
debt fund 8.39% 5.77% 7.95% 7.80%
<CAPTION>
======================================================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
======================================================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.14 $0.2460 $0.0000
Class B $10.15 $0.2337 $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 six 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
6/30/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
10
<PAGE>
Top 10 Holdings as of 6/30/98
<TABLE>
<CAPTION>
===========================================================================================
HOLDING AMOUNT
===========================================================================================
<S> <C>
California Educational Facilities Authority Revenue,
Stanford University, Series N, 5.20%, due 12/1/27 $22,055,904
New York City Municipal Water Finance Authority
Water & Sewer Systems, 5.500%, due 6/15/27 19,251,000
Michigan State Hospital Finance Authority Revenue,
Genesys Health Systems, Series A, 7.50%, due 10/1/27 18,267,863
Massachusetts State Health & Education Facilities Authority Revenue,
Harvard University, Series P, 5.375%, due 11/1/32 16,116,625
Dade County (Florida) Special Obligation, Series B
5.00%, due 10/1/35 15,606,401
New Hampshire Higher Educational & Health Facilities Revenue,
Dartmouth College, 5.125%, due 6/1/28 12,870,000
Louisiana Public Facilities Authority, Hospital Revenue,
Pendleton Memorial Methodist, 6.75%, due 6/1/22 12,502,248
Foothill-Eastern Transportation Corridor Agency
Toll Road Revenue, Series A, (zero coupon), due 1/1/27 12,132,706
Texas Water Resources Finance Authority Revenue,
7.625%, due 8/15/08 11,658,400
New York State Medical Care Facilities Finance Agency Revenue
Hospital & Nursing Home, Series A, 8.00%, due 2/15/28 11,618,301
</TABLE>
- ----------
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.
11
<PAGE>
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (99.6%)+
ALABAMA (0.8%)
Birmingham Alabama Airport
Authority Revenue, Series A
7.375%, due 7/1/10 (a) ................. $ 3,600,000 $ 3,825,000
-------------
CALIFORNIA (14.9%)
Anaheim Public Financing
Authority Lease Revenue
Project C
(zero coupon), due 9/1/18 .............. 3,130,000 1,095,500
California Educational
Facilities Authority Revenue
Pooled College & University Projects
Series A
5.625%, due 7/1/23 ..................... 900,000 907,875
Stanford University, Series N
5.20%, due 12/1/27 ..................... 21,920,000 22,055,904
Fontana Redevelopment Agency
Tax Allocation, Jurupa Hills
Project A
5.50%, due 10/1/27 ..................... 2,000,000 2,005,000
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
5.50%, due 1/1/27 ...................... 56,105,000 12,132,706
(zero coupon), due 1/1/28 .............. 23,540,000 4,825,700
Metropolitan Water District of
Southern California Waterworks
Revenue
Series A
5.00%, due 7/1/26 ...................... 300,000 292,500
Series C
5.00%, due 7/1/37 ...................... 5,200,000 5,031,000
Modesto Irrigation District
Financing Authority Revenue
Series D
4.75%, due 9/1/22 ...................... 750,000 707,813
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24 ...................... 7,445,000 7,695,003
Oakland California Revenue, Series A
7.60%, due 8/1/21 ...................... 10,500,000 10,736,040
Palo Alto California Unified
School District, Series B
5.375%, due 8/1/18 ..................... 1,275,000 1,302,094
San Diego California Industrial
Development Authority
San Diego Gas & Electric, Series A
5.90%, due 6/1/18 ...................... 1,000,000 1,061,250
San Diego County
Water Authority Revenue
Series A
4.75%, due 5/1/20 ...................... 1,705,000 1,613,356
Simi Valley California Unified
School District
Refundable & Capital
Improvement Projects
5.25%, due 8/1/22 ...................... 300,000 306,750
-------------
71,768,491
-------------
CONNECTICUT (2.0%)
Mashantucket Western Pequot Tribe
Connecticut Special Revenue
Series B
5.75%, due 9/1/27 (b) .................. 9,500,000 9,785,000
-------------
DISTRICT OF COLUMBIA (0.6%)
District of Columbia Revenue
Georgetown University
Series A
7.40%, due 4/1/18 ...................... 2,815,000 2,944,068
-------------
FLORIDA (4.7%)
Dade County
Special Obligation, Series B
5.00%, due 10/1/35 ..................... 16,110,000 15,606,401
Florida State
Department of Transportation
Right of Way
5.375%, due 7/1/26 ..................... 7,040,000 7,172,000
-------------
22,778,401
-------------
GEORGIA (0.5%)
Fulton County Georgia
Water & Sewer Revenue
4.75%, due 1/1/28 ...................... 2,500,000 2,350,000
-------------
ILLINOIS (11.3%)
Chicago Board of Education
Chicago School Reform
5.75%, due 12/1/20-12/1/27 ............. 18,000,000 19,190,000
Chicago Illinois Gas Supply Revenue
Peoples Gas, Light & Coke Co.
Series A
8.10%, due 5/1/20 (a) .................. 2,000,000 2,162,500
Chicago Illinois Midway Airport
Revenue, Series A
5.50%, due 1/1/29 ...................... 9,145,000 9,407,919
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
ILLINOIS (Continued)
Chicago Illinois O'Hare
International Airport Revenue
Series A
5.50%, due 1/1/16 ...................... $ 1,000,000 $ 1,026,250
Illinois Health Facilities Authority
Revenue
Glenoaks Hospital, Series E
9.50%, due 11/15/19 .................... 850,000 964,750
Hinsdale Hospital
Series B
9.00%, due 11/15/15 .................... 1,830,000 2,054,175
Series C
9.50%, due 11/15/19 .................... 5,460,000 6,197,100
Proctor Community Hospital Project
7.375%, due 1/1/23 ..................... 3,700,000 3,968,435
Illinois Regional Transportation
Authority, Series C
7.10%, due 6/1/25 ...................... 1,500,000 1,725,000
Kankakee Illinois Sewer Revenue
7.00%, due 5/1/16 ...................... 2,000,000 2,255,000
Metropolitan Pier & Exposition
Authority, Illinois Dedicated
State Tax Revenue
(zero coupon), due 6/15/29 ............. 17,925,000 3,517,781
Southwestern Illinois Development
Authority, Medical Facilities
Revenue, Anderson Hospital
Project, Series A
7.00%, due 8/15/12 ..................... 2,000,000 2,162,500
-------------
54,631,410
-------------
INDIANA (1.8%)
Indiana Bond Backed Revenue
State Revolving Fund, Series A
5.25%, due 2/1/19 ...................... 5,135,000 5,154,256
Indianapolis Industrial Exempt
Facility Revenue, Mid-America
Energy Resource Income Project
7.25%, due 12/1/11 (a) ................. 2,000,000 2,088,780
Tippecanoe County Indiana
School Building Corp.
First Mortgage
6.00%, due 7/15/13 ..................... 1,300,000 1,397,500
-------------
8,640,536
-------------
LOUISIANA (3.1%)
Louisiana Public Facilities
Authority, Hospital Revenue
Pendleton Memorial Methodist
6.75%, due 6/1/22 ...................... 11,600,000 12,502,248
Louisiana State Offshore Terminal
Authority, Deepwater Port Revenue
Series E
7.60%, due 9/1/10 ...................... 2,135,000 2,316,475
-------------
14,818,723
-------------
MASSACHUSETTS (5.9%)
Massachusetts Bay Transportation
Authority, General Transportation
System, Series A
4.50%, due 3/1/26 ...................... 3,000,000 2,673,750
Massachusetts State General
Obligation, Consolidated Loan
Series C
5.625%, due 8/1/14 ..................... 2,070,000 2,176,088
Massachusetts State Health &
Educational Facilities Authority
Revenue
Harvard University, Series P
5.375%, due 11/1/32 .................... 15,820,000 16,116,625
Medical Center of Central
Massachusetts
7.10%, due 7/1/21 ...................... 2,500,000 2,734,375
Issue A
7.10%, due 7/1/21 ...................... 300,000 325,125
Southcoast Health System
Series A
4.75%, due 7/1/27 ...................... 2,000,000 1,840,000
University Hospital, Series C
7.25%, due 7/1/19 ...................... 2,500,000 2,693,750
-------------
28,559,713
MICHIGAN (5.3%)
Detroit City General Obligation
School District, Series A
5.70%, due 5/1/25 ...................... 2,000,000 2,100,000
Michigan State Hospital Finance
Authority Revenue
Genesys Health System, Series A
7.50%, due 10/1/27 ..................... 15,255,000 18,267,862
Pontiac Osteopathic Hospital
Series A
6.00%, due 2/1/24 ...................... 5,000,000 5,150,000
-------------
25,517,862
-------------
MINNESOTA (0.6%)
Minneapolis & Saint Paul Minnesota
Metropolitan Airports Commission
Series 7
7.80%, due 1/1/13 (a) .................. 2,750,000 2,851,942
-------------
</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 Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
MISSISSIPPI (1.3%)
Mississippi State General Obligation .....
Series C
4.75%, due 12/01/15 .................... $ 6,355,000 $ 6,100,800
-------------
NEBRASKA (0.4%)
Nebraska Investment Finance
Authority, Single Family
Housing Revenue, Series C
6.30%, due 9/1/28 (a) .................. 1,990,000 2,124,325
-------------
NEVADA (1.4%)
Clark County Airport Improvement
Revenue
8.125%, due 7/1/18 (a) ................. 6,500,000 6,630,000
-------------
NEW HAMPSHIRE (4.8%)
New Hampshire Higher Educational &
Health Facilities Authority Revenue
Dartmouth College
5.125%, due 6/1/28 ..................... 13,000,000 12,870,000
5.70%, due 6/1/27 ...................... 9,400,000 9,987,500
-------------
22,857,500
-------------
NEW JERSEY (1.5%)
Middletown Township
General Obligation
New Jersey Board of Education
5.80%, due 8/1/22 ...................... 3,850,000 4,081,000
New Jersey Health Care Facilities
Financing Authority Revenue
Zurbrugg Memorial Hospital
Series C
8.50%, due 7/1/12 ...................... 3,165,000 3,210,861
-------------
7,291,861
-------------
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 5,431,250
-------------
NEW YORK (23.3%)
Battery Park City Authority
Revenue, Series A
5.50%, due 11/1/26 ..................... 100,000 103,125
Long Island Power Authority
New York Electric Systems
Revenue, Series A
5.125%, due 12/1/22 .................... 325,000 320,531
Metropolitan Transportation Authority
Commuter Facilities Revenue
Series B
4.75%, due 7/1/26 ...................... 6,020,000 5,643,750
Series A
5.625%, due 7/1/27 ..................... 5,150,000 5,394,625
Service Contract Transport Facilities
Series 7
(zero coupon), due 7/1/14 .............. 3,930,000 1,753,763
Series L
7.50%, due 7/1/17 ...................... 5,950,000 6,069,000
Transit Facilities Revenue
Series C
5.50%, due 7/1/22 ...................... 1,000,000 1,037,500
New York City General Obligation
Series D
6.00%, due 2/15/25 ..................... 1,570,000 1,670,087
8.00%, due 8/1/04 ...................... 165,000 183,769
Series B
7.00%, due 6/1/15 ...................... 515,000 556,844
Series C
7.20%, due 8/15/15 ..................... 150,000 161,625
Series A
7.75%, due 8/15/07-8/15/16 ............. 425,000 470,994
Series F
8.20%, due 11/15/04 .................... 755,000 851,263
New York City Municipal Water
Finance Authority, Water & Sewer
Systems Revenue
Series D
4.75%, due 6/15/25 ..................... 1,875,000 1,767,188
Series B
5.50%, due 6/15/27 ..................... 18,600,000 19,251,000
5.75%, due 6/15/29 ..................... 1,000,000 1,066,250
New York City Transitional Finance
Authority Revenue, Future Tax
Secured, Series C
4.75%, due 5/1/23 ...................... 5,400,000 5,055,750
Series A
5.00%, due 8/15/27 ..................... 3,500,000 3,390,625
New York State Dormitory Authority
Revenue
Cornell University, Series A
7.375%, due 7/1/30 ..................... 2,880,000 3,110,400
New York University, Series A
5.75%, due 7/1/27 ...................... 2,500,000 2,762,500
6.00%, due 7/1/18 ...................... 3,300,000 3,724,875
Park Ridge Housing Income Project
7.85%, due 2/1/29 ...................... 1,400,000 1,453,466
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
NEW YORK (Continued)
Rockefeller University
4.75%, due 7/1/37 ...................... $ 850,000 $ 799,841
St. Johns University
5.70%, due 7/1/26 ...................... 3,250,000 3,432,812
State University Educational
Facilities
5.125%, due 5/15/27 .................... 1,780,000 1,746,625
5.50%, due 5/15/26 ..................... 6,250,000 6,367,188
Series A
4.75%, due 5/15/25 ..................... 1,500,000 1,411,875
Series B
7.50%, due 5/15/11 ..................... 4,250,000 5,174,375
New York State Energy Research &
Development Authority
Gas Facilities Revenue
Brooklyn Union Gas Co., Project
5.50%, due 1/1/21 ...................... 1,250,000 1,290,625
New York State Environmental
Facilities Corp. Pollution Control
Revenue, State Water
Series A
7.25%, due 6/15/10 ..................... 400,000 442,000
7.50%, due 6/15/12 ..................... 3,050,000 3,309,250
New York State Local Government
Assistance Corp.
Series C
(zero coupon), due 4/1/14 .............. 1,130,000 522,625
New York State Medical Care Facilities
Finance Agency Revenue
7.375%, due 8/15/19 .................... 1,615,000 1,695,750
7.875%, due 8/15/20 .................... 450,000 492,187
Hospital & Nursing Home
Series A
8.00%, due 2/15/28 ..................... 11,345,000 11,618,301
Montefiore Medical Center
6.00%, due 2/15/35 ..................... 2,150,000 2,311,250
St. Francis Hospital of Roslyn
Project A
7.625% due 11/1/21 ..................... 3,875,000 3,998,457
New York State Thruway Authority
Service Contract Revenue
Local Highway & Bridge
5.75%, due 4/1/16 ...................... 100,000 105,250
Niagara Falls New York Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15 ..................... 500,000 525,625
North Hempstead City
General Obligation, Series A
4.75%, due 1/15/18 ..................... 1,000,000 958,750
Port Jervis Industrial Development
Authority, Franciscan Health
Partnership
5.50%, due 11/1/16 ..................... 200,000 201,000
-------------
112,202,716
-------------
NORTH CAROLINA (0.6%)
New Hanover County North Carolina
Hospital Revenue, New Hanover
Regional Medical Center Project
5.75%, due 10/1/26 ..................... 2,500,000 2,653,125
-------------
OHIO (0.5%)
Ohio State Air Quality Development
Authority Revenue, Pollution
Control, Cleveland County Project
8.00%, due 12/1/13 ..................... 2,000,000 2,307,500
-------------
PENNSYLVANIA (3.7%)
Delaware County Pennsylvania
Industrial Development
Authority, Series A
6.20%, due 7/1/19 ...................... 5,000,000 5,418,750
Emmaus Pennsylvania General
Authority Revenue, Series E
7.90%, due 5/15/18 ..................... 6,450,000 6,622,409
Horizon Hospital System Authority
Pennsylvania Hospital Revenue
6.35%, due 5/15/16-5/15/26 ............. 5,315,000 5,722,350
-------------
17,763,509
-------------
SOUTH CAROLINA (1.5%)
Piedmont Municipal Power Agency
South Carolina Electric Revenue
Series A
4.75%, due 1/1/25 ...................... 7,885,000 7,421,756
-------------
TEXAS (4.9%)
Matagorda County Navigation
District 1, Pollution Control
Revenue
Central Power & Light Co. Project
7.50%, due 12/15/14 .................... 2,400,000 2,574,000
Houston Lighting & Power Co.
Series E
7.20%, due 12/1/18 ..................... 3,470,000 3,691,213
Nueces River Authority Texas
Water Supply Facilities
Corpus Christi Lake Project
5.50%, due 3/1/27 ...................... 1,250,000 1,293,750
</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 Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)
TEXAS (Continued)
South Texas Community College
District
5.75%, due 8/15/15 ..................... $ 1,500,000 $ 1,586,250
Tarrant County Junior College
District
4.625%, due 2/15/15 .................... 3,000,000 2,850,000
Texas Water Resources Finance
Authority Revenue
7.625%, due 8/15/08 .................... 11,210,000 11,658,400
-------------
23,653,613
-------------
VIRGINIA (2.0%)
Pocahontas Parkway Association
Virginia Toll Road Revenue
Series A
5.50%, due 8/15/28 ..................... 3,000,000 2,970,000
Upper Occoquan Sewer Authority
Virginia Regional Sewer Revenue
Series A
4.75%, due 7/1/29 ...................... 7,000,000 6,597,500
-------------
9,567,500
-------------
WASHINGTON (0.4%)
Port Seattle Washington Revenue
Series A
5.50%, due 10/1/17 ..................... 2,000,000 2,080,000
-------------
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 3,221,250
-------------
Total Long-Term Municipal Bonds
(Cost $466,584,764) .................... 479,777,851
-------------
SHORT-TERM MUNICIPAL BONDS (2.0%)
FLORIDA (0.8%)
Hillsborough County Industrial
Development Authority, Pollution
Control Revenue, Tampa Electric Co.
4.00%, due 5/15/18 (c) ................. 3,800,000 3,800,000
-------------
GEORGIA (0.6%)
Burke County Development
Authority, Pollution Control
Revenue, Georgia Power Co.
4.00%, due 4/1/32 (c) .................. 2,900,000 2,900,000
-------------
MICHIGAN (0.6%)
Michigan State Strategic Fund Ltd.
Obligation Revenue
Dow Chemical Co. Project
4.00%, due 2/1/09 (c) .................. 1,400,000 1,400,000
Reserve 1
4.00%, due 9/1/30 (c) .................. 1,700,000 1,700,000
-------------
3,100,000
-------------
Total Short-Term Municipal Bonds
(Cost $9,800,000) ...................... 9,800,000
-------------
Total Investments
(Cost $476,384,764) (d) ................ 101.6% 489,577,851(e)
Liabilities in Excess of Cash
and Other Assets ....................... (1.6) (7,870,190)
------------- -------------
Net Assets ............................... 100.0% $ 481,707,661
============= =============
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) May be sold to institutional investors only.
(c) Variable rate security that may be tendered back to issuer at any time
prior to maturity at par.
(d) The cost stated also represents the aggregate cost for Federal income tax
puposes.
(e) At June 30, 1998, net unrealized appreciation was $13,193,087, based on
cost for Federal tax purposes. This consisted of aggregate gross unrealized
appreciation for all investments on which there was an excess of market
value over cost of $18,071,180 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost over market value
of $ 4,878,093.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $476,384,764) ..... $ 489,577,851
Cash .................................................................. 25,274
Receivables:
Interest ............................................................ 7,554,388
Investment securities sold .......................................... 4,701,341
Fund shares sold .................................................... 568,429
-------------
Total assets ...................................................... 502,427,283
-------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 17,914,548
Dividend payable .................................................... 1,802,169
Fund shares redeemed ................................................ 448,586
MainStay Management ................................................. 244,837
NYLIFE Distributors ................................................. 195,574
Transfer agent ...................................................... 29,657
Custodian ........................................................... 8,997
Variation margin payable on futures contracts ....................... 7,030
Trustees ............................................................ 2,851
Accrued expenses ...................................................... 65,373
-------------
Total liabilities ................................................. 20,719,622
-------------
Net assets ............................................................ $ 481,707,661
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 15,476
Class B ............................................................. 459,173
Additional paid-in capital ............................................ 477,113,722
Accumulated undistributed net investment income ....................... (319,430)
Accumulated net realized loss on investments .......................... (8,754,367)
Net unrealized appreciation on investments ............................ 13,193,087
-------------
Net assets ............................................................ $ 481,707,661
=============
CLASS A
Net assets applicable to outstanding shares ........................... $ 15,696,371
=============
Shares of beneficial interest outstanding ............................. 1,547,583
=============
Net asset value per share outstanding ................................. $ 10.14
Maximum sales charge (4.50% of offering price) ........................ 0.48
-------------
Maximum offering price per share outstanding .......................... $ 10.62
=============
CLASS B
Net assets applicable to outstanding shares ........................... $ 466,011,290
=============
Shares of beneficial interest outstanding ............................. 45,917,294
=============
Net asset value and offering price per share outstanding .............. $ 10.15
=============
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 13,909,997
------------
Expenses:
Management ................................................ 1,451,148
Distribution--Class B ..................................... 587,373
Service--Class A .......................................... 17,272
Service--Class B .......................................... 587,373
Transfer agent ............................................ 205,260
Shareholder communication ................................. 47,774
Recordkeeping ............................................. 38,350
Professional .............................................. 28,860
Custodian ................................................. 28,775
Registration .............................................. 22,024
Trustees .................................................. 6,549
Miscellaneous ............................................. 17,192
------------
Total expenses .......................................... 3,037,950
------------
Net investment income ....................................... 10,872,047
------------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ..................................... 1,439,352
Futures transactions ...................................... (540,588)
------------
Net realized gain on investments ............................ 898,764
------------
Net change in unrealized appreciation on investments ........ (2,633,373)
------------
Net realized and unrealized loss on investments ............. (1,734,609)
------------
Net increase in net assets resulting from operations ........ $ 9,137,438
============
</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 Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------- -------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income .............................................................. $ 10,872,047 $ 24,426,541
Net realized gain on investments ................................................... 898,764 6,139,324
Net change in unrealized appreciation on investments ............................... (2,633,373) 11,084,242
------------- -------------
Net increase in net assets resulting from operations ............................... 9,137,438 41,650,107
------------- -------------
Dividends to shareholders:
From net investment income:
Class A .......................................................................... (341,503) (659,120)
Class B .......................................................................... (10,858,374) (23,759,021)
------------- -------------
Total dividends to shareholders ................................................ (11,199,877) (24,418,141)
------------- -------------
Capital share transactions: Net proceeds from sale of shares:
Class A .......................................................................... 4,045,271 3,327,275
Class B .......................................................................... 18,040,069 31,620,029
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .......................................................................... 223,089 503,552
Class B .......................................................................... 5,755,508 14,892,349
------------- -------------
28,063,937 50,343,205
Cost of shares redeemed:
Class A .......................................................................... (1,545,784) (7,772,835)
Class B .......................................................................... (37,874,705) (77,392,586)
------------- -------------
Decrease in net assets derived from capital share transactions ................. (11,356,552) (34,822,216)
------------- -------------
Net decrease in net assets ..................................................... (13,418,991) (17,590,250)
NET ASSETS:
Beginning of period .................................................................. 495,126,652 512,716,902
------------- -------------
End of period ........................................................................ $ 481,707,661 $ 495,126,652
============= =============
Accumulated undistributed net investment income (excess distribution) at end of period $ (319,430) $ 8,400
============= =============
</TABLE>
- ----------
* Unaudited.
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 Class A Class B Class A Class B
----------- ----------- ----------- ----------- ----------- -----------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $10.19 $10.19 $9.84 $9.84 $10.02 $10.03
----------- ----------- ----------- ----------- ----------- -----------
Net investment
income ............... 0.25 0.23 0.51 0.49 0.54 0.51
Net realized and
unrealized gain (loss)
on investments ....... (0.05) (0.04) 0.35 0.35 (0.19) (0.19)
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations ........... 0.20 0.19 0.86 0.84 0.35 0.32
----------- ----------- ----------- ----------- ----------- -----------
Less dividends and
distributions:
From net investment
income ............... (0.25) (0.23) (0.51) (0.49) (0.53) (0.51)
From net realized gain
on investments ....... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ........ (0.25) (0.23) (0.51) (0.49) (0.53) (0.51)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value at end
of period ............ $10.14 $10.15 $10.19 $10.19 $9.84 $9.84
=========== =========== =========== =========== =========== ===========
Total investment
return (a) ........... 1.95% 1.92% 9.02% 8.80% 3.63% 3.33%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ........... 4.74%+ 4.49%+ 5.14% 4.93% 5.4% 5.2%
Expenses ........... 1.01%+ 1.26%+ 1.01% 1.22% 1.0% 1.2%
Portfolio turnover rate 55% 55% 119% 119% 95% 95%
Net assets at end of
period (in 000's) .... $15,696 $466,011 $13,017 $482,109 $16,486 $496,231
<CAPTION>
Class B
--------------------------------------------
Class A Class B September 1
----------- ----------- through Year ended August 31
Year ended December 31 ---------------------------
December 31, 1995 1994** 1994 1993
--------------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .. $9.20 $9.20 $9.71 $10.39 $10.21
----------- ----------- ----------- ----------- -----------
Net investment
income ............... 0.52 0.51 0.17 0.51 0.57
Net realized and
unrealized gain (loss)
on investments ....... 0.83 0.83 (0.51) (0.58) 0.47
----------- ----------- ----------- ----------- -----------
Total from investment
operations ........... 1.35 1.34 (0.34) (0.07) 1.04
----------- ----------- ----------- ----------- -----------
Less dividends and
distributions:
From net investment
income ............... (0.53) (0.51) (0.17) (0.53) (0.60)
From net realized gain
on investments ....... -- -- -- (0.08) (0.26)
----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ........ (0.53) (0.51) (0.17) (0.61) (0.86)
----------- ----------- ----------- ----------- -----------
Net asset value at end
of period ............ $10.02 $10.03 $9.20 $9.71 $10.39
=========== =========== =========== =========== ===========
Total investment
return (a) ........... 15.00% 14.86% (3.53%) (0.69%) 10.81%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ........... 5.5% 5.2% 5.6%+ 5.4% 5.6%
Expenses ........... 1.0% 1.2% 1.2%+ 1.2% 1.2%
Portfolio turnover rate 110% 110% 37% 92% 138%
Net assets at end of
period (in 000's) .... $9,752 $543,314 $513,781 $552,156 $476,761
</TABLE>
- ----------
* Unaudited.
** 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.
20
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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.
The ability of issuers of debt securities to meet their obligations may be
affected by economic and political developments in a specific industry or
region.
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
21
<PAGE>
MainStay Tax Free Bond Fund
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 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
22
<PAGE>
Notes to Financial Statements unaudited (continued)
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 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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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. For the six months ended June 30, 1998, the
Manager earned $1,451,148.
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.
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 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
23
<PAGE>
MainStay Tax Free Bond Fund
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.
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 $3,355 the six months
ended June 30, 1998. The Fund was also advised that NYLIFE Distributors retained
contingent deferred sales charges on redemptions of Class B shares of $184,643
for the six months ended June 30, 1998.
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 six months ended June
30, 1998, amounted to $210,632.
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 $7,057 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$38,350 for the six months ended June 30, 1998.
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, were
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 prior fiscal year.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $267,651 and $286,141,
respectively.
24
<PAGE>
Notes to Financial Statements unaudited (continued)
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
-------------------- ---------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 400 1,775 338 3,190
Shares issued in reinvestment of dividends and distributions 22 567 51 1,499
------ ------ ------ ------
422 2,342 389 4,689
Shares redeemed ............................................ (152) (3,728) (787) (7,807)
------ ------ ------ ------
Net increase (decrease) .................................... 270 (1,386) (398) (3,118)
====== ====== ====== ======
</TABLE>
- ----------
* Unaudited.
25
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
26
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
27
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
TAX FREE BOND FUND(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
28
<PAGE>
MainStay Tax Free Bond Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA14-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay California Tax Free Fund Highlights 3
$10,000 Invested in the MainStay California
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification of Holdings--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 11
Portfolio of Investments 12
Unaudited Financial Statements 14
Notes to Financial Statements 18
The MainStay Funds 24
<PAGE>
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
2
<PAGE>
MainStay California Tax Free Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
. During the first half of 1998, California benefited from an estimated $4.5
billion state surplus, strength in Silicon Valley, and a diversified
economic base, but the state saw declines in exports and container shipping
because of weakness in Asian markets.
. In the first six months of the year, the California municipal bond market
was relatively uneventful.
. Standard & Poor's raised California's municipal debt rating slightly, from
"A+ stable"* to "A+ with a positive outlook."
. Although the yield on 30-year Treasuries dropped significantly, oversupply
in the municipal market helped keep municipal bond prices relatively
stable.
. Insured issues continued to dominate the market, reducing opportunities to
benefit from quality differences among newly issued securities.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
. The MainStay California Tax Free Fund returned 7.44% and 7.16% for Class A
shares and Class B shares, respectively, excluding all sales charges, for
the one-year period ended 6/30/98.
. The Fund used diversification by issuer, coupon, maturity, geographic area,
municipal sector, and call date to help reduce portfolio risk.
. With a relatively steady yield curve and municipal bonds trading in a tight
price range, the Fund found few opportunities to provide yield advantages.
. The Fund's long duration hurt performance in the first quarter and failed
to help when the market did not rally in the second quarter.
. Both share classes underperformed the average Lipper+ California municipal
debt fund, which returned 2.28% for the six months ended 6/30/98.
- ----------
* Debt rated A by Standard & Poor's is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong. A rating may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
+ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$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 2.61%, 5-Year 4.29%, since inception 5.93%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
California Municipal
Period end Tax Free Fund Bond 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 $14,491 $16,038 $11,758
6/98 $14,760 $16,469 $11,838
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 2.16%, 5-Year 4.75%, since inception 6.53%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lehman Brothers
California Municipal
Period end Tax Free Fund Bond 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
6/98 $15,327 $16,469 $11,838
</TABLE>
- ----------
Past performance is no guarantee of future results. 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.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds rated Baa or better
by Moody's with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
Overall, the first half of 1998 was a positive period for the California
economy, although difficulties in Asian markets began to have an impact on
certain sectors. With an anticipated $4.5 billion state surplus, the economic
environment appeared vibrant. Real estate prices were strong and homebuilders
saw extremely high demand. Silicon Valley continued to thrive, although
relations with Asian markets remain a potential problem area. Construction and
manufacturing appear to be doing well, but exports and container shipping
declined due to the "Asian contagion."
Despite these minor setbacks, California's economic strength led Standard &
Poor's to upgrade California's municipal debt rating slightly, from "A+ stable"
to "A+ with a positive outlook."
Although yields on 30-year Treasury bonds dropped to record lows, supply and
demand imbalances caused California municipal prices to remain relatively
stable. Most of the imbalance came from excessive supply, which was prompted by
issuers seeking to take advantage of lower long-term rates. With stable prices
in a declining rate environment, municipals substantially underperformed
Treasury securities during the reporting period.
As has generally been the case in recent years, the vast majority of new issues
were insured credits or were rated AAA,* providing few opportunities to gain
price or yield advantages by investing in securities with quality differences.
Given this context, how did the MainStay California Tax Free Fund perform in the
first six months of 1998?
For the six months ended 6/30/98, the MainStay California Tax Free Fund returned
1.86% and 1.84% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes underperformed the average Lipper+
California municipal debt fund, which returned 2.28% for the first half of 1998.
What were the primary reasons for the Fund's underperformance?
In the first quarter, we lengthened the Fund's duration before the market began
to decline, which had a negative impact on performance. Although the Fund
maintained its long duration in the second quarter as long-term interest rates
declined, oversupply left municipal prices flat, so the Fund's duration strategy
failed to provide the benefits we had anticipated. Since the Fund is restricted
from investing in high-yield municipals, it was also at a relative disadvantage
to competing funds that could enhance yields by investing in lower-grade
securities.
What strategies did you use to enhance the Fund's yields during the reporting
period?
There were few steps we could take, since the yield curve remained relatively
stable and most new issues were either top quality or insured credits. We did
seek opportunities among some single-A credits, which provided solid performance
for the Fund.
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.
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.
- ----------
* Debt rated AAA has the highest rating assigned by Standard &Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
+ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.70
12/94 (4.88)
12/95 15.18
12/96 3.44
12/97 7.90
6/98 1.86
</TABLE>
See footnote * on page 11 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.70
12/94 (4.88)
12/95 14.91
12/96 3.10
12/97 7.63
6/98 1.84
</TABLE>
Returns reflect the historical performance of the Class A shares for periods
12/91 through 12/94
See footnote * on page 11 for more information on performance.
Opportunities among BBB++ credits were extremely limited during the reporting
period.
Part of the Fund's strategy is to seek attractive prerefunding candidates, but
once again, opportunities were limited in California, where there are few
variations in quality and yield, so prerefunding is seldom a consideration.
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
- ----------
++ Debt rated BBB by Standard & Poor's exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
6
<PAGE>
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- --------------------------------------------------------------------
<S> <C>
Education 19.9%
Electric Utility 16.5%
County/City/Special District/General Obligation 13.4%
Water Utility 10.4%
Special Tax 7.8%
All Other 32.0%
</TABLE>
Actual percentages will vary over time.
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, in many cases, has been reduced by more
than 20 years.
What were some of the Fund's larger purchases during the first six months of
1998?
The Fund purchased California General Obligation bonds with a 5.0% coupon due in
November of 2023. The bonds represented the best value we could find within the
Fund's diversification guidelines at the time, and they have provided solid
performance since we purchased them for the Fund.
In March, the Fund purchased new issue Puerto Rico 5.0% bonds due in July 2027.
The deal was attractively priced and the bonds were sold at a profit shortly
after we bought them for the Fund, which had a strong positive impact on
performance.
In May, the Fund purchased Anaheim Public Finance Authority zero-coupon bonds,
due in September of 2018. The bonds helped us extend the Fund's duration, which
didn't help much during the reporting period, but may strengthen the Fund's
performance if interest rates decline.
We were also attracted to the 4.75% coupon of San Francisco Bay Area Rapid
Transit bonds. We purchased the bonds for the Fund, believing that this coupon
should perform well if the market rallies. We used similar reasoning on other
purchases for the Fund, such as Santa Monica School District 5.25% bonds.
Although we bought these bonds for the Fund at a market high and they were weak
performers, we believe they may perform well if interest rates decline and bond
prices rise.
Do you really think interest rates may still go lower?
Given the impact of the Asian crisis, there had been talk of deflation at the
end of the reporting period, which certainly suggests that rates could continue
to decline. Given the amount of new issuance we've seen in
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 and services over time. When deflation occurs, the purchasing
power of the dollar increases.
7
<PAGE>
the first half of the year, oversupply may be less of a problem, so we believe
the market could rally. Many issuers are on a June 30 fiscal year, and the
oversupply may have resulted from an attempt to reduce costs within that time
frame. If supply evens out and rates decline, several of the Fund's largest
purchases in the first half of 1998 could have a positive impact in the second
half of the year.
Were there significant sales during the reporting period?
The Fund sold its California Statewide Community Development Authority 5.125%
July 2017 bonds as the price approached par. When a bond's price reaches par,
the duration shortens dramatically. Other major sales made by the Fund were
based on the same reasoning and included: San Francisco Building Authority 5.25%
bonds of December 2021, San Diego Sewer 5.25% bonds of May 2027, and California
Health 5.0% bonds of July 2021.
It sounds as if the Fund buys and sells bonds across several coupons,
maturities, and geographic locations.
That's right. We seek to diversify the Fund in as many ways as possible, which
is difficult within a single state. So we try to buy everything from road and
hospital bonds to transportation, water, sewer, and school bonds for the Fund.
When possible, we try to buy bonds for the Fund in different municipalities or
geographic areas to reduce the exposure to any single area. We also seek to
diversify across a broad spectrum of coupons and maturities to reduce the impact
if any particular bond sector experiences weakness.
We also believe lengthening the call protection of the securities in the Fund's
underlying portfolio is important to avoid reinvestment risk. During the
reporting period we made some adjustments in that direction. We also wanted to
stay near our duration target, which we think has positioned the Fund well for
the future.
QUALITY BREAKDOWN AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Quality Percentage
- --------------------------------------------------------------------
<S> <C>
AAA 47.6%
AA 23.6%
A 6.9%
BBB 21.8%
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.
8
<PAGE>
Which of the Fund's holdings were strong performers during the reporting period?
Foothill/Corridor Agency zero-coupon toll-road bonds due January 2027 were the
Fund's best-performing securities. The very long duration of zero-coupon bonds
helped these bonds outperform, and the likelihood of prerefunding this summer
helped. In addition, the construction is proceeding ahead of schedule. So
everything about these bonds was positive. Anaheim zero-coupon bonds also did
well as zero-coupons tended to outperform regular-coupon bonds.
California University Revenue 5.125% bonds were also strong performers for the
Fund. We purchased these modest premium bonds for the Fund right before a market
rally, which had a decidedly positive impact. The same was true of some
noncallable Simi Valley School District 5.25% bonds that we purchased for the
Fund before the market rallied.
Which bonds were among the Fund's worst performers?
We purchased San Diego Water 4.75% bonds due May of 2020 for the Fund when the
market was at its high in January and the securities did not perform well. The
Fund also owned some California Educational Facility/Stanford University 5.2%
bonds due December 2027 that are rated AAA on their own and used to command a
premium. Unfortunately, they have begun to trade like ordinary insured AAA
credits, which has taken a toll on their performance.
Why did they lose their pricing advantage?
More than half of new issues are now insured credits. Although AAA issuers used
to have a price advantage, with municipal bond insurance taking over so much of
the market, the distinction between an insured credit and a AAA issuer is
becoming less evident in the marketplace. We've seen a general reduction in
price differentials, which has made it increasingly difficult to provide yield
advantages in the California market.
What is the overall credit quality of the Fund's investment portfolio?
We continue to focus primarily on higher-quality securities. The overall credit
quality of the securities in the Fund's investment portfolio is AA.ss. Of
course, we seek opportunities for higher yield whenever they're available. At
the same time, we try to avoid sectors with inherent weaknesses, such as
utilities that face uncertainties related to deregulation.
What is your outlook for the future?
Basically, we're bullish on municipals. We believe their substantial
underperformance relative to Treasuries is a cyclical trend that is likely to
reverse in the months ahead. Since we anticipate slower growth in the second
half of the year and subdued inflation in the wake of the Asian crisis, we think
interest rates may go lower. That could cause municipals to rally.
We know that California may be more likely than other states to feel the effects
of
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.
- ----------
ss. Debt rated AA by Standard & Poor's differs from the highest rated issues
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
9
<PAGE>
Asian problems, and we're continuing to monitor those factors. Nevertheless, we
believe that the California economy is basically strong and do not foresee any
major difficulties ahead.
Whatever happens in the municipal markets, the Fund will continue to seek a high
level of current income that's substantially free from regular federal income
tax and personal income taxes of California State, consistent with the
preservation of capital.
Ravi Akhoury
James Flood
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
10
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 6/30/98
<S> <C> <C> <C>
Class A 7.44% 5.26% 6.66%
Class B 7.16% 5.08% 6.53%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 6/30/98
<S> <C> <C> <C>
Class A 2.61% 4.29% 5.93%
Class B 2.16% 4.75% 6.53%
<CAPTION>
================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
================================================================================
1 year 5 years Life of Fund through 6/30/98
<S> <C> <C> <C>
Class A 88 out of 49 out of 35 out of
100 funds 57 funds 44 funds
Class B 97 out of n/a 80 out of
100 funds 81 funds
Average Lipper
CA municipal
debt fund 8.61% 5.92% 7.16%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $9.88 $0.2325 $0.0000
Class B $9.86 $0.2199 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued 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 six 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 (10/1/91)
through 6/30/98. Class B shares were first offered to the public on 1/3/95.
11
<PAGE>
MainStay California Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (99.9%)+
CALIFORNIA (99.9%)
Anaheim California Public Financing
Authority, Lease Revenue
Project C
(zero coupon), due 9/1/18........... $2,000,000 $ 700,000
(zero coupon), due 9/1/22........... 1,500,000 425,625
Baldwin Park California Unified
School District
(zero coupon), due 8/1/17........... 1,255,000 467,487
California Educational Facilities
Authority Revenue
Pooled College & University
Project A
5.625%, due 7/1/23.................. 1,100,000 1,109,625
Project B
6.30%, due 4/1/21................... 500,000 552,000
Stanford University, Series N
5.20%, due 12/1/27.................. 1,200,000 1,207,440
California Health Facilities Financing
Authority, Hospital Sutter A
6.70%, due 1/1/13................... 1,000,000 1,021,780
California Housing Finance Agency
Revenue, Home Mortgage
Series C
8.30%, due 8/1/19 (a)............... 20,000 20,420
California Pollution Control
Financing Authority Revenue
San Diego Gas & Electric Co.
Series A
5.90%, due 6/1/14................... 400,000 439,000
California Statewide Communities
Development Authority
Lease Revenue, United Airlines
Series A
5.70%, due 10/1/33 (a).............. 725,000 740,406
California Statewide Community
Development Corp.
7.00%, due 9/1/09................... 260,000 283,725
Capistrano Unified School District
Community Facility, Special Tax
8.375%, due 10/1/20................. 1,250,000 1,392,188
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.......... 1,350,000 666,562
Fontana Redevelopment Agency
Tax Allocation, Jurupa Hills
Project A
5.50%, due 10/1/27.................. 500,000 501,250
Foothill--Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/27........... 1,000,000 216,250
Los Angeles California Harbor
Department Revenue
8.70%, due 9/1/15................... 540,000 570,375
Los Angeles County
Transportation Commission
Sales Tax Revenue, Series A
7.40%, due 7/1/15................... 400,000 422,316
Los Angeles Unified School District
Series A
5.00%, due 7/1/21................... 1,750,000 1,710,625
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................... 300,000 290,250
Modesto California Irrigation District
Financing Authority Revenue
Domestic Water Project D
4.75%, due 9/1/22................... 750,000 707,813
Northern California Power Agency
Public Power Revenue
Hydroelectric Project 1
7.15%, due 7/1/24................... 2,070,000 2,139,511
Oakland California Revenue
Series A
7.60%, due 8/1/21................... 1,050,000 1,073,604
Palo Alto California Unified School
District, Series B
5.375%, due 8/1/18.................. 700,000 714,875
Sacramento Municipal
Utilities District Electric Revenue
Series K
5.25%, due 7/1/24................... 250,000 255,625
San Diego California Industrial
Development Revenue
San Diego Gas & Electric Co.
Series A
5.90%, due 6/1/18................... 1,000,000 1,061,250
San Diego County Water Authority
Revenue, Series A
4.75%, due 5/1/20................... 1,275,000 1,206,469
San Francisco California Bay Area
Rapid Transit District Sales Tax
Revenue
4.75%, due 7/1/23................... 1,000,000 942,500
San Marino California Unified School
District, Series B
5.00%, due 6/1/23................... 1,000,000 990,000
</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>
Portofolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (Continued)+
CALIFORNIA (Continued)
Santa Monica--Malibu Unified
School District
5.25%, due 9/1/13................... $1,000,000 $ 1,031,250
Simi Valley California Unified
School District, Refundable
& Capital Improvement Projects
5.25%, due 8/1/22................... 500,000 511,250
South Tahoe California Joint Powers
Financing Authority Revenue
Project 1A
7.20%, due 10/1/23.................. 1,000,000 1,140,000
University California Revenue
Multiple Purpose Projects, Series E
5.125%, due 9/1/13.................. 1,000,000 1,020,000
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09................... 750,000 769,162
-----------
Total Long-Term Municipal Bonds
(Cost $27,477,062).................. 27,803,183
-----------
Total Investments
(Cost $27,477,062) (b).............. 99.9% 27,803,183(c)
Cash and Other Assets,
Less Liabilities.................... 0.1 27,713
---------- -----------
Net Assets............................ 100.0% $27,830,896
========== ===========
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1998, net unrealized appreciation was $326,121, 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 $614,808 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $288,687.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $27,477,062) ...... $ 27,803,183
Receivables:
Investment securities sold .......................................... 1,499,144
Interest ............................................................ 465,839
Fund shares sold .................................................... 3,766
------------
Total assets ....................................................... 29,771,932
------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 1,536,445
Custodian ........................................................... 235,262
Fund shares redeemed ................................................ 15,000
NYLIFE Distributors ................................................. 7,520
MainStay Management ................................................. 6,047
Transfer agent ...................................................... 2,621
Trustees ............................................................ 152
Accrued expenses .................................................... 33,467
Variation margin on futures contracts ............................... 825
Dividend payable .................................................... 103,697
------------
Total liabilities .................................................. 1,941,036
------------
Net assets ............................................................ $ 27,830,896
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 19,093
Class B ............................................................. 9,093
Additional paid-in capital ............................................ 27,575,576
Accumulated distribution in excess of net investment income ........... (26,345)
Accumulated net realized loss on investments .......................... (72,642)
Net unrealized appreciation on investments ............................ 326,121
------------
Net assets ............................................................ $ 27,830,896
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 18,869,077
============
Shares of beneficial interest outstanding ............................. 1,909,293
============
Net asset value per share outstanding ................................. $ 9.88
Maximum sales charge (4.50% of offering price) ........................ 0.47
------------
Maximum offering price per share outstanding .......................... $ 10.35
============
CLASS B
Net assets applicable to outstanding shares ........................... $ 8,961,819
============
Shares of beneficial interest outstanding ............................. 909,300
============
Net asset value and offering price per share outstanding .............. $ 9.86
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 762,036
---------
Expenses:
Management ................................................ 65,684
Custodian ................................................. 24,670
Shareholder communication ................................. 23,317
Service--Class A .......................................... 22,847
Service--Class B .......................................... 9,995
Transfer agent ............................................ 19,854
Professional .............................................. 11,046
Distribution--Class B ..................................... 9,992
Registration .............................................. 1,219
Trustees .................................................. 325
Miscellaneous ............................................. 11,366
---------
Total expenses before reimbursement ...................... 200,315
Expense reimbursement from Manager .......................... (27,359)
---------
Net expenses ............................................. 172,956
---------
Net investment income ....................................... 589,080
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ..................................... (32,067)
Futures transactions ...................................... 14,198
---------
Net realized loss on investments ............................ (17,869)
---------
Net change in unrealized appreciation on investments ........ (80,580)
---------
Net realized and unrealized loss on investments ............. (98,449)
---------
Net increase in net assets resulting from operations ........ $ 490,631
=========
</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 Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .................................................... $ 589,080 $ 1,128,924
Net realized gain (loss) on investments .................................. (17,869) 407,293
Net change in unrealized appreciation (depreciation) on investments ...... (80,580) 237,577
------------ ------------
Net increase in net assets resulting from operations ..................... 490,631 1,773,794
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A ................................................................ (432,551) (847,841)
Class B ................................................................ (182,090) (285,056)
From net realized gain on investments:
Class A ................................................................ -- (216,082)
Class B ................................................................ -- (85,569)
------------ ------------
Total dividends and distributions to shareholders ..................... (614,641) (1,434,548)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................................ 2,144,515 2,581,223
Class B ................................................................ 2,234,494 2,238,857
Net asset value of shares issued to shareholders in reinvestment
of dividends and distributions:
Class A ................................................................ 191,948 648,114
Class B ................................................................ 83,879 235,604
------------ ------------
4,654,836 5,703,798
Cost of shares redeemed:
Class A ................................................................ (1,580,353) (3,369,454)
Class B ................................................................ (606,267) (374,371)
------------ ------------
Increase in net assets derived from capital share transactions ....... 2,468,216 1,959,973
------------ ------------
Net increase in net assets ........................................... 2,344,206 2,299,219
NET ASSETS:
Beginning of period ........................................................ 25,486,690 23,187,471
------------ ------------
End of period .............................................................. $ 27,830,896 $ 25,486,690
============ ============
Accumulated distribution in excess of net investment income at end of period $ (26,345) $ (784)
============ ============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
---------- ---------- ---------- ---------- ---------- ----------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
-------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ..................... $9.93 $9.90 $9.78 $9.75 $9.95 $9.91
---------- ---------- ---------- ---------- ---------- ----------
Net investment
income .................................. 0.23 0.22 0.48 0.45 0.49 0.45
Net realized and
unrealized gain (loss)
on investments .......................... (0.05) (0.04) 0.27 0.27 (0.16) (0.16)
---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations .............................. 0.18 0.18 0.75 0.72 0.33 0.29
---------- ---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment
income .................................. (0.23) (0.22) (0.48) (0.45) (0.50) (0.45)
From net realized gain
on investments .......................... -- -- (0.12) (0.12) -- --
---------- ---------- ---------- ---------- ---------- ----------
Total dividends and
distributions ........................... (0.23) (0.22) (0.60) (0.57) (0.50) (0.45)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end
of period ............................... $9.88 $9.86 $9.93 $9.90 $9.78 $9.75
========== ========== ========== ========== ========== ==========
Total investment
return (a) .............................. 1.86% 1.84% 7.90% 7.63% 3.44% 3.10%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income .............................. 4.56%+ 4.31%+ 4.88% 4.63% 5.0% 4.7%
Net expenses .......................... 1.24%+ 1.49%+ 1.24% 1.49% 1.24% 1.49%
Expenses (before
reimbursement) ...................... 1.45%+ 1.70%+ 1.26% 1.51% 1.3% 1.6%
Portfolio turnover rate ................... 54% 54% 108% 108% 79% 79%
Net assets at end of
period (in 000's) ....................... $18,869 $8,962 $18,199 $7,288 $18,098 $5,089
</TABLE>
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Class A Class B September 1
---------- ---------- through Year ended August 31
Year ended December 31 -------------------------
December 31, 1995 1994** 1994 1993
------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .................... $9.10 $9.10 $9.57 $10.38 $9.90
---------- ---------- ---------- ---------- ----------
Net investment
income ................................. 0.50 0.52 0.17 0.53 0.55
Net realized and
unrealized gain (loss)
on investments ......................... 0.85 0.81 (0.47) (0.51) 0.64
---------- ---------- ---------- ---------- ----------
Total from investment
operations ............................. 1.35 1.33 (0.30) 0.02 1.19
---------- ---------- ---------- ---------- ----------
Less dividends and
distributions:
From net investment
income ................................. (0.50) (0.52) (0.17) (0.52) (0.59)
From net realized gain
on investments ......................... -- -- -- (0.31) (0.12)
---------- ---------- ---------- ---------- ----------
Total dividends and
distributions .......................... (0.50) (0.52) (0.17) (0.83) (0.71)
---------- ---------- ---------- ---------- ----------
Net asset value at end
of period .............................. $9.95 $9.91 $9.10 $9.57 $10.38
========== ========== ========== ========== ==========
Total investment
return (a) ............................. 15.18% 14.91% (3.11%) 0.12% 12.58%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ............................. 5.3% 5.1% 5.5%+ 5.4% 5.6%
Net expenses ......................... 1.24% 1.49% 0.99%+ 0.99% 0.99%
Expenses (before
reimbursement) ..................... 1.4% 1.7% 1.2%+ 1.1% 1.2%
Portfolio turnover rate .................. 107% 107% 24% 96% 154%
Net assets at end of
period (in 000's) ...................... $19,825 $1,963 $16,667 $17,356 $14,603
</TABLE>
- ----------
* Unaudited.
** 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.
17
<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 twenty-two 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.
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 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
18
<PAGE>
Notes to Financial Statements unaudited
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.
19
<PAGE>
MainStay California Tax Free Fund
Expenses. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when 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 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.
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser 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. For the six months ended June 30, 1998 the
Manager earned $65,684 and reimbursed the Fund $27,359.
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.
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 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
20
<PAGE>
Notes to Financial Statements unaudited (continued)
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.
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 $1,982 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemptions of Class B shares of
$7,329 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $20,482.
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 June 30, 1998, NYLIFE Distributors beneficially held shares of Class
A of the Fund with a net asset value of $2,678,688, which represents 14.2% of
the Class A 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 $374 for the six months ended June
30, 1998.
Note 4--Federal Income Tax:
The Fund utilized $161,199, the remaining balance of its capital loss
carryforward, during the prior 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 that year as if they arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $16,511 and $14,144, respectively.
21
<PAGE>
MainStay California Tax Free Fund
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 June 30, 1998.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
----------------- -----------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold......................................................... 217 226 262 229
Shares issued in reinvestment of dividends and distributions........ 19 8 66 24
--- --- --- ---
236 234 328 253
Shares redeemed..................................................... (160) (61) (345) (39)
--- --- --- ---
Net increase........................................................ 76 173 (17) 214
=== === === ===
</TABLE>
- ----------
* Unaudited.
22
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a portfolio Financial Corporation(2)
consisting primarily of non-U.S. equity securities.
Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
24
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
24
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (Continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by investing MacKay Shields
primarily in high-yield debt securities of non-U.S. issuers. Financial Corporation(2)
Capital appreciation is a secondary objective. Certain of
the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Capital Financial Corporation(2)
appreciation is a secondary objective. The potential for
high yield is accompanied by higher risk. Certain of
the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
25
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (Continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
26
<PAGE>
MainStay California Tax Free Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA04-08/98
[RECYCLE SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay High Yield Corporate Bond Fund
Highlights 3
$10,000 Invested in the MainStay High Yield
Corporate Bond Fund versus First Boston
High Yield Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Industry--Top 5 7
Quality Breakdown 9
Returns & Lipper Rankings 11
Top 10 Holdings 12
10 Largest Purchases 13
10 Largest Sales 13
Portfolio of Investments 14
Unaudited Financial Statements 25
Notes to Financial Statements 29
The MainStay Funds 38
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R)500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay High Yield Corporate Bond Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o A robust economy, with low interest rates, modest inflation, and low
unemployment helped most bond markets provide strong performance in the
first six months of 1998.
o In June, the yields on 30-year Treasury bonds declined to all-time lows,
moving prices higher for most income securities.
o While yield spreads remained narrow through most of the reporting period,
spreads widened in June, expanding the return potential of lower-rated
bonds.
o Telecommunications and media continued to account for a substantial
percentage of new issuance in the high-yield market.
o Record inflows continued to strengthen the high-yield bond market
throughout the reporting period.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o The MainStay High Yield Corporate Bond Fund returned 11.37% and 10.74% for
Class A shares and Class B shares, respectively, excluding all sales
charges, for the one-year period ended 6/30/98.
o As of 6/30/98, both share classes were rated five stars overall by
Morningstar, Inc.*
o The Fund benefited from individual security selection in higher-quality
high-yield bonds and selected holdings in telecommunications. The Fund was
overweighted in industrials and media and underweighted in cyclicals and
commodity-related issues.
o Both share classes outperformed the average Lipper+ high current yield
fund, which returned 4.42% for the six months ended 6/30/98.
- ----------
* Morningstar, Inc. is an independent fund performance monitor. Its ratings
reflect historic risk-adjusted performance, taking fees and sales charges
into account, 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 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. Funds (or share
classes) are not rated until they have three years of performance history.
As of 6/30/98, Class A shares of the MainStay High Yield Corporate Bond
Fund received a 3-year rating of five stars out of 1,468 taxable bond
funds, and Class B shares of the Fund received 3-, 5-, and 10-year ratings,
each of five stars, out of 1,468, 890, and 337 taxable bond funds for the
respective periods.
+ See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay High Yield
Corporate Bond Fund versus First Boston
High Yield Index and Inflation
CLASS A SHARES SEC Returns: 1-Year 6.36%, 5-Year 11.78%, 10-Year 11.41%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay High Yield The First Boston
Date Corporate Bond Fund High Yield Index* Inflation+
- ------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $ 9,550 $10,000 $10,000
6/89 $10,509 $10,968 $10,517
6/90 $ 9,602 $10,761 $11,008
6/91 $10,434 $12,449 $11,526
6/92 $13,371 $15,582 $11,882
6/93 $15,952 $18,225 $12,238
6/94 $17,496 $19,014 $12,543
6/95 $19,667 $21,391 $12,924
6/96 $22,600 $23,524 $13,280
6/97 $26,175 $26,975 $13,585
6/98 $29,151 $29,937 $13,813
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 5.74%, 5-Year 12.09%, 10-Year 11.69%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay High Yield The First Boston
Date Corporate Bond Fund High Yield Index* Inflation+
- ------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $10,000 $10,000
6/89 $11,120 $10,968 $10,517
6/90 $10,161 $10,761 $11,008
6/91 $11,042 $12,449 $11,526
6/92 $14,149 $15,582 $11,882
6/93 $16,880 $18,225 $12,238
6/94 $18,515 $19,014 $12,543
6/95 $20,747 $21,391 $12,924
6/96 $23,733 $23,524 $13,280
6/97 $27,280 $26,975 $13,585
6/98 $30,210 $29,937 $13,813
- ------------------------------------------------------------------------
</TABLE>
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 6/30/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* 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.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
During the first six months of 1998, the high-yield bond market benefited from
the strength of the economy, benign inflation, and generally low interest rates.
Given the difficulties in Asia, it appeared unlikely that inflation would become
a problem, and the Federal Reserve Board did not move to affect interest rates.
Even so, in June, 30-year Treasury yields dropped to all-time lows, which helped
raise prices in most bond sectors.
Yield spreads, which were generally tight throughout the reporting period, began
to widen in the second quarter of 1998. This increased the return potential of
lower-rated securities, which had previously been low relative to inherent risk.
While default rates increased slightly during the reporting period, they
remained low relative to historical standards.
During the reporting period, new issuance remained strong among media and
telecommunications companies, but many of the securities appeared to be
overpriced. Asian difficulties led to widening spreads, creating opportunities
among issuers with strong fundamentals and adequate cash flow to service their
debt.
Given this context, how did the MainStay High Yield Corporate Bond Fund perform
in the six months ended 6/30/98?
The MainStay High Yield Corporate Bond Fund returned 5.78% and 5.38% for Class A
shares and Class B shares, respectively, excluding all sales charges for the six
months ended 6/30/98. Both share classes outperformed the average Lipper* high
current yield fund, which returned 4.42% for six months ended 6/30/98.
What was the primary reason the Fund outperformed its peers?
Strategic security selection. In evaluating high-yield securities, we consider a
number of factors beyond just the yield. We consider the quality of the company,
its ability to cover its debt, and the amount of risk it might face in the event
of an economic downturn. During the reporting period, the Fund remained
relatively risk averse, stressing the upper-quality tiers in the high-yield
universe. As it happens, many of the securities we selected for the Fund's
portfolio performed very well during the reporting period, particularly as the
markets reacted to Asian difficulties by emphasizing higher-quality issues.
The Fund also avoided much of the new issuance in the media and
telecommunications area, which we felt was overpriced. Instead, we concentrated
the Fund's telecommunications holdings in a few companies that we believed had
strong potential. These issues outperformed the telecommunications sector as a
whole.
Which telecommunications companies did the Fund own?
CD Radio is a satellite company that proposes to do for radio what Direct TV did
for the television market. In early 1999, CD Radio plans to introduce national
satellite radio, which is an entirely new concept and one we believed the market
would find
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
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 high-yield bonds with different credit ratings.
- ----------
* See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/86 5.01
12/87 0.20
12/88 16.89
12/89 (5.04)
12/90 (7.85)
12/91 32.27
12/92 21.65
12/93 21.65
12/94 1.50
12/95 20.28
12/96 16.33
12/97 12.20
6/98 5.78
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/86 through 12/94. See footnote * on page 11 for more information on
performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/86 5.01
12/87 0.20
12/88 16.89
12/89 (5.04)
12/90 (7.85)
12/91 32.27
12/92 21.65
12/93 21.65
12/94 1.50
12/95 19.71
12/96 15.58
12/97 11.55
6/98 5.38
</TABLE>
See footnote * on page 11 for more information on performance.
attractive. Since the company's bonds were the Fund's top performers,
our security selection proved beneficial for the Fund.
The Fund also held bonds of USN Communications, which is a reseller of
communications services. The company completed a successful equity offering
during the reporting period and the bonds were among the Fund's top performing
securities as a result of the initial public offering (IPO). The Fund reduced
its position after the IPO was completed.
Did the Fund own other securities that showed strong performance during the
first half of 1998?
Absolutely. The Fund benefited from Seven Sixty Seven Leasing paper, which was a
6
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Media 11.2%
Cable 7.1%
Cellular Telephone 5.3%
Steel, Aluminum & Other Metals 4.2%
Telecommunication Services 4.0%
All Other 68.2%
Actual percentages will vary over time. Excludes U.S. government & federal
agency issues.
secured aircraft lease backed by 767 aircraft for TWA. The issuer bought back
the bonds from the Fund at a significant premium, which contributed positively
to performance.
The Fund also did well in Station Casinos, which was recently acquired. During
the reporting period, the Fund purchased bonds in UIH Australia Pacific, which
is a beneficiary of the consolidating Australian cable market, and both
securities contributed positively to performance. The Fund also owned both stock
and high-yield bonds for Quest Diagnostics, a lab testing company that we felt
had outstanding potential, and our judgment proved correct.
What securities did the Fund purchase during the reporting period?
The Fund purchased Octel Developments, a specialty chemicals company that was
spun off from Great Lakes Chemical. The company's bonds were attractive to us,
offering a combination of risk and reward characteristics we felt would be
positive going forward.
The Fund also purchased Jafra Cosmetics. Jafra is a direct seller of cosmetic
products in the United States, Mexico, and Germany. The company is run by former
senior managers from Mary Kay and Avon, which we believe can help the company
rapidly increase its market share.
The Fund purchased a convertible security from Cirrus Logic, a technology
company that makes chips and crystals and has very strong asset coverage.
All of these securities contributed positively to performance during the
reporting period.
Did the Fund purchase any securities in emerging markets?
Yes. The Fund purchased bonds of Conproca and Hutchison Whampoa. Hutchison
Whampoa is a leading Hong Kong conglomerate with investments in
telecommunications, media, finance, and property. This investment is viewed as
particularly attractive given Hutchison's large U.S. cash position and the fact
that many of its assets are outside of Asia.
7
<PAGE>
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
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.
In late 1997, the Fund purchased bonds, issued by First Pacific Capital, a
successful Hong Kong conglomerate. During the first half of 1998, the company
completed an asset sale and showed strong bond performance as its debt coverage
increased. We increased the Fund's position in First Pacific Capital during the
reporting period, and the bonds have contributed positively to performance.
Which securities did the Fund sell during the reporting period?
The Fund had a number of successful sales during the first half of 1998. The
largest was Viacom, where we cut the Fund's position in half to take profits. We
bought and sold Columbia/HCA Healthcare during the reporting period, which had a
positive impact on performance.
In addition, we trimmed back on some of the Fund's higher-quality holdings as
spreads began to widen and we believed there was greater opportunity in
lower-quality securities.
Can you explain what you mean by that?
Certainly. Last year, with relatively tight yield spreads between securities
rated BB+ and B,++ we elected to invest the Fund primarily in the higher-rated
bonds, because we didn't feel that investors were being adequately compensated
for taking on additional risk. As yield spreads widened during the reporting
period, however, we decided that the compensation for additional risk was in a
more favorable range, and started to increase the Fund's holdings in the
single-B category.
Wouldn't you have been better off with single-B securities all along?
During the reporting period, the yield advantage was only about 40 basis points.
But we look at more than just yield. We continue to believe that we're in the
late stages of a credit cycle and that high-yield securities, by their very
nature, carry additional risks for which investors should receive adequate
compensation.
As it happens, even with the Fund's concentration in higher-quality securities,
it was able to outperform the average Lipper high current yield fund. In other
words, the Fund was able to provide higher returns with lower-than-average risk.
We believe that's the kind of portfolio management investors like to see.
Which of the Fund's securities provided the weakest performance?
Even the Fund's weakest bonds had relatively little negative impact on
performance. Cityscape Financial is a specialty finance company that has
continued to underperform the market. P.T. Polysindo Eka Perkasa is an
Indonesian textile company that also underperformed.
Did the Fund's sector weightings have a significant impact on performance?
To answer that question, we need to point out that we're bottom-up investors,
evaluating securities one-by-one on their fundamental characteristics and
individual merits. Each of the Fund's sector weightings is a direct result of
this bottom-up investment process, which seeks to identify companies with
attractive returns, well-priced securities, and a catalyst or stimulus for
improvement in the future.
- ----------
+ Debt rated BB by Standard & Poor's is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to the obligor's capacity to meet its financial commitment on the
obligation.
++ Debt rated B by Standard & Poor's is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity to meet its
financial commitment on the obligation.
8
<PAGE>
With that in mind, the Fund did benefit from being overweighted in industrials,
media, and emerging markets--and from being underweighted in telecommunications,
where most securities were overpriced; commodities, where prices were declining;
and cyclicals, which were generally out of favor.
As we head into the second half of the year, we have reallocated the Fund's
assets, seeking to take advantage of strong asset coverage in the energy sector.
The Fund continues to be overweighted in media and emerging markets, and we have
strengthened the Fund's exposure in shipping.
With low oil prices and continuing problems in Asia, isn't the Fund taking on
additional risk?
Perhaps, but calculating the relationship between risk and reward is what
high-yield investing is all about. We have already shown that selective
emerging-market investments can be beneficial, despite problems in Asia.
Although oil prices remain low and could even go lower, we believe the energy
companies in which the Fund is investing have more than adequate ability to
service their debt and we have purchased securities for the Fund at very
attractive prices.
Perhaps the biggest risk the Fund may face going forward is being underweighted
in equities. If the stock market continues to climb, the Fund could underperform
its peers as a result. But we believe that the Fund is well positioned given
company fundamentals, security prices, and inherent risks in the market at the
end of June.
What is your outlook for the future?
We believe that the high-yield market continues to offer opportunities and that
widening spreads may make lower-rated securities increasingly attractive. We
continue to underweight telecommunications in the Fund because we don't see
attractive values there. As long as steel
QUALITY BREAKDOWN AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
U.S. Government & Federal Agencies 3.6%
A 2.2%
BBB 2.4%
BB 20.1%
B 45.5%
CCC 8.3%
D 1.4%
Cash, Equivalents & Other Assets,
Less Liabilities 9.2%
All Other 7.3%
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
9
<PAGE>
High-yield securities run greater risks of price fluctuations, loss of principal
and interest, default or bankruptcy by the issuer, and other risks, which is why
these securities are considered 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.
and other commodities demonstrate weakness, we're unlikely to move the Fund's
portfolio in that direction. We continue to evaluate the relationship between
risk and reward, both at home and abroad, measuring asset coverage and free cash
flow, seeking to discover value opportunities in the high-yield bond market.
No matter how the markets may move, the Fund will continue to seek maximum
current income through investment in a diversified portfolio of high-yield debt
securities.
Denis Laplaige
Steven Tananbaum
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
10
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
====================================================================================================
Fund average annual total returns*
====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 11.37% 12.81% 11.92% 10.97%
Class B 10.74% 12.34% 11.69% 10.78%
<CAPTION>
====================================================================================================
Fund SEC returns*
====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 6.36% 11.78% 11.41% 10.55%
Class B 5.74% 12.09% 11.69% 10.78%
<CAPTION>
====================================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 93 out of n/a n/a n/a
215 funds
Class B 128 out of 3 out of 7 out of 8 out of
215 funds 76 funds 52 funds 35 funds
Average Lipper high
current yield fund 11.45% 9.90% 10.23% 9.66%
<CAPTION>
====================================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
====================================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $8.28 $0.3468 $0.0000
Class B $8.27 $0.3144 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued 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 (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 six 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
6/30/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
11
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
=================================================================================
HOLDING AMOUNT
=================================================================================
<S> <C>
Loewen Group, Inc. (The), 6.70%, due 10/1/99 $79,708,960
UCAR Global Enterprises, Inc., Series B, 12.00%, due 1/15/05 77,576,070
Marcus Cable Operating Co. L.P., (zero coupon), due 8/1/04
13.50%, beginning 8/1/99 67,969,840
Tokai Preferred Capital Co. L.L.C., 9.98%, due 12/29/49
11.0914%, beginning 6/30/08 67,445,781
First Pacific Capital Ltd., 2.00%, due 3/27/02 64,486,922
CD Radio, Inc., (zero coupon), due 12/1/07
15.00%, beginning 12/1/02 63,899,550
Millicom International Cellular, S.A
(zero coupon), due 6/1/06, 13.50%, beginning 6/1/01 60,842,100
UIH Australia/Pacific, Inc., Series B
(zero coupon), due 5/15/06, 14.00%, beginning 5/15/01 53,689,144
Le Groupe Videotron Ltee, 10.625%, due 2/15/05 51,843,497
Quest Diagnostics, Inc., 10.75%, due 12/15/06 50,738,970
</TABLE>
- ----------
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.
12
<PAGE>
<TABLE>
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
=========================================================================================
SECURITY AMOUNT OF PURCHASE
=========================================================================================
<S> <C>
Tokai Preferred Capital Co. L.L.C., 9.98%, due 12/29/49
11.0914%, beginning 6/30/08 $68,866,963
United International Holdings, Inc., (zero coupon), due 2/15/08
10.75%, beginning 2/15/03 67,501,100
UCAR Global Enterprises, Inc., Series B, 12.00%, due 1/15/05 61,644,414
UIH Australia/Pacific, Inc., Series B, (zero coupon), due 5/15/06
14.00%, beginning 5/15/01 and Series D, (zero coupon), due 5/15/06
14.00%, beginning 5/15/01 48,606,700
Globalstar L.P. Capital Corp., 11.50%, due 6/1/05 48,370,981
SB Treasury Co. L.L.C., 9.40%, due 12/29/49, 10.925%, beginning 6/30/08 46,153,906
Conproca, S.A., 12.00%, due 6/16/10 43,475,000
Northern Offshore ASA, 10.00%, due 5/15/05 41,911,850
Samsonite Corp., 10.75%, due 6/15/08 40,561,023
IPC Magazines Group, PLC, (zero coupon), due 3/15/08
10.75%, beginning 3/15/03 and 9.625%, due 3/15/08 39,595,729
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
=========================================================================================
SECURITY AMOUNT OF SALE
=========================================================================================
Viacom, Inc., 6.75%, due 1/15/03, 8.00%, due 7/7/06 and
Class B Common Stock $118,837,139
United International Holdings, Inc., (zero coupon), due 11/15/99
(zero coupon), due 2/15/08, 10.75%, beginning 2/15/03
and Class A Common Stock 78,949,338
CD Radio, Inc., (zero coupon), due 12/1/07, 15.00%, beginning 12/1/02
Common Stock and 10.50% Series C Preferred Stock 50,102,214
SB Treasury Co. L.L.C., 9.40%, due 12/29/49, 10.925%, beginning 6/30/08 46,132,844
Abbey Healthcare Group, Inc., 9.50%, due 11/1/02 43,713,221
USN Communications, Inc., (zero coupon), due 8/15/04, 14.625%
beginning 8/15/00 and Common Stock 41,615,041
Owens-Illinois, Inc., 7.85%, due 5/15/04 34,827,000
CMS Energy Corp., 7.625%, due 11/15/04 and 8.125%, due 5/15/02 32,473,119
Extendicare Health Services, 9.35%, due 12/15/07 28,260,903
Trans World Airlines, Inc., (zero coupon), due 4/15/99 and
11.375%, due 4/15/03 27,460,695
</TABLE>
- ----------
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>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
LONG-TERM BONDS (81.1%)+
CONVERTIBLE BONDS (4.5%)
BANKS (0.2%) MBI Finance Ltd.
(zero coupon)
due 12/18/01 (f) .......................... $ 10,510,000 $ 6,306,000
-------------
CAPITAL GOODS (0.0%) (b)
Paliburg International Finance Co.
3.50%, due 2/6/01 (f) ..................... 500,000 367,500
-------------
CELLULAR TELEPHONE (0.6%)
Metro Pacific Capital Ltd.
2.50%, due 4/11/03 (c)(f) ................. 4,600,000 3,703,000
2.50%, due 4/11/03 (f) .................... 15,898,000 12,797,890
United States Cellular Corp.
(zero coupon), due 6/15/15 ................ 20,345,000 7,553,081
-------------
24,053,971
-------------
CONGLOMERATES (2.1%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (f) .................... 73,073,000 64,486,922
Hutchison Delta Finance Ltd.
7.00%, due 11/8/02 (f) .................... 8,920,000 9,262,938
JG Summit (Cayman) Ltd.
3.50%, due 12/23/03 (f) ................... 15,074,000 8,026,905
-------------
81,776,765
-------------
DRUGS (0.0%) (b)
Ivax Corp.
6.50%, due 11/15/01 ....................... 600,000 537,000
-------------
PAPER & FOREST PRODUCTS (0.3%)
Sappi BVI Finance Ltd.
7.50%, due 8/1/02 (f) ..................... 12,070,000 10,863,000
-------------
REAL ESTATE (0.1%)
Sino Land Co.
5.00%, due 2/26/01 (f) .................... 5,335,000 3,627,800
-------------
RETAIL (0.0%) (b)
Sports Authority, Inc. (The)
5.25%, due 9/15/01 ........................ 2,000,000 1,925,000
-------------
TECHNOLOGY (1.0%)
Cirrus Logic, Inc.
6.00%, due 12/15/03 ....................... 31,925,000 25,859,250
6.00%, due 12/15/03 (c) ................... 15,000,000 12,150,000
-------------
38,009,250
-------------
TELECOMMUNICATION SERVICES (0.2%)
Technology Resources
Industries Berhad
(zero coupon), due 10/31/04 ............... 1,940,000 2,231,000
2.75%, due 11/28/04 (f) ................... 4,200,000 4,578,000
-------------
6,809,000
-------------
Total Convertible Bonds
(Cost $178,572,475) ....................... 174,275,286
-------------
CORPORATE BONDS (61.6%)
AEROSPACE (1.1%)
Newport News Shipbuilding, Inc.
8.625%, due 12/1/06 ....................... 17,175,000 18,076,687
9.25%, due 12/1/06 ........................ 6,300,000 6,693,750
Sequa Corp.
8.75%, due 12/15/01 ....................... 1,742,000 1,768,130
9.375%, due 12/15/03 ...................... 12,100,000 12,584,000
9.625%, due 10/15/99 ...................... 1,000,000 1,027,500
-------------
40,150,067
-------------
AIRLINES (0.8%) USAir, Inc.
10.00%, due 7/1/03 ........................ 22,510,000 23,636,175
Valujet, Inc.
10.25%, due 4/15/01 ....................... 6,250,000 6,046,875
-------------
29,683,050
-------------
AUTO MANUFACTURING (0.2%)
Titan Tire Corp.
7.00%, due 2/11/00 (m) .................... 6,542,838 6,428,338
-------------
BANKS (2.7%)
B.F. Saul Real Estate Investment
Trust, Series B
9.75%, due 4/1/08 ......................... 18,440,000 18,209,500
First Nationwide Holdings, Inc.
12.25%, due 5/15/01 ....................... 3,880,000 4,238,900
Local Financial Corp.
11.00%, due 9/8/04 ........................ 14,790,000 16,121,100
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
BANKS (Continued)
Tokai Preferred Capital Co. L.L.C.
9.98%, due 12/29/49
11.0914%, beginning
6/30/08 (c)(g) ............................ $ 72,425,000 $ 67,445,781
-------------
106,015,281
-------------
BUILDING MATERIALS (0.6%)
Triangle Pacific Corp.
10.50%, due 8/1/03 ........................ 22,625,000 23,530,000
-------------
CABLE (4.8%)
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99 ................. 29,065,000 7,266,250
Series B
(zero coupon), due 8/15/05
14.50%, beginning 8/15/00 ................. 21,800,000 4,796,000
Continental Cablevision, Inc.
11.00%, due 6/1/07 ........................ 11,770,000 12,797,368
CS Wireless Systems, Inc.
Series B
(zero coupon), due 3/1/06
11.375%, beginning 3/1/01 ................. 36,335,000 9,174,588
Heartland Wireless
Communications, Inc.
13.00%, due 4/15/03 (i) ................... 6,800,000 2,618,000
Series B
14.00%, due 10/15/04 (i) .................. 23,985,000 9,234,225
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99 .................. 70,072,000 67,969,840
Primestar, Inc.
10.9375%, due 4/1/99 (d)(m) ............... 11,580,000 11,580,000
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01 ................. 87,835,000 53,689,144
Series D
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01 ................. 12,300,000 7,518,375
-------------
186,643,790
-------------
CASINOS (3.0%)
Casino America, Inc.
12.50%, due 8/1/03 ........................ 10,745,000 12,141,850
El Comandante Capital Corp.
11.75%, due 12/15/03 ...................... 15,130,000 15,281,300
Empress River Casino Finance Corp.
10.75%, due 4/1/02 ........................ 3,500,000 3,780,000
Grand Casinos, Inc.
10.125%, due 12/1/03 ...................... 3,805,000 4,166,475
Horseshoe Gaming L.L.C.
Series B
12.75%, due 9/30/00 ....................... 34,335,000 37,682,663
Penn National Gaming, Inc.
10.625%, due 12/15/04 ..................... 10,910,000 11,455,500
President Riverboat Casinos, Inc.
13.00%, due 9/15/01 ....................... 29,961,000 27,713,925
Treasure Bay Gaming & Resorts
(zero coupon)
due 1/1/50 (a)(e) ......................... 2,333,335 84,346
10.00%, due 11/1/03 ....................... 2,056,381 2,056,381
Trump Castle Funding, Inc.
13.875%, due 11/15/05 (g) ................. 262 240
-------------
114,362,680
-------------
CELLULAR TELEPHONE (1.4%)
CCPR Services, Inc.
10.00%, due 2/1/07 ........................ 17,250,000 16,732,500
Centennial Cellular Corp.
8.875%, due 11/1/01 ....................... 17,118,000 17,781,323
10.125%, due 5/15/05 ...................... 15,085,000 16,970,625
International Wireless
Communications Holdings, Inc.
(zero coupon), due 8/15/01 ................ 10,000,000 1,800,000
-------------
53,284,448
-------------
CHEMICALS (2.3%)
Agriculture Minerals &
Chemicals, Inc.
10.75%, due 9/30/03 ....................... 15,250,000 16,241,250
Harris Chemical North
America, Inc.
10.75%, due 10/15/03 ...................... 31,420,000 33,030,275
International Specialty
Products, Inc., Series B
9.00%, due 10/15/03 ....................... 16,000,000 16,600,000
Octel Developments, PLC
10.00%, due 5/1/06 (c) .................... 8,765,000 8,940,300
Uniroyal Chemical Co., Inc.
9.00%, due 9/1/00 ......................... 14,450,000 15,028,000
-------------
89,839,825
-------------
CHILD CARE SERVICES (0.5%)
La Petite Holdings Corp.
9.625%, due 8/1/01 ........................ 20,292,000 20,799,300
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
COMPUTERS & OFFICE EQUIPMENT (0.3%)
American Business
Information, Inc.
9.50%, due 6/15/08 (c) .................... $ 4,950,000 $ 4,974,750
Unisys Corp.
10.625%, due 10/1/99 ...................... 1,379,000 1,397,961
11.75%, due 10/15/04 ...................... 5,500,000 6,345,625
-------------
12,718,336
-------------
CONGLOMERATES (1.0%)
Figgie International, Inc.
9.875%, due 10/1/99 ....................... 11,750,000 12,161,250
Hutchison Whampoa Ltd.
7.45%, due 8/1/17 (c) ..................... 9,680,000 7,704,322
JG Summit Holdings
8.375%, due 3/17/04 ....................... 24,840,000 19,530,450
-------------
39,396,022
-------------
CONSUMER DURABLES (1.7%)
Samsonite Corp.
10.75%, due 6/15/08 (c) ................... 40,870,000 40,563,475
Selmer Co., Inc.
11.00%, due 5/15/05 ....................... 19,800,000 21,681,000
11.00%, due 5/15/05 (c) ................... 1,500,000 1,642,500
-------------
63,886,975
-------------
CONSUMER NON-DURABLES (0.2%)
Icon Health & Fitness Holdings, Inc.
Series B
(zero coupon), due 11/15/04
15.00%, beginning 11/15/99 ................ 13,000,000 9,750,000
-------------
COSMETICS (0.7%)
Jafra Cosmetics International, Inc.
11.75%, due 5/1/08 (c) .................... 28,345,000 28,345,000
-------------
DEFENSE ELECTRONICS (0.8%)
Alliant Techsystems, Inc.
11.75%, due 3/1/03 ........................ 27,502,000 29,805,292
-------------
DOMESTIC OIL & GAS (1.6%)
Denbury Management, Inc.
9.00%, due 3/1/08 ......................... 10,000,000 9,550,000
Houston Exploration Co. (The)
Series B
8.625%, due 1/1/08 ........................ 6,530,000 6,530,000
Northern Offshore ASA
10.00%, due 5/15/05 (c) ................... 42,345,000 40,439,475
Stone Energy Corp.
8.75%, due 9/15/07 ........................ 4,000,000 4,030,000
-------------
60,549,475
-------------
DRUGS (0.4%)
ICN Pharmaceuticals, Inc.
Series B
9.25%, due 8/15/05 ........................ 13,580,000 14,292,950
-------------
ELECTRIC UTILITIES (1.9%)
CMS Energy Corp.
7.00%, due 1/15/05 ........................ 14,510,000 14,075,338
El Paso Electric Co.
Series E
9.40%, due 5/1/11 ......................... 17,191,000 19,597,740
ESI Tractebel Acquisition Corp.
7.99%, due 12/30/11 (c) ................... 19,175,000 19,175,000
Midland Funding Corp. I
Series C-91
10.33%, due 7/23/02 (q) ................... 14,774,891 15,986,343
Series C-94
10.33%, due 7/23/02 (q) ................... 3,064,805 3,316,101
-------------
72,150,522
-------------
ENERGY (1.1%)
Conproca, S.A.
12.00%, due 6/16/10 (c)(f) ................ 43,475,000 44,127,125
-------------
EQUIPMENT FINANCING (1.3%)
Atlas Air, Inc.
Series 1998-1C
8.01%, due 1/2/10 (c)(q) .................. 12,730,000 12,780,156
12.25%, due 12/1/02 (q) 11,112,000 12,167,084
GPA Airplanes Trust
Series 1, Class D
10.875%, due 3/15/19 (q) .................. 11,340,000 12,834,499
S-C Aircraft
Series 1997-C
11.00%, due 7/1/04 (c)(m)(q) .............. 11,809,040 12,399,492
-------------
50,181,231
-------------
FINANCE (1.8%)
Amresco, Inc.
Series 98-A
9.875%, due 3/15/05 ....................... 10,815,000 11,017,781
CB Richard Ellis Services, Inc.
8.875%, due 6/1/06 ........................ 17,820,000 17,686,350
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
FINANCE (Continued)
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (i) .................... $ 57,665,000 $ 23,066,000
Resource America, Inc.
12.00%, due 8/1/04 ........................ 3,290,000 3,520,300
TPE International Finance Co. B.V.
8.75%, due 5/15/02 (d)(f) ................. 4,800,000 2,400,000
Traffic Stream (BVI)
Infrastructure Ltd.
14.25%, due 5/1/06 (c) .................... 13,438,000 10,750,400
-------------
68,440,831
-------------
FOOD, BEVERAGES & TOBACCO (1.7%)
Colorado Prime Corp.
12.50%, due 5/1/04 ........................ 20,325,000 20,020,125
Fresh Foods, Inc.
10.75%, due 6/1/06 (c) .................... 12,035,000 12,035,000
Global Health Sciences, Inc.
11.00%, due 5/1/08 (c) .................... 14,050,000 13,874,375
Standard Commercial Corp.
8.875%, due 8/1/05 ........................ 17,195,000 16,851,100
Tingyi (Cayman Islands)
Holdings Corp.
7.113%, due 11/29/99 (d)(f) ............... 5,000,000 4,012,500
-------------
66,793,100
-------------
HEALTH CARE (3.2%)
Fountain View, Inc.
11.25%, due 4/15/08 (c) ................... 9,830,000 10,002,025
Magellan Health Services, Inc.
9.00%, due 2/15/08 (c) .................... 22,085,000 21,919,363
Medaphis Corp.
9.50%, due 2/15/05 (c) .................... 27,208,000 26,663,840
Quest Diagnostics, Inc.
10.75%, due 12/15/06 ...................... 45,404,000 50,738,970
Vencor, Inc.
9.875%, due 5/1/05 (c) .................... 12,805,000 12,596,919
-------------
121,921,117
-------------
HOUSING (0.9%)
Greystone Homes, Inc.
10.75%, due 3/1/04 ........................ 33,794,000 36,497,520
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(h) ........................ 108,500 30,380
-------------
36,527,900
-------------
INDUSTRIAL (0.1%)
Interlake Corp.
12.00%, due 11/15/01 ...................... 3,500,000 3,850,000
-------------
INSURANCE (0.1%)
Superior National Capital Trust I
10.75%, due 12/1/17 (r) ................... 4,600,000 4,922,000
-------------
LEISURE (0.5%)
Bally Total Fitness Holdings Corp.
Series B
9.875%, due 10/15/07 ...................... 18,508,000 19,063,240
-------------
MEDIA (6.1%)
Affiliated Newspapers
Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99 .................. 23,872,000 23,513,920
Ascent Entertainment Group, Inc.
(zero coupon), due 12/15/04
11.875%, beginning 12/15/02 ............... 21,300,000 13,738,500
CBS, Inc.
7.75%, due 6/1/99 ......................... 15,290,000 15,441,860
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning 12/1/02 ................. 109,230,000 63,899,550
Comcast Corp.
9.125%, due 10/15/06 ...................... 7,000,000 7,455,000
9.50%, due 1/15/08 ........................ 4,300,000 4,558,000
Garden State Newspapers, Inc.
12.00%, due 7/1/04 ........................ 9,065,000 10,096,144
General Media, Inc.
10.625%, due 12/31/00 ..................... 41,695,000 38,776,350
Maxwell Communications Corp., PLC
Facility A (a)(h)(i)(j) ................... 9,973,584 897,623
Paxson Communications Corp.
11.625%, due 10/1/02 ...................... 3,500,000 3,753,750
Telemundo Group, Inc.
7.00%, due 2/15/06
10.50%, beginning 2/15/99 ................. 9,500,000 10,200,625
Tri-State Outdoor Media
11.00%, due 5/15/08 (c) ................... 3,250,000 3,290,625
Viacom, Inc.
8.00%, due 7/7/06 ......................... 38,310,000 39,459,300
-------------
235,081,247
-------------
MINING (0.5%)
Great Central Mines Ltd.
8.875%, due 4/1/08 (c)(f) ................. 17,800,000 17,488,500
-------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
OIL SERVICES (0.3%)
Pool Energy Services Co.
8.625%, due 4/1/08 (c) .................... $ 11,175,000 $ 10,895,625
-------------
PAPER & FOREST PRODUCTS (0.7%)
P.T. Polysindo Eka Perkasa
(zero coupon), due 4/12/00 ................ 552,322 115,988
10.00%, due 4/3/00 ........................ 3,000,000 630,000
SD Warren Co.
Series B
12.00%, due 12/15/04 ...................... 12,095,000 13,380,094
Stone Container Corp.
Bank debt
9.063%, due 10/1/03 (d)(m) ................ 4,161,769 4,265,813
11.875%, due 12/1/98 ...................... 1,900,000 1,914,250
12.625%, due 7/15/98 ...................... 5,750,000 5,750,000
-------------
26,056,145
-------------
PERSONAL SERVICES (2.1%)
Loewen Group, Inc. (The)
6.70%, due 10/1/99 (c) .................... 80,000,000 79,708,960
-------------
POLLUTION & RELATED (0.2%)
ICF Kaiser International, Inc.
13.00%, due 12/31/03 ...................... 5,419,000 5,906,710
-------------
REAL ESTATE (0.5%)
LNR Property Corp.
9.375%, due 3/15/08 (c) ................... 17,630,000 17,674,075
Olympia & York Maiden
Lane Finance Corp.
10.375%, due 12/31/49
(a)(f)(h)(i) .............................. 4,000 3,000
-------------
17,677,075
-------------
RECREATION & ENTERTAINMENT (1.3%)
Affinity Group, Inc.
11.50%, due 10/15/03 ...................... 36,315,000 38,312,325
Affinity Group Holding, Inc.
11.00%, due 4/1/07 ........................ 2,935,000 3,140,450
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (h)(i) ................ 42,087,000 1,473,045
Hollywood Entertainment Corp.
Series B
10.625%, due 8/15/04 ...................... 8,600,000 8,772,000
-------------
51,697,820
-------------
RESTAURANTS & LODGING (2.2%)
Advantica Restaurant Group, Inc.
11.25%, due 1/15/08 ....................... 19,315,000 20,522,187
Booth Creek Ski Holdings, Inc.
Series B
12.50%, due 3/15/07 ....................... 1,500,000 1,605,000
Series C
12.50%, due 3/15/07 (c) ................... 1,075,000 1,150,250
Extended Stay America, Inc.
9.15%, due 3/15/08 (c) .................... 5,000,000 4,925,000
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning
6/30/99 (c)(m) ............................ 53,990,000 49,805,775
Romacorp, Inc.
12.00%, due 7/1/06 (c) .................... 8,000,000 8,130,000
-------------
86,138,212
-------------
RETAIL (0.7%)
K Mart Corp.
8.25%, due 1/1/22 ......................... 2,800,000 2,863,000
8.375%, due 7/1/22 ........................ 2,529,000 2,630,160
K Mart Funding Corp.
Series F
8.80%, due 7/1/10 ......................... 10,970,000 11,432,045
TM Group Holdings, PLC
11.00%, due 5/15/08 (c) ................... 11,000,000 11,261,250
-------------
28,186,455
-------------
STEEL, ALUMINUM & OTHER METALS (3.5%)
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 ........................ 10,700,000 11,368,750
LTV Corp. (The)
8.20%, due 9/15/07 ........................ 25,598,000 24,702,070
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05 ....................... 72,332,000 77,576,070
-------------
134,199,890
-------------
SUPERMARKETS (0.2%)
Penn Traffic Co. (The)
10.25%, due 2/15/02 ....................... 8,000,000 6,360,000
-------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
==================================
<S> <C> <C>
CORPORATE BONDS (Continued)
TECHNOLOGY (0.7%)
Electronic Retailing Systems
International, Inc.
(zero coupon), due 2/1/04
13.25%, beginning 2/1/00 .................. $ 10,000,000 $ 4,200,000
Metawave Communications Corp.
13.75%
due 4/28/00 (d)(l)(m) ..................... 8,870,000 9,136,100
Samsung Electronics America, Inc.
9.75%, due 5/1/03 (c) ..................... 15,500,000 14,492,500
-------------
27,828,600
-------------
TELECOMMUNICATION SERVICES (2.3%)
Globalstar L.P. Capital Corp.
11.50%, due 6/1/05 (c) .................... 42,450,000 41,335,687
Impsat Corp.
12.375%, due 6/15/08 (c) .................. 13,270,000 13,402,700
Orion Network System, Inc.
(zero coupon), due 1/15/07
12.50%, beginning 1/15/02 ................. 8,360,000 6,353,600
Protection One Alarm
Monitoring, Inc.
(zero coupon), due 6/30/05
13.625%
beginning 12/31/98 ........................ 8,000,000 9,000,000
T/SF Communications Corp.
Series B
10.375%, due 11/1/07 ...................... 12,820,000 13,044,350
USN Communications, Inc.
Series B
(zero coupon), due 8/15/04
14.625%, beginning 8/15/00 ................ 10,147,000 7,508,780
-------------
90,645,117
-------------
TEXTILE & APPAREL (0.7%)
Norton McNaughton, Inc.
12.50%, due 6/1/05 (c) .................... 25,570,000 25,570,000
-------------
TRANSPORTATION (2.9%)
Cathay International Holdings, Inc.
13.00%, due 4/15/08 (c) ................... 19,685,000 17,322,800
Cenargo International, PLC
9.75%, due 6/15/08 (c)(f) ................. 11,880,000 11,627,550
Equimar Shipholdings Ltd.
9.875%, due 7/1/07 ........................ 1,000,000 910,000
Ermis Maritime Holdings Ltd.
12.50%, due 3/15/06 (c)(s) ................ 23,555 27,360,960
Pacific & Atlantic (Holdings) Inc.
11.50%, due 5/30/08 (c) ................... 26,840,000 25,229,600
Pegasus Shipping Hellas Ltd.
11.875%, due 11/15/04 ..................... 29,190,000 29,554,875
-------------
112,005,785
-------------
Total Corporate Bonds
(Cost $2,402,718,306) ..................... 2,372,904,036
-------------
FOREIGN BONDS (2.0%)
CASINOS (0.3%)
William Hill Finance, PLC
10.625%, due 4/30/08 (c) ..............(pound) 8,000,000 13,102,770
-------------
MEDIA (0.0%) (b)
Maxwell Communications Corp., PLC
Facility B (a)(h)(i)(j) ................... 1,131,066 169,847
-------------
MINING (0.1%)
Greenstone Resources Ltd.
9.00%, due 2/28/02 ........................C$ 6,000,000 3,468,108
-------------
PAPER & FOREST PRODUCTS (0.0%) (b)
P.T. Polysindo Eka Perkasa
20.00%, due 3/16/00 ....................IDR 6,000,000,000 85,135
20.00%, due 3/27/00 ....................... 4,000,000,000 56,757
20.00%, due 3/28/00 ....................... 5,000,000,000 70,946
-------------
212,838
-------------
PUBLISHING (1.6%)
IPC Magazines Group, PLC
(zero coupon)
due 3/15/08, 10.75%,
beginning 3/15/03 (c) ................(pound) 35,585,000 33,842,977
9.625%, due 3/15/08 (c) ................... 3,000,000 4,755,231
Regional Independent Media Group
(zero coupon), due 7/1/08
12.875%,
beginning 7/1/03 (c) ...................... 24,175,000 22,033,560
-------------
60,631,768
-------------
Total Foreign Bonds
(Cost $82,707,024) 77,585,331
-------------
</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>
LOAN PARTICIPATIONS (0.9%)
CHEMICALS (0.4%)
Kronos International, Inc.
Bank debt
6.34375%
due 9/15/00 (d)(j)(m) ..................... DM 16,136,793 $ 8,873,001
Bank debt
6.4375%
due 9/15/99 (d)(j)(m) ..................... 14,413,598 7,925,483
-------------
16,798,484
-------------
RECREATION & ENTERTAINMENT (0.2%)
Alliance Entertainment Corp.
Bank debt
8.44%,
due 1/31/99 (d)(h)(j)(m) .................. $ 1,740,000 1,687,800
Bank debt
8.69%,
due 7/25/99 (d)(h)(j)(m) .................. 5,610,000 3,478,200
Bank debt
8.69%,
due 6/30/01 (d)(h)(j)(m) .................. 1,933,750 1,198,925
-------------
6,364,925
-------------
TRANSPORTATION (0.3%)
Eurotunnel
Bank debt
Tranche A
(zero coupon),
due 12/31/50 (j)(m) .....................(pound) 3,000,000 3,303,634
Bank debt
Tranche H2
6.2625%,
due 2/1/06 (d)(j)(m) ...................... FF 15,122,553 2,504,376
Bank debt
Tranche G2
10.125%,
due 2/1/06 (d)(j)(m) ....................(pound) 2,120,438 3,542,377
Bank debt
Tranche G2
10.1875%,
due 2/1/06 (d)(j)(m) ...................... 1,734,904 2,898,309
-------------
12,248,696
-------------
Total Loan Participations
(Cost $35,399,406) 35,412,105
-------------
U.S. GOVERNMENT &
FEDERAL AGENCY (3.6%)
FEDERAL HOME LOAN
MORTGAGE CORPORATION (2.5%)
13.00%, due 8/12/98 ....................... $ 95,000,000 95,656,450
-------------
UNITED STATES TREASURY BOND (1.1%)
12.375%, due 5/15/04 ...................... 30,000,000 40,129,800
-------------
Total U.S. Government &
Federal Agency
(Cost $142,323,375) 135,786,250
-------------
YANKEE BONDS (8.5%)
CABLE (1.4%)
Australis Holdings Pty Ltd.
(zero coupon), due 11/1/02
15.00%, beginning 11/1/00 ................. 10,074,000 2,014,800
CF Cable TV, Inc.
11.625%, due 2/15/05 ...................... 6,750,000 7,610,625
Kabelmedia Holdings GmbH
(zero coupon), due 8/1/06
13.625%, beginning 8/1/01 ................. 35,664,000 27,639,600
Rogers Cablesystems Ltd.
10.125%, due 9/1/12 ....................... 7,715,000 8,409,350
TeleWest, PLC
(zero coupon), due 10/1/07
11.00%, beginning 10/1/00 ................. 9,728,000 8,074,240
-------------
53,748,615
-------------
CELLULAR TELEPHONE (3.3%)
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01 .................. 78,760,000 60,842,100
Occidente y Caribe Celular, S.A.
Series B
(zero coupon), due 3/15/04
14.00%, beginning 3/15/01 ................. 19,365,000 14,547,956
Rogers Cantel, Inc.
8.30%, due 10/1/07 ........................ 31,140,000 30,517,200
9.375%, due 6/1/08 ........................ 20,000,000 20,800,000
-------------
126,707,256
-------------
MEDIA (1.7%)
Le Groupe Videotron Ltee
10.625%, due 2/15/05 ...................... 47,212,000 51,843,497
Rogers Communications, Inc.
8.875%, due 7/15/07 ....................... 12,735,000 12,830,513
-------------
64,674,010
-------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
================================
<S> <C> <C>
YANKEE BONDS (Continued)
PAPER & FOREST PRODUCTS (0.6%)
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c) ................... $ 19,615,000 $ 22,164,950
-------------
STEEL, ALUMINUM & OTHER METALS (0.7%)
Ivaco, Inc.
11.50%, due 9/15/05 ....................... 25,505,000 27,927,975
-------------
TELECOMMUNICATION SERVICES (0.6%)
Fonorola, Inc.
12.50%, due 8/15/02 ....................... 19,842,000 21,975,015
-------------
TESTING SERVICES (0.1%)
Intertek Testing Services Ltd.
12.00%
due 11/1/07 (c)(g)(m) ..................... 4,636,681 4,659,864
-------------
TRANSPORTATION (0.1%)
Guangzhou-Shenzhen
Superhighway (Holdings) Ltd.
9.875%, due 8/15/04 ....................... 8,000,000 5,730,000
-------------
Total Yankee Bonds
(Cost $318,669,957) ....................... 327,587,685
-------------
Total Long-Term Bonds
(Cost $3,160,390,543) ..................... 3,123,550,693
-------------
<CAPTION>
Shares
=================
<S> <C> <C>
COMMON STOCKS (5.7%)
APPLIANCES & FURNITURE (0.0%) (b)
Central Rents, Inc. (a)(c) .................. 10,500 630,000
-------------
BANKS (0.0%) (b)
Kookmin Bank GDR (o) ........................ 781,173 3,062,198
-------------
BUSINESS SERVICES (0.0%) (b)
Iron Mountain, Inc. (a) ..................... 3,246 145,258
<CAPTION>
Shares Value
=================================
<S> <C> <C>
CABLE (0.8%)
CS Wireless
Systems, Inc. (a)(c) ...................... 5,180 52
United International Holdings
Inc., Class A (a) ......................... 1,854,700 29,675,200
-------------
29,675,252
-------------
CASINOS (0.3%)
Casino America, Inc. (a) .................... 207,925 727,737
Colorado Gaming &
Entertainment Co. (a) ..................... 368,128 2,024,704
Grand Casinos, Inc. (a) ..................... 262,300 4,393,525
Harrah's Entertainment, Inc. (a) ............ 129,600 3,013,200
-------------
10,159,166
-------------
CELLULAR TELEPHONE (0.0%) (b)
Celcaribe, S.A. (a)(c) ...................... 751,212 3,004,848
-------------
DOMESTIC OIL & GAS (0.8%)
Pioneer Natural Resources Co. ............... 241,200 5,758,650
R&B Falcon Corp. (a) ........................ 584,480 13,223,860
Union Pacific Resources
Group, Inc. ............................... 740,000 12,996,250
-------------
31,978,760
-------------
DRUGS (0.0%) (b)
ICN Pharmaceuticals, Inc. ................... 780 35,636
-------------
FOOD, BEVERAGES & TOBACCO (0.5%)
Dr. Pepper Bottling Holdings, Inc.
Class A (a) ............................... 200,000 5,900,000
Philip Morris Companies, Inc. ............... 325,000 12,796,875
TLC Beatrice International
Holdings, Inc. (a) ........................ 25,000 1,250,000
-------------
19,946,875
-------------
HEALTH CARE (0.6%)
Beverly Enterprises, Inc. (a) ............... 290,000 4,060,000
Quest Diagnostics, Inc. (a) ................. 876,000 19,162,500
-------------
23,222,500
-------------
MEDIA (0.7%)
Affiliated Newspapers
Investments, Inc. (a) ..................... 28,000 3,360,000
CD Radio, Inc. (a) .......................... 444,860 17,127,110
Rogers Communications, Inc.
Class B (a)(p) ............................ 483,275 4,304,979
-------------
24,792,089
-------------
</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>
Shares Value
=================================
<S> <C> <C>
COMMON STOCKS (Continued)
PAPER & FOREST PRODUCTS (0.3%)
Sappi Ltd. (a) .............................. 2,044,200 $ 7,767,960
TimberWest Timber
Trust (The) (p) ........................... 423,000 2,502,448
-------------
10,270,408
-------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
Series B (a) .............................. 43,750 43,750
-------------
SPECIALIZED SERVICES (0.4%)
Cendant Corp. (a) ........................... 748,525 15,344,763
-------------
TECHNOLOGY (0.4%)
Hadco Corp. (a) ............................. 188,200 4,387,412
Samsung Electronics
Co., Ltd. GDR (o) ......................... 288,070 4,603,359
Seagate Technology, Inc. (a) ................ 236,000 5,649,250
-------------
14,640,021
-------------
TELECOMMUNICATION SERVICES (0.9%)
Telecomunicacoes Brasileiras
S.A. ADR (k) .............................. 253,570 27,607,434
USN Communications, Inc. (a) ................ 669,159 5,938,786
-------------
33,546,220
-------------
TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of
America, Inc. (a) ......................... 17,400 130,500
-------------
Total Common Stocks
(Cost $191,882,714) ....................... 220,628,244
-------------
PREFERRED STOCKS (3.2%)
BANKS (0.0%) (b)
California Federal Preferred
Capital Corp.
9.125%, Series A (g) ...................... 50,000 1,365,625
River Bank America, N.Y.
15.00%, Series A .......................... 30,000 570,000
-------------
1,935,625
-------------
CASINOS (0.1%)
Station Casinos, Inc.
7.00% (n) ................................. 70,050 3,471,853
-------------
EQUIPMENT FINANCING (0.6%)
GPA Group, PLC (a)(m) ....................... 41,600,000 23,712,000
-------------
MEDIA (2.0%)
Cumulus Media, Inc.
13.75%, Series A .......................... 10,415 10,597,263
Granite Broadcasting Corp.
12.75% (g) ................................ 3,960 4,633,745
Paxson Communications Corp.
12.50% (g) ................................ 28,729 29,734,461
Spanish Broadcasting System, Inc.
14.25% (c)(g) ............................. 29,171 30,702,478
-------------
75,667,947
-------------
PAPER & FOREST PRODUCTS (0.1%)
Paperboard Industries
International, Inc.
5.00%, Class A (c)(m)(p) .................. 219,308 3,588,398
-------------
REAL ESTATE (0.4%)
Crown American Realty Trust
11.00%, Series A .......................... 294,930 15,815,621
-------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
$0.056, Series A (g) ...................... 2,297 1,149
-------------
Total Preferred Stocks
(Cost $109,604,410) ....................... 124,192,593
-------------
WARRANTS (0.8%)
CABLE (0.1%)
Peoples Choice TV Corp.
expire 6/1/00 (a) ......................... 300 3
Supercanal Holding, S.A.
Series A
expire 11/14/99 (a)(c)(m) ................. 6,822,324 955,125
UIH Australia/Pacific, Inc.
expire 5/15/06 (a)(c) ..................... 24,315 121,575
United International
Holdings, Inc.
expire 11/15/99 (a) ....................... 20,834 417,942
-------------
1,494,645
-------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
=================================
<S> <C> <C>
WARRANTS (Continued)
CASINOS (0.0%) (b)
Belle Casino, Inc. (a)(c) ................... 5,500 $ 55
Boomtown, Inc.
expire 11/1/98 (a)(c) ..................... 7,350 1,838
Casino America, Inc.
expire 5/3/01 (a) ......................... 36,808 36,808
HDA Management Corp.
expire 12/15/98 (a)(c) .................... 6,450 258,000
Louisiana Casino Cruises, Inc.
expire 12/1/98 ............................ 12,000 60,000
-------------
356,701
-------------
CELLULAR TELEPHONE (0.0%) (b)
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 1,058,400
-------------
1,126,349
-------------
CONGLOMERATES (0.0%) (b)
IFA Capital, Inc.
Series H
expire 11/14/99 (a)(c) .................... 8,000 240,000
-------------
FOOD, BEVERAGES & TOBACCO (0.0%) (b)
Colorado Prime Corp.
expire 12/31/03 (a)(c) .................... 18,825 188,250
-------------
HOUSEHOLD PRODUCTS (0.0%) (b)
Chattem, Inc.
expire 6/17/99 (a)(c) ..................... 9,500 532,000
-------------
MEDIA (0.7%)
General Media, Inc.
expire 12/21/03 (a)(c) .................... 34,486 345
Spanish Broadcasting System, Inc.
expire 6/30/99 (a)(c)(u) .................. 19,780 4,153,800
expire 6/30/99 (a)(t) ..................... 44,150 21,633,500
-------------
25,787,645
-------------
POLLUTION & RELATED (0.0%) (b)
ICF Kaiser International, Inc.
expire 12/31/98 (a)(v) .................... 48,835 12,209
expire 12/31/98 (a)(w) .................... 28,000 7,000
-------------
19,209
-------------
TECHNOLOGY (0.0%) (b)
Metawave Communications Corp.
expire 4/28/00 (a)(m) ..................... 164,401 1,644
-------------
TELECOMMUNICATION SERVICES (0.0%) (b)
Rocky Mountain Internet, Inc.
expire 7/29/03 (a)(m) ..................... 152,488 892,052
-------------
TESTING SERVICES (0.0%) (b)
Intertek Testing Services Ltd.
expire 12/31/99 (a)(m) .................... 691 220,001
-------------
Total Warrants
(Cost $7,586,138) ......................... 30,858,496
-------------
<CAPTION>
Principal
Amount
==================
<S> <C> <C>
SHORT-TERM INVESTMENTS (8.4%)
COMMERCIAL PAPER (4.7%)
General Electric Corp.
5.70%, due 7/2/98 ......................... $ 30,000,000 29,995,250
Goldman Sachs Group L.P. (The)
6.25%, due 7/1/98 ......................... 90,070,000 90,070,000
Morgan Stanley, Dean Witter,
Discover & Co.
6.25%, due 7/1/98 ......................... 58,730,000 58,730,000
-------------
Total Commercial Paper
(Cost $178,795,250) 178,795,250
-------------
SHORT-TERM BONDS (3.7%)
FOOD, BEVERAGES & TOBACCO (0.2%)
Buenos Aires Embotelladora
Sociedad Anonima
Bank debt
9.479%, due 8/1/98 (i)(m) ................. 15,750,000 9,765,000
-------------
</TABLE>
23
<PAGE>
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
================================
<S> <C> <C>
SHORT-TERM BONDS (Continued)
PAPER & FOREST PRODUCTS (0.2%)
P.T. Polysindo Eka Perkasa
(zero coupon), due 7/17/98 ................ $ 16,000,000 $ 3,360,000
(zero coupon)
due 10/23/98 (g) .......................... 11,741,460 2,465,707
(zero coupon), due 10/23/98 ............... 313,898 65,919
-------------
5,891,626
-------------
TEXTILE & APPAREL (0.0%) (b)
Alpargatas S.A.I.C.
11.75%, due 8/18/98 (c)(i) ................ 800,000 600,000
-------------
FEDERAL HOME LOAN MORTGAGE CORP. (3.3%)
13.00%, due 11/4/98 ....................... 125,000,000 127,998,750
-------------
Total Short-Term Bonds
(Cost $172,573,645) ....................... 144,255,376
-------------
Total Short-Term Investments
(Cost $351,368,895) ....................... 323,050,626
-------------
Total Investments
(Cost $3,820,832,700) (x) ................. 99.2% 3,822,280,652(y)
Cash and Other Assets,
Less Liabilities........................... 0.8 32,664,364
------------- -------------
Net Assets .................................. 100.0% $3,854,945,016
============= ==============
</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 June 30, 1998.
(e) Fair valued security. Aggregate at less than one tenth of a percent.
(f) Euro-Dollar bond.
(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) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(m) Restricted security.
(n) Convertible preferred stock.
(o) GDR--Global Depository Receipt.
(p) Canadian security.
(q) Asset-backed security.
(r) 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.
(s) 23,555 Units--each unit reflects $1,100 principal amount of 12.50% First
Preferred Ship Mortgage Notes, plus one warrant to acquire $100 principal
amount of Notes.
(t) 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.
(u) 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.
(v) 4.8 warrants will entitle the holder thereof to purchase one share of
common stock at a price equal to $5.00 per share, subject to adjustment
under certain circumstances.
(w) Each warrant will entitle the holder to purchase one share of common stock
at a price equal to $230 per share, subject to adjustment under certain
circumstances.
(x) The cost for Federal income tax purposes is $3,820,961,175.
(y) At June 30, 1998 net unrealized appreciation was $1,319,477, 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 $156,373,513 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $155,054,036.
((pound)) Security denominated in British Pound Sterling.
(C$) Security denominated in Canadian Dollar.
(FF) Security denominated in French Franc.
(DM) Security denominated in German Deutsche Mark.
(IDR) Security denominated in Indonesian Rupia.
24
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $3,820,832,700) .................. $ 3,822,280,652
Cash ................................................................................. 1,002
Deposit with broker .................................................................. 3,347,097
Receivables:
Investment securities sold ......................................................... 200,957,595
Dividends and interest ............................................................. 77,575,315
Fund shares sold ................................................................... 8,938,929
Unrealized appreciation on forward foreign currency contracts ........................ 301,468
Other assets ......................................................................... 46,610
---------------
Total assets ..................................................................... 4,113,448,668
---------------
LIABILITIES:
Payables:
Investment securities purchased .................................................... 221,528,434
Fund shares redeemed ............................................................... 5,983,109
NYLIFE Distributors ................................................................ 3,005,560
MainStay Management ................................................................ 1,804,782
Transfer agent ..................................................................... 310,080
Custodian .......................................................................... 91,407
Trustees ........................................................................... 19,689
Accrued expenses ..................................................................... 525,705
Unrealized depreciation on forward foreign currency contracts ........................ 618,707
Dividend payable ..................................................................... 24,616,179
---------------
Total liabilities ................................................................ 258,503,652
---------------
Net assets ........................................................................... $ 3,854,945,016
===============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................................ $ 342,426
Class B ............................................................................ 4,320,030
Additional paid-in capital ........................................................... 3,767,095,554
Accumulated undistributed net investment income ...................................... 1,553,073
Accumulated undistributed net realized gain on investments ........................... 80,797,325
Net unrealized appreciation on investments ........................................... 1,447,952
Net unrealized depreciation on foreign currency and forward foreign currency contracts (611,344)
---------------
Net assets ........................................................................... $ 3,854,945,016
===============
CLASS A
Net assets applicable to outstanding shares .......................................... $ 283,495,965
===============
Shares of beneficial interest outstanding ............................................ 34,242,583
===============
Net asset value per share outstanding ................................................ $ 8.28
Maximum sales charge (4.50% of offering price) ....................................... 0.39
---------------
Maximum offering price per share outstanding ......................................... $ 8.67
===============
CLASS B
Net assets applicable to outstanding shares .......................................... $ 3,571,449,051
===============
Shares of beneficial interest outstanding ............................................ 432,003,006
===============
Net asset value and offering price per share outstanding ............................. $ 8.27
===============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ..................................................................... $ 7,215,461
Interest (b) ...................................................................... 172,086,274
-------------
Total income .................................................................... 179,301,735
-------------
Expenses:
Distribution--Class B ............................................................. 13,128,627
Management ........................................................................ 11,304,515
Service--Class A .................................................................. 334,006
Service--Class B .................................................................. 4,376,208
Transfer agent .................................................................... 2,193,817
Shareholder communication ......................................................... 302,401
Professional ...................................................................... 269,574
Registration ...................................................................... 240,120
Custodian ......................................................................... 239,992
Recordkeeping ..................................................................... 202,787
Trustees .......................................................................... 49,502
Miscellaneous ..................................................................... 21,241
-------------
Total expenses before waiver .................................................... 32,662,790
Fee waived by Manager ............................................................... (818,071)
-------------
Net expenses ...................................................................... 31,844,719
-------------
Net investment income ............................................................. 147,457,016
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ............................................................. 65,264,248
Securities sold short ............................................................. (466,913)
Foreign currency transactions ..................................................... 808,880
-------------
Net realized gain on investments and foreign currency transactions .................. 65,606,215
-------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................. (16,455,157)
Foreign currency and forward foreign currency contracts ........................... (1,271,599)
-------------
Net unrealized loss on investments and foreign currency transactions ................ (17,726,756)
-------------
Net realized and unrealized gain on investments and foreign currency transactions ... 47,879,459
-------------
Net increase in net assets resulting from operations ................................ $ 195,336,475
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $122,901.
(b) Interest recorded net of foreign withholding taxes of $2,589.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ...................................................................... $ 147,457,016 $ 256,747,395
Net realized gain on investments ........................................................... 65,264,248 147,564,306
Net realized loss on securities sold short ................................................. (466,913) --
Net realized gain on foreign currency transactions ......................................... 808,880 978,376
Net change in unrealized appreciation on securities transactions ........................... (16,455,157) (64,858,129)
Net change in unrealized appreciation (depreciation) on foreign currency and forward foreign
currency contracts ....................................................................... (1,271,599) 806,336
--------------- ---------------
Net increase in net assets resulting from operations ....................................... 195,336,475 341,238,284
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A .................................................................................. (11,274,202) (15,875,053)
Class B .................................................................................. (133,757,494) (243,546,134)
From net realized gain on investments and foreign currency transactions:
Class A .................................................................................. -- (9,477,663)
Class B .................................................................................. -- (134,845,754)
--------------- ---------------
Total dividends and distributions to shareholders ...................................... (145,031,696) (403,744,604)
--------------- ---------------
Capital share transactions: Net proceeds from sale of shares:
Class A .................................................................................. 88,813,973 184,071,711
Class B .................................................................................. 430,936,885 1,197,246,355
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A .................................................................................. 6,683,923 19,615,677
Class B .................................................................................. 74,476,990 273,550,920
--------------- ---------------
600,911,771 1,674,484,663
Cost of shares redeemed:
Class A .................................................................................. (58,760,382) (76,496,410)
Class B .................................................................................. (356,791,307) (474,186,948)
--------------- ---------------
Increase in net assets derived from capital share transactions ......................... 185,360,082 1,123,801,305
--------------- ---------------
Net increase in net assets ................................................................... 235,664,861 1,061,294,985
NET ASSETS:
Beginning of period .......................................................................... 3,619,280,155 2,557,985,170
--------------- ---------------
End of period ................................................................................ $ 3,854,945,016 $ 3,619,280,155
--------------- ---------------
Accumulated undistributed net investment income (excess distribution) at end of period ....... $ 1,553,073 $ (872,247)
=============== ===============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------------- ------------- ------------- ------------- ------------- -------------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
------------------------------ ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ... $8.16 $8.15 $8.27 $8.26 $7.92 $7.92
------------- ------------- ------------- ------------- ------------- -------------
Net investment income ... 0.35 0.32 0.74 0.69 0.72 0.67
Net realized and
unrealized gain
(loss) on investments . 0.12 0.12 0.23 0.23 0.52 0.52
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 ............ 0.47 0.44 0.97 0.92 1.24 1.19
------------- ------------- ------------- ------------- ------------- -------------
Less dividends and
distributions:
From net investment
income ................ (0.35) (0.32) (0.74) (0.69) (0.71) (0.67)
In excess of net
investment income ..... -- -- -- -- -- --
From net realized gain
on investments ........ -- -- (0.34) (0.34) (0.18) (0.18)
In excess of net realized
gain on investments ... -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total dividends and
distributions ......... (0.35) (0.32) (1.08) (1.03) (0.89) (0.85)
------------- ------------- ------------- ------------- ------------- -------------
Net asset value at end
of period ............. $8.28 $8.27 $8.16 $8.15 $8.27 $8.26
============= ============= ============= ============= ============= =============
Total investment
return (a) ............ 5.78% 5.38% 12.20% 11.55% 16.33% 15.58%
Ratios (to average net
assets)/
Supplemental Data:
Net investment
income ............ 8.52%+ 7.77%+ 8.79% 8.18% 9.0% 8.4%
Net expenses ........ 0.99%+ 1.74%+ 1.01% 1.62% 1.0% 1.6%
Expenses (before
waiver) ........... 1.03%+ 1.78%+ 1.01% 1.62% 1.0% 1.6%
Portfolio turnover rate . 71% 71% 128% 128% 118% 118%
Net assets at end of
period (in 000's) ..... $283,496 $3,571,449 $238,841 $3,380,439 $116,805 $2,441,180
<CAPTION>
Class B
-----------------------------------------------
Class A Class B September 1
------------- ------------- through Year ended August 31
Year ended December 31 ------------------------------
December 31, 1995 1994** 1994 1993
------------------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ... $7.44 $7.44 $7.70 $7.93 $7.41
------------- ------------- ------------- ------------- -------------
Net investment income ... 0.84 0.81 0.23 0.69 0.70
Net realized and
unrealized gain
(loss) on investments . 0.61 0.61 (0.27) (0.08) 0.54
Net realized and
unrealized loss on
foreign currency
transactions .......... (0.00)(b) (0.00)(b) -- -- --
------------- ------------- ------------- ------------- -------------
Total from investment
operations ............ 1.45 1.42 (0.04) 0.61 1.24
------------- ------------- ------------- ------------- -------------
Less dividends and
distributions:
From net investment
income ................ (0.84) (0.81) (0.22) (0.67) (0.72)
In excess of net
investment income ..... (0.01) (0.01) -- -- --
From net realized gain
on investments ........ (0.10) (0.10) -- (0.17) --
In excess of net realized
gain on investments ... (0.02) (0.02) -- -- --
------------- ------------- ------------- ------------- -------------
Total dividends and
distributions ......... (0.97) (0.94) (0.22) (0.84) (0.72)
------------- ------------- ------------- ------------- -------------
Net asset value at end
of period ............. $7.92 $7.92 $7.44 $7.70 $7.93
============= ============= ============= ============= =============
Total investment
return (a) ............ 20.28% 19.71% (0.48%) 7.95% 18.58%
Ratios (to average net
assets)/
Supplemental Data:
Net investment
income ............ 10.2% 9.5% 9.1%+ 8.7% 9.9%
Net expenses ........ 1.0% 1.6% 1.6%+ 1.6% 1.7%
Expenses (before
waiver) ........... 1.0% 1.6% 1.6%+ 1.6% 1.7%
Portfolio turnover rate . 137% 137% 45% 190% 207%
Net assets at end of
period (in 000's) ..... $42,850 $1,601,238 $1,128,913 $1,090,261 $808,538
</TABLE>
- ----------
* Unaudited.
** 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.
28
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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 maximum current income through investment in a
diversified portfolio of high yield debt securities. Capital appreciation is a
secondary objective. High yield securities run greater risks of price
fluctuations, loss of principal and interest, default or bankruptcy by the
issuer, and other risks, which is why these securities are considered
speculative.
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,
29
<PAGE>
MainStay High Yield Corporate Bond Fund
(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 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.
30
<PAGE>
Notes to Financial Statements unaudited (continued)
Forward foreign currency contracts open at June 30, 1998:
<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 8/24/98...................................DM 34,200,000 $19,021,135 $ 9,816
Pound Sterling vs. US$
expiring 9/9/98....................................(pound) 24,425,000 $39,970,902 (618,707)
<CAPTION>
Unrealized
Contract Amount Contract Amount Appreciation/
Purchased Sold (Depreciation)
--------------- --------------- --------------
Foreign Currency Buy Contract
- -----------------------------
<S> <C> <C> <C>
Pound Sterling vs. US$
expiring 9/9/98....................................(pound) 7,997,600 $12,998,807 $ 291,652
---------
Net Unrealized Depreciation On
Forward Foreign
Currency Contracts................................. $(317,239)
=========
</TABLE>
MainStay High Yield Corporate Bond Fund
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 June 30, 1998 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 (the "1933 Act").
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 1933 Act 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.
31
<PAGE>
MainStay High Yield Corporate Bond Fund
Restricted securities held at June 30, 1998:
<TABLE>
<CAPTION>
Principal Percent
Date(s) of Amount/ 6/30/98 of
Security Acquisition Shares Cost Value Net Assets
- -------- ----------- --------- ---- ------- ----------
<S> <C> <C> <C> <C> <C>
Alliance Entertainment Corp.
Bank debt
8.44%, due 1/31/99 3/12/98 $1,740,000 $1,708,822 $1,687,800 0.1%
Bank debt
8.69%, due 7/25/99 3/12/98 5,610,000 4,306,607 3,478,200 0.1
Bank debt
8.69%, due 6/30/01 3/12/98 1,933,750 1,484,474 1,198,925 0.0(c)
Buenos Aires Embotelladora
Sociedad Anonima
Bank debt
9.479%, due 8/1/98 10/22/97-5/8/98 15,750,000 13,013,125 9,765,000 0.3
Eurotunnel
Bank debt, Tranche A
(zero coupon), due 12/31/50 3/13/98 (pound)3,000,000 2,782,920 3,303,634 0.1
Bank debt, Tranche H2
6.2625%, due 2/1/06 3/6/98 FF15,122,553 2,485,466 2,504,376 0.1
Bank debt, Tranche G2
10.125%, due 2/1/06 3/6/98 (pound)2,120,438 3,498,425 3,542,377 0.1
Bank debt, Tranche G2
10.1875%, due 2/1/06 3/6/98 (pound)1,734,904 2,862,348 2,898,309 0.1
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 8/12/97-1/14/98 $53,990,000 44,184,805 49,805,775 1.3
GPA Group, PLC
Preferred Stock 3/7/96-12/23/97 41,600,000 16,177,800 23,712,000 0.6
Intertek Testing Services Ltd.
12.00%, due 11/1/07 (a) 11/8/96 4,636,681 4,431,855 4,659,864 0.1
Warrants, expire 12/31/99 11/8/96 691 223,440 220,001 0.0(c)
Kronos International, Inc.
Bank debt
6.34375%, due 9/15/00 2/25/97-3/31/98 DM16,136,793 8,548,666 8,873,001 0.2
Bank debt
6.4375%, due 9/15/99 2/25/97-7/31/97 DM14,413,598 7,721,679 7,925,483 0.2
Metawave Communications Corp.
13.75%, due 4/28/00 (b) 4/28/98 $8,870,000 8,870,000 9,136,100 0.2
Warrants, expire 4/28/00 4/28/98 164,401 0(d) 1,644 0.0(c)
</TABLE>
32
<PAGE>
Notes to Financial Statements unaudited (continued)
Restricted securities (continued):
<TABLE>
<CAPTION>
Principal Percent
Date(s) of Amount/ 6/30/98 of
Security Acquisition Shares Cost Value Net Assets
- -------- ----------- --------- ---- ------- ----------
<S> <C> <C> <C> <C> <C>
Paperboard Industries
International, Inc.
Preferred Stock,
5.00%, Class A 5/5/98 $ 219,308 $ 3,643,057 $ 3,588,398 0.1%
Primestar, Inc.
10.9375%, due 4/1/99 4/1/98-4/14/98 11,580,000 11,580,000 11,580,000 0.3
Rocky Mountain Internet, Inc.
Warrants, expire 7/29/03 6/8/98 152,488 0(d) 892,052 0.0(c)
S-C Aircraft
Series 1997-C
11.00%, due 7/1/04 3/20/97 11,809,040 11,809,040 12,399,492 0.3
Stone Container Corp.
Bank debt
9.063%, due 10/1/03 7/16/97 4,161,769 4,160,726 4,265,813 0.1
Supercanal Holding, S.A.
Warrants, Series A
expire 11/14/99 11/20/97 6,822,324 545,786 955,125 0.0(c)
Titan Tire Corp.
7.00%, due 2/11/00 6/24/97 6,542,838 6,367,046 6,428,338 0.2
------------ ------------ ---
$160,406,087 $172,821,707 4.5%
============ ============ ===
</TABLE>
- ----------
(a) PIK ("Payment in Kind")--interest payment is made with additional
securities.
(b) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(c) Less than one tenth of a percent.
(d) These warrants have no cost.
DM Deutsche Mark
FF French Franc
(pound) Pound Sterling
33
<PAGE>
MainStay High Yield Corporate Bond Fund
Commitments and Contingencies. As of June 30, 1998, the Fund had unfunded loan
commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
- ------- ----------
<S> <C>
Alliance Entertainment Corp. ............................. $1,271,553
Kronos International, Inc. ............................... 8,184,770
----------
$9,456,323
==========
</TABLE>
Financial Instruments with Concentration of Credit Risk. The Fund invests in
Loan Participations. When the Fund purchases a Loan 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 Loan
Participation. The Fund may be considered to have a concentration of credit risk
in the banking industry, since the Fund will only acquire Loan 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.
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.
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
34
<PAGE>
Notes to Financial Statements unaudited (continued)
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
office and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 Fund's
average daily net assets. The Manager has voluntarily established a fee
breakpoint, which may be discontinued at any time, of 0.55% on assets in excess
of $500 million. For the six months ended June 30, 1998 the Manager earned
$11,304,515 and waived $818,071 of its fees.
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. To the
extent that the Manager has voluntarily established a fee breakpoint, the
Sub-Adviser has voluntarily agreed to do so proportionately.
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 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.
35
<PAGE>
MainStay High Yield Corporate Bond 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 $150,960 for the six
months ended June 30, 1997. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$2,182,131 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $2,204,908.
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 $53,837 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$202,787 for the six months ended June 30, 1998.
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 prior year as if
they arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of U.S.
Government securities, other than short-term securities, were $328,251 and
$558,918, respectively. Purchases and sales of securities, other than U.S.
Government securities, securities subject to repurchase transactions and
short-term securities, were $2,243,248 and $1,908,970, respectively.
36
<PAGE>
Notes to Financial Statements unaudited (continued)
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
-------------------- --------------------
Class A Class B Class A Class B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Shares sold ................................................... 11,238 51,270 21,799 142,143
Shares issued in reinvestment of dividends and distributions .. 804 8,985 2,366 33,033
-------- -------- -------- --------
12,042 60,255 24,165 175,176
Shares redeemed ............................................... (7,051) (42,876) (9,042) (56,201)
-------- -------- -------- --------
Net increase .................................................. 4,991 17,379 15,123 118,975
======== ======== ======== ========
</TABLE>
- ----------
* Unaudited.
37
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
38
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD CORPORATE Maximum current income through investment in a MacKay Shields
BOND FUND(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
39
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
40
<PAGE>
MainStay High Yield Corporate Bond Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA09-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay International Bond Fund Highlights 3
$10,000 Invested in the MainStay
International Bond Fund versus Salomon Brothers
Non-U.S. Dollar World Government Bond
Index--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Country--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 10
Top 10 Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Unaudited Financial Statements 15
Notes to Financial Statements 19
The MainStay Funds 26
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay International Bond Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o Difficulties in several Asian markets caused liquidity concerns, sending
bond investors to other established markets.
o The dollar's strength against other major currencies, in particular Asian
currencies, increased the importance of currency hedging for U.S.
investors.
o With price and yield convergence within European Monetary Union countries,
bond investors sought diversification in Sweden, Denmark, the United
Kingdom, and the dollar bloc.
o Bonds in Japan, Australia, New Zealand, and several emerging markets
underperformed, while European and other dollar-bloc bonds generally
performed well.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o One-year total returns of 4.92% and 4.22% for Class A shares and Class B
shares, respectively, excluding all sales charges, as of 6/30/98.
o The Fund invested primarily in Europe, seeking diversification both within
and outside European Monetary Union countries.
o Canadian bonds contributed positively to the Fund's performance, while some
South African, Mexican, and New Zealand bonds negatively impacted
performance.
o Both share classes outperformed the average Lipper* international income
fund, which returned 2.78% for the first half of 1998.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$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 0.20%, since inception 8.41%
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Salomon Brothers
Non-U.S. Dollar MainStay
World Government International
Period End Bond Index Bond Fund
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $10,000 $ 9,550
12/94 $10,256 $ 9,569
12/95 $12,261 $11,356
12/96 $12,761 $12,935
12/97 $12,218 $13,171
6/98 $12,473 $13,593
</TABLE>
[GRAPHIC] MainStay International Bond Fund
[GRAPHIC] Salomon Brothers Non-U.S. Dollar
World Government Bond Index*
CLASS B SHARES SEC Returns: 1-Year -0.78%, since inception 8.67%
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Salomon Brothers
Non-U.S. Dollar MainStay
World Government International
Period End Bond Index Bond Fund
- --------------------------------------------------------------------------------
<S> <C> <C>
9/13/94 $10,000 $10,000
12/94 $10,256 $10,020
12/95 $12,261 $11,819
12/96 $12,761 $13,371
12/97 $12,218 $13,255
6/98 $12,473 $13,637
</TABLE>
- ----------
Past performance is no guarantee of future results. 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.
* The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.
4
<PAGE>
Portfolio Management Discussion and Analysis
In the first six months of 1998, international bond markets were influenced by a
number of factors. Liquidity concerns that grew out of relative weakness in the
currencies of Japan, Taiwan, and other Asian countries spread to Russia, Latin
America, South Africa, and other emerging markets. With economic setbacks in
these regions, demand for their bonds declined, with investments flowing into
Europe, the United States, and established dollar-bloc nations, such as Canada
and Australia.
Advancements toward European Monetary Union (EMU) caused the bonds of
participating nations to converge in price and yield, reducing opportunities for
diversification and yield advantages in core European countries. As a result,
the bonds of Sweden, Denmark, and the United Kingdom, which are not yet
participating in EMU, became attractive diversification candidates.
Throughout the reporting period, the dollar strengthened against most major
currencies, increasing the risk of unhedged positions for U.S. investors.
Given this context, how did the MainStay International Bond Fund perform in the
first six months of 1998?
For the six months ended 6/30/98, the MainStay International Bond Fund returned
3.20% and 2.89% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes outperformed the average Lipper*
international income fund, which returned 2.78% for the first half of 1998.
What was the principal reason why the Fund outperformed its peers?
Late in 1997, we saw the difficulties in Japanese and other Asian markets and
generally avoided their bonds. Instead, we concentrated the Fund's assets
primarily in European countries including Italy, Sweden, France, and Germany,
and dollar-bloc countries such as Canada. We generally avoided currency exposure
during the first six months of 1998. Both decisions had a positive impact on the
Fund's performance.
Where did the Fund invest in Europe?
The Fund had diversified exposure throughout Europe, with investments in most
EMU countries. As prices, yields, and returns began to converge in these
nations, however, the Fund sought diversification in bonds of non-EMU countries,
including Sweden, Denmark, and the United Kingdom.
How did the Fund's European investments perform?
Generally, they performed well. Among the many EMU nations, France returned
5.0%, Germany 4.6%, and Austria 4.6%, all in local terms during the first half
of the year. Outside the EMU, Sweden returned 7.4%, Denmark 5.2%, and the U.K.
5.9% in local terms for the same period.
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
Dollar bloc
- -----------
Major markets, including Canada, Australia, New Zealand, Hong Kong, and others,
whose currencies are tied to the U.S. dollar and tend to move in the same
general direction as the U.S. dollar relative to other currencies.
European Monetary Union
- -----------------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/94 0.20
12/95 18.68
12/96 13.90
12/97 1.83
6/98 3.20
</TABLE>
Returns reflect the historical performance of the Class B shares for the period
ended 12/31/94. See footnote * on page 10 for more information on performance.
See footnote * on page 10 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/94 0.20
12/95 17.96
12/96 13.13
12/97 1.15
6/98 2.89
</TABLE>
See footnote * on page 10 for more information on performance.
How did those returns translate into U.S. dollars?
The results varied, depending on the level of hedging the Fund employed in
various countries. As the dollar strengthened against local currencies, the
returns on some unhedged positions were negatively impacted, but the level of
currency exposure wasn't a major factor in the Fund's overall performance.
What securities did you select for the Fund in Sweden?
The Fund bought 10-year Swedish government bonds for their attractive valuations
and to add diversification to the Fund's
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.
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.
6
<PAGE>
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Country Percentage
- ------- ----------
<S> <C>
Germany 18.1%
Canada 12.4%
United Kingdom 11.5%
Italy 10.2%
Denmark 7.7%
All Other 40.1%
</TABLE>
Actual percentages will vary over time.
holdings. During the reporting period the Swedish economy was strong, with low
inflation and the central bank moving rates lower. As a result, the bonds were
significant positive contributors to the Fund's performance.
What bonds appealed to you in Denmark?
We purchased Danish mortgage bonds for the Fund for their liquidity, higher
yield potential, and quality. Unfortunately, the bonds we chose underperformed
as interest rates declined. Even so, we think they have underlying value, and at
the end of the first half of the year, we intend to continue to hold them in the
Fund's portfolio.
In the United Kingdom, were there specific securities that appeared attractive?
We added to the Fund's position by buying bonds with shorter maturities, or as
we like to say, at the front end of the yield curve. Although the U.K. has been
raising interest rates, we believe that the nation is near the end of that phase
of its economic cycle and that 5-year bonds will perform well in the coming
months. The Fund also benefited from the performance of a sterling-denominated
10-year bond for Bayerische Landesbank Giro that we purchased in February 1997.
The bond was up about 4.5% in local terms for the reporting period. Another U.K.
bond that did well was a 20-year European Investment Bank issue that the Fund
has owned for approximately one year. It was up 7.8% in local terms during the
reporting period, and was sold to purchase a British Telecom 20-year issue
during the first quarter of the year. The British Telecom bond returned 4.9% in
local terms from purchase date through the end of the second quarter.
Were there other developments in Europe that were noteworthy?
Yes. As EMU convergence occurred, a high-yield bond market has emerged in
Europe, giving lower-rated credits access to the public bond markets as an
alternative to bank financing. Although the Fund doesn't invest primarily in
high-yield securities, it did participate in one such issue late in the second
quarter.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the local currency declines.
Front end of the 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.
Yields on short-term securities with maturities of five years or less would
appear on the left of such a graph and are sometimes referred to as the front
end of the yield curve.
7
<PAGE>
How did the Fund's dollar-bloc investments perform?
We liked the dollar bloc during the first six months of 1998 and had success
with Canadian 30-year government bonds we purchased for the Fund in May. The
bonds returned 2.8% in local terms through the end of the second quarter.
Unfortunately, the Fund carried some currency exposure with that position, which
reduced the positive effect on the Fund's performance.
Other dollar-bloc nations, including Australia and New Zealand, provided mixed
results. While the "Asian contagion" negatively impacted demand for key
commodities that both of these economies rely upon for exports, the primary
forces behind the price action in bonds were excessive currency volatility
caused by intense speculator activity and inconsistent comments on monetary
policy by the Central Bank of New Zealand. We fully hedged the currency exposure
on the Fund's New Zealand holdings, giving a positive aspect to negative
performers, as the New Zealand dollar dropped about 10% versus the U.S. dollar.
In local terms, the Fund's New Zealand holdings were down 2.2%.
In Australia, we sold the Fund's 3-year bonds to buy 10-year issues and
capitalize on changes in the yield curve. The 10-year bonds outperformed the
3-year securities by 30 basis points as the yield curve flattened amid concerns
that interest rates would move to quell currency speculation. Unfortunately, the
gains from this trade were somewhat offset by the Fund's exposure to Australian
dollars, which declined about 5% relative to the U.S. dollar in the first six
months of 1998.
Did the Fund have other investments that did not perform well?
Yes. The Fund held about 2.5% of its assets in South African bonds that declined
about 1.8% in local terms during the first six months of 1998. Although we had
anticipated a decline in South African interest rates, when Asian difficulties
raised the specter of deflation, just the
QUALITY BREAKDOWN AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Bond Percentage
- ---- ----------
<S> <C>
AAA 57.4%
AA 16.3%
A 11.8%
BBB 0.7%
BB 2.6%
B 1.8%
Government Agencies 1.3%
Cash, Equivalents & Other Assets,
Less Liabilities 8.1%
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's.
See the prospectus for details.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
8
<PAGE>
opposite occurred. Recognizing the problem, we sold the Fund's entire position
during the second quarter. The sale was timely as rates have risen 300 basis
points since the sale.
The Fund also purchased bonds of a Mexican company, Innova S de R.L. The
company, which sells satellite dishes, has positive fundamentals, growing
subscription rates, and is owned by major players in the broadcasting and
telecommunications industries. Even so, the bonds declined about 1.9% in local
terms, due to rising interest rates, a weakening peso, and softening demand for
Mexican bonds.
What was the Fund's duration strategy during the reporting period?
We tried to keep the Fund's portfolio neutral, with a duration around five
years. Within certain core European markets, the Fund maintained a somewhat
longer duration, and in the U.K., Ireland, and Italy, we tended to stress
shorter-term securities for the Fund.
What was the overall quality of the Fund's investment portfolio?
Although the Fund owned securities of various quality ratings, as of June 30,
1998, the overall quality of the securities in the Fund's investment portfolio
was AA.+ Since the Fund invests primarily in government bonds in established
markets, we anticipate that the quality of the portfolio will most likely remain
in the AA range. Yet, when we see opportunities that we believe are attractive,
we may purchase emerging-market or high-yield bonds for the Fund within the
constraints outlined in the prospectus.
What is your outlook going forward?
We believe that Europe will continue to benefit from restructuring and movement
toward monetary union. But this may also cause prices and yields to further
converge within core European markets. As a result, bonds of EMU nations may
become more of a commodity, which could increase the attractiveness of non-EMU
nations. The latter countries may provide yield advantages or other attractive
characteristics such as currency exchange rate opportunities.
As of the end of the first half of 1998, we saw little reason to consider
Japanese bonds for the Fund's portfolio and remain somewhat shy of Asian issues,
even though some markets may have fully discounted the economic problems. We
continue to favor the dollar-bloc countries as well as the U.K. and will employ
hedging selectively as we seek to identify opportunities in local currencies.
Most importantly, the Fund continues to seek competitive overall return from a
diversified portfolio of non-U.S., primarily government securities, with
appropriate attention to the risk factors inherent in international investing.
Joseph Portera
Portfolio Manager
MacKay Shields Financial Corporation
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.
- ----------
+ Debt rated AA by Standard & Poor's differs from the highest rated issues
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
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.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
=========================================================================================
Fund average annual total returns*
=========================================================================================
1 year Life of Fund through 6/30/98
<S> <C> <C>
Class A 4.92% 9.74%
Class B 4.22% 9.08%
<CAPTION>
=========================================================================================
Fund SEC returns*
=========================================================================================
1 year Life of Fund through 6/30/98
<S> <C> <C>
Class A 0.20% 8.41%
Class B -0.78% 8.67%
<CAPTION>
=========================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
=========================================================================================
1 year Life of Fund through 6/30/98
<S> <C> <C>
Class A 17 out of 9 out of
54 funds 32 funds
Class B 22 out of 7 out of
54 funds 26 funds
Average Lipper
international
income fund 3.67% 7.23%
</TABLE>
<TABLE>
<CAPTION>
=========================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
=========================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.12 $0.3008 $0.0000
Class B $10.15 $0.2600 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued 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 six 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 (9/13/94)
through 6/30/98. The Fund's Class A shares were first offered to the public
on 1/3/95.
10
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
==========================================================================================
HOLDING COUNTRY AMOUNT
===========================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds, 7.25%, due 12/7/07 United Kingdom $2,146,127
Nykredit, Series ANN, 6.00%, due 10/1/26 Denmark 1,403,212
Canadian Government, Series J24, 10.25%, due 2/1/04 Canada 1,323,242
Hydro-Quebec, 5.50%, due 5/15/03 Canada 1,236,958
Irish Government, 8.00%, due 10/18/00 Ireland 1,163,040
Treuhandanstalt, 7.50%, due 9/9/04 Germany 1,141,046
Kingdom of Denmark, 7.00%, due 11/15/07 Denmark 1,123,870
Bundesobligation, Series 123, 4.50%, due 5/17/02 Germany 1,006,841
Bundesobligation, Series 117, 5.125%, due 11/21/00 Germany 934,184
Ford Motor Credit Co., 5.25%, due 6/16/08 Germany 922,266
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
===========================================================================================
AMOUNT
SECURITY COUNTRY OF PURCHASE
===========================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds,due 8/10/99 - 12/7/07 United Kingdom $3,900,829
Canadian Government, due 2/1/04 - 6/1/27 Canada 3,684,716
Australian Government, due 3/15/02 - 8/15/08 Australia 3,657,082
Bundesobligation, due 11/21/00 - 1/4/28 Germany 2,335,245
Fannie Mae, due 9/26/00 - 8/15/07 United Kingdom 2,079,701
Swedish Government, due 5/5/00 - 5/5/08 Sweden 1,586,286
Nykredit, due 10/1/26 Denmark 1,387,290
Hydro-Quebec, due 5/15/03 Canada 1,252,499
Irish Government, due 10/18/00 Ireland 1,190,757
Kingdom of Denmark, due 11/15/07 Denmark 1,117,277
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
===========================================================================================
AMOUNT
SECURITY COUNTRY OF SALE
===========================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds, due 8/10/99 - 9/27/13 United Kingdom $4,529,521
Australian Government, due 3/15/02 - 8/15/08 Australia 2,909,296
Canadian Government, due 9/1/00 - 6/1/27 Canada 2,788,701
Republic of Deutschland, due 11/21/00 - 1/4/24 Germany 2,135,527
Fannie Mae, due 9/26/00 - 6/20/02 United Kingdom 1,999,419
Swedish Government, due 5/5/00 - 5/5/08 Sweden 1,929,128
Kingdom of Denmark, due 11/15/01 - 12/15/04 Denmark 1,526,996
United Mexican States, due 6/2/03 - 5/15/26 Canada 1,410,254
International Bank of Reconstruction & Development,
due 8/20/07 - 12/29/17 New Zealand 1,137,502
Province of Ontario, due 10/29/01 - 9/27/05 Canada 1,034,776
</TABLE>
- ----------
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.
11
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==========================
<S> <C> <C>
LONG-TERM BONDS (91.6%)+
CORPORATE BONDS (20.6%)
DENMARK (4.3%)
Nykredit
Series ANN
6.00%, due 10/1/26.............. DK 9,677,000 $1,403,212
----------
EUROPEAN MONETARY UNION (1.7%)
European Investment Bank
Series BR
5.00%, due 4/15/08.............. ECU 520,000 572,357
----------
GERMANY (5.3%)
Bayerische VBK New York
4.50%, due 6/24/02.............. DM 895,000 497,159
Euronet Services Inc.
Series DTCU
(zero coupon), due 7/1/06
12.375%, beginning 7/1/02....... 480,000 164,543
Ford Motor Credit Co.
5.25%, due 6/16/08.............. 1,670,000 922,266
Venezuela Synthetic Sovereign
Investments Ltd.
10.125%, due 12/29/03........... 260,000 145,125
----------
1,729,093
----------
SWEDEN (3.0%)
Banque Nationale de Paris
Medium-Term Notes Series E
11.00%, due 11/4/99............. SK 3,050,000 410,753
Stadshypotek AB
Series 1553
10.00%, due 12/20/00............ 4,000,000 563,175
----------
973,928
----------
UNITED KINGDOM (4.4%)
Bayerische Landesbank Giro
7.875%, due 12/7/06.............(pound) 452,000 818,614
British Telecom PLC
8.625%, due 3/26/20............. 300,000 632,280
----------
1,450,894
----------
UNITED STATES (1.9%)
Banco Hipotecario S.A.
10.00%, due 4/17/03 (c)......... $ 175,000 172,812
Conproca S.A.
12.00%, due 6/16/10 (c)......... 313,000 317,695
Principal
Amount Value
==========================
UNITED STATES (Continued)
Petroleos Mexicanos
6.688%, due 3/8/99 (b).......... $ 150,000 150,000
----------
640,507
----------
Total Corporate Bonds
(Cost $6,789,565)............... 6,769,991
----------
GOVERNMENTS & FEDERAL AGENCIES (70.2%)
ARGENTINA (0.7%)
Argentina Bocon Previs
Series Pre-1
2.996%, due 4/1/01 (b).......... AP 247,739 222,485
----------
AUSTRALIA (4.2%)
Australian Government
Series 808
8.75%, due 8/15/08.............. A$ 370,000 284,711
Series 1007
10.00%, due 10/15/07............ 823,000 671,610
Fannie Mae
6.375%, due 8/15/07............. 674,000 430,765
----------
1,387,086
----------
CANADA (12.4%)
Alberta Government Telephone
Series UB
9.60%, due 7/7/98............... C$ 650,000 443,340
Canadian Government
Series VW17
8.00%, due 6/1/27............... 331,000 306,105
Series J24
10.25%, due 2/1/04.............. 1,578,000 1,323,242
Hydro-Quebec
5.50%, due 5/15/03.............. 1,819,000 1,236,958
Province of Quebec
7.75%, due 3/30/06.............. 975,000 750,148
----------
4,059,793
----------
DENMARK (3.4%)
Kingdom of Denmark
7.00%, due 11/15/07............. DK 6,712,000 1,123,870
----------
FRANCE (6.3%)
France Obligations Assimilables
du Tresor
5.25%, due 4/25/08.............. FF 1,690,000 288,290
7.50%, due 4/25/05.............. 3,252,000 626,839
</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.
12
<PAGE>
Portfolio of Investments* June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
==========================
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (Continued)
FRANCE (Continued)
France Obligations Assimilables
du Tresor
8.50%, due 3/28/00 - 12/26/12... FF 6,110,000 $1,148,972
----------
2,064,101
----------
GERMANY (12.8%)
Bundesobligation
Series 123
4.50%, due 5/17/02 (a).......... DM 1,805,000 1,006,841
Series 117
5.125%, due 11/21/00............ 1,648,000 934,184
Republic of Deutschland
Series 98
5.625%, due 1/4/28.............. 627,000 360,562
Series 95
7.375%, due 1/3/05.............. 1,212,000 773,718
Treuhandanstalt
7.50%, due 9/9/04............... 1,784,000 1,141,046
----------
4,216,351
----------
IRELAND (3.5%)
Irish Government
8.00%, due 10/18/00............. IP 780,000 1,163,040
----------
ITALY (10.2%)
Buoni Poliennali del Tesoro
6.50%, due 11/1/27.............. IL 795,000,000 509,539
8.50%, due 1/1/04............... 890,000,000 590,159
9.50%, due 2/1/01............... 950,000,000 598,975
10.50%, due 7/15/00............. 1,325,000,000 831,464
12.00%, due 5/1/02.............. 1,190,000,000 839,140
----------
3,369,277
----------
NORWAY (2.0%)
Norwegian Government
6.75%, due 1/15/07.............. NK 4,570,000 642,900
----------
SPAIN (3.8%)
Spanish Government
7.35%, due 3/31/07.............. SP 30,180,000 230,150
8.30%, due 12/15/98............. 4,000,000 26,567
10.25%, due 11/30/98............ 15,850,000 105,903
10.50%, due 10/30/03............ 66,300,000 550,672
11.30%, due 1/15/02............. 41,490,000 330,473
----------
1,243,765
----------
Principal
Amount Value
==========================
SWEDEN (3.1%)
Swedish Government
Series 1036
10.25%, due 5/5/00.............. SK 2,300,000 318,300
Series 1030
13.00%, due 6/15/01............. 4,500,000 695,986
----------
1,014,286
----------
UNITED KINGDOM (7.1%)
United Kingdom Treasury Bonds
7.25%, due 12/7/07..............(pound) 1,168,000 2,146,127
8.00%, due 12/7/00.............. 110,000 187,866
----------
2,333,993
----------
UNITED STATES (0.7%)
Republic of Panama
8.875%, due 9/30/27............. $ 233,000 219,602
----------
Total Governments & Federal Agencies
(Cost $23,414,361).............. 23,060,549
----------
YANKEE BONDS (0.8%)
UNITED STATES (0.8%)
Innova S de R.L.
12.875%, due 4/1/07............. $ 260,000 265,200
----------
Total Yankee Bonds
(Cost $284,050)................. 265,200
----------
Total Long-Term Bonds
(Cost $30,487,976).............. 30,095,740
----------
SHORT-TERM INVESTMENTS (1.6%)
COMMERCIAL PAPER (0.9%)
UNITED STATES (0.9%)
Goldman Sachs Group L.P. (The)
6.25%, due 7/1/98............... $ 300,000 300,000
----------
Total Commercial Paper
(Cost $300,000)................. 300,000
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
MainStay International Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
==========================
<S> <C> <C>
CORPORATE BONDS (0.4%)
UNITED STATES (0.4%)
Nacional Financiera S.N.C.
6.688%, due 3/15/99 (b)......... $ 125,000 $ 125,000
-----------
Total Corporate Bonds
(Cost $125,100)................. 125,000
-----------
GOVERNMENT BONDS (0.3%)
AUSTRALIA (0.3%)
Treasury Corp. Victoria
Series 1098
12.00%, due 10/22/98............ A$ 165,000 104,263
-----------
Total Government Bonds
(Cost $123,064)................. 104,263
-----------
Total Short-Term Investments
(Cost $548,164)................. 529,263
-----------
Total Investments
(Cost $31,036,140) (d).......... 93.2% 30,625,003(e)
Cash and Other Assets,
Less Liabilities................ 6.8 2,237,758
------- ------------
Net Assets........................ 100.0% $32,862,761
======= ===========
</TABLE>
- ----------
(a) Segregated as collateral for forward foreign currency contracts.
(b) Floating rate. Rate shown is the rate in effect at June 30, 1998.
(c) May be sold to institutional investors only.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(e) At June 30, 1998 net unrealized depreciation for securities was $411,137,
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 $315,781 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $726,918.
(f) The following abbreviations are used in the above portfolio:
AP --Argentine Peso
A$ --Australian Dollar
C$ --Canadian Dollar
DK --Danish Krone
DM --Deutsche Mark
ECU --European Currency Unit
FF --French Franc
IP --Irish Punt
IL --Italian Lira
NK --Norwegian Krone
(pound) --Pound Sterling
SP --Spanish Peseta
SK --Swedish Krona
$ --U.S. Dollar
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $31,036,140) .................................................. $30,625,003
Cash denominated in foreign currencies (identified cost $1,394,968) ............................................... 1,388,227
Receivables:
Investment securities sold ...................................................................................... 1,011,326
Interest ........................................................................................................ 767,430
Fund shares sold ................................................................................................ 67,400
Unrealized appreciation on forward foreign currency contracts ..................................................... 282,989
Unamortized organization expense .................................................................................. 11,993
-----------
Total assets ................................................................................................... 34,154,368
-----------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................. 776,959
Fund shares redeemed ............................................................................................ 105,605
Custodian ....................................................................................................... 19,028
NYLIFE Distributors ............................................................................................. 18,586
MainStay Management ............................................................................................. 12,176
Transfer agent .................................................................................................. 7,441
Trustees ........................................................................................................ 206
Accrued expenses .................................................................................................. 49,030
Dividend payable .................................................................................................. 138,666
Unrealized depreciation on forward foreign currency contracts ..................................................... 163,910
-----------
Total liabilities .............................................................................................. 1,291,607
-----------
Net assets ........................................................................................................ $32,862,761
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ......................................................................................................... $ 14,027
Class B ......................................................................................................... 18,395
Additional paid-in capital ........................................................................................ 33,453,124
Accumulated undistributed net investment income ................................................................... 15,073
Accumulated undistributed net realized gain on investments ........................................................ 250,810
Accumulated net realized loss on foreign currency transactions .................................................... (580,517)
Net unrealized depreciation on investments ........................................................................ (411,137)
Net unrealized appreciation on translation of other assets and liabilities in foreign currencies
and forward foreign currency contracts .......................................................................... 102,986
-----------
Net assets ........................................................................................................ $32,862,761
===========
CLASS A
Net assets applicable to outstanding shares ....................................................................... $14,199,789
===========
Shares of beneficial interest outstanding ......................................................................... 1,402,739
===========
Net asset value per share outstanding ............................................................................. $ 10.12
Maximum sales charge (4.50% of offering price) .................................................................... 0.48
-----------
Maximum offering price per share outstanding ...................................................................... $ 10.60
===========
CLASS B
Net assets applicable to outstanding shares ....................................................................... $18,662,972
===========
Shares of beneficial interest outstanding ......................................................................... 1,839,474
===========
Net asset value and offering price per share outstanding .......................................................... $ 10.15
===========
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest .......................................................................................................... $1,181,978
----------
Expenses:
Management ........................................................................................................ 116,841
Distribution--Class B ............................................................................................. 73,921
Transfer agent .................................................................................................... 52,281
Shareholder communication ......................................................................................... 31,270
Service--Class B .................................................................................................. 24,614
Custodian ......................................................................................................... 19,422
Professional ...................................................................................................... 17,964
Service--Class A .................................................................................................. 17,115
Registration ...................................................................................................... 16,123
Recordkeeping ..................................................................................................... 7,498
Amortization of organization expense .............................................................................. 4,945
Trustees .......................................................................................................... 429
Miscellaneous ..................................................................................................... 4,683
----------
Total expenses before waiver ..................................................................................... 387,106
Fees waived by Manager .............................................................................................. (50,075)
----------
Net expenses ..................................................................................................... 337,031
----------
Net investment income ............................................................................................... 844,947
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ............................................................................................. 245,364
Foreign currency transactions ..................................................................................... (580,517)
----------
Net realized loss on investments and foreign currency transactions .................................................. (335,153)
----------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................................................. 373,940
Translation of other assets and liabilities in foreign currencies and forward foreign currency contracts .......... 109,005
----------
Net unrealized gain on investments and foreign currency transactions ................................................ 482,945
----------
Net realized and unrealized gain on investments and foreign currency transactions ................................... 147,792
----------
Net increase in net assets resulting from operations ................................................................ $ 992,739
==========
</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>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ............................................................................ $ 844,947 $ 1,591,078
Net realized gain on investments ................................................................. 245,364 871,829
Net realized gain (loss) on foreign currency transactions ........................................ (580,517) 736,097
Net change in unrealized appreciation (depreciation) on investments .............................. 373,940 (2,552,852)
Net change in unrealized appreciation (depreciation) on translation of other assets and
liabilities in foreign currencies and forward foreign currency contracts ........................ 109,005 (143,251)
----------- -----------
Net increase in net assets resulting from operations ............................................. 992,739 502,901
----------- -----------
Dividends and distributions to shareholders:
From net investment income and net realized gain on foreign currency transactions:
Class A ......................................................................................... (409,841) (844,072)
Class B ......................................................................................... (500,326) (1,366,130)
From net realized gain on investments:
Class A ......................................................................................... -- (327,237)
Class B ......................................................................................... -- (559,408)
----------- -----------
Total dividends and distributions to shareholders ............................................. (910,167) (3,096,847)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A ......................................................................................... 2,702,248 2,078,813
Class B ......................................................................................... 1,679,308 7,769,493
Net asset value of shares issued to shareholders in reinvestment of dividends and distributions:
Class A ......................................................................................... 100,623 519,949
Class B ......................................................................................... 356,400 1,648,318
----------- -----------
4,838,579 12,016,573
Cost of shares redeemed:
Class A ......................................................................................... (876,831) (1,345,653)
Class B ......................................................................................... (4,314,911) (5,928,756)
----------- -----------
Increase (decrease) in net assets derived from capital share transactions ..................... (353,163) 4,742,164
----------- -----------
Net increase (decrease) in net assets ......................................................... (270,591) 2,148,218
NET ASSETS:
Beginning of period ................................................................................ 33,133,352 30,985,134
----------- -----------
End of period ...................................................................................... $32,862,761 $33,133,352
=========== ===========
Accumulated undistributed net investment income at end of period ................................... $ 15,073 $ 80,293
=========== ===========
</TABLE>
- ----------
* Unaudited.
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 A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
----------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $10.10 $10.12 $10.95 $10.98 $10.43 $10.45
------ ------ ------ ------ ------ ------
Net investment income ......... 0.28 0.24 0.80 0.74 0.72 0.64
Net realized and
unrealized gain (loss)
on investments .............. 0.17 0.21 (0.94) (0.96) 0.27 0.27
Net realized and
unrealized gain (loss) on
foreign currency
transactions ................ (0.13) (0.16) 0.33 0.34 0.41 0.42
------ ------ ------ ------ ------ ------
Total from investment
operations .................. 0.32 0.29 0.19 0.12 1.40 1.33
------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income and net realized
gain on foreign
currency transactions ....... (0.30) (0.26) (0.76) (0.70) (0.73) (0.65)
From net realized gain
on investments .............. -- -- (0.28) (0.28) (0.15) (0.15)
In excess of net realized
gain on investments and
foreign currency
transactions ................ -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total dividends and
distributions ............... (0.30) (0.26) (1.04) (0.98) (0.88) (0.80)
------ ------ ------ ------ ------ ------
Net asset value at
end of period ............... $10.12 $10.15 $10.10 $10.12 $10.95 $10.98
====== ====== ====== ====== ====== ======
Total investment return (a) ... 3.20% 2.89% 1.83% 1.15% 13.90% 13.13%
Ratios (to average
net assets)/
Supplemental Data:
Net investment income ...... 5.50%+ 4.75%+ 5.35% 4.69% 5.4% 4.8%
Net expenses ............... 1.58%+ 2.33%+ 1.56% 2.22% 1.5% 2.1%
Expenses (before waiver) ... 1.88%+ 2.63%+ 1.86% 2.52% 1.8% 2.4%
Portfolio turnover rate ....... 112% 112% 179% 179% 59% 59%
Net assets at end of
period (in 000's) ........... $14,200 $18,663 $12,263 $20,870 $11,965 $19,020
<CAPTION>
Class B
---------------
Class A Class B September 13,**
------- ------- through
Year ended December 31,
December 31, 1995 1994
---------------------- ---------------
<S> <C> <C> <C>
Net asset value at
beginning of period ......... $9.90 $9.90 $10.00
------ ------ ------
Net investment income ......... 1.15 1.06 0.12
Net realized and
unrealized gain (loss)
on investments .............. 0.59 0.61 (0.08)
Net realized and
unrealized gain (loss) on
foreign currency
transactions ................ 0.07 0.07 (0.02)
------ ------ ------
Total from investment
operations .................. 1.81 1.74 0.02
------ ------ ------
Less dividends and
distributions:
From net investment
income and net realized
gain on foreign
currency
transactions ................ (0.61) (0.56) (0.12)
From net realized gain
on investments .............. (0.28) (0.28) --
In excess of net realized
gain on investments and
foreign currency transactions (0.39) (0.35) --
------ ------ ------
Total dividends and
distributions ............... (1.28) (1.19) (0.12)
------ ------ ------
Net asset value at
end of period ............... $10.43 $10.45 $9.90
====== ====== ======
Total investment return (a) ... 18.68% 17.96% 0.20%
Ratios (to average
net assets)/
Supplemental Data:
Net investment income ...... 5.6% 4.9% 4.8%+
Net expenses ............... 1.5% 2.2% 2.8%+
Expenses (before waiver) ... 1.8% 2.5% 3.1%+
Portfolio turnover rate ....... 103% 103% 4%
Net assets at end of
period (in 000's) ........... $11,494 $13,212 $17,155
</TABLE>
- ----------
* Unaudited.
** 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.
18
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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 to provide 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.
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.
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.
19
<PAGE>
MainStay International Bond Fund
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 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 period-end
to credit loss in the event of a counterparty's failure to perform its
obligations.
Forward foreign currency contracts open at June 30, 1998:
<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 7/6/98 ................... A$ 1,745,000 $ 1,140,794 $ 60,017
Australian Dollar vs. U.S. Dollar, expiring 7/6/98 - 7/10/98 ......... A$ 1,803,420 $ 1,068,289 (48,736)
Canadian Dollar vs. U.S. Dollar, expiring 7/22/98 .................... C$ 1,615,000 $ 1,099,837 1,078
Danish Krone vs. Deutsche Mark, expiring 9/22/98 ..................... DK 12,300,000 DM 3,225,130 724
Deutsche Mark vs. French Franc, expiring 8/18/98 ..................... DM 2,981,995 FF 10,000,000 1,932
Deutsche Mark vs. Irish Punt, expiring 7/1/98 ........................ DM 269,428 IP 107,000 (14)
Deutsche Mark vs. Pound Sterling, expiring 7/1/98 .................... DM 11,442,691 (pound) 3,888,980 149,326
Deutsche Mark vs. Spanish Peseta, expiring 7/14/98 ................... DM 433,186 SP 36,800,000 283
Deutsche Mark vs. Swiss Franc, expiring 9/29/98 ...................... DM 407,249 CF 340,000 (646)
Deutsche Mark vs. U.S. Dollar, expiring 7/24/98 ...................... DM 8,257,792 $ 4,619,337 37,427
Irish Punt vs. Deutsche Mark, expiring 7/1/98 ........................ IP 107,000 DM 269,201 (112)
New Zealand Dollar vs. U.S. Dollar, expiring 7/13/98 ................. N$ 749,463 $ 369,560 (19,139)
</TABLE>
20
<PAGE>
Notes to Financial Statements unaudited (continued)
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
----------------- ----------------- --------------
Foreign Currency Sale Contracts
- -------------------------------
<S> <C> <C> <C>
Norwegian Krone vs. Deutsche Mark, expiring 9/14/98................... NK 5,126,550 DM 1,214,391 $ 6,641
Pound Sterling vs. Deutsche Mark, expiring 7/1/98 - 9/30/98........... (pound) 4,120,180 DM 12,268,748 (73,322)
Swedish Krona vs. Deutsche Mark, expiring 8/11/98..................... SK 2,625,000 DM 609,586 8,876
Swedish Krona vs. Deutsche Mark, expiring 8/11/98..................... SK 8,000,000 DM 1,805,910 (1,764)
<CAPTION>
Contract Contract
Amount Amount
Purchased Sold
---------------------- ----------------
Foreign Currency Buy Contracts
- ------------------------------
<S> <C> <C> <C> <C>
Australian Dollar vs. U.S. Dollar, expiring 7/6/98............ A$ 502,400 $ 309,152 2,013
Australian Dollar vs. U.S. Dollar, expiring 7/6/98............ A$ 1,313,100 $ 833,359 (20,082)
Canadian Dollar vs. U.S. Dollar, expiring 7/22/98............. C$ 408,300 $ 277,880 (95)
New Zealand Dollar vs. U.S. Dollar, expiring 7/13/98.......... N$ 749,463 $ 374,027 14,672
-----------
Net unrealized appreciation on forward foreign currency contracts $ 119,079
===========
</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.
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
21
<PAGE>
MainStay International Bond Fund
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,
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 period. Net currency gains or losses from valuing
foreign currency denominated assets and liabilities other than investments at
period end exchange rates are reflected in unrealized foreign exchange gains.
Foreign currency held at June 30, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- ----------------------------------------------------- ---------- -----------
<S> <S> <C> <C>
Danish Krone DK 170 $ 25 $ 25
Deutsche Mark DM 2,271,490 1,265,573 1,258,445
European Currency Unit ECU 7 7 7
French Franc FF 381 64 63
Italian Lira IL 97,481,793 55,468 54,882
Norwegian Krone NK 3,560 466 464
South African Rand ZAR 5,662 1,108 961
Spanish Peseta SP 3,858 26 25
Swedish Krona SK 585,000 72,231 73,355
---------- ----------
$1,394,968 $1,388,227
========== ==========
</TABLE>
22
<PAGE>
Notes to Financial Statements unaudited (continued)
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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. For the six months ended June 30, 1998, the
Manager earned $116,841 and waived $50,075 of its fee.
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.
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 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.
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.
23
<PAGE>
MainStay International Bond Fund
Sales Charges. The Fund was advised by NYLIFE Distributors that the amount of
sales charge retained on sales of Class A Fund shares was $1,525 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$18,050 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $53,861.
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 June 30, 1998, NYLIFE Distributors beneficially held Class A shares
of the Fund with a net asset value of $7,801,709, which represents 54.9% of the
net assets of Class A shares 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 $478 for the six months ended June
30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$7,498 for the six months ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $35,478 and $34,275, 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 June 30, 1998.
24
<PAGE>
Notes to Financial Statements unaudited (continued)
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
--------------------- ----------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................................ 265 164 196 726
Shares issued in reinvestment of dividends and distributions ............... 10 35 50 158
---- ---- ---- ----
275 199 246 884
Shares redeemed ............................................................ (86) (422) (125) (555)
---- ---- ---- ----
Net increase (decrease) .................................................... 189 (223) 121 329
==== ==== ==== ====
</TABLE>
- ----------
* Unaudited.
25
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
26
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL BOND FUND(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
27
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
28
<PAGE>
MainStay International Bond Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MainStay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA10-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Money Market Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Yields & Lipper Rankings 7
Portfolio of Investments 8
Unaudited Financial Statements 10
Notes to Financial Statements 14
The MainStay Funds 18
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/STEPHEN C. ROUSSIN
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Money Market Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o Domestic bonds and money markets were influenced by Asian economic
contractions, a solid U.S. economy, and relatively tame inflation during
the first six months of 1998.
o During the reporting period, the money market yield curve was flat and
exhibited low volatility.
o During the first half of the year, the average money market fund remained
within a narrow range of 55 to 60 days to maturity.
o Treasury bills were relatively expensive throughout the reporting period,
moving opportunities into other segments of the money market.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o For the 7-day period ended 6/30/98, the MainStay Money Market Fund provided
an effective yield of 5.08% and a current yield of 4.96% for both Class A
shares and Class B shares.
o The Fund stayed within 50 to 60 days to maturity throughout the first six
months of 1998.
o The Fund avoided Treasury securities in favor of commercial paper,
floating-rate notes, CDs, Yankee obligations, and asset-backed securities.
o The Fund owned only top-tier securities throughout the reporting period.
o Both share classes outperformed the average Lipper* money market fund,
which returned 2.42% for the six months ended 6/30/98.
- ----------
* See footnote and table on page 7 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
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.
Portfolio Management Discussion and Analysis
During the first half of 1998, domestic bonds and money markets were largely
influenced by world events. Economic contractions in Asian markets, including
Japan, caused difficulties in markets from Latin America to Russia and China.
One positive outcome has been relatively tame inflation, keeping the Federal
Reserve from adjusting domestic interest rates. As a result, interest rates in
general have remained within a relatively narrow range.
With a yield curve that was virtually flat, there were few advantages to
changing average maturity. The average money market fund stayed within a range
of 55 to 60 days to maturity throughout the first half of the year. With the
flight to quality surrounding the Asian difficulties and reduced federal
issuance, Treasury bills became somewhat expensive, shifting opportunities to
other market sectors.
Given this context, how did the MainStay Money Market Fund perform in the first
six months of 1998?
For the 7-day period ended 6/30/98, the MainStay Money Market Fund provided an
effective yield of 5.08% and a current yield of 4.96% for both Class A shares
and Class B shares. For the one-year period, Class A and Class B shares
outperformed the average Lipper* money market fund, and Class B shares
outperformed the average Lipper peer fund over the 5- and 10-year periods ended
6/30/98.
What accounted for the Fund's above-average performance?
In an environment where the yield curve remained steady and relatively flat,
there was little opportunity to add value by extending maturities. We also
believed that Treasury bills were severely overpriced and avoided them in the
portfolio. Instead, we looked for securities that offered yield advantages
without taking on substantial risk. We focused on domestic and Yankee issues,
corporate and asset-backed commercial paper, and floating-rate notes. Each of
these sectors contributed to the Fund's above-average performance.
Did the Fund own any Asian securities?
No. We saw the problems in Asia and avoided their securities entirely. We did,
however, invest the Fund's assets in a number of international securities,
primarily Yankee issues of banks and insurance companies. In a low interest rate
environment, we felt financial firms would do well--and their securities showed
strong performance throughout the reporting period. We selected credits that
were rated AA+ or better, and the Fund focused on issuers we felt had minimal
Asian exposure.
Did the Fund face any currency risk?
No. Yankee issues are denominated in dollars, so there's no currency risk.
- ----------
* See footnote and table on page 7 for more information on Lipper Analytical
Services, Inc.
+ Debt rated AA by Standard & Poor's differs from the highest rated issues
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
4
<PAGE>
Are there any advantages to global diversification?
By diversifying with strong European issuers, we were able to expand the Fund's
horizons beyond domestic securities without increasing its risk. We believe that
diversification is an effective way of seeking to manage risk, so we believe
investors may benefit from global diversification, as long as the quality
remains high.
Was the Fund heavily invested in commercial paper?
A significant portion of the Fund's assets were invested in commercial paper,
including direct issues by corporations--and asset-backed issues with high
credit quality, strong cash flows backed by collateral, and highly rated credit
enhancement. Commercial paper contributed positively to the Fund's performance.
Were there other sectors in which the Fund invested?
Yes, the Fund purchased some one-year floating-rate notes that we believed were
inexpensively priced relative to commercial paper. The notes helped the Fund's
performance and gave us a good way to manage the Fund's average maturity.
Did the Fund invest in callable CDs or other esoteric securities?
While the Fund has utilized those securities in the past, they offered few
advantages to issuers or investors during this relatively calm period in the
money markets. The Fund invested primarily in simpler "plain vanilla" securities
that offered greater liquidity. That decision was positive for the Fund's
overall performance.
How do you seek to manage risk in the money market portfolio?
One way is through careful credit analysis. In addition to seeing what the
rating agencies have to say, we watch the performance of corporate issuers in
the stock market. If a stock falters, we use it as a trigger to sell debt
securities held by the Fund if the outlook for the issuer is questionable. We
believe that the stock market can discount new information much faster than
rating agencies can reflect it.
The Fund also focuses on securities in the highest rating categories. During the
reporting period, the Fund did not invest in second-tier issues or split-rated
issues, and, in fact, the lowest rating on any security the portfolio owned was
A1/P1,++ which is very high.
What is your outlook going forward?
Looking ahead, we believe that Asian turmoil, inflation expectations, and
reactions to reduced Treasury financing have been almost fully priced into the
market. So we're taking a relatively neutral stand. While we remain bullish over
the long term, we believe unusual movements in the yield curve and other minor
market fluctuations may present the most obvious
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.
Yankee issues
- -------------
Dollar-denominated securities 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.
- ----------
++ A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Issuers rated Prime-1 by Moody's Investors
Service, Inc. have a superior ability for repayment of senior short-term
debt obligations.
5
<PAGE>
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.
Split-rated issues
- ------------------
Securities rated top tier by one credit rating agency and second tier by
another.
opportunities in the next couple of months. Whatever happens, the Fund will
continue to seek high-quality securities that may provide a high level of
current income consistent with preservation of capital and liquidity.
Ed Munshower
Claude Athaide
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
6
<PAGE>
Yields & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
==========================================================================================================================
Fund SEC yields*
==========================================================================================================================
7-day effective yield 7-day current yield
<S> <C> <C>
Class A 5.08% 4.96%
Class B 5.08% 4.96%
</TABLE>
<TABLE>
<CAPTION>
==========================================================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
==========================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 127 out of n/a n/a 99 out of
298 funds 230 funds
Class B 127 out of 78 out of 51 out of 45 out of
298 funds 190 funds 120 funds 100 funds
Average Lipper
money market
fund 4.96% 4.54% 5.34% 5.46%
</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 7-day current yield reflects
certain fee waivers and/or expense limitations, without which this
performance figure would have been 4.69%. The current yield is based on the
7-day period ending 6/30/98. The fee waivers and/or expense limitations are
voluntary and may be discontinued 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 (5/1/86) through
6/30/98. The Fund's Class A shares were first offered to the public on
1/3/95.
7
<PAGE>
MainStay Money Market Fund
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
=============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (100.3%)+
ASSET-BACKED SECURITY (1.5%)
Green Tree Financial Corp.
Series 98-2 Class A1
5.67%, due 4/1/99 (c) .......................... $ 6,807,809 $ 6,807,809
-----------
CERTIFICATES OF DEPOSIT (6.4%)
Bayerische Landesbank Girozentrale
5.53%, due 3/23/99 (b)(c) ...................... 9,000,000 8,994,924
Bayerische Vereinsbank AG
5.74%, due 9/4/98 (b)(c) ....................... 13,000,000 13,000,000
Deutsche Bank AG
5.94%, due 9/15/98 (c) ......................... 3,000,000 3,000,942
Westdeutsche Landesbank
Girozentrale
5.78%, due 7/31/98 (c) ......................... 4,000,000 3,999,980
-----------
28,995,846
-----------
COMMERCIAL PAPER (86.5%)
Abbey National North America
6.10%, due 7/2/98 .............................. 1,000,000 999,831
Allianz of America Finance Corp.
5.53%, due 8/7/98 (a) .......................... 9,950,000 9,893,448
Associates Corp. of North America
5.52%, due 8/24/98 ............................. 8,000,000 7,933,760
Associates First Capital Corp.
5.53%, due 8/3/98 .............................. 10,000,000 9,949,308
Banca CRT Financial Corp.
5.54%, due 9/1/98 .............................. 6,000,000 5,942,753
5.55%, due 8/6/98 .............................. 4,000,000 3,977,800
5.60%, due 8/19/98 ............................. 5,000,000 4,961,889
Banco Bradesco S.A., Grand Cayman
Series A
5.54%, due 11/19/98 ............................ 8,640,000 8,452,526
Banco Santander Puerto Rico
5.51%, due 7/13/98 ............................. 6,000,000 5,988,980
5.62%, due 7/27/98 ............................. 2,240,000 2,230,908
BankAmerica Corp.
5.33%, due 10/5/98 ............................. 15,500,000 15,279,890
BCI Funding Corp.
5.50%, due 7/13/98 ............................. 9,000,000 8,983,500
5.54%, due 7/13/98 ............................. 4,600,000 4,591,505
BIL North America Inc.
5.52%, due 7/27/98 ............................. 8,000,000 7,968,107
5.55%, due 7/1/98 .............................. 4,911,000 4,911,000
British Telecommunications PLC
5.53%, due 7/8/98 .............................. 8,425,000 8,415,941
BTR Dunlop Finance Inc.
5.40%, due 7/8/98 (a) .......................... 5,000,000 4,994,750
5.46%, due 7/9/98 (a) .......................... 7,100,000 7,091,385
Caisse Centrale des Banques
Populaires International Inc.
5.44%, due 9/22/98 (a) ......................... 3,950,000 3,900,458
5.52%, due 8/18/98 (a) ......................... 5,615,000 5,573,674
Caisse Centrale Desjardins du Quebec
5.49%, due 7/8/98 .............................. 9,000,000 8,990,393
Cosco (Cayman) Fund Co. Ltd.
5.65%, due 7/27/98 ............................. 8,000,000 7,967,356
Credit Suisse First Boston
5.51%, due 9/10/98 (a) ......................... 7,760,000 7,675,672
Deutsche Bank Financial Inc.
5.51%, due 8/14/98 ............................. 8,000,000 7,946,124
5.60%, due 7/10/98 ............................. 9,145,000 9,132,197
Ford Motor Credit Co.
5.53%, due 7/10/98 ............................. 10,000,000 9,986,175
5.54%, due 7/10/98 ............................. 8,000,000 7,988,920
Formosa Plastics Corp. U.S.A
5.55%, due 7/6/98 .............................. 7,000,000 6,994,604
General Electric Capital Corp.
5.36%, due 7/28/98 ............................. 8,000,000 7,967,840
5.41%, due 10/15/98 ............................ 7,300,000 7,183,715
5.50%, due 10/21/98 ............................ 6,000,000 5,897,333
Goldman Sachs Group L.P. (The)
5.52%, due 8/28/98 ............................. 3,160,000 3,131,897
5.53%, due 8/26/98 ............................. 8,000,000 7,931,182
5.60%, due 7/1/98 .............................. 2,935,000 2,935,000
ING America Insurance Holdings Inc.
5.50%, due 8/28/98 ............................. 6,000,000 5,946,833
5.54%, due 7/21/98 ............................. 8,000,000 7,975,378
Lloyds Bank PLC
5.50%, due 8/26/98 ............................. 4,000,000 3,965,778
Merrill Lynch & Co. Inc.
5.53%, due 7/24/98 ............................. 5,000,000 4,982,335
5.53%, due 8/28/98 ............................. 4,000,000 3,964,362
Minmetals Capital & Securities Inc.
5.39%, due 8/24/98 ............................. 1,000,000 991,915
5.46%, due 8/24/98 ............................. 1,300,000 1,289,353
Morgan Stanley, Dean Witter,
Discover & Co.
5.54%, due 7/17/98 ............................. 9,000,000 8,977,840
5.61%, due 7/28/98 (b)(c) ...................... 7,000,000 7,000,000
National Rural Utilities Cooperative
Finance Corp.
5.49%, due 9/25/98 ............................. 8,000,000 7,895,080
Nationwide Building Society
5.52%, due 11/2/98 ............................. 10,000,000 9,809,867
Pemex Capital Inc.
5.52%, due 10/2/98 ............................. 8,000,000 7,885,920
</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.
8
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
=============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
COMMERCIAL PAPER (Continued)
Petroleo Brasileiro S.A.-Petrobras
5.48%, due 11/25/98 ....................... $ 10,000,000 $ 9,776,233
Prudential Finance (Jersey) Ltd.
5.49%, due 7/7/98 ......................... 4,000,000 3,996,340
5.53%, due 7/7/98 ......................... 8,000,000 7,992,627
5.58%, due 7/10/98 ........................ 7,170,000 7,159,998
Prudential Funding Corp.
5.51%, due 9/4/98 ......................... 8,000,000 7,920,411
Salomon Smith Barney Holdings Inc.
5.51%, due 10/9/98 ........................ 10,000,000 9,846,945
5.53%, due 8/11/98 ........................ 8,250,000 8,198,041
5.57%, due 8/6/98 ......................... 1,315,000 1,307,675
San Paolo U.S. Financial Co.
5.37%, due 7/21/98 ........................ 8,100,000 8,075,835
6.20%, due 7/1/98 ......................... 5,400,000 5,400,000
Songs Fuel Co.
5.40%, due 8/10/98 ........................ 9,000,000 8,946,000
Svenska Handelsbanken Inc.
5.51%, due 7/27/98 ........................ 5,700,000 5,677,317
Transportadora de Gas del Sur S.A
5.50%, due 7/21/98 ........................ 4,000,000 3,987,778
-------------
392,739,682
-------------
CORPORATE NOTE (0.8%)
American General Finance Corp.
8.50%, due 8/15/98(c) ..................... 3,500,000 3,510,687
-------------
MEDIUM-TERM NOTES (5.1%)
Goldman Sachs Group L.P. (The)
5.69%, due 3/26/99 (a)(b)(c) .............. 7,500,000 7,500,000
International Business Machines Corp.
5.52%, due 4/1/99 (b)(c) .................. 9,000,000 8,995,338
Merrill Lynch & Co. Inc. Series B
5.67%, due 3/17/99 (b)(c) ................. 6,400,000 6,402,312
-------------
22,897,650
-------------
Total Short-Term Investments
(Amortized Cost $454,951,674)(d) .......... 100.3% 454,951,674
Liabilities in Excess of
Cash and Other Assets ..................... (0.3) (1,153,805)
------------- -------------
Net Assets .................................. 100.0% $ 453,797,869
============= =============
</TABLE>
- ----------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at June 30, 1998.
(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
Auto Manufacturing ........................ $ 7,988,920 1.8%
Banks # ................................... 208,515,142 45.9
Brokerage ................................. 80,170,215 17.7
Conglomerates ............................. 15,151,555 3.3
Consumer Financial Services ............... 9,986,175 2.2
Finance ................................... 85,154,258 18.8
Insurance ................................. 23,815,659 5.2
Real Estate ............................... 6,807,809 1.5
Telecommunication Services ................ 8,415,941 1.9
Utilities-Gas ............................. 8,946,000 2.0
------------- -----
454,951,674 100.3
Liabilities in Excess of
Cash and Other Assets ................... (1,153,805) (0.3)
------------- -----
Net Assets ................................ $ 453,797,869 100.0%
============= =====
</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.
9
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (amortized cost $454,951,674) ...... $ 454,951,674
Cash .................................................................. 123,350
Receivables:
Interest ............................................................ 910,799
Fund shares sold .................................................... 34,060
-------------
Total assets ...................................................... 456,019,883
-------------
LIABILITIES:
Payables:
Transfer agent ...................................................... 139,941
MainStay Management ................................................. 85,487
Fund shares redeemed ................................................ 22,841
Custodian ........................................................... 3,759
Trustees ............................................................ 2,134
Accrued expenses ...................................................... 62,467
Dividend payable ...................................................... 1,905,385
-------------
Total liabilities ................................................. 2,222,014
-------------
Net assets ............................................................ $ 453,797,869
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 1,026,445
Class B ............................................................. 3,511,657
Additional paid-in capital ............................................ 449,272,053
Accumulated net realized loss on investments .......................... (12,286)
-------------
Net assets ............................................................ $ 453,797,869
=============
CLASS A
Net assets applicable to outstanding shares ........................... $ 102,644,467
=============
Shares of beneficial interest outstanding ............................. 102,644,467
=============
Net asset value and offering price per share outstanding .............. $ 1.00
=============
CLASS B
Net assets applicable to outstanding shares ........................... $ 351,153,402
=============
Shares of beneficial interest outstanding ............................. 351,165,688
=============
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.
10
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest .................................................. $ 12,303,300
------------
Expenses:
Management ................................................ 1,048,785
Transfer agent ............................................ 783,999
Shareholder communication ................................. 61,396
Registration .............................................. 58,911
Recordkeeping ............................................. 34,901
Custodian ................................................. 24,226
Professional .............................................. 23,424
Trustees .................................................. 5,544
Miscellaneous ............................................. 9,828
------------
Total expenses before reimbursement ..................... 2,051,014
Expense reimbursement from Manager .......................... (535,277)
------------
Net expenses ............................................ 1,515,737
------------
Net investment income ....................................... 10,787,563
------------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 3,596
------------
Net increase in net assets resulting from operations ........ $ 10,791,159
============
</TABLE>
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 Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .................................................................. $ 10,787,563 $ 20,223,457
Net realized gain (loss) on investments ................................................ 3,596 (1,381)
------------- -------------
Net increase in net assets resulting from operations ................................... 10,791,159 20,222,076
------------- -------------
Dividends to shareholders:
From net investment income:
Class A .............................................................................. (2,297,524) (3,484,902)
Class B .............................................................................. (8,490,039) (16,738,555)
------------- -------------
Total dividends to shareholders .................................................... (10,787,563) (20,223,457)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A .............................................................................. 305,582,634 296,699,694
Class B .............................................................................. 273,326,775 560,499,416
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A .............................................................................. 2,067,305 3,089,563
Class B .............................................................................. 8,050,320 15,596,777
------------- -------------
589,027,034 875,885,450
Cost of shares redeemed:
Class A .............................................................................. (285,930,912) (272,754,087)
Class B .............................................................................. (266,848,834) (556,956,479)
------------- -------------
Increase in net assets derived from capital share transactions ..................... 36,247,288 46,174,884
------------- -------------
Net increase in net assets ......................................................... 36,250,884 46,173,503
NET ASSETS:
Beginning of period ...................................................................... 417,546,985 371,373,482
------------- -------------
End of period ............................................................................ $ 453,797,869 $ 417,546,985
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
---------------- ----------------- -----------------
<S> <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
----------- ----------- ---------- ----------- ---------- -----------
Net investment
income ............ 0.05 0.05 0.05 0.05 0.05 0.05
----------- ----------- ---------- ----------- ---------- -----------
Less dividends from
net investment
income ............ (0.05) (0.05) (0.05) (0.05) (0.05) (0.05)
----------- ----------- ---------- ----------- ---------- -----------
Net asset value at
end of period ..... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=========== =========== ========== =========== ========== ===========
Total investment
return (a) ........ 4.96% 4.96% 5.08% 5.08% 4.91% 4.91%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ........ 4.98%+ 4.98%+ 4.97% 4.97% 4.8% 4.8%
Net expenses .... 0.70%+ 0.70%+ 0.70% 0.70% 0.7% 0.7%
Expenses
(before
reimbursement) .. 0.95%+ 0.95%+ 0.95% 0.95% 1.0% 1.0%
Net assets at end of
period (in 000's).. $102,644 $351,153 $80,925 $336,622 $53,890 $317,483
<CAPTION>
Class B
--------------------------------------------
Class A Class B September 1
------- ------- through Year ended August 31
Year ended December 31 ---------------------------
December 31, 1995 1994** 1994 1993
----------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............ $1.00 $1.00 $1.00 $1.00 $1.00
--------- ----------- ----------- ----------- -----------
Net investment
income ............ 0.05 0.05 0.02 0.03 0.03
--------- ----------- ----------- ----------- -----------
Less dividends from
net investment
income ............ (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
========= =========== =========== =========== ===========
Total investment
return (a) ........ 5.51% 5.51% 1.54% 3.08% 2.71%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ........ 5.4% 5.4% 4.6%+ 3.1% 2.7%
Net expenses .... 0.7% 0.7% 0.7%+ 0.7% 0.7%
Expenses
(before
reimbursement) .. 0.9% 0.9% 0.9%+ 1.0% 0.9%
Net assets at end of
period (in 000's).. $34,880 $279,843 $221,912 $192,477 $149,907
</TABLE>
- ----------
* Unaudited.
** 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.
13
<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 twenty-two 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.
14
<PAGE>
Notes to Financial Statements unaudited
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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. For the six months
ended June 30, 1998, the Manager earned $1,048,785 and reimbursed the Fund
$535,277.
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 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-Adviser has
voluntarily agreed to do so proportionately.
Contingent Deferred Sales Charge. Even though the Fund does not assess a
contingent deferred sales charge upon redemption of Class B shares of the Fund,
the applicable contingent deferred sales charge will be assessed when shares are
redeemed from the Fund if the shareholder previously exchanged his or her
investment into the Fund from another Fund in the Trust. The Fund was advised
that NYLIFE Distributors received from shareholders the proceeds from contingent
deferred sales charges for the six months ended June 30, 1998, in the amount of
$419,171.
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 six months ended June
30, 1998 amounted to $825,978.
15
<PAGE>
MainStay Money Market 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 $6,210 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$34,901 for the six months ended June 30, 1998.
Note 4--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
------------------- --------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 305,583 273,327 296,700 560,499
Shares issued in reinvestment of dividends and distributions 2,067 8,050 3,089 15,597
-------- -------- -------- --------
307,650 281,377 299,789 576,096
Shares redeemed ............................................ (285,931) (266,849) (272,754) (556,956)
-------- -------- -------- --------
Net increase ............................................... 21,719 14,528 27,035 19,140
======== ======== ======== ========
</TABLE>
- ----------
* Unaudited.
16
<PAGE>
This page intentionally left blank
17
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
18
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
19
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
20
<PAGE>
MainStay Money Market Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] Mainstay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA12-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay New York Tax Free Fund Highlights 3
$10,000 Invested in the MainStay New York
Tax Free Fund versus Lehman Brothers
Municipal Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification of Holdings--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
2
<PAGE>
MainStay New York Tax Free Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
. During the first half of 1998, New York City benefited from a budget
surplus, a bull market on Wall Street, rising real estate values, strong
tourism, and high hotel occupancy rates.
. In the first six months of the year, the New York municipal bond market was
relatively uneventful.
. Although the yield on 30-year Treasuries dropped significantly, oversupply
in the municipal market helped keep municipal bond prices relatively
stable.
. Insured issues continued to dominate the market, reducing opportunities to
benefit from quality differences among newly issued securities.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
. The MainStay New York Tax Free Fund returned 7.84% and 7.57% for Class A
shares and Class B shares, respectively, excluding all sales charges, for
the one-year period ended 6/30/98.
. The Fund used diversification by issuer, coupon, maturity, geographic area,
municipal sector, and call date to help reduce portfolio risk.
. With a relatively steady yield curve and municipal bonds trading in a tight
price range, the Fund found few opportunities to provide yield advantages.
. The Fund's long duration hurt performance in the first quarter and failed
to help when the market did not rally in the second quarter.
. Both share classes underperformed the average Lipper* New York municipal
debt fund, which returned 2.37% for the six months ended 6/30/98.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$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 2.99%, 5-Year 4.67%, since inception 6.23%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay New York Lehman Brothers
Period end Tax Free Fund Municipal Bond 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
6/98 $15,039 $16,469 $11,838
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 2.57%, 5-Year 5.15%, since inception 6.83%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay New York Lehman Brothers
Period end Tax Free Fund Municipal Bond 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
6/98 $15,622 $16,469 $11,838
</TABLE>
- ----------
Past performance is no guarantee of future results. 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.
* The Lehman Brothers Municipal Bond Index (which does not have a sales
charge) includes approximately 15,000 municipal bonds rated Baa or better
by Moody's with a maturity of at least two years. Bonds subject to the
Alternative Minimum Tax or with floating or zero coupons are excluded. The
Index is unmanaged and results assume the reinvestment of all income and
capital gain distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
New York State and New York City experienced a favorable period in the first
half of 1998, with the economy strengthened by the bull market on Wall Street,
strong tourism, and growth in the computer service sector. Real estate prices
rose throughout the reporting period, and hotel occupancy rates were high.
For the New York municipal bond market, the first half of the year was
exceedingly quiet. Yields to maturity on New York municipals were virtually
unchanged over the reporting period. While there were minor ups and downs over
time, the municipal market was about as uneventful as it has been in any recent
period.
Although yields on 30-year Treasury bonds dropped to record lows, supply and
demand imbalances caused New York municipal prices to remain relatively stable.
Most of the imbalance came from excessive supply, which was prompted by issuers
seeking to take advantage of lower long-term rates. With stable prices in a
declining rate environment, municipals substantially underperformed Treasury
securities during the reporting period.
As has generally been the case in recent years, the majority of new issues were
insured credits or were rated AAA,* providing few opportunities to benefit from
quality differences.
Given this context, how did the MainStay New York Tax Free Fund perform in the
first six months of 1998?
For the six months ended 6/30/98, the MainStay New York Tax Free Fund returned
2.25% and 2.13% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes underperformed the average Lipper+ New
York municipal debt fund, which returned 2.37% for the first half of 1998.
What were the primary reasons for the Fund's underperformance?
In the first quarter, we lengthened the Fund's duration before the market began
to decline, which had a negative impact on performance. Although the Fund
maintained its long duration in the second quarter as long-term interest rates
declined, oversupply left municipal prices flat, so the Fund's duration strategy
failed to provide the benefits we had anticipated. Since the Fund is restricted
from investing in high-yield municipals, it was also at a relative disadvantage
to competing funds that could enhance yields by investing in lower-grade
securities.
What strategies did you use to enhance yields during the reporting period?
There were few steps we could take, since the yield curve remained relatively
stable and most new issues were either top-
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.
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.
- ----------
* Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
strong.
+ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
CLASS A SHARES
<TABLE>
<CAPTION>
Period end Total Return %
- ------------------------------------------
<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
6/98 2.25
</TABLE>
See footnote * on page 10 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- ------------------------------------------
<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
6/98 2.13
</TABLE>
Returns reflect the historical performance of the Class A shares for periods
12/91 through 12/94.
See footnote * on page 10 for more information on performance.
quality or insured credits. We did seek opportunities among BBB++ hospital bonds
and the Fund invested in some New York City split-rated general obligation bonds
rated A/A-,(S) which provided solid performance for the Fund.
The Fund also seeks potential prerefunding candidates as a part of its regular
security selection process. Several of the Fund's high-coupon New York City
general obligation bonds were prerefunded during the first half of the year,
which contributed positively to the Fund's performance.
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
- ----------
++ Debt rated BBB by Standard & Poor's exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
(S) Bonds which are rated A by Moody's Investors Service, Inc. possess many
favorable investment attributes and are to be considered as
upper-medium-grade obligations. Debt rated A by Standard & Poor's is
somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
6
<PAGE>
DIVERSIFICATION OF Holdings--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ---------------------------------------------------------------
<S> <C>
Education 20.4%
Hospital/Nursing Home 19.6%
Transportation 12.6%
County/City/Special District--General Obligation 12.5%
Water Utility 11.4%
All Other 23.5%
</TABLE>
Actual percentages will vary over time.
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, in many cases, has been reduced by more than 20
years.
What were some of the Fund's larger purchases during the first six months of
1998?
The Fund purchased New York City Water Authority 5.5% bonds due in June of 2027.
They were attractive for their high coupon and were consistent with the Fund's
duration strategy at the time. Long Island Power Authority came to market with a
$3.5 billion bond offering, which was well priced because the deal was so large.
Although the offering was oversubscribed, the Fund was able to participate,
purchasing 5.25% bonds due in December of 2026. The Fund later sold the bonds at
a profit as the price came more in line with the coupon.
In April, the Fund also purchased some Virgin Island Public Finance Authority
5.5% bonds due in October of 2022, which came at an attractive price. The bonds
are double tax free for New York State residents and triple tax free for New
York City residents, and were also sold at a profit shortly after the Fund
bought them.
Other deals that came at attractive prices included New York City General
Obligation 5.125% bonds of August 2025 and New York Dormitory Authority 5.3%
bonds of August 2021. The Fund participated in both deals and took profits later
in the reporting period.
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.
7
<PAGE>
Were there other significant sales?
The Fund also sold another New York Dormitory Authority bond with a 4.75% coupon
due in May of 2025. Like the other dormitory authority bonds, the Fund was able
to benefit from short-term price swings as the market adjusted to these new
bonds. Of course, there were many other purchases and sales during the reporting
period, but these were the largest ones.
Were there any strategic initiatives during the reporting period?
We believe lengthening the call protection of the Fund's underlying portfolio
securities is important to avoid reinvestment risk and we made some adjustments
to the Fund's portfolio in that direction. We also wanted to stay near the
Fund's duration target, even though its positioning didn't produce the results
we hoped for during the reporting period. Certainly, if interest rates move, or
if the oversupply declines, as we think it will, we believe the Fund's duration
could help.
Why do you think the oversupply will decline?
Many issuers have a fiscal year that ends in June. We believe many of the new
issues were designed to improve their reporting, so issuance should taper off in
the coming months.
Which of the Fund's holdings were strong performers during the reporting period?
The Fund's best-performing bonds were four high-coupon positions of New York
City general obligations that were prerefunded. Prerefunding raises quality and
shortens maturity, so the Fund receives an assured payout until the call date
with lower risk. It's one of the best things that can happen to a municipal bond
fund.
The Fund also saw strong performance from New York City Transitional Finance
Authority 4.75% bonds due May of 2023. These long-duration bonds were purchased
before the recent rally, which had a very positive impact on the Fund's
performance.
QUALITY BREAKDOWN AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ---------------------------------------------------
<S> <C>
AAA 54.9%
AA 7.3%
A 21.8%
BBB 8.1%
Cash, Equivalents & Other Assets, 7.9%
Less Liabilities
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's. See the prospectus for details.
8
<PAGE>
Which bonds were among the Fund's worst performers?
In January, the Fund purchased some Metropolitan Transit Authority 5.625% bonds
due July of 2027. Unfortunately, these high-coupon bonds suffered in the ensuing
sell-off and were the Fund's worst performers during the reporting period.
We purchased Puerto Rico 4.5% bonds due in July of 2023 for the Fund, just as
the market was peaking and later sold them at a loss. The Fund also had
unfortunate timing with New York State Dormitory Authority 5.5% bonds due May of
2026. Although the bonds appeared attractive, we purchased them for the Fund
when the market was paying a higher premium for bonds with 5.5% coupons, and as
the market adjusted, the bonds came down in price.
Finally, the Fund purchased New York State Medical Care bonds with a 6.0% coupon
and a February 2035 maturity. While the bonds carried an attractive coupon, we
purchased them for the Fund as the market was near its high point, so they have
subsequently declined relative to other securities in the portfolio.
How have you sought to protect investors from potential hazards in the municipal
market?
The Fund continues to focus primarily on higher-quality securities. The overall
credit quality of the Fund's investment portfolio is AA.# We also use broad
diversification by type of issuer, geographic region, municipal sector, coupon,
and call date to keep the portfolio from being affected by weakness in any
single region or market sector.
Of course, we seek opportunities for higher yield whenever they're available.
The Fund has had good success with BBB hospital bonds in the past, but may
lighten up on them going forward. We also try to avoid sectors with inherent
weaknesses, such as utilities, which face uncertainties related to deregulation.
What is your outlook for the future?
Basically, we're bullish on municipals. We believe their substantial
underperformance relative to Treasuries is a cyclical trend that is likely to
reverse in the months ahead. Since we anticipate slower growth in the second
half of the year and subdued inflation in the wake of the Asian crisis, we think
interest rates may go lower. That could cause municipals to rally.
We know that New York City is projecting deficits in future years, so how their
current surplus is used will make a big difference in the economic environment.
If Wall Street continues to do well, personal income taxes are likely to remain
high, which should be good for the state. The booming real estate market has
been good for New York City and the surrounding areas, but we can't really say
whether or how long it may continue.
Whatever happens in the municipal markets, the Fund will continue to seek a high
level of current income that's substantially free from regular federal income
tax and personal income taxes of New York State and its political subdivisions,
including New York City, consistent with the preservation of capital.
Ravi Akhoury
James Flood
Portfolio Managers
MacKay Shields Financial Corporation
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.
- ----------
# Debt rated AA by Standard & Poor's differs from the highest-rated issues
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
Past performance is no guarantee of future results.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
1 year 5 years Life of Fund through 6/30/98
<S> <C> <C> <C>
Class A 7.84% 5.64% 6.96%
Class B 7.57% 5.47% 6.83%
================================================================================
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
1 year 5 years Life of Fund through 6/30/98
<S> <C> <C> <C>
Class A 2.99% 4.67% 6.23%
Class B 2.57% 5.15% 6.83%
================================================================================
<CAPTION>
================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
================================================================================
1 year 5 years Life of Fund through 6/30/98
<S> <C> <C> <C>
Class A 70 out of 26 out of 27 out of
92 funds 53 funds 40 funds
Class B 78 out of n/a 62 out of
92 funds 75 funds
Average Lipper
NY municipal
debt fund 8.38% 5.44% 7.11%
================================================================================
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.08 $0.2337 $0.0000
Class B $10.02 $0.2205 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued 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 six 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 (10/1/91)
through 6/30/98. Class B shares were first offered to the public on 1/3/95.
10
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (92.1%)+
NEW YORK (92.1%)
Battery Park City Authority Revenue
Series A
5.50%, due 11/1/26.................... $ 900,000 $ 928,125
Metropolitan Transportation Authority
New York Commuter Facilities
Revenue
Series A
5.625%, due 7/1/27.................... 850,000 890,375
New York City General Obligation
Series D
6.00%, due 2/15/25.................... 1,000,000 1,063,750
Series C
7.20%, due 8/15/15.................... 50,000 53,875
7.50%, due 8/1/20..................... 25,000 28,094
Series F
8.20%, due 11/15/04................... 95,000 107,112
New York City Municipal Water
Finance Authority, Water and Sewer
Systems Revenue, Series B
5.50%, due 6/15/27.................... 1,400,000 1,449,000
5.875%, due 6/15/26................... 500,000 531,875
New York City Transitional
Finance Authority Revenue
Series C
4.75%, due 5/1/23..................... 600,000 561,750
New York State Dormitory Authority
Revenue
Manhattanville
(zero coupon), due 7/1/19............. 2,175,000 744,938
(zero coupon), due 7/1/21............. 1,175,000 362,781
New York University Series A
5.75%, due 7/1/27..................... 500,000 552,500
Park Ridge Housing Income Project
7.85%, due 2/1/29..................... 800,000 830,552
Rockefeller University
4.75%, due 7/1/37..................... 900,000 846,891
St. Johns University
5.70%, due 7/1/26..................... 500,000 528,125
State University Educational Facilities
5.50%, due 5/15/26.................... 750,000 764,063
Series B
7.00%, due 5/15/16.................... 600,000 639,750
New York State Energy Research &
Development Authority
Electric Co. Facilities Revenue
Con Edison, Project A
7.50% due 1/1/26 (a).................. 500,000 528,125
New York State Local Government
Assistance Corp.
(zero coupon), due 4/1/14............. 1,500,000 693,750
New York State Medical Care Facilities
Finance Agency Revenue
7.375%, due 8/15/19................... 400,000 420,000
7.50%, due 2/15/21.................... 315,000 346,106
7.875%, due 8/15/20................... 55,000 60,156
8.875%, due 8/15/07................... 455,000 465,806
Hospital & Nursing Home
8.00%, due 2/15/28.................... 1,000,000 1,024,090
Montefiore Medical Center
6.00%, due 2/15/35.................... 850,000 913,750
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21................... 1,035,000 1,067,975
New York State Thruway Authority
Service Contract Revenue
Local Highway and Bridge
5.75%, due 4/1/16..................... 900,000 947,250
Niagara Falls, New York, Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15.................... 715,000 751,644
North Hempstead New York
Series A
4.75%, due 1/15/18.................... 1,000,000 958,750
Port Authority of New York &
New Jersey Consolidated Bonds
Series 52
9.00%, due 11/1/14.................... 150,000 160,125
Port Jervis Industrial Development
Authority, Franciscan Health
Partnership
5.50%, due 11/1/16.................... 800,000 804,000
----------
Total Long-Term Municipal Bonds
(Cost $19,733,215).................... 20,025,083
----------
SHORT-TERM INVESTMENTS (6.4%)
New York City General Obligation
Series B
4.00%, due 8/15/04 (b)................ 500,000 500,000
New York City Municipal Water
Finance Authority, Water and Sewer
Systems Revenue, Series C
4.00%, due 6/15/22 (b)................ 500,000 500,000
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay New York Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (Continued)
New York State Energy Research &
Development Authority
Pollution Control Revenue
Electric & Gas, Series B
4.00%, due 2/1/29 (b)................. $ 400,000 $ 400,000
-----------
Total Short-Term Investments
(Cost $1,400,000)..................... 1,400,000
-----------
Total Investments
(Cost $21,133,215) (c)................ 98.5% 21,425,083(d)
Cash and Other Assets,
Less Liabilities...................... 1.5 328,961
----------- -----------
Net Assets.............................. 100.0% $21,754,044
=========== ===========
</TABLE>
- ----------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Variable rate security that may be tendered back to the issuer at any time
prior to maturity at par.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1998, net unrealized appreciation was $291,868, 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 $534,901 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $243,033.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $21,133,215) ...... $ 21,425,083
Receivables:
Interest ............................................................ 311,521
Cash ................................................................ 150,188
Fund shares sold .................................................... 170
------------
Total assets ....................................................... 21,886,962
------------
LIABILITIES:
Payables:
NYLIFE Distributors ................................................. 5,593
MainStay Management ................................................. 5,111
Transfer agent ...................................................... 2,673
Custodian ........................................................... 1,009
Trustees ............................................................ 124
Accrued expenses ...................................................... 35,811
Variation margin on futures contracts ................................. 2,202
Dividend payable ...................................................... 80,395
------------
Total liabilities .................................................. 132,918
------------
Net assets ............................................................ $ 21,754,044
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 15,249
Class B ............................................................. 6,367
Additional paid-in capital ............................................ 21,293,586
Accumulated distribution in excess of net investment income ........... (24,843)
Accumulated undistributed net realized gain on investments ............ 171,817
Unrealized appreciation on investments ................................ 291,868
------------
Net assets ............................................................ $ 21,754,044
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 15,376,497
============
Shares of beneficial interest outstanding ............................. 1,524,855
============
Net asset value per share outstanding ................................. $ 10.08
Maximum sales charge (4.50% of offering price) ........................ 0.47
------------
Maximum offering price per share outstanding .......................... $ 10.55
============
CLASS B
Net assets applicable to outstanding shares ........................... $ 6,377,547
============
Shares of beneficial interest outstanding ............................. 636,712
============
Net asset value and offering price per share outstanding .............. $ 10.02
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest ..................................................... $ 568,180
---------
Expenses:
Management ................................................... 49,766
Shareholder communication .................................... 21,616
Transfer agent ............................................... 19,181
Service--Class A ............................................. 17,562
Service--Class B ............................................. 7,321
Professional ................................................. 10,890
Distribution--Class B ........................................ 7,322
Custodian .................................................... 4,054
Recordkeeping ................................................ 2,000
Registration ................................................. 689
Trustees ..................................................... 249
Miscellaneous ................................................ 8,701
---------
Total expenses before reimbursement ......................... 149,351
Expense reimbursement from Manager ............................. (18,579)
---------
Net expenses ................................................ 130,772
---------
Net investment income .......................................... 437,408
---------
REALIZED and unrealized gain (loss) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions ........................................ 203,199
Futures transactions ......................................... (13,781)
---------
Net realized gain on investments ............................... 189,418
---------
Net change in unrealized appreciation on investments ........... (184,108)
---------
Net realized and unrealized gain on investments ................ 5,310
---------
Net increase in net assets resulting from operations ........... $ 442,718
=========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ............................................................................ $ 437,408 $ 910,529
Net realized gain on investments ................................................................. 189,418 389,340
Net change in unrealized appreciation on investments ............................................. (184,108) 213,878
------------ ------------
Net increase in net assets resulting from operations ............................................. 442,718 1,513,747
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A ......................................................................................... (330,694) (695,736)
Class B ......................................................................................... (331,557) (218,110)
From net realized gain on investments:
Class A ......................................................................................... -- (184,623)
Class B ......................................................................................... -- (73,041)
------------ ------------
Total dividends and distributions to shareholders ............................................. (662,251) (1,171,510)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ......................................................................................... 2,251,869 542,479
Class B ......................................................................................... 1,360,967 1,935,502
Net asset value of shares issued to shareholders in reinvestment of dividends:
Class A ......................................................................................... 119,551 375,244
Class B ......................................................................................... 59,920 184,143
------------ ------------
3,792,307 3,037,368
Cost of shares redeemed:
Class A ......................................................................................... (791,040) (2,924,796)
Class B ......................................................................................... (626,006) (728,335)
------------ ------------
Increase (decrease) in net assets derived from capital share transactions ..................... 2,375,261 (615,763)
------------ ------------
Net increase (decrease) in net assets ......................................................... 2,355,728 (273,526)
NET ASSETS:
Beginning of period ................................................................................ 19,398,316 19,671,842
------------ ------------
End of period ...................................................................................... $ 21,754,044 $ 19,398,316
============ ============
Accumulated distribution in excess of net investment income at end of period ....................... $ (24,843) $ --
============ ============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
---------- ---------- ---------- ---------- ---------- ----------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ......... $10.09 $10.03 $ 9.91 $ 9.84 $10.12 $10.02
------ ------ ------ ------ ------ ------
Net investment income ......... 0.23 0.22 0.49 0.45 0.50 0.45
Net realized and
unrealized gain (loss)
on investments .............. (0.01) (0.01) 0.32 0.33 (0.21) (0.18)
------ ------ ------ ------ ------ ------
Total from investment
operations .................. 0.22 0.21 0.81 0.78 0.29 0.27
------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income ...................... (0.23) (0.22) (0.49) (0.45) (0.50) (0.45)
From net realized gain
on investments .............. -- -- (0.14) (0.14) -- --
------ ------ ------ ------ ------ ------
Total dividends and
distributions ............... (0.23) (0.22) (0.63) (0.59) (0.50) (0.45)
------ ------ ------ ------ ------ ------
Net asset value at end
of period ................... $10.08 $10.02 $10.09 $10.03 $ 9.91 $ 9.84
====== ====== ====== ====== ====== ======
Total investment
return (a) .................. 2.25% 2.13% 8.39% 8.14% 3.06% 2.86%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income ................... 4.47%+ 4.22%+ 4.88% 4.63% 5.0% 4.7%
Net expenses ............... 1.24%+ 1.49%+ 1.24% 1.49% 1.24% 1.49%
Expenses (before
reimbursement) ........... 1.43%+ 1.68%+ 1.41% 1.66% 1.4% 1.6%
Portfolio turnover rate ....... 105% 105% 212% 212% 114% 114%
Net assets at end of
period (in 000's) ........... $15,376 $6,378 $13,814 $5,585 $15,572 $4,100
<CAPTION>
Class A
-----------------------------------------------
Class A Class B September 1
----------- ---------- through Year ended August 31
Year ended December 31 ---------------------------
December 31, 1995 1994** 1994 1993
---------------------------- ------------ ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period .................... $ 9.20 $ 9.20 $9.58 $10.43 $ 9.95
------ ------ ----- ------ ------
Net investment income .................... 0.52 0.59 0.19 0.56 0.60
Net realized and
unrealized gain (loss)
on investments ......................... 0.91 0.82 (0.39) (0.59) 0.54
------ ------ ----- ------ ------
Total from investment
operations ............................. 1.43 1.41 (0.20) (0.03) 1.14
------ ------ ----- ------ ------
Less dividends and
distributions:
From net investment
income ................................. (0.51) (0.59) (0.18) (0.57) (0.65)
From net realized gain
on investments ......................... -- -- -- (0.25) (0.01)
------ ------ ----- ------ ------
Total dividends and
distributions .......................... (0.51) (0.59) (0.18) (0.82) (0.66)
------ ------ ----- ------ ------
Net asset value at end
of period .............................. $10.12 $10.02 $9.20 $ 9.58 $10.43
====== ====== ===== ====== ======
Total investment
return (a) ............................. 15.97% 15.67% (2.11%) (0.35%) 11.88%
Ratios (to average net assets)/
Supplemental Data:
Net investment
income .............................. 5.4% 5.1% 6.1%+ 5.7% 6.0%
Net expenses .......................... 1.24% 1.49% 0.99%+ 0.99% 0.98%
Expenses (before
reimbursement) ...................... 1.4% 1.6% 1.2%+ 1.1% 1.2%
Portfolio turnover rate .................. 114% 114% 39% 169% 131%
Net assets at end of
period (in 000's) ...................... $18,248 $1,588 $17,106 $17,862 $15,665
</TABLE>
- ----------
* Unaudited.
** 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.
16
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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.
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 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
17
<PAGE>
MainStay New York Tax Free Fund
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 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.
18
<PAGE>
Notes to Financial Statements unaudited (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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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. For the six months ended June 30, 1998, the
Manager earned $49,766 and reimbursed the Fund $18,579.
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.
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 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
19
<PAGE>
MainStay New York Tax Free Fund
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.
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 $3,720 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$12,095 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $19,732.
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 June 30, 1998, NYLIFE Distributors beneficially held shares of Class
A of the Fund with a net asset value of $5,034,853 which represents 32.7% of the
Class A 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 $284 for the six months ended June
30, 1998.
Note 4--Federal Income Tax:
The Fund intends to elect, to the extent provided by the regulations, to treat
$17,689 of qualifying capital losses that arose during the prior year as if they
arose on January 1, 1998.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $21,111 and $20,648, respectively.
20
<PAGE>
Notes to Financial Statements unaudited (continued)
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 June 30, 1998.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 223 136 55 195
Shares issued in reinvestment of dividends and distributions 12 6 37 18
---- ---- ---- ----
235 142 92 213
Shares redeemed ............................................ (79) (62) (294) (73)
---- ---- ---- ----
Net increase ............................................... 156 80 (202) 140
==== ==== ==== ====
</TABLE>
- ----------
* Unaudited.
21
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
22
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
23
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
NEW YORK TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
24
<PAGE>
MainStay New York Tax Free Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA13-08/98
[RECYCLE SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Convertible Fund Highlights 3
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500, First Boston
Convertible Securities Index, and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 12
Top 10 Holdings 13
10 Largest Purchases 13
10 Largest Sales 13
Portfolio of Investments 14
Unaudited Financial Statements 26
Notes to Financial Statements 30
The MainStay Funds 38
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move. This semiannual report can
help. It provides information on the performance and holdings of your MainStay
investment, with commentary from the portfolio managers. At MainStay, we're
working hard to earn your trust--by providing the information, selection, and
service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* See page 4 for more information on the S&P 500.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Convertible Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o During the first half of 1998, domestic stocks and bonds both rallied, with
the S&P 500* reaching record highs.
o In general, convertible securities underperformed equities by a substantial
margin.
o Convertibles with exposure to Asian markets suffered as demand slackened
throughout the Pacific region.
o Difficulties among some major high-yield issuers led convertible investors
to reevaluate risks.
o Telecommunications and media mergers pushed valuations to high levels,
while declining oil prices resulted in losses among energy-related issues.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
o The MainStay Convertible Fund returned 12.19% and 11.41% for Class A shares
and Class B shares, respectively, excluding all sales charges, for the
one-year period ended 6/30/98.
o Careful evaluation of risk and reward helped the Fund make sound
investments in a market where many securities faced setbacks.
o The Fund benefited from convertibles in a wide range of industries, while
energy and commodity holdings underperformed.
o Both share classes outperformed the average Lipper+ convertible fund, which
returned 5.77% for the six months ended 6/30/98.
o Since June of 1997, the Fund has been closed to new investors.
- ----------
* See footnote on page 4 for more information on the S&P 500.
+ See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
Convertible Fund versus S&P 500, First Boston
Convertible Securities Index, and Inflation
CLASS A SHARES SEC Returns: 1-Year 6.02%, 5-Year 11.36%, 10-Year 12.42%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
First Boston
MainStay Convertible Securities S%P
Period end Convertible Fund Index* 500+ Inflation++
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6/88 $ 9,450 $10,000 $10,000 $10,000
6/89 $10,000 $11,176 $12,055 $10,517
6/90 $10,135 $11,608 $14,043 $11,008
6/91 $11,227 $12,259 $15,081 $11,526
6/92 $14,106 $14,818 $17,103 $11,882
6/93 $17,788 $17,886 $19,434 $12,236
6/94 $19,389 $18,176 $19,708 $12,543
6/95 $22,396 $21,177 $24,846 $12,924
6/96 $25,567 $24,090 $31,306 $13,280
6/97 $28,729 $27,440 $42,172 $13,585
6/98 $32,232 $31,486 $54,887 $13,813
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 6.41%, 5-Year 11.89%, 10-Year 12.81%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
First Boston
MainStay Convertible Securities S%P
Period end Convertible Fund Index* 500+ Inflation++
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6/88 $10,000 $10,000 $10,000 $10,000
6/89 $10,582 $11,176 $12,055 $10,517
6/90 $10,725 $11,608 $14,043 $11,008
6/91 $11,881 $12,259 $15,081 $11,526
6/92 $14,927 $14,818 $17,103 $11,882
6/93 $18,823 $17,886 $19,434 $12,236
6/94 $20,517 $18,176 $19,708 $12,543
6/95 $23,632 $21,177 $24,846 $12,924
6/96 $26,808 $24,090 $31,306 $13,280
6/97 $29,964 $27,440 $42,172 $13,585
6/98 $33,384 $31,486 $54,887 $13,813
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 6/30/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* The MainStay Convertible Fund, going forward, will measure its performance
against the First Boston Convertible Securities Index. This index reflects
the holdings of the Fund better than the S&P 500, against which the Fund is
currently measured, and the subadvisor believes that it is, therefore, a
better performance benchmark. The First Boston Convertible Securities Index
generally includes 250 to 300 issues--convertibles must have a minimum
issue size of $50 million; bonds and preferreds must be rated B- or better
by S&P; and preferreds must have a minimum of 500,000 shares outstanding.
Eurobonds are also included if they are issued by U.S.-domiciled companies,
rated B- or higher by S&P, and have an issue size of greater than $100
million. Securities in the Fund will not precisely match those in the index
and so, performance of the Fund will differ.
+ "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
++ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
The first six months of 1998 provided positive stock market returns. Indeed, the
S&P 500 Index* rose more than 17%, reaching record levels by the end of June.
Unfortunately, the convertible bond market didn't keep pace with the equity
market's advance. Problems among certain high-yield issuers, notably Sunbeam,
Western Digital, FPA Medical, and Boston Chicken, caused investors to rethink
their risk parameters. Problems in Asian markets also took a toll, with
investors being forced to take losses even in highly liquid issues.
As a result, the convertible landscape was strewn with securities that faced
difficulties, giving investors added incentive to carefully evaluate both the
risk and reward potential of the securities they selected. Merger and
acquisition activity in the telecommunications, cable, and media industries
pushed prices to high levels, increasing the risk parameters of these
convertibles, thus reducing the opportunities in some of the largest sectors of
the convertible market. Declining oil prices caused energy-related issues to
underperform, and slipping gold and silver prices caused precious-metal
securities to show poor performance. Nevertheless, the market provided a wide
range of opportunities among technology companies, retailers, and other issuers
with strong fundamentals and positive earnings potential.
Given this context, how did the MainStay Convertible Fund perform in the first
six months of 1998?
For the six months ended 6/30/98, the MainStay Convertible Fund returned 7.17%
and 6.85% for Class A shares and Class B shares, respectively, excluding all
sales charges. Both share classes outperformed the average Lipper+ convertible
fund, which returned 5.77% for the first half of 1998.
Why was the Fund able to outperform its peers?
We believe our investment process is the key to the Fund's outperformance. We do
not just evaluate convertible securities, but also the underlying fundamentals
that may affect stock performance. In this way, we get a well-rounded picture of
how the company and its securities are likely to perform in various market
environments. Our in-depth research is often able to detect potential problems,
which was particularly important in a convertible market in which many
securities faced setbacks. While we didn't avoid every company that had
difficulties, we were able to identify several strong opportunities and avoided
some of the biggest problem issues.
Which securities were the worst performers during the reporting period?
There were a few high-yield issuers that faced serious problems. Sunbeam and FPA
Medical were large issuers whose fundamentals deteriorated. Fortunately, the
Fund didn't participate in either of those companies' offerings. Another
troublesome company was Boston Chicken, which the Fund held going into the
reporting period. Although we had hoped to see a turnaround in operations,
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
- ----------
* See footnote on page 4 for more information on the S&P 500.
+ See footnote and table on page 12 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<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
6/98 7.17
</TABLE>
Returns reflect the historical performance of the Class B shares for the 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>
Period end Total Return %
- -------------------------------------------------
<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
6/98 6.85
</TABLE>
See footnote * on page 12 for more information on performance.
the management team failed to correct the company's difficulties and was
eventually fired, and the convertibles performed very poorly. Although it was
the worst holding in the Fund, the position was small and had a 40 basis point
impact on overall performance.
Does the Fund continue to hold Boston Chicken?
Yes. We believe that the market has overreacted to the company's troubles and we
believe security values could increase if a restructuring plan is put into
place.
6
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ---------------------------------------------
<S> <C>
Computers & Office Equipment 8.0%
Health Care 6.2%
Auto Parts 6.2%
Software 6.0%
Publishing 5.2%
All Other 68.4%
</TABLE>
Actual percentages will vary over time. This chart does not include short
positions in common stock and written call options.
Which securities did the Fund purchase during the reporting period?
World Color Press was one of the Fund's biggest purchases and a strong
performer. We liked the company's management, the quality of its printing, and
its reputation in the industry. We had bought and sold the convertibles last
year in profitable transactions. When KKR, a major investor in World Color
Press, elected to sell a portion of its holding, the price of the convertibles
declined and we were able to make significant purchases over the second quarter
of 1998 at attractive prices. The Fund purchased the bonds around par value and
at the end of the reporting period they were trading at a premium, so they had a
positive impact on the Fund's performance.
The Fund also bought 6% convertible bonds maturing in 2005 from Advanced Micro
Devices. AMD is the second largest chip manufacturer behind Intel and appeared
to have strong potential in its K6 chip, the company's answer to Intel's Pentium
chip. Unfortunately, as demand in Asian markets declined, the price of AMD stock
went from the mid-20s into the teens. That took a substantial toll on the Fund's
performance. The Fund continues to hold the convertibles because they offer a
yield to maturity over 9% and have good price appreciation potential.
Did the Fund have other major purchases during the first half of 1998?
As prices of real estate investment trust (REIT) securities declined through the
second quarter, we felt that they were an attractive investment for the Fund
based on both yield and valuation. In particular, we believed there was
fundamental value in the retail REIT sector, which was benefiting from positive
trends among major retailers.
In June, the Fund purchased a convertible preferred issued by General Growth
Properties, one of the largest owners of shopping malls in the United States.
The preferred issue offered a yield of 7.25%, and a very modest conversion
premium, allowing the Fund to participate in much of the positive movement in
the stock,
Par value
- ---------
The nominal or face value of a security. A bond selling at par, for example, is
worth the same dollar value it was issued for or at which it will be redeemed at
maturity. In price comparisons, 100 may be used to represent par value, with
higher or lower values representing premiums or discounts, respectively.
Yield to maturity
- -----------------
A concept that reflects the rate of return an investor would receive if an
interest-bearing security were held to its maturity date.
Real estate investment trust (REIT)
- -----------------------------------
A publicly traded company that manages a portfolio of real estate properties to
earn profits for shareholders.
7
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------------
<S> <C>
Convertible Bonds 46.8%
Convertible Preferred Stocks 31.6%
Common Stocks 13.4%
Purchased Put Options 3.2%
Preferred Stocks 0.6%
Coprorate Bonds 0.2%
Cash, Equivalents & Other Assets,
Less Liabilities 4.2%
</TABLE>
Actual percentages will vary over time. This chart does not include short
positions in common stock and written call options.
with significant downside protection provided through the yield.
The Fund also purchased Bay Networks convertible bonds shortly before the
company received a takeover bid from Northern Telecom. While the deal hadn't
closed by the end of the first half of the year, the offer had a positive impact
on the Fund's performance.
Did you anticipate the takeover?
The Fund purchased Bay Networks for its positive fundamentals. But given the
size of the company and the amount of takeover activity in the communications
sector, we felt it had strong potential as a takeover target and we're pleased
to see the Fund's investors benefit from our security selection process.
Which securities did the Fund sell during the reporting period?
There were several. Perhaps the largest sale was Unisys. As the price of Unisys
stock rose dramatically, their 8.25% convertibles were converted into common
stock. Since this was one of the Fund's largest holdings, and the stock carried
extra downside risk, we decided to sell some of the stock and purchase Unisys
preferred, which has an attractive current yield, strong upside potential, and
less downside risk. Unisys was the Fund's best performer during the first six
months of 1998.
The Fund also experienced excellent results with Home Depot. With problems in
the Asian markets, investors focused on purely domestic issues, with retailers
receiving much of the attention. We purchased Home Depot bonds for the Fund when
the convertibles were trading slightly above par value. Later, when the price of
the bonds rose dramatically, we sold them realizing a substantial profit for the
Fund.
Why doesn't the Fund continue to hold convertibles when they're increasing in
value?
We try to balance upside potential and downside risk in proportions we believe
are favorable for shareholders. For example,
8
<PAGE>
when we bought Mail-Well for the Fund in the fourth quarter of 1997, it had
excellent upside potential and what we believed to be limited downside risk. As
the price rose during the reporting period, it continued to have upside
potential, but began to carry the full downside risk of the underlying stock. So
the Fund sold it at a profit, even though it might have gone higher. We believe
in managing both the upside and downside of the Fund's investment portfolio to
give investors the combination of characteristics that makes convertibles
attractive.
Are there other reasons to sell?
Certainly. If a security's underlying fundamentals falter, the Fund may sell it
to avoid problems. That happened in the energy sector during the first half of
1998. As oil prices continued to drop, the Fund sold Diamond Offshore, EVI, and
Lomack Petroleum--all at losses. Although many characteristics of these
companies were strong throughout the reporting period, investors are projecting
difficulties in the distant future, which have weakened the market's interest in
these securities.
The Fund also sold Cendant, a company that resulted from the merger of CUC
International and HFS. We liked Cendant's mandatory convertible preferreds when
the Fund purchased them, but during the first half of the year, questions about
accounting irregularities at CUC International resulted in both the stock and
mandatory convertible preferreds being severely punished. When the stock
rebounded, the Fund sold the mandatory convertible preferreds and moved into the
convertible bonds, which should provide greater downside protection if the stock
decreases from current levels.
Which securities provided the best performance for the Fund during the first
half of 1998?
Unisys was by far the Fund's best performer. The stock doubled in price during
the reporting period. We've already discussed the Fund's move into Unisys
convertible preferred. Everything about Unisys was positive for the Fund in the
first half of the year.
S3 is a computer graphics firm that did not perform well in 1997, but rebounded
strongly in the first six months of 1998. We believed the company had strong
potential and our assessment paid off for shareholders when the price of the
convertibles rose from the 50s to the 70s on speculation that the company might
be taken over. S3, which was cash flow neutral as of 6/30/98, should generate
positive cash flows in the second half of the year, and we think it has positive
potential for the Fund going forward.
The Fund also did well with Time Warner convertible bonds and preferreds. In the
strong cable and media market, the stock did very well and the convertibles
followed suit. When they rose to the level where they took on the downside
characteristics of equities, we sold the Fund's position to reduce the Fund's
risk profile and take profits.
The Fund also had success with Station Casinos, an owner of both Las Vegas and
riverboat casino properties. The company was acquired by Crescent Real Estate in
January 1998, resulting in the preferred
Mandatory convertible preferred
- -------------------------------
A security that is similar to a common stock with an attractive yield feature.
Generally, mandatory convertible preferreds perform more like modified equities
rather than true convertibles.
Cash flow
- ---------
The amount of income or earnings available to cover outstanding liabilities and
other obligations, including debt service.
9
<PAGE>
Premium
- -------
The amount by which a bond sells above its face or par value. For example, a
bond with a face value of $1,000 would sell for a $100 premium when it cost
$1,100. Different from the conversion premium, which is the amount by which the
price of a convertible exceeds the market price of the underlying stock.
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.
securities increasing over 20% during the reporting period.
Were there other success stories?
Yes. Newell Corp. convertibles moved from around 50 when the Fund bought them
last year to around 60 at the end of June 1998. So we pared back on the Fund's
position to take profits. Newell is a little-known company that takes major
brands from Rolodex and ball point pens to household products and streamlines
their manufacturing and distribution process. This "integration" process has
been largely responsible for the company's success, and their securities have
been positive for the Fund.
Do any of the Fund's convertible holdings ever get called?
Unfortunately, they sometimes do. The Fund purchased Consolidated Natural Gas at
a premium and lost money when the bonds were called at par. The impact was
slightly negative, and something of a surprise, since the securities were well
past their call date.
Were there Fund holdings that performed poorly during the first half of the
year?
Commodity prices, including precious metals, declined substantially during the
reporting period. The Fund held Coeur d'Alene, a major name in silver and gold
mining that performed poorly as precious metal prices declined. Freeport-McMoRan
also issued a security that was convertible into an instrument that reflected
the price of silver. As silver prices declined, the security also
underperformed.
Is the Fund overweighted or underweighted in any sectors of the market?
Generally speaking, we are bottom-up investors, which means we select securities
for the Fund based on their individual merits, rather than on sector
characteristics. After identifying the growth potential in retail REITs, the
Fund closed the first half of 1998 overweighted in REIT securities. The Fund was
also overweighted in energy, and we believe that the larger energy companies may
provide better performance and more resilience to market forces. The Fund ended
the first half of the year underweighted in media, which we believe is
overvalued. The Fund is also underweighted in steel, as metals and heavy
manufacturing have both shown weakness in recent months, particularly with the
General Motors strike.
Why is the Fund closed to new investors?
That decision was made over a year ago to protect investors from liquidity
problems that could arise because of the substantial size of the Fund in a
relatively small convertible market. The Trustees believe it is in the best
interest of shareholders to maintain this policy, but may change it in the
future if market conditions warrant.
What is your outlook going forward?
We continue to remain cautious about the potential for credit problems. Having
seen problems in several high-yield issuers, we will continue to do careful
credit research before we invest. The disjointed, sector-specific behavior of
the market may pose both opportunities and hazards going forward. As we head
into the third quarter,
10
<PAGE>
we're beginning to find potential opportunities among so-called busted
convertibles, which are convertibles that trade like regular income securities
because their stock price has fallen significantly.
We will continue to focus on both the risk and reward characteristics of all the
securities we consider as the Fund seeks capital appreciation together with
current income.
Denis Laplaige
Neil Feinberg
Thomas Wynn
Portfolio Managers
MacKay Shields Financial Corporation
Liquidity
- ---------
Securities are said to be liquid when they can be easily bought or sold in large
volume without substantially affecting their price. Some securities, such as
private placements or stocks that have few shares outstanding are considered
illiquid either because there are few market participants interested in buying
or selling the securities or because purchases and sales may cause wide price
swings.
High-yield securities run greater risks of price fluctuations, loss of principal
and interest, default or bankruptcy by the issuer, and other risks, which is why
these securities are considered speculative.
As of 6/2/97, this Fund was closed to new investors.
Past performance is no guarantee of future results.
11
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
=====================================================================================================
Fund average annual total returns*
=====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 12.19% 12.62% 13.05% 10.70%
Class B 11.41% 12.14% 12.81% 10.51%
<CAPTION>
=====================================================================================================
Fund SEC returns*
=====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 6.02% 11.36% 12.42% 10.19%
Class B 6.41% 11.89% 12.81% 10.51%
<CAPTION>
=====================================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
=====================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 35 out of n/a n/a 20 out of
50 funds 32 funds
Class B 36 out of 15 out of 5 out of 4 out of
50 funds 24 funds 17 funds 8 funds
Average Lipper
convertible
securities fund 14.08% 12.60% 11.66% 9.58%
<CAPTION>
=====================================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
=====================================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $14.25 $0.2521 $0.0000
Class B $14.25 $0.1978 $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 (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 six 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
6/30/98. Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86.
12
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
=========================================================================================
HOLDING AMOUNT
=========================================================================================
<S> <C>
MascoTech, Inc., 4.50%, due 12/15/03 $35,232,000
Microsoft Corp., $2.196, Series A 34,912,500
World Color Press, Inc., 6.00%, due 10/1/07 24,585,750
Unisys Corp., $3.75, Series A 23,810,325
RPM, Inc. of Ohio, (zero coupon), due 9/30/12 21,468,484
Merrill Lynch & Co., Inc., 7.25%, Series SAI 20,437,750
Advanced Micro Devices, Inc., 6.00%, due 5/15/05 18,122,000
Newell Financial Trust I, 5.25% 17,790,500
Hollinger, Inc., (zero coupon), due 9/30/12 17,674,850
Pennzoil Co., 4.75%, due 10/1/03 17,548,125
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
=========================================================================================
SECURITY AMOUNT OF PURCHASE
=========================================================================================
<S> <C>
Hilton Hotels Corp., 5.00%, due 5/15/06 and Common Stock $59,554,503
Time Warner, Inc., (zero coupon), due 6/22/13 and Common Stock 44,567,076
World Color Press, Inc., 6.00%, due 10/1/07 and Common Stock 43,546,137
Unisys Corp., $3.75, Series A Preferred Stock and Common Stock 38,004,813
MascoTech, Inc., 4.50%, due 12/15/03 and Common Stock 31,866,054
Owens Corning Capital LLC, 6.50%
Preferred Stock and Owens Corning Common Stock 27,857,341
Advanced Micro Devices, Inc., 6.00%, due 5/15/05 and Common Stock 26,114,592
Integrated Health Services, Inc., 6.00%, due 1/1/03 and Common Stock 25,348,413
Diamond Offshore Drilling, Inc., 3.75%, due 2/15/07 and Common Stock 22,327,550
Station Casinos, Inc., 7.00% Preferred Stock and Common Stock 20,643,010
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
==========================================================================================
SECURITY AMOUNT OF SALE
==========================================================================================
<S> <C>
Hilton Hotels Corp., 5.00%, due 5/15/06 and Common Stock $57,341,560
Time Warner, Inc., (zero coupon), due 6/22/13 and Common Stock 44,842,367
Unisys Corp., $3.75, Series A Preferred Stock and Common Stock 38,302,951
Mail-Well, Inc., 5.00%, due 11/1/02 and Common Stock 29,872,615
Apple Computer, Inc., 6.00%, due 6/1/01 and Common Stock 28,650,020
Loral Space & Communications Ltd., 6.00%
Series C Preferred Stock and Common Stock 27,342,947
Apple South, Inc., $3.50, Series A Preferred Stock, $3.50
Preferred Stock and Common Stock 24,251,450
World Color Press, Inc., 6.00%, due 10/1/07 and Common Stock 22,913,230
Diamond Offshore Drilling, Inc., 3.75%, due 2/15/07 and Common Stock 20,315,459
Newell Financial Trust I, 5.25% Preferred Stock and Newell Co. Common Stock 19,789,424
</TABLE>
- ----------
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.
13
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
CONVERTIBLE SECURITIES (78.4%)+
BONDS (46.8%)
AUTO PARTS (5.0%)
Mark IV Industries, Inc.
4.75%, due 11/1/04 .................. $ 4,850,000 $ 4,492,313
4.75%, due 11/1/04 (c)............... 4,150,000 3,843,938
MascoTech, Inc.
4.50%, due 12/15/03 (d).............. 36,700,000 35,232,000
-----------
43,568,251
-----------
BANKS (0.4%)
Mitsubishi Bank Limited
International Finance
(Bermuda) Trust
3.00%, due 11/30/02.................. 3,950,000 3,821,625
-----------
BIOTECHNOLOGY (0.3%)
Aviron
5.75%, due 4/1/05 ................... 2,000,000 2,327,500
-----------
CELLULAR TELEPHONE (0.3%)
United States Cellular Corp.
(zero coupon), due 6/15/15 (q)....... 6,000,000 2,265,000
-----------
CHEMICALS (2.5%)
RPM, Inc. of Ohio
(zero coupon), due 9/30/12 (q)....... 40,650,000 21,468,484
-----------
COMPUTER PERIPHERALS (0.4%)
Adaptec, Inc.
4.75%, due 2/1/04.................... 4,100,000 3,239,000
-----------
COMPUTERS & OFFICE EQUIPMENT (3.6%)
Applied Magnetics Corp.
7.00%, due 3/15/06 .................. 8,075,000 4,037,015
Cirrus Technology, Inc.
6.00%, due 12/15/03 ................. 2,700,000 2,187,000
Cymer, Inc.
3.50%, due 8/6/04 (c)................ 4,500,000 3,403,125
HMT Technology Corp.
5.75%, due 1/15/04 .................. 500,000 350,000
5.75%, due 1/15/04 (c)............... 2,500,000 1,750,000
InaCom Corp.
4.50%, due 11/1/04................... 2,000,000 2,052,500
Integrated Process Equipment Corp.
6.25%, due 9/15/04................... 4,000,000 3,020,000
6.25%, due 9/15/04 (c)............... 5,000,000 3,775,000
Safeguard Scientifics, Inc.
6.00%, due 2/1/06 (c)(d)............. 5,775,000 8,431,500
Trikon Technologies, Inc.
(zero coupon), due 10/15/01 (g)...... 160,000 89,600
(zero coupon), due 10/15/01 (c)(g) 3,225,000 1,806,000
-----------
30,901,740
-----------
DOMESTIC OILS (1.1%)
Texaco Capital, Inc.
3.50%, due 8/5/04 (l)................ 9,550,000 9,955,875
-----------
DRUGS (1.8%)
Alza Corp.
(zero coupon), due 7/14/14 (a)....... 7,000,000 4,130,000
Fuisz Technologies, Ltd.
7.00%, due 10/15/04 ................. 350,000 358,750
Roche Holdings, Inc.
Series DTC
(zero coupon), due 4/2/10 (q)........ 9,600,000 5,472,000
Sepracor, Inc.
6.25%, due 2/15/05 (c)............... 4,750,000 5,308,125
-----------
15,268,875
-----------
ELECTRICAL EQUIPMENT (0.7%)
Antec Corp.
4.50%, due 5/15/03 (c)............... 5,000,000 5,825,000
-----------
ENERGY (2.0%) Pennzoil Co.
Series U.S.
4.75%, due 10/1/03 (d)............... 12,250,000 17,548,125
-----------
FINANCE (0.0%) (b)
Cityscape Financial Corp.
6.00%, due 5/1/06 (g)................ 500,000 27,500
-----------
FOOD, BEVERAGES & TOBACCO (0.2%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12 ................... 1,700,000 1,683,000
-----------
HEALTH CARE (2.9%)
HEALTHSOUTH Corp.
3.25%, due 4/1/03.................... 8,500,000 8,383,125
Integrated Health Services, Inc.
5.75%, due 1/1/01 ................... 5,000,000 5,876,550
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
BONDS (Continued)
HEALTH CARE (Continued)
Tenet Healthcare Corp.
6.00%, due 12/1/05................... $10,500,000 $ 9,240,000
Veterinary Centers of America, Inc.
5.25%, due 5/1/06.................... 2,000,000 1,755,000
-----------
25,254,675
-----------
INDUSTRIAL (1.1%)
Thermo Instrument Systems, Inc.
4.00%, due 1/15/05................... 9,500,000 9,440,625
-----------
INSURANCE (0.3%)
Statesman Group, Inc.
6.25%, due 5/1/03.................... 2,750,000 2,970,000
-----------
LEISURE (0.2%)
Family Golf Centers, Inc.
5.75%, due 10/15/04.................. 1,450,000 1,761,750
-----------
MEDICAL EQUIPMENT (0.4%)
Thermo Cardiosystems, Inc.
4.75%, due 5/15/04 (c)............... 3,000,000 3,067,500
-----------
NON-DEFENSE ELECTRONICS (0.3%)
Oak Industries, Inc.
4.875%, due 3/3/08 (c)............... 2,000,000 2,197,500
-----------
OIL SERVICES (1.1%)
Diamond Offshore Drilling, Inc.
3.75%, due 2/15/07................... 2,000,000 2,325,000
Loews Corp.
3.125%, due 9/15/07.................. 8,250,000 7,507,500
-----------
9,832,500
-----------
PAPER & FOREST PRODUCTS (0.3%)
Thermo Fibertek, Inc.
4.50%, due 7/15/04 (c)............... 3,000,000 3,030,000
-----------
PERSONAL SERVICES (1.0%)
Equity Corporation International
4.50%, due 12/31/04 ................. 2,700,000 2,970,000
4.50%, due 12/31/04 (c).............. 5,500,000 6,050,000
-----------
9,020,000
-----------
PERSONNEL SERVICES (1.7%)
Interim Services, Inc.
4.50%, due 6/1/05.................... 2,500,000 2,706,250
Metamor Worldwide, Inc.
2.94%, due 8/15/04................... 12,450,000 12,169,875
-----------
14,876,125
-----------
PUBLISHING (4.9%)
Hollinger, Inc.
Series U.S.
(zero coupon), due 10/5/13 (d)(m) 42,590,000 17,674,850
World Color Press, Inc.
6.00%, due 10/1/07................... 22,050,000 24,585,750
-----------
42,260,600
-----------
RESTAURANTS & LODGING (1.0%)
Boston Chicken, Inc.
(zero coupon), due 6/1/15............ 26,600,000 1,729,000
4.50%, due 2/1/04 ................... 5,600,000 1,120,000
CKE Restaurants, Inc.
4.25%, due 3/15/04 (c)............... 4,000,000 4,200,000
Hilton Hotels Corp.
5.00%, due 5/15/06................... 2,000,000 2,080,000
-----------
9,129,000
-----------
RETAIL (1.4%)
Action Performance Companies, Inc.
4.75%, due 4/1/05 (c)................ 2,000,000 1,895,000
Michaels Stores, Inc.
6.75%, due 1/15/03 (d)(q)............ 8,010,000 8,510,625
PETsMART, Inc.
6.75%, due 11/1/04 (c)............... 1,500,000 2,004,375
-----------
12,410,000
-----------
SEMICONDUCTORS (3.7%)
Advance Micro Devices, Inc.
6.00%, due 5/15/05 .................. 22,100,000 18,122,000
C-Cube Microsystem, Inc.
5.875%, due 11/1/05.................. 3,500,000 3,036,250
S3, Incorporated
5.75%, due 10/1/03 .................. 10,265,000 7,570,437
Xilinx Inc.
5.25%, due 11/1/02 .................. 4,000,000 3,800,000
-----------
32,528,687
-----------
SOFTWARE (1.8%)
BEA Systems, Inc.
4.00%, due 6/15/05 (c)............... 9,750,000 10,383,750
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
BONDS (Continued)
SOFTWARE (Continued)
System Software Associates, Inc.
7.00%, due 9/15/02................... $ 4,250,000 $ 3,378,750
Vantive Corp.
4.75%, due 9/1/02 ................... 2,500,000 2,162,500
-----------
15,925,000
-----------
SPECIALIZED SERVICES (0.9%)
CUC International, Inc.
3.00%, due 2/15/02 .................. 6,650,000 6,583,500
3.00%, due 2/15/02 (c)............... 1,500,000 1,485,000
-----------
8,068,500
-----------
STEEL, ALUMINUM & OTHER METALS (2.0%)
Coeur d'Alene Mines Corp.
7.25%, due 10/31/05 ................. 1,000,000 730,000
7.25%, due 10/31/05 (c).............. 14,800,000 10,804,000
Inco Ltd.
5.75%, due 7/1/04 (m)................ 5,900,000 5,516,500
-----------
17,050,500
-----------
TECHNOLOGY (1.1%)
Thermo Electron Corp.
4.25%, due 1/1/03 (c)................ 8,800,000 9,416,000
-----------
TELECOMMUNICATION EQUIPMENT (1.5%)
Comverse Technology, Inc.
4.50%, due 7/1/05 (c)................ 2,500,000 2,556,250
5.75%, due 10/1/06................... 4,550,000 5,767,125
World Access, Inc.
4.50%, due 10/1/02 .................. 4,800,000 4,920,000
-----------
13,243,375
-----------
TELECOMMUNICATION SERVICES (0.9%)
Rogers Communications, Inc.
2.00%, due 11/26/05 (m).............. 500,000 310,000
Telecom Corp. of New Zealand Ltd.
5.75%, due 4/1/03 (c)................ 3,000,000 3,075,000
Tel-Save Holdings, Inc.
5.00%, due 12/15/04 ................. 2,000,000 1,565,000
5.00%, due 12/15/04 (c).............. 3,375,000 2,640,938
-----------
7,590,938
-----------
Total Convertible Bonds
(Cost $408,939,396).................. 406,973,250
<CAPTION>
Shares Value
===============================
<S> <C> <C>
PREFERRED STOCKS (31.6%)
AEROSPACE (0.3%)
Coltec Capital Trust
5.25% (c)............................ 60,600 2,908,800
-----------
AUTO PARTS (1.0%)
Tower Auto Capital, Inc.
6.75% (c)............................ 178,000 8,566,250
-----------
BIOTECHNOLOGY (0.7%)
Alkermes, Inc.
6.50%................................ 42,500 1,769,062
6.50% (c)............................ 110,000 4,578,750
-----------
6,347,812
-----------
BUILDING MATERIALS (1.9%)
Owens Corning Capital LLC
6.50% (c)............................ 295,000 16,077,500
-----------
CABLE (1.7%)
Cablevision Systems Corp.
8.50%, Series I (d)(i1).............. 96,700 6,182,756
United International Holdings, Inc.
4.00%, Series A (n).................. 53,641 8,636,201
-----------
14,818,957
-----------
CASINOS (1.0%)
Station Casinos, Inc.
7.00%, Series A ..................... 182,900 9,064,981
-----------
CHEMICALS (0.1%)
Merrill Lynch & Co., Inc.
6.25% (j1)........................... 35,600 1,121,400
-----------
COMPUTERS & OFFICE EQUIPMENT (2.8%)
Unisys Corp.
$3.75, Series A ..................... 455,700 23,810,325
-----------
CONGLOMERATES (0.5%)
Corning Delaware L.P.
6.00% (d)............................ 81,500 4,604,750
-----------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
PREFERRED STOCKS (Continued)
CONSUMER STAPLES (2.1%)
Newell Financial Trust I
5.25%................................ 299,000 $ 17,790,500
------------
DOMESTIC OIL & GAS (1.1%)
Enron Corp.
6.25%................................ 321,000 6,420,000
Tesoro Petroleum Corp.
7.25%................................ 175,000 2,789,062
------------
9,209,062
------------
DOMESTIC OILS (0.3%)
Nuevo Financing I
5.75%, Series A ..................... 55,000 2,512,813
------------
ENERGY (0.2%)
Chesapeake Energy Corp.
7.00% (c)............................ 47,000 2,009,250
------------
FOOD, BEVERAGES & TOBACCO (0.9%)
Chiquita Brands International, Inc.
$2.875, Series A..................... 98,500 4,518,688
$3.75, Series B...................... 57,000 3,220,500
------------
7,739,188
------------
HEALTH CARE (0.8%)
Owens & Minor Trust I
5.375% (c)........................... 130,000 4,875,000
Sun Financing I
7.00% (c)............................ 100,000 2,275,000
------------
7,150,000
------------
HOME BUILDING (0.2%)
Fleetwood Capital Trust
6.00% (c)............................ 37,000 1,974,875
------------
HOUSEHOLD PRODUCTS (0.2%)
AJL PEPS
$1.44 (h)............................ 240,900 1,686,300
------------
INSURANCE (2.9%)
Conseco Financing Trust IV
7.00%, Series F...................... 95,000 5,035,000
Merrill Lynch & Co., Inc.
7.25% (d)(j2)........................ 281,900 20,437,750
------------
25,472,750
------------
MACHINERY (0.3%)
Ingersoll-Rand Co.
6.75%................................ 100,000 2,400,000
------------
NATURAL GAS PIPELINES (0.9%)
El Paso Energy Capital Trust I
4.75%................................ 145,500 7,711,500
------------
PAPER & FOREST PRODUCTS (1.7%)
International Paper Co.
5.25% (d)............................ 289,600 14,480,000
------------
REAL ESTATE (1.8%)
General Growth Properties, Inc.
7.25%................................ 259,000 6,539,750
Lodgian Capital Trust I
7.00% (c)............................ 168,000 7,938,000
Security Capital Pacific Trust
$1.44, Series A...................... 46,700 1,406,838
------------
15,884,588
------------
RESTAURANTS & LODGING (0.7%)
Suiza Capital Trust II
5.50% (c)............................ 125,000 6,187,500
------------
SOFTWARE (4.0%) Microsoft Corp.
$2.196, Series A (d)................. 367,500 34,912,500
------------
STEEL, ALUMINUM & OTHER METALS (0.8%)
Timet Capital Trust I
6.625%............................... 35,000 1,522,500
WHX Corp.
$3.75, Series B...................... 115,300 5,073,200
------------
6,595,700
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE>
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
PREFERRED STOCKS (Continued)
TELECOMMUNICATION EQUIPMENT (1.1%)
Loral Space & Communications Ltd.
6.00%, Series C ..................... 80,500 $ 6,178,375
QUALCOMM Financial Trust
5.75%................................ 71,000 3,425,750
------------
9,604,125
------------
TELECOMMUNICATION SERVICES (0.4%)
Metromedia International Group
7.25%................................ 44,000 2,266,000
Nextlink Communications, Inc.
6.50% (c) ........................... 15,000 783,750
------------
3,049,750
------------
TRANSPORTATION (1.2%)
Union Pacific Capital Trust
6.25% (c) ........................... 230,000 10,651,990
------------
Total Preferred Stocks
(Cost $263,320,384) ................. 274,343,166
------------
Total Convertible Securities
(Cost $672,259,780) ................. 681,316,416
------------
<CAPTION>
Principal
Amount
===========
<S> <C> <C>
CORPORATE BONDS (0.2%)
COMPUTERS & OFFICE EQUIPMENT (0.2%)
Businessland, Inc.
5.50%, due 3/1/07.................... $1,936,000 1,277,760
------------
FINANCE (0.0%) (b)
Cityscape Financial Corp.
12.75%, due 6/1/04 (g)............... 1,000,000 400,000
------------
HOUSING (0.0%) (b)
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(f)................... 18,799 5,264
------------
Total Corporate Bonds
(Cost $1,628,462).................... 1,683,024
------------
<CAPTION>
Shares Value
===============================
<S> <C> <C>
COMMON STOCKS (13.4%)
APPLIANCES & FURNITURE (0.1%)
Sherman Williams Co. (The)............. 25,000 $ 828,125
------------
BUILDING MATERIALS (0.3%)
American Standard Companies, Inc. (a) 67,000 2,994,062
------------
BUSINESS SERVICES (0.0%) (b)
Iron Mountain, Inc. (a)................ 983 43,989
------------
CHEMICALS (0.2%)
Agrium, Inc............................ 59,100 746,137
Monsanto Co............................ 18,500 1,033,687
RPM, Inc. of Ohio (a).................. 6,075 103,275
------------
1,883,099
------------
COMPUTER NETWORKING (0.3%)
Bay Networks, Inc. (a)................. 72,000 2,322,000
------------
COMPUTER PERIPHERALS (0.0%)(b)
Adaptec, Inc. (a)...................... 100 1,431
------------
COMPUTERS & OFFICE EQUIPMENT (1.2%)
BISYS Group, Inc. (The) (a)............ 29,200 1,197,200
Seagate Technology, Inc. (a)........... 150,000 3,571,875
Unisys Corp. (a)....................... 154,700 4,370,265
Vanstar Corp. (a)...................... 100,000 1,456,250
------------
10,595,590
------------
DOMESTIC OIL & GAS (0.8%)
Apache Corp............................ 103,833 3,270,739
Snyder Oil Corp........................ 120,300 2,398,481
Tuboscope, Inc. (a).................... 58,000 1,145,500
------------
6,814,720
------------
DOMESTIC OILS (1.0%)
Nuevo Energy Co. (a)................... 7,100 228,087
Oryx Energy Co. (a).................... 85,000 1,880,625
Phillips Petroleum Co.................. 25,000 1,204,687
Santa Fe Energy Resources, Inc. (a).... 371,900 3,997,925
Texaco, Inc............................ 25,000 1,492,187
------------
8,803,511
------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
COMMON STOCKS (Continued)
DRUGS (0.1%)
PhyCor, Inc. (a)....................... 57,000 $ 944,062
------------
ELECTRIC UTILITIES (0.3%)
EL Paso Electric Co. (a)............... 43,500 399,656
Wisconsin Energy Corp.................. 87,100 2,645,662
------------
3,045,318
------------
ELECTRICAL EQUIPMENT (0.1%)
Alcatel Alsthom S.A. (CGE) ADR (e)..... 31,300 1,273,519
------------
ENERGY (0.9%)
Abacan Resource Corp. (a).............. 160,500 100,313
Burlington Resources, Inc. (a)......... 80,000 3,445,000
OGE Energy Corp........................ 43,000 1,161,000
Union Pacific Resources Group, Inc..... 175,000 3,073,438
------------
7,779,751
------------
EXPLORATION & PRODUCTION (0.3%)
EEX Corp. (a).......................... 121,500 1,139,063
Lomak Petroleum, Inc................... 100,000 1,043,750
------------
2,182,813
------------
FINANCE (0.3%)
Everest Reinsurance Holdings, Inc...... 70,300 2,702,156
------------
FOOD, BEVERAGES & TOBACCO (0.4%)
International Multifoods Corp.......... 56,400 1,551,000
Philip Morris Companies, Inc........... 47,500 1,870,313
------------
3,421,313
------------
GAS UTILITIES (0.2%)
MarketSpan Corp. (a)................... 57,112 1,709,791
------------
HEALTH CARE (2.2%)
HEALTHSOUTH Corp. (a).................. 30,000 800,625
Integrated Health Services, Inc........ 361,089 13,540,854
Owens & Minor, Inc..................... 88,900 889,000
United HealthCare Corp................. 35,000 2,222,500
Veterinary Centers Of America, Inc. (a) 76,300 1,435,394
------------
18,888,373
------------
HOUSEHOLD PRODUCTS (0.0%) (b)
Amway Japan Ltd. ADR (e)............... 50,000 271,875
------------
MEDIA (0.6%)
Time Warner, Inc....................... 57,759 4,934,785
------------
MINING (0.5%)
Barrick Gold Corp...................... 165,500 3,175,531
Homestake Mining Co.................... 72,500 752,188
------------
3,927,719
------------
PAPER & FOREST PRODUCTS (0.2%)
International Paper Co................. 2,800 120,400
Repap Enterprises, Inc. (a)(o)......... 9,294,809 1,516,901
------------
1,637,301
------------
PUBLISHING (0.3%)
Mail-Well, Inc. (a).................... 70,000 1,518,125
World Color Press, Inc. (a)............ 31,800 1,113,000
------------
2,631,125
------------
REAL ESTATE (0.0%)(b)
General Growth Properties, Inc......... 3,900 145,763
------------
RECREATION & ENTERTAINMENT (0.2%)
Alliance Gaming Corp. (a).............. 388,144 1,552,576
------------
RESTAURANTS & LODGING (0.5%)
Hilton Hotels Corp..................... 29,500 840,750
Starwood Hotels & Resorts.............. 78,000 3,768,375
------------
4,609,125
------------
RETAIL (0.0%) (b)
Action Performance Companies, Inc. (a) 7,700 247,844
------------
SEMICONDUCTORS (0.3%)
C-Cube Microsystems, Inc. (a).......... 25,000 464,063
Level One Communications, Inc. (a)..... 97,100 2,281,850
------------
2,745,913
------------
SPECIALIZED SERVICES (0.5%)
Catalina Marketing Corp. (a)........... 40,000 2,077,500
Cendant Corp. (a)...................... 100,000 2,087,500
------------
4,165,000
------------
</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>
COMMON STOCKS (Continued)
STEEL, ALUMINUM & OTHER METALS (0.4%)
National Steel Corp.................... 95,222 $ 1,130,761
Reynolds Metals Co..................... 34,700 1,941,031
WHX Corp. (a).......................... 20,000 257,500
Worthington Industries, Inc............ 19,400 292,213
------------
3,621,505
------------
TECHNOLOGY (0.3%)
Thermo Electron Corp. (a).............. 69,000 2,358,938
------------
TELECOMMUNICATION EQUIPMENT (0.6%)
Comverse Technology, Inc. (a).......... 20,000 1,037,500
DSC Communications Corp. (a)........... 19,600 588,000
Loral Space & Communications Ltd. (a) 50,000 1,412,500
QUALCOMM, Inc. (a)..................... 4,800 269,700
RF Micro Devices, Inc. (a)............. 150,000 1,631,250
------------
4,938,950
------------
TELECOMMUNICATION SERVICES (0.1%)
Rogers Communications, Inc.
Class B (a)(o)....................... 108,000 962,056
------------
TEXTILE & APPAREL (0.2%)
Burlington Industries, Inc............. 96,200 1,352,813
------------
Total Common Stocks
(Cost $116,839,149).................. 116,336,911
------------
PREFERRED STOCK (0.6%)
MINING (0.6%)
Freeport-McMoRan
Copper & Gold, Inc.
Series Silver (d)(i2)(k)............. 330,000 5,568,750
------------
Total Preferred Stock
(Cost $5,626,500).................... 5,568,750
------------
Total Long-Term Investments
(Cost $794,725,429).................. 804,905,101
------------
<CAPTION>
Number of
Contracts Value
===============================
<S> <C> <C>
PURCHASED PUT OPTIONS (3.2%)
AUTO PARTS (0.2%)
MascoTech, Inc.
Expire July 1998
Strike Price $30.00.................. 3,400 $ 2,040,000
------------
BIOTECHNOLOGY (0.0%) (b)
Alkermes, Inc.
Expire July 1998
Strike Price $26.00.................. 150 121,875
------------
CABLE (0.1%)
Cablevision Systems Corp.
Expire August 1998
Strike Price $95.00.................. 600 750,000
------------
CASINOS (0.1%)
Station Casinos, Inc.
Expire July 1998
Strike Price $18.00.................. 2,150 712,295
------------
CHEMICALS (0.0%) (b)
RPM, Inc. of Ohio
Expire July 1998
Strike Price $20.00.................. 517 158,357
------------
COMPUTERS & OFFICE EQUIPMENT (0.2%)
Cirrus Technology, Inc.
Expire July 1998
Strike Price $13.00.................. 230 40,250
HMT Technology Corp.
Expire July 1998
Strike Price $14.00.................. 330 185,625
InaCom Corp.
Expire July 1998
Strike Price $38.00.................. 500 312,500
Safeguard Scientifics, Inc.
Expire July 1998
Strike Price $52.00.................. 1,210 1,247,873
Vanstar Corp.
Expire July 1998
Strike Price $19.00.................. 900 376,920
------------
2,163,168
------------
CONGLOMERATES (0.3%)
Owens Corning
Expire July 1998
Strike Price $48.00.................. 3,200 2,300,160
------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Number of
Contracts Value
===============================
<S> <C> <C>
PURCHASED PUT OPTIONS (Continued)
CONSUMER STAPLES (0.1%)
Newell Co.
Expire July 1998
Strike Price $57.00.................. 1,050 $ 754,740
------------
DOMESTIC OILS (0.2%)
Texaco, Inc.
Expire July 1998
Strike Price $75.00.................. 1,010 1,546,613
------------
DRUGS (0.1%)
Alza Corp.
Expire July 1998
Strike Price $56.00.................. 570 726,750
------------
ELECTRICAL EQUIPMENT (0.0%)(b)
Antec Corp.
Expire July 1998
Strike Price $25.00.................. 500 90,650
Expire August 1998
Strike Price $29.00.................. 500 290,650
------------
381,300
------------
ENERGY (0.2%)
Chevron Corp.
Expire July 1998
Strike Price $94.00.................. 650 666,250
Strike Price $98.00.................. 750 1,068,750
------------
1,735,000
------------
HEALTHCARE (0.3%)
Integrated Health Services, Inc.
Expire July 1998
Strike Price $45.00.................. 2,760 2,070,000
Owens & Minor, Inc.
Expire August 1998
Strike Price $14.00.................. 1,250 500,000
Ventas, Inc.
Expire July 1998
Strike Price $19.00.................. 700 363,160
------------
2,933,160
------------
INDUSTRIAL (0.0%)(b)
Thermo Instrument Systems, Inc.
Expire July 1998
Strike Price $34.00.................. 200 155,000
------------
INSURANCE (0.1%)
SunAmerica, Inc.
Expire July 1998
Strike Price $58.00.................. 140 7,882
Strike Price $61.00.................. 1,250 445,375
------------
453,257
------------
MACHINERY (0.1%)
Ingersoll-Rand Co.
Expire July 1998
Strike Price $55.00.................. 450 492,210
------------
NATURAL GAS PIPELINES (0.1%)
El Paso Natural Gas Co.
Expire July 1998
Strike Price $45.00.................. 750 506,250
------------
OIL SERVICES (0.2%)
Diamond Offshore Drilling, Inc.
Expire July 1998
Strike Price $53.00.................. 1,700 2,156,960
------------
PAPER & FOREST PRODUCTS (0.1%)
International Paper Co.
Expire July 1998
Strike Price $59.00.................. 750 1,200,000
------------
PERSONNEL SERVICES (0.0%) (b)
Metamor Worldwide, Inc.
Expire July 1998
Strike Price $40.00.................. 900 433,170
------------
RETAIL (0.0%) (b)
Action Performance Companies, Inc.
Expire August 1998
Strike Price $38.00.................. 500 290,650
------------
SEMICONDUCTORS (0.1%)
Advance Micro Devices, Inc.
Expire July 1998
Strike Price $24.00.................. 950 659,110
------------
SOFTWARE (0.2%) Microsoft Corp.
Expire August 1998
Strike Price $125.00................. 920 1,529,500
------------
</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>
Number of
Contracts Value
===============================
<S> <C> <C>
PURCHASED PUT OPTIONS (Continued)
SOFTWARE (Continued)
Systems Software Associates, Inc.
Expire July 1998
Strike Price $10.00.................. 1,000 $ 287,500
------------
1,817,000
------------
SPECIALIZED SERVICES (0.1%)
Cendant Corp.
Expire August 1998
Strike Price $27.00.................. 1,000 650,000
------------
STEEL, ALUMINUM & OTHER METALS (0.2%)
Coeur d'Alene Mines Corp.
Expire July 1998
Strike Price $12.00.................. 1,502 788,550
Inco Ltd.
Expire July 1998
Strike Price $18.00.................. 1,100 481,250
WHX Corp.
Expire July 1998
Strike Price $17.00.................. 1,604 611,605
------------
1,881,405
------------
TELECOMMUNICATION EQUIPMENT (0.1%)
Comverse Technology, Inc.
Expire August 1998
Strike Price $62.00.................. 400 405,000
QUALCOMM, Inc.
Expire July 1998
Strike Price $62.00.................. 500 290,650
------------
695,650
------------
TRANSPORTATION (0.1%)
Union Pacific Corp.
Expire July 1998
Strike Price $56.00.................. 400 480,000
------------
Total Purchased Put Options
(Cost $32,843,459)................... 28,194,080
------------
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
SHORT-TERM INVESTMENT (1.5%)
COMMERCIAL PAPER (1.5%)
General Electric Corp.
5.70%, due 7/2/98.................... $13,000,000 $ 12,997,942
------------
Total Short-Term Investment
(Cost $12,997,942)................... 12,997,942
------------
Total Investments
(Cost $842,195,292)(r)............... 97.3% 846,097,123(s)
Cash and Other Assets,
Less Liabilities..................... 2.7 23,455,360
----------- ------------
Net Assets............................. 100.0% $869,552,483
=========== ============
<CAPTION>
Shares
===========
<S> <C> <C>
SHORT POSITIONS (-0.6%)
COMMON STOCKS (-0.6%)
CABLE (-0.1%)
Cablevision Systems Corp.
Class A.............................. (4,400) (367,400)
------------
COMPUTERS & OFFICE EQUIPMENT (-0.3%)
Applied Magnetics Corp................. (382,800) (2,918,850)
------------
FINANCE (-0.0%) (b)
Cityscape Financial Corp............... (17,000) (680)
------------
HEALTH CARE (-0.0%) (b)
Integrated Health Services, Inc. ...... (142) (5,325)
------------
HOUSEHOLD PRODUCTS (-0.1%)
Amway Japan Ltd. (p)................... (73,977) (402,250)
Amway Japan Ltd. ADR (e)............... (47,400) (502,057)
------------
(904,307)
------------
REAL ESTATE (-0.1%)
Security Capital Pacific Trust......... (21,139) (475,628)
------------
SEMICONDUCTORS (-0.0%)(b)
C-Cube Microsystems, Inc............... (10,000) (185,625)
------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
COMMON STOCKS (Continued)
TELECOMMUNICATIONS EQUIPMENT (-0.0%) (b)
Comverse Technology, Inc............... (2,200) $ (114,125)
------------
Total Common Stocks
(Proceeds $12,780,174)............... (4,971,940)
------------
<CAPTION>
Number of
Contracts
===========
<S> <C> <C>
WRITTEN CALL OPTIONS (-0.0%) (b)
AUTO PARTS (-0.0%)(b)
MascoTech, Inc.
Expire July 1998
Strike Price $30.00.................. (3,400) (3,400)
------------
BIOTECHNOLOGY (-0.0%) (b)
Alkermes, Inc.
Expire July 1998
Strike Price $26.00.................. (150) (150)
------------
CABLE (-0.0%) (b)
Cablevision Systems Corp.
Expire August 1998
Strike Price $95.00.................. (600) (600)
------------
CASINOS (-0.0%) (b)
Station Casinos, Inc.
Expire July 1998
Strike Price $18.00.................. (2,150) (2,150)
------------
CHEMICALS (-0.0%) (b)
RPM, Inc. of Ohio
Expire July 1998
Strike Price $20.00.................. (517) (517)
------------
COMPUTERS & OFFICE EQUIPMENT (-0.0%) (b)
Cirrus Technology, Inc.
Expire July 1998
Strike Price $13.00.................. (230) (230)
HMT Technology Corp.
Expire July 1998
Strike Price $14.00.................. (330) (330)
<CAPTION>
Number of
Contracts Value
===============================
<S> <C> <C>
COMPUTERS & OFFICE EQUIPMENT (Continued)
InaCom Corp.
Expire July 1998
Strike Price $38.00.................. (500) $ (500)
Safeguard Scientifics, Inc.
Expire July 1998
Strike Price $52.00.................. (1,210) (1,210)
Vanstar Corp.
Expire July 1998
Strike Price $19.00.................. (900) (900)
------------
(3,170)
------------
CONGLOMERATES (-0.0%) (b)
Owens Corning
Expire July 1998
Strike Price $48.00.................. (3,200) (3,200)
------------
CONSUMER STAPLES (-0.0%) (b)
Newell Co.
Expire July 1998
Strike Price $57.00.................. (1,050) (1,050)
------------
DOMESTIC OILS (-0.0%) (b)
Texaco, Inc.
Expire July 1998
Strike Price $75.00.................. (1,010) (1,010)
------------
DRUGS (-0.0%) (b)
Alza Corp.
Expire July 1998
Strike Price $56.00.................. (570) (570)
------------
ELECTRICAL EQUIPMENT (-0.0%) (b)
Antec Corp.
Expire July 1998
Strike Price $25.00.................. (500) (500)
Expire August 1998
Strike Price $29.00.................. (500) (500)
------------
(1,000)
------------
ENERGY (-0.0%) (b) Chevron Corp.
Expire July 1998
Strike Price $94.00.................. (650) (650)
Strike Price $98.00.................. (750) (750)
------------
(1,400)
------------
</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>
Number of
Contracts Value
===============================
<S> <C> <C>
WRITTEN CALL OPTIONS (Continued)
HEALTHCARE (-0.0%) (b)
Integrated Health Services, Inc.
Expire July 1998
Strike Price $45.00.................. (2,760) $ (2,760)
Owens & Minor, Inc.
Expire August 1998
Strike Price $14.00.................. (1,250) (1,250)
Ventas, Inc.
Expire July 1998
Strike Price $19.00.................. (700) (700)
------------
(4,710)
------------
INDUSTRIAL (-0.0%) (b)
Thermo Instrument Systems, Inc.
Expire July 1998
Strike Price $34.00.................. (200) (200)
------------
INSURANCE (-0.0%) (b)
SunAmerica, Inc.
Expire July 1998
Strike Price $58.00.................. (140) (140)
Strike Price $61.00.................. (1,250) (1,250)
------------
(1,390)
------------
MACHINERY (-0.0%) (b)
Ingersoll-Rand Co.
Expire July 1998
Strike Price $55.00.................. (450) (450)
------------
NATURAL GAS PIPELINES (-0.0%) (b)
El Paso Natural Gas Co.
Expire July 1998
Strike Price $45.00.................. (750) (750)
------------
OIL SERVICES (-0.0%) (b)
Diamond Offshore Drilling, Inc.
Expire July 1998
Strike Price $53.00.................. (1,700) (1,700)
------------
PAPER & FOREST PRODUCTS (-0.0%) (b)
International Paper Co.
Expire July 1998
Strike Price $59.00.................. (750) (750)
------------
PERSONNEL SERVICES (-0.0%) (b)
Metamor Worldwide, Inc.
Expire July 1998
Strike Price $40.00.................. (900) (900)
------------
RETAIL (-0.0%) (b)
Action Performance Companies, Inc.
Expire August 1998
Strike Price $38.00.................. (500) (500)
------------
SEMICONDUCTORS (-0.0%) (b)
Advance Micro Devices, Inc.
Expire July 1998
Strike Price $24.00.................. (950) (950)
------------
SOFTWARE (-0.0%) (b)
Microsoft Corp.
Expire August 1998
Strike Price $125.00................. (920) (920)
Systems Software Associates, Inc.
Expire July 1998
Strike Price $10.00.................. (1,000) (1,000)
------------
(1,920)
------------
SPECIALIZED SERVICES (-0.0%) (b)
Cendant Corp.
Expire August 1998
Strike Price $27.00.................. (1,000) (1,000)
------------
STEEL, ALUMINUM & OTHER METALS (-0.0%) (b)
Coeur d'Alene Mines Corp.
Expire July 1998
Strike Price $12.00.................. (1,502) (1,502)
Inco Ltd.
Expire July 1998
Strike Price $18.00.................. (1,100) (1,100)
WHX Corp.
Expire July 1998
Strike Price $17.00.................. (1,604) (1,604)
------------
(4,206)
------------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Number of
Contracts Value
===============================
<S> <C> <C>
WRITTEN CALL OPTIONS (Continued)
TELECOMMUNICATION EQUIPMENT (-0.0%) (b)
Comverse Technology, Inc.
Expire August 1998
Strike Price $62.00.................. (400) $ (400)
QUALCOMM, Inc.
Expire July 1998
Strike Price $62.00.................. (500) (500)
------------
(900)
------------
TRANSPORTATION (-0.0%) (b)
Union Pacific Corp.
Expire July 1998
Strike Price $56.00.................. (400) (400)
------------
Total Written Call Options
(Proceeds $38,943)................... (38,943)
------------
Total Short Positions
(Proceeds $12,819,117)............... $ (5,010,883)
============
</TABLE>
- ----------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Partially segregated as margin against common stock short position.
(e) ADR--American Depository Receipt.
(f) Issuer in bankruptcy.
(g) Issuer in default.
(h) PEPS--Premium Exchangeable Participating Shares--each PEP is exchangeable
for 1.25 American Depository Shares of Amway Japan on 2/15/99.
(i1) Depository Shares--each share represents one-tenth of a share of Series I
convertible preferred stock.
(i2) Depository Shares--each share represents 0.025 shares of a share of silver
denominated preferred stock.
(j1) STRYPES--Structured Yield Product Exchangeable for IMC Global, Inc. common
stock.
(j2) STRYPES--Structured Yield Product Exchangeable for SunAmerica, Inc. common
stock.
(k) Dividend equals U.S. dollar equivalent of 0.04125 oz. of silver per share.
(l) Euro-dollar bond.
(m) Yankee bond.
(n) Restricted security.
(o) Canadian security.
(p) Japanese security.
(q) 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.
(r) The cost for Federal income tax purposes is $843,202,889.
(s) At June 30, 1998 net unrealized appreciation was $2,894,234, 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 $61,123,019 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $58,228,785.
25
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $842,195,292) ..... $846,097,123
Cash .................................................................. 128,485
Deposit with broker for securities sold short ......................... 12,780,174
Receivables:
Investment securities sold .......................................... 41,694,128
Dividends and interest .............................................. 20,864,984
Fund shares sold .................................................... 233,607
Unrealized appreciation on forward foreign currency contracts ......... 181,266
------------
Total assets ...................................................... 921,979,767
------------
LIABILITIES:
Securities sold short (proceeds $12,780,174) .......................... 4,971,940
Options written (premiums received $38,943) ........................... 38,943
Payables:
Investment securities purchased ..................................... 39,431,914
Fund shares redeemed ................................................ 1,056,479
NYLIFE Distributors ................................................. 684,719
MainStay Management ................................................. 529,121
Transfer agent ...................................................... 117,201
Custodian ........................................................... 40,547
Trustees ............................................................ 5,827
Accrued expenses ...................................................... 108,003
Dividend payable ...................................................... 5,442,590
------------
Total liabilities ................................................. 52,427,284
------------
Net assets ............................................................ $869,552,483
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 39,869
Class B ............................................................. 570,217
Additional paid-in capital ............................................ 812,473,654
Accumulated undistributed net investment income ....................... 619,290
Accumulated undistributed net realized gain on investments ............ 43,958,122
Net unrealized appreciation on investments ............................ 3,901,831
Net unrealized appreciation on securities sold short .................. 7,808,234
Net unrealized appreciation on forward foreign currency contracts ..... 181,266
------------
Net assets ............................................................ $869,552,483
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 56,825,958
============
Shares of beneficial interest outstanding ............................. 3,986,878
============
Net asset value per share outstanding ................................. $ 14.25
Maximum sales charge (5.50% of offering price) ........................ 0.83
------------
Maximum offering price per share outstanding .......................... $ 15.08
============
CLASS B
Net assets applicable to outstanding shares ........................... $812,726,525
============
Shares of beneficial interest outstanding ............................. 57,021,746
============
Net asset value and offering price per share outstanding .............. $ 14.25
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE>
Statement of Operations for the six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ..................................................................... $ 7,246,152
Interest .......................................................................... 15,064,347
------------
Total income .................................................................... 22,310,499
------------
Expenses:
Management ........................................................................ 3,260,759
Distribution--Class B ............................................................. 3,158,231
Service--Class A .................................................................. 79,464
Service--Class B .................................................................. 1,052,744
Transfer agent .................................................................... 872,458
Dividends on securities sold short ................................................ 825,326
Shareholder communication ......................................................... 125,419
Custodian ......................................................................... 99,791
Recordkeeping ..................................................................... 59,000
Professional ...................................................................... 47,923
Trustees .......................................................................... 12,360
Registration ...................................................................... 11,119
Miscellaneous ..................................................................... 17,085
------------
Total expenses .................................................................. 9,621,679
------------
Net investment income ............................................................... 12,688,820
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ............................................................. 61,188,262
Securities sold short ............................................................. (13,352,849)
Option transactions ............................................................... (5,017,599)
Foreign currency transactions ..................................................... 1,095,775
------------
Net realized gain on investments and foreign currency transactions .................. 43,913,589
------------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................. (2,902,178)
Securities sold short ............................................................. 8,718,853
Forward foreign currency contracts ................................................ (868,265)
------------
Net unrealized gain on investments and foreign currency transactions ................ 4,948,410
------------
Net realized and unrealized gain on investments and foreign currency transactions ... 48,861,999
------------
Net increase in net assets resulting from operations ................................ $ 61,550,819
============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $8,657.
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 Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended Year ended
June 30, December 31,
1998* 1997
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income ....................................................... $ 12,688,820 $ 32,411,201
Net realized gain on investments ............................................ 61,188,262 75,766,771
Net realized loss on short sale transactions ................................ (13,352,849) (6,578,078)
Net realized loss on option transactions .................................... (5,017,599) --
Net realized gain on foreign currency transactions .......................... 1,095,775 1,087,917
Net change in unrealized appreciation on security transactions .............. (2,902,178) (20,895,179)
Net change in unrealized depreciation on securities sold short .............. 8,718,853 12,260,878
Net change in unrealized appreciation on forward foreign currency contracts . (868,265) 637,775
------------- -------------
Net increase in net assets resulting from operations ........................ 61,550,819 94,691,285
------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A ................................................................... (1,067,772) (2,668,900)
Class B ................................................................... (11,540,147) (30,007,599)
From net realized gain on investments:
Class A ................................................................... -- (5,382,678)
Class B ................................................................... -- (70,065,339)
------------- -------------
Total dividends and distributions to shareholders ....................... (12,607,919) (108,124,516)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ................................................................... 3,684,804 15,235,444
Class B ................................................................... 20,341,680 123,016,962
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A ................................................................... 556,420 7,544,470
Class B ................................................................... 5,820,512 89,693,078
------------- -------------
30,403,416 235,489,954
Cost of shares redeemed:
Class A ................................................................... (15,147,669) (14,025,978)
Class B ................................................................... (100,431,308) (156,109,349)
------------- -------------
Increase (decrease) in net assets derived from capital share transactions (85,175,561) 65,354,627
------------- -------------
Net increase (decrease) in net assets ................................... (36,232,661) 51,921,396
NET ASSETS:
Beginning of period ........................................................... 905,785,144 853,863,748
------------- -------------
End of period ................................................................. $ 869,552,483 $ 905,785,144
============= =============
Accumulated undistributed net investment income at end of period .............. $ 619,290 $ 538,389
============= =============
</TABLE>
- ----------
* Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
28
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
----------- ----------- ----------- ----------- ----------- -----------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
----------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ... $ 13.53 $ 13.52 $ 13.81 $ 13.80 $ 13.45 $ 13.45
----------- ----------- ----------- ----------- ----------- -----------
Net investment income ... 0.25 0.21 0.60 0.51 0.57 0.48
Net realized and
unrealized gain (loss)
on investments ........ 0.72 0.72 0.91 0.91 1.02 1.02
Net realized and
unrealized gain (loss)
on foreign currency
transactions .......... 0.00(b) 0.00(b) 0.03 0.03 0.02 0.02
----------- ----------- ----------- ----------- ----------- -----------
Total from investment
operations ............ 14.50 14.45 1.54 1.45 1.61 1.52
----------- ----------- ----------- ----------- ----------- -----------
Less dividends and
distributions:
From net investment
income ................ (0.25) (0.20) (0.60) (0.51) (0.62) (0.54)
From net realized gain
on investments ........ -- -- (1.22) (1.22) (0.63) (0.63)
----------- ----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ......... (0.25) (0.20) (1.82) (1.73) (1.25) (1.17)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value at end of
period ................ $ 14.25 $ 14.25 $ 13.53 $ 13.52 $ 13.81 $ 13.80
=========== =========== =========== =========== =========== ===========
Total investment
return (a) ............ 7.17% 6.85% 11.36% 10.67% 12.13% 11.39%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............ 3.50%+ 2.75%+ 4.10% 3.47% 4.4% 3.8%
Expenses ............ 1.32%+ 2.07%+ 1.45% 2.08% 1.5% 2.1%
Portfolio turnover rate . 183% 183% 273% 273% 296% 296%
Net assets at end of
period (in 000's) ..... $ 56,826 $ 812,726 $ 64,246 $ 841,540 $ 56,621 $ 797,243
<CAPTION>
Class B
--------------------------------------------
Class A Class B September 1
----------- ----------- through Year ended August 31
Year ended December 31 ---------------------------
December 31, 1995 1994** 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ... $ 11.67 $ 11.67 $ 12.83 $ 13.92 $ 11.46
----------- ----------- ----------- ----------- -----------
Net investment income ... 0.59 0.51 0.19 0.50 0.92
Net realized and
unrealized gain (loss)
on investments ........ 2.14 2.14 (0.71) 0.70 2.45
Net realized and
unrealized gain (loss)
on foreign currency
transactions .......... (0.00)(b) (0.00)(b) -- (0.01) --
----------- ----------- ----------- ----------- -----------
Total from investment
operations ............ 2.73 2.65 (0.52) 1.19 3.37
----------- ----------- ----------- ----------- -----------
Less dividends and
distributions:
From net investment
income ................ (0.55) (0.47) (0.21) (0.49) (0.42)
From net realized gain
on investments ........ (0.40) (0.40) (0.43) (1.79) (0.49)
----------- ----------- ----------- ----------- -----------
Total dividends and
distributions ......... (0.95) (0.87) (0.64) (2.28) (0.91)
----------- ----------- ----------- ----------- -----------
Net asset value at end of
period ................ $ 13.45 $ 13.45 $ 11.67 $ 12.83 $ 13.92
=========== =========== =========== =========== ===========
Total investment
return (a) ............ 23.72% 23.02% (4.09%) 8.95% 30.80%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............ 4.9% 4.3% 4.8%+ 3.5% 3.4%
Expenses ............ 1.5% 2.1% 1.9%+ 1.9% 1.9%
Portfolio turnover rate . 243% 243% 77% 269% 370%
Net assets at end of
period (in 000's) ..... $ 26,836 $ 427,461 $ 180,304 $ 160,407 $ 58,943
</TABLE>
- ----------
* Unaudited.
** 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.
29
<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 twenty-two 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
30
<PAGE>
Notes to Financial Statements unaudited
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.
31
<PAGE>
MainStay Convertible Fund
Forward foreign currency contract open at June 30, 1998:
<TABLE>
<CAPTION>
Contract Amount Contract Amount Unrealized
Sold Purchased Appreciation
--------------- --------------- ------------
Foreign Currency Sale Contract
<S> <C> <C> <C>
Japanese Yen vs. US$, expiring 8/19/98 (YEN)617,622,000 $4,664,819 $181,266
========
</TABLE>
- ----------
(YEN) 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.
32
<PAGE>
Notes to Financial Statements unaudited (continued)
Purchased option activity for the period ended June 30, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
------------- -------------
<S> <C> <C>
Options outstanding at December 31, 1997 ................................. 3,900 $ 4,755,450
Options--assigned ........................................................ (62,927) (50,746,899)
Options--purchased ....................................................... 217,797 187,072,324
Options--sold ............................................................ (119,827) (108,237,416)
------------- -------------
Options outstanding at June 30, 1998 ..................................... 38,943 $ 32,843,459
============= =============
Written option activity for the period ended June 30, 1998 was as follows:
<CAPTION>
Number of
Contracts Premium
------------- -------------
<S> <C> <C>
Options outstanding at December 31, 1997 ................................. (100) $ (34,699)
Options--expired ......................................................... 101,227 364,895
Options--written ......................................................... (183,131) (597,890)
Options--buybacks ........................................................ 43,061 228,751
------------- -------------
Options outstanding at June 30, 1998 ..................................... (38,943) $ (38,943)
============= =============
</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 (the "1933 Act").
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.
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 June 30, 1998:
<TABLE>
<CAPTION>
Percent
Acquisition 6/30/98 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 $8,636,201 1.0%
========== ========== ===
</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.
33
<PAGE>
MainStay Convertible Fund
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.
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-today portfolio management of 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%. For the six months ended June 30, 1998 the Manager
earned $3,260,759.
34
<PAGE>
Notes to Financial Statements unaudited (continued)
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.
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 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.
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 $6,207 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$879,957 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $894,002.
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 $13,211 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$59,000 for the six months ended June 30, 1998.
35
<PAGE>
MainStay Convertible Fund
Note 4--Deposit with Broker:
Cash deposited with broker in the amount of $12,780,174 is partially restricted
as collateral for securities sold short.
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of U.S.
Government securities were $9,855 and $9,777, respectively. Purchases and sales
of securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $1,457,222 and
$1,428,505, respectively.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
---------------------- ----------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ........................................................ 261 1,429 1,070 8,666
Shares issued in reinvestment of dividends and distributions ....... 38 401 551 6,561
------- ------- ------- -------
299 1,830 1,621 15,227
Shares redeemed .................................................... (1,061) (7,039) (973) (10,777)
------- ------- ------- -------
Net increase (decrease) ............................................ (762) (5,209) 648 4,450
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
36
<PAGE>
[This page intentionally left blank]
37
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
38
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE FUND(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
39
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
40
<PAGE>
MainStay Convertible Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA06-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Value Fund Highlights 3
$10,000 Invested in the MainStay
Value Fund versus S&P 500 and
Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Year-by-Year & Six-Month Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 10
Top 10 Equity Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Unaudited Financial Statements 15
Notes to Financial Statements 19
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Value Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
. A robust economy, with low interest rates, modest inflation, and low
unemployment moved stocks higher in the first six months of 1998.
. Weakness in Asian economies caused a flight to high-quality companies with
predictable earnings growth.
. Merger and acquisition activity was high, with several large transactions
that occurred mostly outside traditional value sectors.
. With investors primarily focused on large-cap growth stocks, the S&P 500*
advanced to record levels in June
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
. The MainStay Value Fund returned 14.12% and 13.40% for Class A shares and
Class B shares, respectively, excluding all sales charges, for the one-year
period ended 6/30/98.
. The Fund used the underperformance of value stocks to add to its holdings
in several sectors at low prices.
. The Fund benefited from individual security selection among automotive and
financial stocks and selected retailers.
. Both share classes underperformed the average Lipper+ growth and income
fund, which returned 12.11% for the six months ended 6/30/98.
- ----------
* See footnote on page 4 for more information on the S&P 500 Index.
+ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the
MainStay Value Fund versus
S&P 500 and Inflation
CLASS A SHARES SEC Returns: 1-Year 7.84%, 5-Year 14.68%, 10-Year 15.84%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay
Period end Value Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $ 9,450 $10,000 $10,000
6/89 $11,608 $12,055 $10,517
6/90 $12,355 $14,043 $11,008
6/91 $13,824 $15,081 $11,526
6/92 $17,257 $17,103 $11,882
6/93 $20,723 $19,434 $12,238
6/94 $22,000 $19,708 $12,543
6/95 $25,300 $24,846 $12,924
6/96 $30,280 $31,306 $13,280
6/97 $38,122 $42,172 $13,585
6/98 $43,504 $54,887 $13,813
</TABLE>
CLASS B SHARES SEC Returns: 1-Year 8.40%, 5-Year 15.30%, 10-Year 16.26%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay
Period end Value Fund S&P 500* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
6/88 $10,000 $10,000 $10,000
6/89 $12,284 $12,055 $10,517
6/90 $13,074 $14,043 $11,008
6/91 $14,628 $15,081 $11,526
6/92 $18,261 $17,103 $11,882
6/93 $21,929 $19,434 $12,238
6/94 $23,281 $19,708 $12,543
6/95 $26,695 $24,846 $12,924
6/96 $31,764 $31,306 $13,280
6/97 $39,786 $42,172 $13,585
6/98 $45,116 $54,887 $13,813
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/30/88 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 6/30/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 6/30/88. 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.
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. The S&P 500 is an unmanaged
index and is considered to be generally representative of the U.S. stock
market. Results assume the reinvestment of all income and capital gain
distributions.
+ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
With U.S. gross domestic product increasing more than investors anticipated in
the first half of 1998, the stock market enjoyed robust returns. Low interest
rates, benign inflation, low unemployment, and a rallying bond market were among
the many factors that influenced investors during the reporting period.
A number of factors combined to focus investor attention on large-capitalization
growth stocks and away from value issues. Continuing difficulties in Asian
markets spread to China, Latin America, and Russia, causing a flight to quality,
which attracted investors to domestic names and highly liquid securities.
Declining oil, gold, and copper prices caused weakness among energy and
commodity-related issues, which are traditionally in deep value sectors.
Financial stocks did well in a declining rate environment, with low inflation
keeping the Federal Reserve Board from taking any action. With strong consumer
confidence, higher employment, and wage increases during the first half of the
year, retailers and selected automotive and auto-related stocks showed strength.
Transportation issues and tobacco stocks, on the other hand, showed relatively
weak performance. During the period, the top 30 stocks in the S&P 500* accounted
for half of the total return of the Index. This is an unusual concentration, the
magnitude of which was last seen in late 1972.
Given this context, how did the MainStay Value Fund perform in the six months
ended 6/30/98?
For the six months ended 6/30/98, the MainStay Value Fund returned 3.73% and
3.36% for Class A shares and Class B shares, respectively, excluding all sales
charges. Both share classes underperformed the average Lipper+ growth and income
fund, which returned 12.11% for the six months ended 6/30/98.
What factors caused the Fund to underperform its peers?
Value stocks in general were out of favor throughout the first half of 1998. Due
to our strict deep value investment disciplines, most of the best-performing
stocks fell outside of our valuation tolerance.
The Fund did not compromise its value disciplines to seek higher returns in a
period when growth stocks were in favor. Instead, we utilized the weakness in
value stocks to reposition the portfolio and seek issues at attractive prices
during the reporting period, often in declining market sectors.
Which stocks did the Fund purchase during the first half of the year?
The most significant allocation change in the portfolio was in the energy
sector, which represents about 8% of the S&P 500, but as of June 30, represented
about 13% of the Fund's portfolio. In particular, we bought or added to the
Fund's posi-
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Growth versus
value
- -------------
Growth investments typically include stocks with rising prices and positive
earnings trends. Value stocks typically include equities that are currently
trading below their fair market value, even if they have the potential to
increase in value over time.
Flight to quality
- -----------------
When investors in general move to improve the quality or liquidity of the
securities they own, because of economic, industry, or market concerns that
suggest lower-quality securities or those that are less liquid are likely to be
more vulnerable to negative market events.
- ----------
* See page 4 for more information on the S&P 500.
+ See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
YEAR-BY-YEAR & SIX-MONTH PERFORMANCE
CLASS A SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/86 (9.51)
12/87 (2.57)
12/88 16.11
12/89 21.38
12/90 (6.05)
12/91 41.26
12/92 19.52
12/93 13.55
12/94 (0.22)
12/95 28.74
12/96 21.84
12/97 21.88
6/98 3.73
</TABLE>
Returns reflect the historical performance of the Class B shares for the periods
12/86 through 12/94.
See footnote * on page 10 for more information on performance.
CLASS B SHARES
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------
<S> <C>
12/86 (9.51)
12/87 (2.57)
12/88 16.11
12/89 21.38
12/90 (6.05)
12/91 41.26
12/92 19.52
12/93 13.55
12/94 (0.22)
12/95 28.01
12/96 21.11
12/97 21.29
6/98 3.36
</TABLE>
See footnote * on page 10 for more information on performance.
tions in a number of exploration and production companies including Union
Pacific Resources, Oryx Energy, Apache Corp., Noble Affiliates, Inc., and
Texaco. We found the stocks compelling on the basis of their price to cash flow
valuations. While these stocks were punished during the first six months because
of falling oil prices and reduced demand in Asia, we believe that if supply and
demand fundamentals improve, these issues may have strong potential going
forward.
6
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- -------------------------------------------
<S> <C>
Electric Utilities 12.6%
Insurance 9.7%
Oil 7.6%
Health Care 6.7%
Banks 5.8%
All Other 57.6%
</TABLE>
Actual percentages will vary over time.
Late in the second quarter, cyclical stocks returned to our screens as strong
value candidates. Browning-Ferris is a waste management name we found attractive
and purchased for the Fund during the reporting period. We also found value for
the Fund in Continental Airlines and Northwest Airlines, which were trading at
attractive prices because of declining international and Asian air traffic.
Finally, Goodyear Tire is a company that has gone through cost restructuring and
earnings development, but is still going through a period of uncertainty related
to economic difficulties in Asia and Brazil. We believe the stock is undervalued
and added it to the Fund's portfolio.
Were there other major purchases during the reporting period?
Yes. We increased the Fund's tobacco holdings, largely because the litigation
controversy has depressed their prices well below the companies' underlying
asset values. Even taking anticipated litigation risk into account, names such
as RJR Nabisco and Philip Morris have been trading at values well below the
price of their assets, yet the stocks continue to provide yields that are close
to or above those available from Treasury securities.
We also added to the Fund's telecommunications holdings with U.S. West
Communications. In addition, we added to the Fund's utility holdings with Texas
Utilities, Illinova Corporation, OGE Energy Corp., Niagara Mohawk, and Energy
East. Overall, utilities were positive contributors to the Fund's performance,
but as a group, utilities underperformed the market.
What positions did the Fund sell in order to make these purchases?
In the utility area, the Fund redeployed capital from issues we felt had reached
their target valuations. For example, the Fund sold PG&E, which outperformed the
S&P 500 during the reporting period.
The Fund also sold a number of cyclical stocks in the first quarter of the year,
trimming back on paper and forest
7
<PAGE>
products companies that we thought might underperform if Asian production slowed
down. We sold Tenneco, Georgia Pacific, and Chesapeake to avoid short-term risk,
even though we saw long-term merit in the stocks. We may revisit these companies
later in the year if valuations are favorable.
We also had significant sales in the Fund's financial stocks, largely because
they rose so high they triggered our sell disciplines. The Fund sold Bankers
Trust and Chase Manhattan and substantially trimmed its positions in Equitable,
NationsBank, and Transamerica. All of these stocks had a significantly positive
impact on the Fund's performance.
Were there other significant sales during the reporting period?
Yes. IBP Inc. is a meat packing company that didn't perform up to our
expectations, so we sold the Fund's position. We also found that offshore
drilling companies were selling at a premium to exploration and production
companies, so the Fund sold Diamond Offshore Drilling, Noble Drilling, and R&B
Falcon in order to purchase the exploration and production companies mentioned
previously.
Which stocks were the best performers in the Fund during the first half of 1998?
About a third of the portfolio outperformed the market. Ford Motor Company was
up 21%++ in the first six months of 1998. Lexmark International Group, a printer
company, was up 60%. Equitable, which benefited from low interest rates, was up
50%, and we pared back on the Fund's position to take some profits, while Xerox
was up 39%. Following the announcement of an acquisition by Dana Corp., Echlin,
an automotive afterparts company, was up 38%. All of these stocks reflected the
potential in our value strategy, even in a market that showed a strong
preference for growth disciplines.
With low inflation and low interest rates, financial stocks did particularly
well, with
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------------------
<S> <C>
Common Stocks 96.5%
Preferred Stocks 0.3%
Cash, Equivalents & Other Assets, Less Liabilities 3.2%
</TABLE>
Actual percentages will vary over time.
- ----------
++ Returns reflect performance for the six-month period ended 6/30/98.
8
<PAGE>
NationsBank up 27%, CIGNA up 21%, and Bank One and Travelers both up 15% for the
reporting period. The strength of the economy, increasing consumer confidence,
and rising personal income also rewarded retail companies such as Federated
Department Stores, which was up 25% for the first half of 1998. The optimistic
outlook also helped the gaming industry, sending Harrah's Entertainment up 23%
for the reporting period.
Which stocks underperformed?
As noted, the tobacco industry has been hard hit by news reports about ongoing
litigation. RJR Nabisco was down 34% over the first six months of the year and
Philip Morris declined 11%. However, their strong fundamentals and attractive
prices were consistent with our value discipline and we added to the Fund's
positions in both stocks.
With declining oil prices, Union Pacific Resources dropped 27%, Seagull Energy
fell 20%, Oryx Energy declined 13%, and Apache Oil was down 10%.
During the reporting period, CSX Corp., a railroad company, declined 15%, and
Northwest Airlines suffered from low Asian air traffic and lost 20% in the first
half of the year.
What do you feel were the best decisions you made for the Fund during the
reporting period?
Our best decision for the Fund was to not allow any style drift during the first
half of 1998. We stuck to our value disciplines, and invested the Fund's assets
where we found value. In a period when growth stocks are popular, it's tempting
to go for their strong returns. It's tough to stick to your discipline. But
going against the grain when the market is rising may position the Fund very
favorably when market conditions change. We also exercised good judgment in
cutting back on companies with Asian exposure.
In which sectors is the Fund currently overweighted?
At the end of the first half of the year, the Fund was heavily overweighted in
materials processing, energy, transportation, and utilities, relative to the S&P
500. In other areas, the Fund was generally in line with the Index.
What is your outlook going forward?
We believe that value stocks are at historically low valuation levels. With the
stock market selling at all-time highs and the "deep value" segment of the
market selling at substantial discounts, we believe a value approach may prove
beneficial to long-term investors.
The Fund will continue to seek maximum long-term total return from a combination
of capital growth and income, with a focus squarely on stocks that we believe
the market has undervalued.
Denis Laplaige
Jeffrey A. Simon
Portfolio Managers
MacKay Shields Financial Corporation
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.
Past performance is no guarantee of future results.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
=================================================================================================================
Fund average annual total returns*
=================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 14.12% 15.99% 16.50% 13.00%
Class B 13.40% 15.52% 16.26% 12.81%
<CAPTION>
=================================================================================================================
Fund SEC returns*
=================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 7.84% 14.68% 15.84% 12.48%
Class B 8.40% 15.30% 16.26% 12.81%
<CAPTION>
=================================================================================================================
Fund Lipper+ rankings & Lipper category returns as of 6/30/98
=================================================================================================================
Life of Fund
1 year 5 years 10 years through 6/30/98
<S> <C> <C> <C> <C>
Class A 620 out of n/a n/a 359 out of
668 funds 393 funds
Class B 629 out of 251 out of 53 out of 95 out of
668 funds 275 funds 143 funds 114 funds
Average Lipper
growth &
income fund 22.86% 18.93% 15.61% 13.92%
<CAPTION>
=================================================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
=================================================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $22.46 $0.1162 $0.0000
Class B $22.44 $0.0313 $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 (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 six 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
6/30/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class B shares on 5/1/86.
10
<PAGE>
<TABLE>
<CAPTION>
Top 10 Equity Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
Texas Utilities Co. $42,457,500
CIGNA Corp. 37,322,100
Philip Morris Cos. 36,585,675
Browning-Ferris Industries Inc. 33,512,900
Echlin Inc. 33,108,356
AT&T Corp. 32,365,882
Foundation Health Systems, Inc. Class A 32,045,625
Union Pacific Resources Group Inc. 31,573,862
Central & South West Corp. 30,581,062
American Standard Cos. Inc. 30,517,094
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
Texas Utilities Co. $41,751,713
Union Pacific Resources Group Inc. 41,207,540
Browning-Ferris Industries Inc. 31,600,131
US West Inc. 30,628,168
Oryx Energy Co. 26,335,964
Reynolds Metals Co. 22,967,968
Adaptec Inc. 21,517,095
Philip Morris Cos. 21,239,282
Venator Group, Inc. 21,039,548
Illinova Corp. 20,510,533
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
PG&E Corp. $31,938,164
Williams Cos., Inc. 25,696,170
Chase Manhattan Corp. 20,837,537
AT&T Corp. 20,683,813
AMR Corp. 20,420,714
Ford Motor Co. 20,346,628
Kroger Co. 19,213,935
Tenneco Inc. 19,131,271
Bankers Trust Corp. 18,332,877
UST Inc. 17,262,297
</TABLE>
- ----------
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.
11
<PAGE>
MainStay Value Fund
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
COMMON STOCKS (96.5%)+
AEROSPACE/DEFENSE (0.9%)
Coltec Industries Inc (a)............. 747,300 $ 14,852,588
--------------
AIRLINES (2.2%)
Continental Airlines, Inc. Class B (a) 314,800 19,163,450
Northwest Airlines Corp. Class A (a).. 431,900 16,655,144
--------------
35,818,594
--------------
AUTO MANUFACTURING (1.3%)
Ford Motor Co......................... 351,950 20,765,050
--------------
AUTO PARTS (4.9%)
Echlin Inc............................ 674,820 33,108,356
LucasVarity PLC ADR (b)............... 661,400 26,331,988
Mark IV Industries, Inc............... 870,455 18,823,589
--------------
78,263,933
--------------
BANKS (5.8%)
Banc One Corp......................... 450,797 25,160,108
KeyCorp............................... 219,400 7,816,125
NationsBank Corp...................... 331,986 25,396,929
PNC Bank Corp......................... 341,200 18,360,825
Wells Fargo & Co...................... 45,600 16,826,400
--------------
93,560,387
--------------
CHEMICALS (2.6%)
Agrium Inc............................ 1,064,500 13,439,312
Georgia Gulf Corp..................... 470,850 10,741,266
IMC Global Inc........................ 591,810 17,828,276
--------------
42,008,854
--------------
COMPUTER PERIPHERALS (0.9%)
Adaptec Inc. (a)...................... 1,031,500 14,763,344
--------------
COMPUTERS & OFFICE EQUIPMENT (4.3%)
International Business Machines
Corp................................ 167,375 19,216,742
Lexmark International Group, Inc.
Class A (a)......................... 483,400 29,487,400
Xerox Corp............................ 207,890 21,126,821
--------------
69,830,963
--------------
CONGLOMERATES (1.9%)
American Standard Cos. Inc. (a)....... 682,900 30,517,094
--------------
CONTAINERS (2.8%)
Crown Cork & Seal Co., Inc............ 318,000 15,105,000
Owens-Illinois Inc. (a)............... 656,610 29,383,298
--------------
44,488,298
--------------
ELECTRIC UTILITIES (12.6%)
BEC Energy............................ 584,000 24,236,000
Central & South West Corp............. 1,137,900 30,581,062
Energy East Corp...................... 393,000 16,358,625
FPL Group, Inc........................ 419,000 26,397,000
Illinova Corp. ....................... 687,800 20,634,000
MarketSpan Corp....................... 453,728 13,583,482
Niagara Mohawk Power Corp. (a)........ 386,600 5,774,837
Northeast Utilities (a)............... 88,900 1,505,744
Pinnacle West Capital Corp............ 318,600 14,337,000
Public Service Enterprise
Group Inc........................... 180,100 6,202,194
Texas Utilities Co.................... 1,020,000 42,457,500
--------------
202,067,444
--------------
ELECTRONIC COMPONENTS (1.7%)
Raychem Corp.......................... 423,500 12,519,719
UCAR International Inc. (a)........... 525,000 15,323,437
--------------
27,843,156
--------------
ENERGY (2.8%)
Coastal Corp. (The)................... 307,450 21,463,853
Seagull Energy Corp. (a).............. 1,142,570 18,923,816
Tosco Corp............................ 141,200 4,147,750
--------------
44,535,419
--------------
FOOD (0.7%)
IBP, Inc.............................. 623,300 11,297,313
--------------
HEALTH CARE (6.7%)
Aetna Inc............................. 327,760 24,950,730
Allegiance Corp....................... 478,000 24,497,500
Columbia/HCA Healthcare Corp.......... 914,630 26,638,599
Foundation Health Systems, Inc.
Class A (a)......................... 1,215,000 32,045,625
--------------
108,132,454
--------------
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
COMMON STOCKS (Continued)
INSURANCE (9.7%)
Allstate Corp. (The).................. 227,090 $ 20,792,928
Chubb Corp............................ 328,945 26,438,955
CIGNA Corp............................ 540,900 37,322,100
Equitable Cos., Inc. (The)............ 359,950 26,973,753
Transamerica Corp..................... 146,260 16,838,183
Travelers Group Inc................... 457,380 27,728,662
--------------
156,094,581
--------------
INTERNATIONAL OIL (1.0%)
British Petroleum Co., PLC ADR (b).... 189,511 16,724,346
--------------
LEISURE (0.4%)
Callaway Golf Co...................... 369,600 7,276,500
--------------
OIL SERVICES (2.0%)
Union Pacific Resources Group Inc..... 1,797,800 31,573,862
--------------
OILS (7.6%)
Apache Corporation.................... 569,900 17,951,850
Noble Affiliates, Inc................. 633,000 24,054,000
Occidental Petroleum Corp............. 981,028 26,487,774
Oryx Energy Co. (a)................... 1,037,400 22,952,475
Texaco Inc............................ 125,600 7,496,750
Unocal Corp........................... 653,550 23,364,413
--------------
122,307,262
--------------
PAPER & FOREST PRODUCTS (2.1%)
Bowater Inc........................... 422,235 19,950,604
Georgia-Pacific Corp.
(Timber Group)...................... 604,700 13,908,100
--------------
33,858,704
--------------
POLLUTION & RELATED (2.1%)
Browning-Ferris Industries Inc........ 964,400 33,512,900
--------------
RAILROADS (1.6%)
CSX Corp.............................. 348,875 15,873,812
Union Pacific Corp.................... 231,800 10,228,175
--------------
26,101,987
--------------
RECREATION & ENTERTAINMENT (1.5%)
Harrah's Entertainment, Inc. (a)...... 1,023,700 23,801,025
--------------
RETAIL (4.4%)
Federated Department Stores,
Inc. (a)............................ 532,270 28,642,779
Toys "R" Us, Inc. (a)................. 1,074,070 25,307,774
Venator Group, Inc. (a)............... 842,300 16,108,988
--------------
70,059,541
--------------
STEEL, ALUMINUM & OTHER METALS (1.3%)
Reynolds Metals Co.................... 368,800 20,629,750
--------------
TELECOMMUNICATION (3.9%)
AT&T Corp............................. 566,580 32,365,882
US West Inc........................... 645,000 30,315,000
--------------
62,680,882
--------------
TELECOMMUNICATION SERVICES (1.3%)
GTE Corp.............................. 372,000 20,692,500
--------------
TEXTILES/HOME FURNISHINGS & APPAREL (0.5%)
Burlington Industries, Inc. (a)....... 453,631 6,379,186
Shaw Industries, Inc.................. 85,900 1,513,987
--------------
7,893,173
--------------
TIRE & RUBBER (1.5%)
Goodyear Tire & Rubber Co. (The)...... 363,790 23,441,718
--------------
TOBACCO (3.5%)
Philip Morris Cos..................... 929,160 36,585,675
RJR Nabisco Holdings Corp............. 845,780 20,087,275
--------------
56,672,950
--------------
Total Common Stocks
(Cost $1,388,445,232)............... 1,552,066,572
--------------
PREFERRED STOCK (0.3%)
RAILROADS (0.3%)
Union Pacific Capital Trust
$6.25 (c)........................... 90,000 4,168,170
--------------
Total Preferred Stock
(Cost $4,500,000)................... 4,168,170
--------------
</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 Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
===============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (3.8%)
COMMERCIAL PAPER (3.8%)
General Electric Co.
5.70%, due 7/2/98................... $12,000,000 $ 11,998,100
Prudential Funding Corp.
6.30%, due 7/1/98................... 23,525,000 23,525,000
Salomon Smith Barney Holdings Inc.
5.56%, due 7/1/98................... 25,000,000 25,000,000
--------------
Total Short-Term Investments
(Cost $60,523,100).................. 60,523,100
--------------
Total Investments
(Cost $1,453,468,332) (d)........... 100.6% 1,616,757,842(e)
Liabilities in Excess of Cash
and Other Assets.................... (0.6) (9,270,340)
----------- --------------
Net Assets............................ 100.0% $1,607,487,502
=========== ==============
</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 $1,454,039,001.
(e) At June 30, 1998, net unrealized appreciation was $162,718,841, 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 $246,419,541 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $83,700,700.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $1,453,468,332) ............ $1,616,757,842
Cash ........................................................................... 650
Receivables:
Investment securities sold ................................................... 30,933,619
Fund shares sold ............................................................. 3,917,119
Dividends and interest ....................................................... 3,861,372
--------------
Total assets ............................................................... 1,655,470,602
--------------
LIABILITIES:
Payables:
Investment securities purchased .............................................. 41,227,516
Fund shares redeemed ......................................................... 3,518,827
NYLIFE Distributors .......................................................... 1,245,566
MainStay Management .......................................................... 756,640
Transfer agent ............................................................... 264,214
Custodian .................................................................... 13,101
Trustees ..................................................................... 8,202
Accrued expenses ............................................................... 136,004
Dividends payable .............................................................. 813,030
--------------
Total liabilities .......................................................... 47,983,100
--------------
Net assets ..................................................................... $1,607,487,502
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ...................................................................... $ 64,626
Class B ...................................................................... 651,546
Additional paid-in capital ..................................................... 1,266,983,302
Accumulated undistributed net investment income ................................ 298
Accumulated undistributed net realized gain on investments ..................... 176,498,220
Net unrealized appreciation on investments ..................................... 163,289,510
--------------
Net assets ..................................................................... $1,607,487,502
==============
CLASS A
Net assets applicable to outstanding shares .................................... $ 145,142,316
==============
Shares of beneficial interest outstanding ...................................... 6,462,620
==============
Net asset value per share outstanding .......................................... $ 22.46
Maximum sales charge (5.50% of offering price) ................................. 1.31
--------------
Maximum offering price per share outstanding ................................... $ 23.77
==============
CLASS B
Net assets applicable to outstanding shares .................................... $1,462,345,186
==============
Shares of beneficial interest outstanding ...................................... 65,154,598
==============
Net asset value and offering price per share outstanding ....................... $ 22.44
==============
</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 six months ended June 30, 1998 unaudited
<TABLE>
INVESTMENT INCOME:
Income:
<S> <C>
Dividends (a) .............................................. $ 14,192,780
Interest ................................................... 2,461,164
-------------
Total income ............................................. 16,653,944
-------------
Expenses:
Distribution--Class B ...................................... 5,515,574
Management ................................................. 4,476,676
Service--Class A ........................................... 179,254
Service--Class B ........................................... 1,838,414
Transfer agent ............................................. 1,593,765
Shareholder communication .................................. 140,042
Recordkeeping .............................................. 94,792
Registration ............................................... 93,486
Custodian .................................................. 74,960
Professional ............................................... 55,704
Trustees ................................................... 21,380
Miscellaneous .............................................. 26,915
-------------
Total expenses ........................................... 14,110,962
-------------
Net investment income ........................................ 2,542,982
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 141,197,646
Net change in unrealized appreciation on investments ......... (92,559,271)
-------------
Net realized and unrealized gain on investments .............. 48,638,375
-------------
Net increase in net assets resulting from operations ......... $ 51,181,357
=============
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $56,636.
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>
Six months
ended Year ended
June 30, December 31,
1998* 1997
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ................................................................ $ 2,542,982 $ 9,591,228
Net realized gain on investments ..................................................... 141,197,646 181,024,677
Net change in unrealized appreciation on investments ................................. (92,559,271) 61,934,892
--------------- ---------------
Net increase in net assets resulting from operations ................................. 51,181,357 252,550,797
--------------- ---------------
Dividends and distributions to shareholders:
From net investment income:
Class A ............................................................................ (745,128) (1,202,485)
Class B ............................................................................ (2,044,031) (8,257,288)
From net realized gain on investments:
Class A ............................................................................ -- (13,228,344)
Class B ............................................................................ -- (152,902,098)
--------------- ---------------
Total dividends and distributions to shareholders ................................ (2,789,159) (175,590,215)
--------------- ---------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ............................................................................ 32,206,161 55,171,252
Class B ............................................................................ 147,552,711 316,208,814
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A ............................................................................ 402,539 14,100,085
Class B ............................................................................ 1,533,317 157,601,498
--------------- ---------------
181,694,728 543,081,649
Cost of shares redeemed:
Class A ............................................................................ (15,699,455) (23,231,392)
Class B ............................................................................ (130,499,776) (165,777,574)
--------------- ---------------
Increase in net assets derived from capital share transactions ................... 35,495,497 354,072,683
--------------- ---------------
Net increase in net assets ....................................................... 83,887,695 431,033,265
NET ASSETS:
Beginning of period .................................................................... 1,523,599,807 1,092,566,542
--------------- ---------------
End of period .......................................................................... $ 1,607,487,502 $ 1,523,599,807
=============== ===============
Accumulated undistributed net investment income at end of period ....................... $ 298 $ 246,475
=============== ===============
</TABLE>
- ----------
* Unaudited.
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 A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Six months ended Year ended Year ended
June 30, 1998* December 31, 1997 December 31, 1996
------------------------ ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............. $21.76 $21.74 $20.34 $20.32 $18.25 $18.25
------ ------ ------ ------ ------ ------
Net investment
income ............. 0.12 0.03 0.27 0.15 0.30 0.20
Net realized and
unrealized
gain (loss)
on investments ..... 0.70 0.70 4.10 4.10 3.66 3.64
------ ------ ------ ------ ------ ------
Total from investment
operations ......... 0.82 0.73 4.37 4.25 3.96 3.84
------ ------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income ............. (0.12) (0.03) (0.27) (0.15) (0.30) (0.20)
From net realized
gain on investments -- -- (2.68) (2.68) (1.57) (1.57)
------ ------ ------ ------ ------ ------
Total dividends and
distributions ...... (0.12) (0.03) (2.95) (2.83) (1.87) (1.77)
------ ------ ------ ------ ------ ------
Net asset value at end
of period .......... $22.46 $22.44 $21.76 $21.74 $20.34 $20.32
====== ====== ====== ====== ====== ======
Total investment
return (a) ......... 3.73% 3.36% 21.88% 21.29% 21.84% 21.11%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ......... 1.00%+ 0.25%+ 1.22% 0.70% 1.6% 1.1%
Expenses ......... 1.07%+ 1.82%+ 1.11% 1.63% 1.1% 1.6%
Portfolio turnover
rate ............... 34%+ 34%+ 61% 61% 47% 47%
Net assets at end of
period (in 000's) .. $145,142 $1,462,345 $124,011 $1,399,589 $73,259 $1,019,307
<CAPTION>
Class B
------------------------------------------
Class A Class B September 1
------ ------- through Year ended August 31
Year ended December 31 ----------------------
December 31, 1995 1994** 1994 1993
---------------------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............. $14.66 $14.66 $16.30 $15.90 $13.82
------ ------ ------ ------ ------
Net investment
income ............. 0.29 0.19 0.04 0.06 0.07
Net realized and
unrealized
gain (loss)
on investments ..... 3.91 3.91 (1.03) 1.04 3.40
------ ------ ------ ------ ------
Total from investment
operations ......... 4.20 4.10 (0.99) 1.10 3.47
------ ------ ------ ------ ------
Less dividends and
distributions:
From net investment
income ............. (0.29) (0.19) (0.03) (0.06) (0.10)
From net realized
gain on investments (0.32) (0.32) (0.62) (0.64) (1.29)
------ ------ ------ ------ ------
Total dividends and
distributions ...... (0.61) (0.51) (0.65) (0.70) (1.39)
------ ------ ------ ------ ------
Net asset value at end
of period .......... $18.25 $18.25 $14.66 $16.30 $15.90
====== ====== ====== ====== ======
Total investment
return (a) ......... 28.74% 28.01% (6.03%) 7.26% 26.58%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ......... 1.5% 0.9% 0.8%+ 0.5% 0.5%
Expenses ......... 1.2% 1.8% 1.8%+ 1.9% 1.9%
Portfolio turnover
rate ............... 48% 48% 11% 53% 77%
Net assets at end of
period (in 000's) .. $25,258 $708,840 $472,365 $449,789 $226,524
</TABLE>
- ----------
* Unaudited.
** 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.
18
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two 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. It is not designed or managed
primarily to produce 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, and (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
19
<PAGE>
MainStay Value Fund
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 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.
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of
20
<PAGE>
Notes to Financial Statements unaudited (continued)
the financial and accounting records required for the Fund. The Manager has
delegated its portfolio management responsibilities to MacKay-Shields Financial
Corporation (the "Sub-Adviser"), a registered investment adviser and indirect
wholly-owned subsidiary of New York Life. Under the supervision of the Trust's
Board of Trustees and the Manager, the Sub-Adviser is responsible for the
day-to-day portfolio management of 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. For
the six months ended June 30, 1998 the Manager earned $4,476,676.
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.
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 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.
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 $60,038 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges on redemptions of Class B shares of
$718,910 for the six months ended June 30, 1998.
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 six months ended June
30, 1998 amounted to $1,604,759.
21
<PAGE>
MainStay Value 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 $23,409 for the six months ended
June 30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$94,792 for the six months ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $616,390 and $519,862,
respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1998* December 31, 1997
--------------------- ---------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 1,428 6,440 2,485 14,271
Shares issued in reinvestment of dividends and distributions 17 64 661 7,405
------- ------- ------- -------
1,445 6,504 3,146 21,676
Shares redeemed ............................................ (682) (5,717) (1,049) (7,460)
------- ------- ------- -------
Net increase ............................................... 763 787 2,097 14,216
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
22
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a portfolio Financial Corporation(2)
consisting primarily of non-U.S. equity securities.
Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
23
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (CONTINUED)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE FUND To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by investing MacKay Shields
primarily in high-yield debt securities of non-U.S. issuers. Financial Corporation(2)
Capital appreciation is a secondary objective. Certain of
the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Capital Financial Corporation(2)
appreciation is a secondary objective. The potential for
high yield is accompanied by higher risk. Certain of
the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
24
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (CONTINUED)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
25
<PAGE>
MainStay Value Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA16-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Strategic Income Fund Highlights 3
$10,000 Invested in the MainStay Strategic
Income Fund versus Lehman Brothers
Aggregate Bond Index and Inflation--
Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Fund Performance for the Periods Ended
12/31/97 & 6/30/98 6
Asset Allocation 7
Portfolio Composition 9
Returns & Lipper Rankings 10
Top 10 Holdings 11
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 22
Notes to Financial Statements 26
The MainStay Funds 34
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R)500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Strategic Income Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
. A robust economy with modest inflation, low unemployment, and declining
Treasury yields helped move domestic bond prices higher in the first six
months of 1998.
. European bond markets provided positive returns, while Asian economies
continued to be troubled by currency problems and financial difficulties.
. The high-yield bond market was strong during the reporting period, with
relatively tight spreads that began to widen in June.
. Overall, the reporting period provided attractive opportunities for bond
investors.
================================================================================
FUND RECAP FOR THE 6- AND 12-MONTH PERIODS ENDED 6/30/98
================================================================================
. The MainStay Strategic Income Fund returned 8.30% and 7.48% for Class A
shares and Class B shares, respectively, excluding all sales charges, for
the one-year period ended 6/30/98.
. The Fund benefited from strong performance in domestic high-grade,
international, and high-yield bonds.
. The Fund stressed Treasury securities in its domestic component, and
reduced emerging market debt in favor of European bonds in its
international component.
. In the high-yield component of the Fund, strong performance among
higher-quality bonds helped provide attractive returns with
lower-than-average risk.
. Both share classes outperformed the average Lipper* multisector income
fund, which returned 2.71% for the six months ended 6/30/98. Class A and
Class B shares ranked first and fourth, respectively, out of 95 funds in
their Lipper peer group.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
Strategic Income Fund versus Lehman Brothers
Aggregate Bond Index and Inflation
CLASS A SHARES SEC Returns: 1-year 3.43%, since inception 4.84%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Strategic Lehman Brothers
Period end Income Fund Aggregate Bond Index* Inflation+
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
2/28/97 $ 9,445 $ 9,889 $10,006
3/31/97 $ 9,834 $10,252 $10,031
6/30/97 $10,181 $10,594 $10,093
9/30/97 $10,183 $10,906 $ 9,800
12/31/97 $10,183 $10,906 $ 9,800
3/31/98 $10,467 $11,075 $10,137
6/30/98 $10,650 $11,334 $10,199
</TABLE>
CLASS B SHARES SEC Returns: 1-year 2.48%, since inception 4.74%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Strategic Lehman Brothers
Period end Income Fund Aggregate Bond 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 $10,031
9/30/97 $10,612 $10,594 $10,093
12/31/97 $10,602 $10,906 $10,130
3/31/98 $10,877 $11,075 $10,137
6/30/98 $10,637 $11,334 $10,199
</TABLE>
- ----------
Past performance is no guarantee of future results. 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 4% 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.
* 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.
4
<PAGE>
Portfolio Management Discussion and Analysis
The first half of 1998 was a positive period for almost all sectors of the world
bond markets. Domestic bonds benefited from a strong U.S. dollar combined with
modest inflation. Mortgage-backed securities weakened as interest rates declined
in both the first and second quarters, increasing prepayments. Corporate bonds
provided positive performance, but generally underperformed long-term Treasuries
over the reporting period.
International bonds were marked by the wide disparities between European and
Asian issues. Continuing currency and financial problems in Asia were compounded
when Japan announced that it had fallen into recession. The accompanying flight
to quality resulted in positive returns in most European markets, particularly
as corporations sought business partners and European nations sought to
strengthen their economies before European Monetary Union takes effect in
January of 1999.
High-yield bonds also had a strong period, with narrow yield spreads finally
beginning to widen late in the second quarter of 1998. The result was an
additional incentive to invest in lower-quality issues, which previously had
failed to adequately compensate investors for the additional risks the
securities involved. Strong new issuance among telecommunications and media
companies was accompanied by inefficient and often unfavorable pricing.
Given this context, how did the MainStay Strategic Income Fund perform in the
first six months of 1998?
For the six months ended 6/30/98, the MainStay Strategic Income Fund returned
4.59% and 4.10% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes outperformed the average Lipper*
multisector income fund, which returned 2.71% for the first half of 1998. In
fact, Class A and Class B shares ranked first and fourth out of 95 funds in
their Lipper category for the reporting period.
What accounted for the Fund's leadership?
The Fund benefited from strong performance across all three of its principal
market sectors--high-grade domestic, international, and high-yield bonds. A long
duration strategy and emphasis on Treasury securities helped the domestic
high-grade portion outperform its peers. A concentration on Europe, with little
emerging market exposure helped the international portion. And careful security
selection and risk evaluation helped the high-yield portion of the Fund avoid
difficulties and identify opportunities throughout the reporting period.
What was the Fund's basic strategy in domestic high-grade bonds?
During the first quarter, there were few opportunities to benefit from the yield
curve, so technical trades among newer and
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
European Monetary Union
- -----------------------
A proposed system that would allow participating European countries to operate
with a common currency or monetary unit.
- ----------
* See footnote and table on page 10 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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 high-yield bonds with different credit ratings.
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.
Emerging markets
- ----------------
Countries with smaller or more recently established capital markets.
FUND PERFORMANCE FOR THE PERIODS ENDED 12/31/97 & 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -------------------------------------------------------
<S> <C>
12/97 6.62 Class A
6/98 4.59 Class A
12/97 6.02 Class B
6/98 4.10 Class B
</TABLE>
See footnote * on page 10 for more information on performance.
older Treasuries helped enhance performance. A similar strategy proved
beneficial during the second quarter. We also shifted the Fund's duration from
long to neutral in both the first quarter and late in the second quarter. Being
heavy in longer-maturity bonds proved especially beneficial in mid-June, when
30-year Treasury yields declined to all-time lows.
Primarily where did the international portion of the Fund invest?
Generally speaking, the Fund sold emerging market bonds to invest primarily in
European debt. The Fund entirely avoided Japan and Russia, which were
exceedingly weak, and it carried little Asian exposure, which also contributed
positively to performance.
With European Monetary Union approaching and modest inflation and low interest
rates throughout most of Europe, we felt the Fund could find the best
international opportunities in European markets. The Fund invested primarily in
Germany, France, Italy, and the United Kingdom, where strong economies, strong
currencies, and strong central banks helped keep bond performance positive.
Active inflation management helped in the United Kingdom, where the Fund saw
positive performance from 10-year bonds. Cross-currency hedging in Germany,
France, and Italy helped keep currency risk to a minimum. The Fund's allocations
in Europe were mostly positive, with slightly negative performance, in U.S.
dollar terms, from Irish government bonds.
Were there any particular strategies that you felt were important in the
international bond portion of the portfolio?
While Irish bonds may not have been positive in the first half of the year, we
think that the market has strong potential going forward. In particular, as
prices and yields converge with the approach of European Monetary Union, we
believe that there could be a substantial improvement in the Irish bonds, and we
remain bullish there.
6
<PAGE>
ASSET ALLOCATION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- -----------------------------------------------------
<S> <C>
Domestic Securities 38.8%
International Securities 29.8%
High-Yield Securities 22.5%
Cash, Equivalents & Other Assets, 8.9%
Less Liabilities
</TABLE>
Actual percentages will vary over time.
We also like Danish mortgage bonds, which are currently providing the Fund 150
basis points over Danish government bonds, which we believe is an attractive
return. If interest rates should rise, we believe the securities may provide
capital appreciation opportunities and help hedge the Fund's other European
investments.
Which high-yield securities provided the most positive performance for the Fund
during the reporting period?
By far, the best performing high-yield bond was CD Radio, a satellite company
whose zero-coupon bonds benefited from attractive pricing and tightening
spreads. The company will seek to do for radio what Direct TV did for
television--provide national satellite access to radio.
Another strong performer was First Pacific Capital, a successful Hong Kong
conglomerate whose bonds were purchased by the Fund late in 1997. Despite
underperforming amid Asian turmoil in the fourth quarter, we felt that the bonds
had strong potential going into 1998. Our opinion proved true when the company
had a successful asset sale and its debt coverage greatly improved.
The Fund saw a significant contribution to performance from a convertible bond
issued by S3, a computer and office equipment company. The Fund also benefited
from Quest Diagnostics, which is yielding about 10.5%. The company has enough
cash to possibly repurchase the bonds. If the company does tender, the Fund
could profit, and even if the company doesn't, the bonds are earning an
attractive return. Either way, shareholders may benefit.
Were there any high-yield bonds that didn't do as well?
While most of the Fund's high-yield bonds were quite successful, the Fund did
have a small position in Boston Chicken, which detracted from performance, and a
few high-yield issues with Asian exposure, which didn't perform as well as the
Fund's other issues. Generally speaking, however, the high-yield holdings were
strong contributors to the Fund's overall performance.
Basis point
- -----------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
7
<PAGE>
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.
High-yield securities run greater risks of price fluctuations,
loss of principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
How was the Fund allocated among the various bond sectors at the end of the
first half of 1998?
The Fund started the year about 35% in domestic high-grade bonds, 35% in
international debt securities, and 30% in high-yield bonds. As of the end of
June, it was evenly split among the three sectors.
What is your outlook going forward?
We believe that the full impact of the Asian difficulties may continue to be
felt in bond markets around the world. At the moment, we believe the situation
suggests that inflation will remain under control and there will be little
reason for the Federal Reserve Board to intervene. But dissenting opinions at
the Board's last meeting suggest that could change in the future.
As long as Europe remains focused on restructuring its companies and economies
for monetary union, the overall impact should be positive on the bond markets.
The impact of a unified currency may require some adjustments, but overall we
believe European bonds will continue to provide positive performance.
In the high-yield market, we see better compensation for securities with higher
risk, but still believe the market remains inefficiently priced. We continue to
monitor risk and reward potential on a security-by-security basis seeking to
identify opportunities for the Fund.
Wherever the markets may move, 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
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
8
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- -----------------------------------------------------
<S> <C>
Foreign Bonds 29.8%
Coporate Bonds 23.6%
U.S. Government & Federal Agencies 13.7%
Convertible Bonds 10.6%
Asset-Backed Securities 6.1%
Yankee Bonds 2.8%
Cash, Equivalents & Other Assets,
Less Liabilities 8.9%
All Other 4.5%
</TABLE>
Actual percentages will vary over time.
9
<PAGE>
Returns & Lipper Rankings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
FUND AVERAGE ANNUAL TOTAL RETURNS*
================================================================================
Life of Fund
1 Year through 6/30/98
<S> <C> <C>
Class A 8.30% 8.52%
Class B 7.48% 7.67%
<CAPTION>
================================================================================
FUND SEC RETURNS*
================================================================================
Life of Fund
1 Year through 6/30/98
<S> <C> <C>
Class A 3.43% 4.84%
Class B 2.48% 4.74%
<CAPTION>
================================================================================
FUND LIPPER+ RANKINGS & LIPPER CATEGORY RETURNS AS OF 6/30/98
================================================================================
Life of Fund
1 Year through 6/30/98
<S> <C> <C>
Class A 25 out of 15 out of
83 funds 81 funds
Class B 45 out of 25 out of
83 funds 81 funds
Average Lipper
multisector
income fund 7.05% 7.27%
<CAPTION>
================================================================================
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE SIX MONTHS ENDED 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.01 $0.3498 $0.0000
Class B $10.00 $0.3126 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect certain fee waivers and/or expense limitations, without which total
return figures may have been lower. The MainStay Strategic Income Fund's
expense cap was terminated on February 28, 1998.
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 six 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
2/28/97 through 6/30/98.
10
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
================================================================================
HOLDING COUNTRY AMOUNT
================================================================================
<S> <C> <C>
Irish Government, 8.00%, due 10/18/00 Ireland $2,688,413
Realkredit Danmark, 6.00%, due 10/1/26 Denmark 1,958,154
MascoTech, Inc., 4.50%, due 12/15/03 United States 1,920,000
British Telecom, PLC, 8.625%, due 3/26/20 United Kingdom 1,285,637
Nykredit, Series ANN, 6.00%, due 10/1/26 Denmark 1,138,868
Cirrus Logic, Inc., 6.00%, due 12/15/03 United States 1,093,500
General Growth Properties, Inc., 7.25%, Series A United States 1,007,500
United Kingdom Treasury Bond, 7.25% due 12/7/07 United Kingdom 973,842
Lodgian Capital Trust I, 7.00% United States 945,000
Advanced Micro Devices, Inc. 6.00% due 5/15/05 United States 820,000
</TABLE>
- ----------
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.
11
<PAGE>
<TABLE>
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
=================================================================================================
SECURITY COUNTRY AMOUNT OF PURCHASE
=================================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds, 7.25% - 10.00%
due 2/26/01 - 9/27/13 United Kingdom $4,399,262
Irish Government, 6.50% - 8.00%
due 10/18/00 - 8/18/06 Ireland 2,758,130
Canadian Government, 6.50% - 10.25%
due 2/1/04 - 6/1/27 Canada 2,539,004
Nykredit, 6.00% - 7.00%
due 10/1/26 - 10/1/29 Denmark 2,240,337
Australian Government, 6.75% - 10.00%
due 3/15/02 - 8/15/08 Australia 2,196,609
Realkredit Danmark, 6.00%, due 10/1/26 Denmark 1,972,187
MascoTech, Inc., 4.50%, due 12/15/03 United States 1,867,500
U.S. Office Products Co., 5.50%, due 5/15/03 United States 1,410,000
Bundesobligation, 4.50% - 7.375%
due 5/17/02 - 1/4/28 Germany 1,316,120
British Telecom, PLC, 8.625%, due 3/26/20 United Kingdom 1,266,060
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
=================================================================================================
SECURITY COUNTRY AMOUNT OF SALE
=================================================================================================
<S> <C> <C>
United Kingdom Treasury Bonds, 7.25% - 10.00%
due 2/26/01 - 9/27/13 United Kingdom $5,816,273
Nykredit, 6.00% - 7.00%
due 10/1/26 - 10/1/29 Denmark 2,635,127
Canadian Government, 6.50% - 10.25%
due 2/1/04 - 6/1/27 Canada 1,713,787
Australian Government, 6.75% - 10.00%
due 3/15/02 - 8/15/08 Australia 1,688,417
Inco Ltd., 5.75%, due 7/1/04 United States 1,498,125
Inacom Corp., 4.50%, due 11/1/04 United States 1,087,500
United Mexican States, 7.00% - 11.50%
due 6/2/03 - 5/15/26 United States 1,056,092
Viacom, Inc., 6.75%, due 1/15/03
and Class B Common Stock United States 1,037,277
Consolidated Natural Gas Co., 7.25%
due 12/15/15 United States 1,037,031
Lam Research Corp., 5.00%, due 9/1/02 United States 918,500
</TABLE>
- ----------
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.
12
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
LONG-TERM BONDS (86.6%)+
ASSET-BACKED SECURITIES (6.1%)
AIRLINE LEASES (0.3%)
Continental Airlines, Inc.
Pass-Through Trust
Series 1998-1A
6.648%, due 3/15/19................. $ 210,000 $ 210,983
----------
AIRPLANE LEASES (0.5%)
AerCo Ltd.
Series 1A Class A1
5.846%, due 7/15/23 (c)(d).......... 150,000 150,000
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19.................. 199,040 209,440
----------
359,440
----------
COMMERCIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (1.8%)
First Union-Lehman Brothers
Bank of America
Commercial Mortgage Trust
Series 1998-C2 Class A1
6.281%, due 6/18/07................. 184,290 185,523
FMAC Loan Receivables Trust
Series 1998-BA Class A2
6.74%, due 11/15/20 (c)............. 155,000 157,230
General Motors Acceptance Corp.
Commercial Mortgage Securities, Inc.
Series 1998-C1 Class A1
6.411%, due 11/15/07................ 185,000 187,359
GS Mortgage Securities Corp. II
Series 1998-GL II Class A1
6.312%, due 4/13/31................. 213,551 215,191
Merrill Lynch Mortgage Investors, Inc.
Series 1998-C2 Class A2
6.39%, due 2/15/30.................. 120,000 121,177
Series 1998-C1 Class A2
6.48%, due 11/15/26................. 120,000 121,240
Series 1995-C2 Class A1
7.0875%, due 6/15/21 (d)............ 199,437 202,899
Morgan Stanley Capital I
Series 1998-WF1 Class A1
6.25%, due 7/15/07.................. 158,284 159,110
Mortgage Capital Funding, Inc.
Series 1998-MC1 Class A1
6.417%, due 3/18/30................. 79,210 80,196
----------
1,429,925
----------
CONSUMER LOANS (1.2%)
Chase Manhattan Recreational
Vehicle Owner Trust
Series 1997-A Class A5
6.05%, due 11/15/04................. 240,000 240,262
CIT Recreational Vehicle Trust
Series 1998-A Class A2
5.92%, due 3/15/07.................. 105,000 105,135
Green Tree Recreational
Equipment & Consumer Trust
Series 1997-C Class A1
6.49%, due 2/15/18.................. 457,328 459,789
NationsCredit Grantor Trust
Series 1997-2 Class A2
6.25%, due 11/15/13................. 117,794 118,128
----------
923,314
----------
CREDIT CARD RECEIVABLES (0.3%)
Chase Credit Card Master Trust
Series 1997-2 Class A
6.30%, due 4/15/03.................. 220,000 221,804
----------
EQUIPMENT FINANCING (0.1%)
Atlas Air, Inc.
Series 1998-1C
8.01%, due 1/2/10 (c)............... 115,000 115,453
----------
RESIDENTIAL MORTGAGE LOANS (COLLATERALIZED
MORTGAGE OBLIGATIONS) (1.6%)
Financial Asset Securitization Inc.
Series 1997-NAMC 2 Class FXA8
10.00%, due 7/25/27................. 269,841 280,718
Norwest Asset Securities Corp.
Series 1997-10 Class A2
6.50%, due 8/25/27(m)............... 530,000 530,980
Residential Asset Securitization Trust
Series 1997-A5 Class A4
10.00%, due 7/25/27................. 262,274 268,175
Series 1997-A9 Class A8
10.00%, due 11/26/27................ 154,730 160,774
----------
1,240,647
----------
UTILITY LOANS (0.3%)
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.................. 210,000 210,976
----------
Total Asset-Backed Securities
(Cost $4,717,438)................... 4,712,542
----------
</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 Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
CONVERTIBLE BONDS (10.6%)
CAPITAL GOODS (0.1%)
Paliburg International Finance Co.
3.50%, due 2/6/01 (k)............... $ 110,000 $ 80,850
----------
CHEMICALS (0.7%)
RPM, Inc. of Ohio
(zero coupon), due 9/30/12.......... 1,000,000 528,130
----------
COMPUTER PERIPHERALS (1.0%)
Adaptec, Inc.
4.75%, due 2/1/04 (c)............... 1,000,000 790,000
----------
COMPUTERS & OFFICE EQUIPMENT (1.0%)
S3, Incorporated
5.75%, due 10/1/03.................. 1,000,000 737,500
----------
CONGLOMERATES (0.5%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (k).............. 320,000 282,400
Loxley Public Co.
3.50%, due 4/20/05 (k).............. 245,000 133,525
----------
415,925
----------
DOMESTIC OILS (2.5%)
MascoTech, Inc.
4.50%, due 12/15/03................. 2,000,000 1,920,000
----------
DRUGS (0.1%)
Ivax Corp.
6.50%, due 11/15/01................. 100,000 89,500
----------
ELECTRICAL EQUIPMENT (1.2%)
Advanced Micro Devices, Inc.
6.00%, due 5/15/05.................. 1,000,000 820,000
Credence Systems Corp.
5.25%, due 9/15/02.................. 110,000 85,525
----------
905,525
----------
PAPER & FOREST PRODUCTS (0.4%)
Sappi BVI Finance Ltd.
7.50%, due 8/1/02 (k)............... 310,000 279,000
----------
REAL ESTATE (0.6%)
Macerich Co.
7.25%, due 12/15/02 (c)............. 500,000 499,375
----------
RESTAURANTS & LODGING (0.3%)
Boston Chicken, Inc.
(zero coupon), due 6/1/15........... 3,000,000 195,000
----------
RETAIL (0.1%)
Sports Authority, Inc. (The)
5.25%, due 9/15/01.................. 45,000 43,312
----------
STEEL, ALUMINUM & OTHER METALS (0.6%)
Inco Ltd.
5.75%, due 7/1/04 (e)............... 500,000 467,500
----------
TECHNOLOGY (1.5%)
Cirrus Logic, Inc.
6.00%, due 12/15/03................. 1,350,000 1,093,500
Samsung Electronics America, Inc.
(zero coupon), due 12/31/07 (k)..... 60,000 48,000
----------
1,141,500
----------
Total Convertible Bonds
(Cost $8,518,549)................... 8,093,117
----------
CORPORATE BONDS (23.6%)
AIRLINES (0.2%)
Valujet, Inc.
10.25%, due 4/15/01................. 135,000 130,613
----------
BANKS (1.6%)
Banc One Corp.
7.60%, due 5/1/07................... 80,000 87,170
B.F. Saul Real Estate Investment Trust
Series B
9.75%, due 4/1/08................... 170,000 167,875
Capital One Bank
Series BKNT
6.375%, due 2/15/03................. 190,000 189,723
First Nationwide Holdings, Inc.
12.25%, due 5/15/01................. 275,000 300,438
Local Financial Corp.
11.00%, due 9/8/04.................. 135,000 147,150
Tokai Preferred Capital Co. L.L.C.
9.98%, due 12/29/49
11.0914%, beginning
6/30/08 (c)(j)...................... 350,000 325,938
----------
1,218,294
----------
BROKERAGE (0.5%)
Bear Stearns Companies, Inc. (The)
6.20%, due 3/30/03.................. 80,000 80,120
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
CORPORATE BONDS (Continued)
Brokerage (Continued)
Lehman Brothers Holdings, Inc.
6.25%, due 4/1/03................... $ 80,000 $ 80,055
Lehman Brothers, Inc.
6.50%, due 4/15/08.................. 110,000 110,143
Merrill Lynch & Co., Inc.
6.00%, 2/12/03...................... 135,000 134,910
----------
405,228
----------
CABLE (2.2%)
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99........... 650,000 162,500
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99............ 575,000 557,750
Primestar, Inc.
10.9375%, due 4/1/99 (d)(g)......... 500,000 500,000
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01........... 700,000 427,875
----------
1,648,125
----------
CASINOS (1.7%)
Casino America, Inc.
12.50%, due 8/1/03.................. 175,000 197,750
Empress River Casino Finance Corp.
10.75%, due 4/1/02.................. 300,000 324,000
Grand Casinos, Inc.
10.125%, due 12/1/03................ 140,000 153,300
Horseshoe Gaming L.L.C.
Series B
12.75%, due 9/30/00................. 150,000 164,625
Penn National Gaming, Inc.
10.625%, due 12/15/04............... 300,000 315,000
President Riverboat Casinos, Inc.
13.00%, due 9/15/01................. 140,000 129,500
----------
1,284,175
----------
CELLULAR TELEPHONE (0.3%)
Centennial Cellular Corp.
8.875%, due 11/1/01................. 160,000 166,200
International Wireless
Communications Holdings, Inc.
(zero coupon), due 8/15/01.......... 475,000 85,500
----------
251,700
----------
CHEMICALS (0.2%)
Octel Developments, PLC
10.00%, due 5/1/06 (c).............. 125,000 127,500
----------
COMPUTERS & OFFICE EQUIPMENT (0.7%)
American Business Information, Inc.
9.50%, due 6/15/08 (c).............. 175,000 175,875
Computer Associates International, Inc.
6.375%, due 4/15/05 (c)............. 250,000 247,875
International Business Machines Corp.
6.50%, due 1/15/28.................. 115,000 115,298
----------
539,048
----------
CONGLOMERATES (0.2%)
Hutchison Whampoa Ltd.
7.45%, due 8/1/17 (c)............... 225,000 179,078
----------
CONSUMER DURABLES (0.3%)
Samsonite Corp.
10.75%, due 6/15/08 (c)............. 200,000 198,500
----------
COSMETICS (0.2%)
Jafra Cosmetics International, Inc.
11.75%, due 5/1/08 (c).............. 175,000 175,000
----------
DEFENSE ELECTRONICS (0.2%)
Alliant Techsystems, Inc.
11.75%, due 3/1/03.................. 150,000 162,563
----------
DOMESTIC OIL & GAS (0.6%)
Houston Exploration Co. (The)
Series B
8.625%, due 1/1/08.................. 170,000 170,000
Northern Offshore ASA
10.00%, due 5/15/05 (c)............. 265,000 253,075
----------
423,075
----------
ELECTRIC UTILITIES (1.3%)
CMS Energy Corp.
7.00%, due 1/15/05.................. 250,000 242,511
Empresa Electrica del Norte Grande S.A.
10.50%, due 6/15/05 (c)............. 135,000 137,700
ESI Tractebel Acquisition Corp.
7.99%, due 12/30/11 (c)............. 175,000 175,000
Niagara Mohawk Power Corp.
Series B
7.00%, due 10/1/00.................. 285,000 285,191
</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 Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
CORPORATE BONDS (Continued)
EKECTRIC UTILITIES (Continued)
Public Service Electric & Gas Co.
Series UU
6.75%, due 3/1/06................... $ 145,000 $ 149,341
----------
989,743
----------
ENERGY (0.7%)
Conproca, S.A.
12.00%, due 6/16/10 (c)(k).......... 175,000 177,625
Mariner Energy, Inc.
Series B
10.50%, due 8/1/06.................. 170,000 172,550
Nuevo Energy Co.
8.875%, due 6/1/08 (c).............. 175,000 178,063
----------
528,238
----------
FINANCE (1.4%)
CB Richard Ellis Services, Inc.
8.875%, due 6/1/06.................. 175,000 173,688
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (h).............. 900,000 360,000
EOP Operating L.P.
6.50%, due 6/15/04 (c).............. 270,000 269,395
Resource America, Inc.
12.00%, due 8/1/04.................. 130,000 139,100
Traffic Stream (BVI) Infrastructure Ltd.
14.25%, due 5/1/06 (c).............. 205,000 164,000
----------
1,106,183
----------
FINANCIAL SERVICES (0.6%)
Conseco, Inc.
6.40%, due 6/15/11 (d).............. 210,000 209,656
Equitable Companies, Inc.
7.00%, due 4/1/28................... 110,000 113,926
Travelers Group, Inc.
6.625%, due 1/15/28................. 145,000 146,030
----------
469,612
----------
FOOD, BEVERAGES & TOBACCO (1.7%)
Coca-Cola Enterprises, Inc.
6.95%, due 11/15/26(m).............. 340,000 355,582
Colorado Prime Corp.
12.50%, due 5/1/04.................. 150,000 147,750
Fresh Foods, Inc.
10.75%, due 6/1/06 (c).............. 90,000 90,000
Global Health Sciences, Inc.
11.00%, due 5/1/08 (c).............. 175,000 172,812
Philip Morris Companies, Inc.
6.15%, due 3/15/10 (d).............. 330,000 329,703
Standard Commercial Corp.
8.875%, due 8/1/05.................. 225,000 220,500
----------
1,316,347
----------
HEALTH CARE (1.5%)
Fountain View, Inc.
11.25%, due 4/15/08 (c)............. 350,000 356,125
Magellan Health Services, Inc.
9.00%, due 2/15/08 (c).............. 75,000 74,438
Medaphis Corp.
9.50%, due 2/15/05 (c).............. 125,000 122,500
Quest Diagnostics, Inc.
10.75%, due 12/15/06................ 355,000 396,712
Sun Healthcare Group, Inc.
9.375%, due 5/1/08 (c).............. 175,000 176,750
----------
1,126,525
----------
HOUSING (0.6%)
Greystone Homes, Inc.
10.75%, due 3/1/04.................. 450,000 486,000
----------
MEDIA (0.8%)
Affiliated Newspapers Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99............ 150,000 147,750
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning 12/1/02........... 375,000 219,375
General Media, Inc.
10.625%, due 12/31/00............... 50,000 46,500
Time Warner, Inc.
8.375%, due 7/1/13.................. 177,000 203,669
----------
617,294
----------
OIL SERVICES (0.2%)
Pool Energy Services Co.
8.625%, due 4/1/08 (c).............. 180,000 175,500
----------
PAPER & FOREST PRODUCTS (0.7%)
Georgia-Pacific Corp.
7.25%, due 6/1/28................... 180,000 182,046
SD Warren Co.
Series B
12.00%, due 12/15/04................ 300,000 331,875
----------
513,921
----------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
============================
<S> <C> <C>
CORPORATE BONDS (Continued)
PUBLISHING (0.4%)
Regional Independent Media Group
10.50%, due 7/1/08 (c).............. $ 275,000 $ 279,125
----------
REAL ESTATE (0.3%)
LNR Property Corp.
9.375%, due 3/15/08 (c)............. 230,000 230,575
----------
RECREATION & ENTERTAINMENT (0.0%)(b)
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (h)(i).......... 160,000 5,600
----------
RESTAURANTS & LODGING (0.9%)
Advantica Restaurant Group, Inc.
11.25%, due 1/15/08................. 160,000 170,000
Booth Creek Ski Holdings, Inc.
Series B
12.50%, due 3/15/07................. 40,000 42,800
Extended Stay America, Inc.
9.15%, due 3/15/08 (c).............. 175,000 172,375
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning
6/30/99 (c)(g)...................... 320,000 295,200
----------
680,375
----------
RETAIL (0.8%)
Albertson's, Inc.
Series C
6.625%, due 6/1/28.................. 175,000 174,872
Federated Department Stores, Inc.
7.00%, due 2/15/28.................. 200,000 203,841
Wal-Mart Stores, Inc.
5.65%, due 2/1/10................... 200,000 199,370
----------
578,083
----------
STEEL, ALUMINUM & OTHER METALS (0.4%)
Carpenter Technology Corp.
Series B
6.275%, due 4/7/03.................. 85,000 85,179
Schuff Steel Co.
10.50%, due 6/1/08 (c).............. 175,000 173,250
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05................. 80,000 85,800
----------
344,229
----------
SUPERMARKETS (0.1%)
Penn Traffic Co. (The)
10.25%, due 2/15/02................. 55,000 43,725
----------
TECHNOLOGY (0.4%)
Electronic Retailing Systems
International, Inc.
(zero coupon), due 2/1/04
13.25%, beginning 2/1/00............ 200,000 84,000
Metawave Communications Corp.
13.75%, due 4/28/00 (d)(g)(o)....... 155,000 159,650
Samsung Electronics America, Inc.
9.75%, due 5/1/03 (c)............... 90,000 84,150
----------
327,800
----------
TELECOMMUNICATION SERVICES (1.1%)
BellSouth Telecommunications Corp.
6.375%, due 6/1/28.................. 200,000 199,322
GTE Corp.
6.94%, due 4/15/28.................. 200,000 202,500
Impsat Corp.
12.375%, due 6/15/08 (c)............ 90,000 90,900
Orion Network System, Inc.
(zero coupon), due 1/15/07
12.50%, beginning 1/15/02........... 250,000 190,000
T/SF Communications Corp.
Series B
10.375%, due 11/1/07................ 180,000 183,150
----------
865,872
----------
TEXTILE & APPAREL (0.3%)
Delta Mills, Inc.
Series B
9.625%, due 9/1/07.................. 140,000 137,550
Norton McNaughton, Inc.
12.50%, due 6/1/05 (c).............. 125,000 125,000
----------
262,550
----------
TRANSPORTATION (0.5%)
Equimar Shipholdings Ltd.
9.875%, due 7/1/07.................. 95,000 86,450
Pacific & Atlantic (Holdings) Inc.
11.50%, due 5/30/08 (c)............. 150,000 141,000
Pegasus Shipping Hellas Ltd.
11.875%, due 11/15/04............... 165,000 167,063
----------
394,513
----------
Total Corporate Bonds
(Cost $18,133,787).................. 18,084,709
----------
</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>
FOREIGN BONDS (29.8%)
ARGENTINA (0.1%)
Argentina Bocon Previs
Series Pre 1
2.996%, due 4/1/01 (d).............. AP 107,981 $ 97,085
----------
AUSTRALIA (1.7%)
Australian Government
Series 808
8.75%, due 8/15/08.................. A$ 115,000 88,491
Series 1007
10.00%, due 10/15/07................ 599,000 488,815
Federal National Mortgage
Association
6.375%, due 8/15/07................. 786,000 502,346
Treasury Corp. of Victoria
8.25%, due 10/15/03................. 295,000 204,713
----------
1,284,365
----------
CANADA (2.9%)
Alberta (Province of)
Series UB
9.60%, due 7/7/98................... C$ 477,000 325,343
Canadian Government
Series WB60
7.25%, due 6/1/07................... 50,000 38,591
Series VW17
8.00%, due 6/1/27................... 439,000 405,982
Series J24
10.25%, due 2/1/04.................. 881,000 738,768
Hydro-Quebec
5.50%, due 5/15/03.................. 1,086,000 738,503
----------
2,247,187
----------
DENMARK (5.0%)
Kingdom of Denmark
7.00%, due 11/15/07................. DK 4,400,000 736,744
Nykredit
Series ANN
6.00%, due 10/1/26.................. 7,854,000 1,138,868
Realkredit Danmark
6.00%, due 10/1/26.................. 13,500,000 1,958,154
----------
3,833,766
----------
EUROPEAN CURRENCY UNIT (0.9%)
European Investment Bank
5.00%, due 4/15/08.................. ECU 630,000 693,432
----------
FRANCE (0.4%)
France Obligations Assimilables
du Tresor
5.25%, due 4/25/08.................. FF 960,000 163,762
7.50%, due 4/25/05.................. 378,000 72,861
8.50%, due 3/28/00-12/26/12......... 356,000 65,282
----------
301,905
----------
GERMANY (3.2%)
Bundes Republic Deutschland
Series 98
5.625%, due 1/4/28.................. DM 340,000 195,520
Series 95
7.375%, due 1/3/05.................. 587,000 374,730
Bundesobligation
Series 123
4.50%, due 5/17/02.................. 1,397,000 779,256
Euronet Services, Inc.
(zero coupon), due 7/1/06........... 645,000 221,105
Ford Motor Credit Co.
5.25%, due 6/16/08.................. 865,000 477,701
Land Baden-Wuerttemberg
Series 38
7.50%, due 10/22/04................. 290,000 184,136
Venezuela Synthetic Sovereign
Investments Ltd.
10.125%, due 12/29/03............... 400,000 223,269
----------
2,455,717
----------
IRELAND (3.5%)
Irish Government
8.00%, due 10/18/00................. IP 1,803,000 2,688,413
----------
ITALY (2.5%)
Buoni Poliennali del Tesoro
6.50%, due 11/1/27.................. IL 440,000,000 282,009
8.25%, due 7/1/01................... 1,000,000,000 621,160
9.50%, due 2/1/01................... 710,000,000 447,655
10.50%, due 7/15/00................. 465,000,000 327,899
12.00%, due 5/1/02.................. 405,000,000 254,146
----------
1,932,869
----------
NORWAY (0.6%)
Norwegian Government
6.75%, due 1/15/07.................. NK 3,130,000 440,323
----------
SPAIN (1.0%)
Spanish Government
7.35%, due 3/31/07.................. SP 10,540,000 80,377
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
================================
<S> <C> <C>
FOREIGN BONDS (Continued)
SPAIN (Continued)
Spanish Government
8.30%, due 12/15/98................. SP 1,390,000 $ 9,232
10.25%, due 11/30/98................ 5,540,000 37,016
10.50%, due 10/30/03................ 16,210,000 134,636
11.30%, due 1/15/02................. 64,470,000 513,511
----------
774,772
----------
SWEDEN (1.6%)
AB Spintab
Series 164
8.50%, due 12/19/01................. SK 1,000,000 139,821
Stadshypotek AB
Series 1553
10.00%, due 12/20/00................ 4,000,000 563,175
Swedish Government
Series 1036
10.25%, due 5/5/00.................. 200,000 27,678
Series 1030
13.00%, due 6/15/01................. 3,000,000 463,990
----------
1,194,664
----------
UNITED KINGDOM (4.0%)
British Telecom, PLC
8.625%, due 3/26/20................. (pound) 610,000 1,285,637
Federal National Mortgage
Association
Series EMTN
7.125%, due 8/10/99................. 250,000 415,311
IPC Magazines Group, PLC
(zero coupon), due 3/15/08
10.75%, beginning 3/15/03 (c)....... 285,000 271,048
Regional Independent Media Group
(zero coupon), due 7/1/08
12.875%, beginning 7/1/03 (c)....... 100,000 91,142
United Kingdom Treasury Bond
7.25%, due 12/7/07.................. 530,000 973,842
----------
3,036,980
----------
UNITED STATES (2.4%)
Banco Hipotecario S.A.
10.00%, due 4/17/03 (c)............. $ 475,000 469,062
Conproca, S.A.
12.00%, due 6/16/10 (c)(k).......... 313,000 317,695
Innova S de R.L.
12.875%, due 4/1/07................. 145,000 147,900
Nacional Financiera SNC
9.375%, due 4/23/99 (c)............. 150,000 150,000
Republic of Colombia
7.625%, due 2/15/07................. 650,000 585,000
Republic of Panama
8.875%, due 9/30/27................. 163,000 153,627
----------
1,823,284
----------
Total Foreign Bonds
(Cost $23,122,539).................. 22,804,762
----------
U.S. GOVERNMENT &
FEDERAL AGENCIES (13.7%)
FEDERAL AGENCY (COLLATERALIZED
MORTGAGE OBLIGATION) (0.2%)
Fannie Mae
Series 1998-M1 Class A1
5.96%, due 5/25/07.................. 130,526 129,973
----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE
PASS-THROUGH SECURITIES) (3.2%)
6.00%, due 12/31/15 TBA (l)......... 525,000 519,587
6.50%, due 12/1/27.................. 229,038 228,215
6.50%, due 12/31/30 TBA (l)......... 830,000 826,107
7.00%, due 7/20/13 TBA (l).......... 860,000 876,263
----------
2,450,172
----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE
PASS-THROUGH SECURITIES) (4.2%)
7.00%, due 8/19/28 TBA (l).......... 1,365,000 1,385,475
7.50%, due 12/15/23................. 354,626 364,822
8.00%, due 7/21/28-8/19/28
TBA (l)........................... 1,440,000 1,492,200
----------
3,242,497
----------
UNITED STATES TREASURY BONDS (1.7%)
6.125%, due 11/15/27 (m)............ 175,000 187,523
7.625%, due 2/15/25 (m)............. 620,000 780,617
8.875%, due 8/15/17 (m)............. 250,000 340,820
----------
1,308,960
----------
UNITED STATES TREASURY NOTES (4.4%)
5.625%, due 11/30/00 (m)............ 160,000 160,350
5.75%, due 4/30/03 (m).............. 1,225,000 1,237,054
6.625%, due 5/15/07 (m)............. 645,000 692,769
7.875%, due 11/15/99 (m)............ 930,000 958,477
7.875%, due 11/15/04 (m)............ 265,000 297,627
----------
3,346,277
----------
Total U.S. Government &
Federal Agencies
(Cost $10,452,211).................. 10,477,879
----------
</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>
YANKEE BONDS (2.8%)
CELLULAR TELEPHONE (0.5%)
Millicom International Cellular, S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01............ $ 475,000 $ 366,937
----------
CONSUMER FINANCIAL SERVICES(0.4%)
Ford Capital Co. B.V.
9.50%, due 6/1/10................... 215,000 269,296
----------
ELECTRIC UTILITIES (0.3%)
United Utilities, PLC
6.45%, due 4/1/08................... 190,000 190,384
----------
FINANCE (0.2%)
Fairfax Financial Holdings Ltd.
6.875%, due 4/15/08................. 160,000 159,640
----------
GAS UTILITIES (0.1%)
Camuzzi Gas Pampeana S.A.
9.25%, due 12/15/01................. 95,000 96,524
----------
MULTI-INDUSTRIAL (0.2%)
Tyco International Group S.A.
6.125%, due 6/15/01................. 175,000 175,108
----------
OIL SERVICES (0.3%)
Petro-Geo-Services ASA
7.125%, due 3/30/28................. 260,000 263,513
----------
PAPER & FOREST PRODUCTS (0.2%)
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c)............. 150,000 169,500
----------
STEEL, ALUMINUM & OTHER METALS (0.2%)
Ivaco, Inc.
11.50%, due 9/15/05................. 125,000 136,875
----------
TELECOMMUNICATION SERVICES (0.4%)
Call-Net Enterprises, Inc.
(zero coupon), due 12/1/04
13.25%, beginning 12/1/99........... 250,000 238,750
Fonorola, Inc.
12.50%, due 8/15/02................. 70,000 77,525
----------
316,275
----------
Total Yankee Bonds
(Cost $2,122,790)................... 2,144,052
----------
Total Long-Term Bonds
(Cost $67,067,314).................. 66,317,061
----------
<CAPTION>
Shares
==============
<S> <C> <C>
PREFERRED STOCKS (4.5%)
CABLE (0.4%)
United International Holdings, Inc.
4.00%, Series A (a)(f)(g)........... 1,840 296,240
----------
MINING (0.9%)
Freeport McMoran
Copper & Gold, Inc.
7.00%, Series A (f)(n).............. 35,400 681,450
----------
REAL ESTATE (1.3%)
General Growth Properties, Inc.
7.25%, Series A (f)................. 40,000 1,007,500
----------
RESTAURANTS & LODGING (1.3%)
Lodgian Capital Trust I
7.00% (c)(f)........................ 20,000 945,000
----------
TELECOMMUNICATION SERVICES (0.6%)
Omnipoint Corp.
7.00% (c)(f)........................ 10,000 485,000
----------
Total Preferred Stocks
(Cost $3,418,453)................... 3,415,190
----------
WARRANTS (0.0%)(b)
FOOD, BEVERAGES & TOBACCO (0.0%)(b)
Colorado Prime Corp.
expire 12/31/03 (a)(c).............. 150 1,500
----------
TECHNOLOGY (0.0%)(b)
Metawave Communications Corp.
expire 4/28/00 (a)(g)............... 2,873 29
----------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Shares Value
===============================
<S> <C> <C>
WARRANTS (Continued)
TELECOMMUNICATION SERVICES (0.0%)(b)
Rocky Mountain Internet, Inc.
expire 7/29/03 (a)(g)............... 825 $ 4,826
-----------
Total Warrants
(Cost $1,450)....................... 6,355
-----------
<CAPTION>
Principal
Amount
==============
<C> <C>
SHORT-TERM INVESTMENTS (14.7%)
COMMERCIAL PAPER (14.5%)
Ford Motor Credit Corp.
5.63%, due 7/2/98................... $ 740,000 739,884
General Electric Corp.
5.62%, due 7/6/98................... 1,660,000 1,658,704
Goldman Sachs Group L.P. (The)
5.52%, due 7/6/98................... 1,090,000 1,089,164
ING Funding
5.56%, due 7/15/98.................. 1,375,000 1,372,027
Merrill Lynch & Co., Inc.
5.63%, due 7/6/98................... 1,700,000 1,698,671
Morgan Stanley, Dean Witter,
Discover & Co.
6.25%, due 7/1/98................... 775,000 775,000
Norwest Corp.
5.71%, due 7/2/98................... 1,660,000 1,659,737
Prudential Funding Corp.
6.30%, due 7/1/98................... 970,000 970,000
Salomon Smith Barney, Inc.
5.56%, due 7/1/98................... 1,100,000 1,100,000
-----------
11,063,187
-----------
FOREIGN SHORT-TERM BOND (0.2%)
UNITED STATES (0.2%)
Nacional Financiera SNC
6.688%, due 3/15/99................. 155,000 155,000
-----------
Total Short-Term Investments
(Cost $11,218,311).................. 11,218,187
-----------
Total Investments
(Cost $81,705,528) (p).............. 105.8% 80,956,793(q)
-----------
Liabilities in Excess of
Cash and Other Assets............... (5.8) (4,426,119)
---------- -----------
Net Assets............................ 100.0% $76,530,674
========== ===========
</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 June 30, 1998.
(e) Yankee bond.
(f) Convertible preferred stock.
(g) Restricted security.
(h) Issue in default.
(i) Issuer in bankruptcy.
(j) PIK ("Payment in Kind")--interest payment is made with additional
securities.
(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) Segregated as collateral for TBAs.
(n) Depository Shares--each share represents 0.05 shares of a share of Series A
7.00% step-up convertible preferred stock.
(o) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(p) The cost for Federal income tax purposes is $81,719,300.
(q) At June 30, 1998 net unrealized depreciation was $762,507, 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 $620,479 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,382,986.
(r) The following abbreviations are used in the above portfolio:
AP --Argentinean Peso
A$ --Australian Dollar
C$ --Canadian Dollar
DK --Danish Krone
DM --Deutsche Mark
ECU --European Currency Unit
FF --French Franc
IP --Irish Punt
IL --Italian Lira
NK --Norwegian Krone
SP --Spanish Peseta
SK --Swedish Krona
(pound)--Pound Sterling
$ --U.S. Dollar
21
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $81,705,528) ............ $ 80,956,793
Cash ........................................................................ 1,263,769
Cash denominated in foreign currencies (identified cost $673,462) ........... 682,464
Receivables:
Investment securities sold ................................................ 5,511,021
Dividends and interest .................................................... 1,153,844
Fund shares sold .......................................................... 156,018
Unrealized appreciation on forward foreign currency contracts ............... 372,140
Unamortized organization expense ............................................ 152,767
------------
Total assets ............................................................ 90,248,816
------------
LIABILITIES:
Payables:
Investment securities purchased ........................................... 12,840,556
Fund shares redeemed ...................................................... 79,229
NYLIFE Distributors ....................................................... 50,565
MainStay Management ....................................................... 39,867
Custodian ................................................................. 21,600
Transfer agent ............................................................ 12,589
Trustees .................................................................. 434
Accrued expenses ............................................................ 54,781
Unrealized depreciation on forward foreign currency contracts ............... 208,046
Dividend payable ............................................................ 410,475
------------
Total liabilities ....................................................... 13,718,142
------------
Net assets .................................................................. $ 76,530,674
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ................................................................... $ 19,299
Class B ................................................................... 57,190
Additional paid-in capital .................................................. 76,550,510
Accumulated distribution in excess of net investment income ................. (377,284)
Accumulated undistributed net realized gain on investments .................. 871,648
Net unrealized depreciation on investments .................................. (748,735)
Net unrealized appreciation on translation of other assets and liabilities
in foreign currencies and forward foreign currency contracts .............. 158,046
------------
Net assets .................................................................. $ 76,530,674
============
CLASS A
Net assets applicable to outstanding shares ................................. $ 19,315,270
============
Shares of beneficial interest outstanding ................................... 1,929,940
============
Net asset value per share outstanding ....................................... $ 10.01
Maximum sales charge (4.50% of offering price) .............................. 0.47
------------
Maximum offering price per share outstanding ................................ $ 10.48
============
CLASS B
Net assets applicable to outstanding shares ................................. $ 57,215,404
============
Shares of beneficial interest outstanding ................................... 5,718,998
============
Net asset value and offering price per share outstanding .................... $ 10.00
============
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .......................................................................... $ 50,452
Interest ........................................................................... 2,534,298
-----------
Total income ..................................................................... 2,584,750
-----------
Expenses:
Management ......................................................................... 211,314
Distribution--Class B .............................................................. 192,636
Service--Class A ................................................................... 23,802
Service--Class B ................................................................... 64,245
Transfer agent ..................................................................... 60,817
Shareholder communication .......................................................... 40,184
Registration ....................................................................... 25,961
Amortization of organization expense ............................................... 20,666
Professional ....................................................................... 15,899
Recordkeeping ...................................................................... 13,282
Custodian .......................................................................... 12,871
Trustees ........................................................................... 875
Miscellaneous ...................................................................... 6,404
-----------
Total expenses before reimbursement .............................................. 688,956
Expense reimbursement from Manager ................................................... (30,927)
-----------
Net expenses ..................................................................... 658,029
-----------
Net investment income ................................................................ 1,926,721
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions .............................................................. 997,663
Foreign currency transactions ...................................................... (9,950)
-----------
Net realized gain on investments and foreign currency transactions ................... 987,713
-----------
Net change in unrealized appreciation (depreciation) on investments:
Security transactions .............................................................. 6,382
Translation of assets and liabilities in foreign currencies and forward
foreign currency contracts ....................................................... (18,814)
-----------
Net unrealized loss on investments and foreign currency transactions ................. (12,432)
-----------
Net realized and unrealized gain on investments and foreign currency transactions .... 975,281
-----------
Net increase in net assets resulting from operations ................................. $ 2,902,002
===========
</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 Changes in Net Assets
<TABLE>
<CAPTION>
Six months February 28, 1997**
ended through
June 30, 1998* December 31,1997
-------------- ------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .............................................................. $ 1,926,721 $ 2,815,744
Net realized gain on investments ................................................... 997,663 1,182,881
Net realized gain (loss) on foreign currency transactions .......................... (9,950) 111,334
Net change in unrealized depreciation on investments ............................... 6,382 (755,117)
Net change in unrealized appreciation on translation of other assets
and liabilities in foreign currencies and forward foreign currency contracts ..... (18,814) 176,860
------------ ------------
Net increase in net assets resulting from operations ............................... 2,902,002 3,531,702
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A .......................................................................... (670,353) (1,504,251)
Class B .......................................................................... (1,648,770) (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 ................................ (2,319,123) (4,267,619)
------------ ------------
Capital share transactions: Net proceeds from sale of shares:
Class A .......................................................................... 1,928,616 13,170,997
Class B .......................................................................... 19,111,232 42,685,916
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A .......................................................................... 413,929 1,749,283
Class B .......................................................................... 1,103,682 1,998,370
------------ ------------
.............................................................................. 22,557,459 59,604,566
Cost of shares redeemed:
Class A .......................................................................... (2,126,508) (16,049,724)
Class B .......................................................................... (7,277,316) (3,024,765)
------------ ------------
Increase in net assets derived from capital share transactions ................. 13,153,635 40,530,077
------------ ------------
Net increase in net assets ..................................................... 13,736,514 39,794,160
NET ASSETS:
Beginning of period .................................................................. 62,794,160 23,000,000
------------ ------------
End of period ........................................................................ $ 76,530,674 $ 62,794,160
============ ============
Accumulated undistributed net investment income (excess distribution) end of period .. $ (377,284) $ 15,118
============ ============
</TABLE>
- ----------
* Unaudited.
** Commencement of operations.
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 A Class B Class A Class B
---------- ---------- ---------- ----------
Six months February 28, 1997**
ended through
June 30, 1998* December 31, 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period ............................. $9.91 $9.91 $10.00 $10.00
---------- ---------- ---------- ----------
Net investment income .............................................. 0.29 0.25 0.54 0.48
Net realized and unrealized gain on investments .................... 0.16 0.15 0.07 0.07
Net realized and unrealized gain (loss) on
foreign currency transactions .................................... (0.00)(b) (0.00)(b) 0.05 0.05
---------- ---------- ---------- ----------
Total from investment operations ................................... 0.45 0.40 0.66 0.60
---------- ---------- ---------- ----------
Less dividends and distributions:
From net investment income ....................................... (0.35) (0.31) (0.54) (0.48)
From net realized gain on investments ............................ -- -- (0.21) (0.21)
---------- ---------- ---------- ----------
Total dividends and distributions .................................. (0.35) (0.31) (0.75) (0.69)
---------- ---------- ---------- ----------
Net asset value at end of period ................................... $10.01 $10.00 $9.91 $9.91
========== ========== ========== ==========
Total investment return (a) ........................................ 4.59% 4.10% 6.62% 6.02%
Ratios (to average net assets)/Supplemental Data:
Net investment income ............................................ 6.02%+ 5.27%+ 6.46%+ 5.71%+
Net expenses ..................................................... 1.32%+ 2.07%+ 1.15%+ 1.90%+
Expenses (before reimbursement) .................................. 1.41%+ 2.16%+ 1.49%+ 2.24%+
Portfolio turnover rate ............................................ 186% 186% 323% 323%
Net assets at end of period (in 000's) ............................. $19,315 $57,216 $18,922 $43,872
</TABLE>
- ----------
* Unaudited.
** Commencement of operations.
+ 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.
25
<PAGE>
MainStay Strategic Income 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 twenty-two 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 objective is to provide current income and competitive overall return
by investing primarily in domestic and foreign debt securities.
The Fund invests in high yield bonds. High yield securities run greater risks of
price fluctuations, loss of principal and interest, default or bankruptcy by the
issuer, and other risks, which is why these securities are considered
speculative.
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)
26
<PAGE>
Notes to Financial Statements unaudited
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 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.
27
<PAGE>
MainStay Strategic Income Fund
Forward foreign currency contracts open at June 30, 1998:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
--------------------- --------------------- --------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts
Australian Dollar vs. US$, expiring 7/6/98 - 7/10/98 A$ 2,652,000 $ 1,633,647 $ (8,946)
Canadian Dollar vs. US$, expiring 7/22/98 C$ 615,000 $ 418,823 411
Danish Krone vs. Deutsche Mark, expiring 9/22/98 DK 22,960,000 DM 6,020,242 1,351
Deutsche Mark vs. Irish Punt, expiring 6/30/98 DM 259,356 IP 103,000 36
Deutsche Mark vs. Pound Sterling, expiring 6/30/98 DM 13,499,966 (pound) 4,574,750 172,518
Deutsche Mark vs. Italian Lira, expiring 7/14/98 DM 50,538 IL 50,000,000 126
Deutsche Mark vs. US$, expiring 7/24/98 DM 17,318,948 $ 9,722,277 112,703
Deutsche Mark vs. Swedish Krona, expiring 8/11/98 DM 496,625 SK 2,200,000 485
Deutsche Mark vs. French Franc, expiring 8/18/98 DM 3,487,443 FF 11,695,000 2,260
Deutsche Mark vs. Swiss Franc, expiring 9/29/98 DM 281,481 CF 235,000 (447)
Irish Punt vs. Deutsche Mark, expiring 6/30/98 IP 103,000 DM 259,138 (157)
Italian Lira vs. Deutsche Mark, expiring 7/14/98 IL 48,000,000 DM 48,475 (144)
New Zealand Dollar vs. US$, expiring 7/13/98 ND 514,967 $ 253,930 (13,151)
Norwegian Krone vs. Deutsche Mark, expiring 9/14/98 NK 3,511,200 DM 831,742 4,548
Pound Sterling vs. Deutsche Mark, expiring 6/30/98 - 9/30/98 (pound) 4,754,100 DM 14,102,845 (134,746)
Pound Sterling vs. US$, expiring 9/9/98 (pound) 319,900 $ 519,869 (11,747)
Swedish Krona vs. Deutsche Mark, expiring 8/11/98 SK 8,330,000 DM 1,934,420 28,168
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Purchased Sold (Depreciation)
--------------------- --------------------- --------------
<S> <C> <C> <C>
Foreign Currency Buy Contracts
Australian Dollar vs. US$, expiring 7/6/98 A$ 1,044,000 $ 645,695 $ 913
Canadian Dollar vs. US$, expiring 7/22/98 C$ 677,500 $ 461,103 (169)
New Zealand Dollar vs. US$, expiring 7/13/98 ND 514,967 $ 256,999 10,082
---------
Net Unrealized Appreciation on Forward Foreign
Currency Contracts $ 164,094
=========
</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 (the "1933 Act").
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 1933 Act 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.
28
<PAGE>
Notes to Financial Statements unaudited (continued)
Restricted securities held at June 30, 1998:
<TABLE>
<CAPTION>
Principal Percent
Acquisition Amount/ 6/30/98 of
Security Date Shares Cost Value Net Assets
- -------- ----------- --------- ---- ------- -----------
<S> <C> <C> <C> <C> <C>
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 8/12/97 $320,000 $ 260,444 $ 295,200 0.4%
Metawave Communications Corp.
13.75%, due 4/28/00(a) 4/28/98 155,000 155,000 159,650 0.2
Warrants, expire 4/28/00 4/28/98 2,873 0(c) 29 0.0(b)
Primestar, Inc.
10.9375%, due 4/1/99 4/1/98 500,000 500,000 500,000 0.6
Rocky Mountain Internet, Inc.
Warrants, expire 7/29/03 6/8/98 825 0(c) 4,826 0.0(b)
United International Holdings, Inc.
Convertible Preferred Stock
4.00%, Series A 8/1/97 1,840 250,655 296,240 0.4
---------- ---------- ---
$1,166,099 $1,255,945 1.6%
========== ========== ===
</TABLE>
- ----------
(a) CIK ("Cash in Kind")--interest payment is made with cash or additional
securities.
(b) Less than one tenth of a percent.
(c) These warrants have no cost.
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.
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
29
<PAGE>
MainStay Strategic Income Fund
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.
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 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
30
<PAGE>
Notes to Financial Statements unaudited (continued)
developments and possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions.
Foreign currency held at June 30, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- --------------------------------------------------- -------- --------
<S> <C> <C> <C> <C>
Deutsche Mark DM 390,430 $217,235 $216,305
Italian Lira IL 19,203 11 11
Norwegian Krone NK 2,438 319 318
Pound Sterling (pound) 250,935 407,052 416,328
Swedish Krona SK 390,000 48,154 48,903
South African Rand ZAR 3,529 691 599
-------- --------
$673,462 $682,464
======== ========
</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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 had voluntarily agreed to reduce its fee
payable to the extent necessary such that total expenses did 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 date of the Fund's commencement of operations,
whichever occurred first. This expense reimbursement was terminated on February
28, 1998. For the six months ended June 30, 1998, the Manager earned $211,314
and reimbursed the Fund $30,927.
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 had agreed
to reimburse expenses of the Fund, the Sub-Adviser had voluntarily agreed to do
so proportionately.
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
31
<PAGE>
MainStay Strategic Income Fund
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 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.
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 $5,389 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$40,764 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. Transfer agent expense paid to MSS for the six months ended June
30, 1998 amounted to $55,972.
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 June 30, 1998, New York Life held shares of Class A with a net asset
value of $6,660,890, which represents 34.5% of the Class A net assets at period
end. NYLIFE Distributors held shares of Class B with a net asset value of
$5,518,569, which represents 9.6% 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 $976 for the six months ended June
30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$13,282 for the six months ended June 30, 1998.
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 prior year as if
they arose on January 1, 1998.
32
<PAGE>
Notes to Financial Statements unaudited (continued)
Note 5--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of U.S.
Government securities were $57,614 and $55,941, respectively. Purchases and
sales of securities, other than U.S. Government securities, securities subject
to repurchase transactions and short-term securities, were $71,669 and $60,488,
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 June 30, 1998.
Note 7--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended February 28** through
June 30, 1998* December 31, 1997
------------------ ------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ..................................................... 192 1,908 1,311 4,226
Shares issued in reinvestment of dividends and distributions .... 42 110 173 199
------- ------- ------- -------
234 2,018 1,484 4,425
Shares redeemed ................................................. (212) (726) (1,576) (297)
------- ------- ------- -------
Net increase (decrease) ......................................... 22 1,292 (92) 4,128
======= ======= ======= =======
</TABLE>
- ----------
* Unaudited.
** Commencement of Operations.
33
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
34
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
STRATEGIC INCOME FUND(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
35
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
36
<PAGE>
MainStay Strategic Income Fund
Semiannual Report
June 30, 1998
Unaudited
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
[LOGO] MAINSTAY(R) FUNDS
(C)1998. All rights reserved. MSSA17-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Strategic Value Fund Highlights 3
$10,000 Invested in the MainStay Strategic
Value Fund versus S&P 500, Lipper Flexible
Portfolio Fund Average, and
Inflation--Class A & Class B Shares 4
Portfolio Management Discussion and Analysis 5
Fund Performance for the Periods Ended
12/31/97 & 6/30/98 6
Asset Allocation 7
Portfolio Composition 9
Fund & Lipper Returns 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Unaudited Financial Statements 20
Notes to Financial Statements 24
The MainStay Funds 30
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* See page 4 for more information on the S&P 500.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Strategic Value Fund Highlights
================================================================================
MARKET RECAP FOR THE 6-MONTH PERIOD ENDED 6/30/98
================================================================================
o A robust economy with low interest rates, modest inflation, and low
unemployment helped move both stocks and bonds higher in the first six
months of 1998.
o Weaknesses in Asian economies caused a flight to high-quality, liquid
securities and caused investors to reevaluate risk.
o High-yield bonds and convertible securities had positive performance during
the reporting period.
o With investors primarily focused on large-cap growth stocks, the first half
of 1998 was a challenging period for value-oriented investors.
================================================================================
FUND RECAP FOR THE 6-MONTH AND SINCE-INCEPTION PERIODS ENDED 6/30/98
================================================================================
o The MainStay Strategic Value Fund returned 10.58% and 10.08% for Class A
shares and Class B shares, respectively, excluding all sales charges, for
the since-inception period ended 6/30/98.
o The Fund sought securities with attractive valuations and appropriate
risk/reward profiles in the current market environment.
o The Fund benefited from individual security selection in stocks,
convertibles, and high-yield bonds.
o Lower oil prices combined with difficulties in Asian economies to
negatively impact some of the Fund's energy, aerospace, and transportation
holdings.
o Both share classes underperformed the average Lipper* flexible portfolio
fund, which returned 10.13% for the six months ended 6/30/98.
- ----------
* See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
$10,000 Invested in the MainStay
Strategic Value Fund versus S&P 500, Lipper
Flexible Portfolio Fund Average, and Inflation
CLASS A SHARES SEC Returns: since inception 4.50%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lipper Flexible
Strategic Portfolio Fund
Period end Value Fund S&P 500* Average+ Inflation++
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/22/97 $ 9,450 $10,000 $10,000 $10,000
12/31/97 $ 9,839 $10,243 $10,031 $10,019
3/31/98 $10,866 $11,672 $10,888 $10,025
6/30/98 $10,450 $12,057 $11,019 $10,087
</TABLE>
CLASS B SHARES SEC Returns: since inception 5.08%
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MainStay Lipper Flexible
Strategic Portfolio Fund
Period end Value Fund S&P 500* Average+ Inflation++
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/22/97 $10,000 $10,000 $10,000 $10,000
12/31/97 $10,404 $10,243 $10,031 $10,019
3/31/98 $11,455 $11,672 $10,888 $10,025
6/30/98 $10,508 $12,057 $11,019 $10,087
</TABLE>
- ----------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 10/22/97 reflecting the
effect of the 5.5% maximum up-front sales charge, thereby reducing the
amount of the investment to $9,450. The Class B graph assumes an initial
investment of $10,000 made on 10/22/97. 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.
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Lipper Analytical Services, Inc. is an independent monitor of mutual fund
performance. Results do not reflect any deduction of sales charges and are
based on total returns with capital gains and dividends reinvested.
++ Inflation is represented by the Consumer Price Index (CPI), which is a
commonly used measure of the rate of inflation and shows the changes in the
cost of selected goods. It does not represent an investment return.
4
<PAGE>
Portfolio Management Discussion and Analysis
During the first half of 1998, a robust economy combined with low interest
rates, benign inflation, and low unemployment to send both the stock and bond
markets higher. Concerns about Asian difficulties, however, caused a general
flight to quality, with investors focusing on higher-quality bonds and highly
liquid, large-capitalization growth stocks. With oil and commodity prices
generally declining, securities with connections to energy, metals, and other
commodities generally underperformed. Throughout the reporting period, investors
focused primarily on growth stocks, making the first half of 1998 a relatively
challenging period for value-oriented equity investors.
With narrow yield spreads in the high-yield market, the compensation for taking
on additional risk was relatively small during most of the reporting period.
Toward the end of the second quarter, however, spreads widened, increasing the
return potential of higher-risk securities. In the convertible market,
risk/reward parameters continued to be driven by a combination of growth
potential in the underlying common stock and a variety of factors affecting bond
performance. These forces provided selective opportunities in an environment
filled with difficulties and securities that suddenly turned sour. While
high-yield and convertible bonds both showed positive performance in the first
half of the year, the stock market as a whole, and growth stocks in particular,
provided significantly higher returns.
Given this context, how did the MainStay Strategic Value Fund perform in the six
months ended 6/30/98?
For the six months ended 6/30/98, the MainStay Strategic Value Fund returned
6.21% and 5.81% for Class A shares and Class B shares, respectively, excluding
all sales charges. Both share classes underperformed the average Lipper*
flexible portfolio fund, which returned 10.13% for six months ended 6/30/98.
What was the primary reason why the Fund underperformed its peers?
The value orientation of the Fund was its primary drawback during the reporting
period. With large-cap growth stocks dominating the market, stocks with low
prices and low price-to-earnings ratios were at a severe disadvantage. The Fund
was also hurt by its large concentration in energy stocks, which suffered from
declining oil prices and reduced demand from Asian countries.
In which markets does the MainStay Strategic Value Fund invest?
Consistent with its objective, the Fund invests primarily in value stocks,
convertible securities, and high-yield bonds.
How did the Fund's stock component perform?
The first half of 1998 was a challenging period for value equities, but the Fund
owned a number of stocks that did well.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Flight to quality
- -----------------
When investors in general move to improve the quality or liquidity of the
securities they own, because of economic, industry, or market concerns that
suggest lower quality securities or those that are less liquid are likely to be
more vulnerable to negative market events.
Growth versus value
- -------------------
Growth investments typically include stocks with rising prices and positive
earnings trends. Value stocks typically include equities that are currently
trading below their fair market value, even if they have the potential to
increase in value over time.
- ----------
* See footnote and table on page 11 for more information on Lipper Analytical
Services, Inc.
5
<PAGE>
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 high-yield bonds with different credit ratings.
FUND PERFORMANCE FOR THE PERIODS ENDED 12/31/97 & 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Total Return %
---------------------------
Period end Class A Class B
- -----------------------------------------------
<S> <C> <C>
12/97 4.11% 4.04%
6/98 6.21% 5.81%
</TABLE>
See footnote * on page 11 for more information on performance.
Were there other significant purchases during the reporting period?
We initiated a large position for the Fund in Shaw Industries, the largest U.S.
carpet manufacturer. The company announced the beginning of a material
restructuring featuring a move to leave carpet retailing and the adoption of
economic value added (EVA) disciplines. These EVA disciplines will allow the
company to focus its efforts on its core competencies, which are manufacturing,
service, and retail.
The Fund substantially increased its position in American Standard. We believe
that a record of improving operating performance in air conditioning, truck
brake systems, and plumbing has been overlooked.
We also increased the Fund's position in IBM. We believe its mix of services,
software, and hardware represents an inexpensive way to take advantage of the
growth in companies that specialize in outsourcing and internets/intranets. We
also believe that the company's core technology strength is underappreciated.
Sometimes, being in a business related to a parent company can constrain
opportunities. That happened to Hussman, a manufacturer of refrigeration
equipment, which was one of the Fund's top-performing stocks during the
reporting period. The company was owned by Whitman, which also owned Pepsi
bottlers. While Hussman enjoyed easy access to Pepsi accounts, the parent kept
Hussman from pursuing competing soft-drink concerns. During the reporting
period, Hussman was spun off from its parent, which broadened the company's list
of potential customers. The Fund purchased Hussman shares shortly after the
spin-off. Hussman has tied managers' compensation to stock performance and has
initiated operating reforms that we believe are likely to improve performance.
The Fund benefited from its ownership of Continental Airlines. We felt that the
company's quality management and underdeveloped hubs offered good prospects for
strong relative growth.
6
<PAGE>
ASSET ALLOCATION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------------------
<S> <C>
Convertible Securities 11.9%
High-Yield Securities 11.1%
Common Stocks 72.4%
Cash, Equivalents & Other Assets, Less Liabilities 4.6%
</TABLE>
Actual percentages will vary over time.
What stocks did the Fund sell during the first half of the year?
The Fund sold Columbia/HCA Healthcare in the second quarter as the company's
share price substantially recovered and its strategic direction became more
certain. The Fund reduced or eliminated positions in several electric utilities
as price targets were achieved.
Which stocks were the best performers in the Fund's stock component?
Shaw Industries, Continental Airlines, and several of the Fund's holdings in
financial stocks, including NationsBank and Equitable, were among the best
performers. Financial stocks have benefited from excess capital and benign
inflation.
Which of the Fund's stocks underperformed?
Raychem is a diversified specialty chemical and electronics company that had
exposure to Asian markets and suffered from decreasing demand. Although the
stock dropped from $40 to $30, the Fund continues to own it because we perceive
value in the stock. We are reassessing the potential long-term impact of the
company's Asian exposure.
Northwest Airlines shares have suffered with unexpected labor strife,
deterioration of the company's operating position in the Far East, and the
uncertain outcome of owning Continental shares. We believe the stock represents
excellent value although we are less confident about when the value will be
realized. We are studying this position closely.
Shares of Foundation Health, an HMO, weakened with news of a
slower-than-expected turnaround in operations and delays in the sale of
nonstrategic assets. We believe the HMO sector is poised for a recovery in 1999,
if insurance rates rise in the face of contracting capacity.
What factors affected the Fund's convertible investments in the first half of
the year?
The convertible market suffered when a number of high-yield credits faced major
7
<PAGE>
PERCS
- -----
Preferred equity--redemption cumulative stock. Allows shareholders to exchange
common stock for preferred shares.
setbacks during the reporting period. Careful fundamental research and
individual security selection helped the Fund avoid these individual setbacks as
it sought to identify securities with attractive risk/reward profiles. Generally
speaking, the Fund seeks to participate in the upside potential of convertible
securities, while limiting downside risk.
Which of the Fund's convertible securities were strong performers during the
reporting period?
There were several. Owens Corning is a manufacturer of insulation and cookware
that benefited from the surge in homebuilding and consumer confidence. Their
convertibles have been the Fund's biggest and best-performing convertible
security.
The Fund also owns a Microsoft PERCS security, which means it has a cap on its
upside potential and is convertible or subject to mandatory redemption in two
years at a price of 102. Since it's trading at 90 now, there's some good upside
potential in this security.
Despite ongoing litigation in the first half of 1998, Microsoft continued to
dominate the computer software market and its convertible bonds contributed
positively to the Fund's performance. The Fund continues to hold the securities.
The Fund purchased Integrated Health Services convertibles in 1997 and sold them
at a profit in the second quarter of 1998. Generally, as convertibles increase
in price, they begin to carry additional downside risk, so the sale helped the
Fund manage both risk and return.
World Color Press is a high-quality name in the printing industry. When one of
the company's large investors decided to liquidate a portion of its common stock
holdings, the convertible bonds temporarily came under price pressure. This
allowed the Fund to invest at attractive prices, which have subsequently risen.
We believe the company is strong and the securities represent genuine value, and
the Fund continues to hold the bonds.
The Fund also benefited from its sales of Mark IV Industries and Pride
International convertibles, although the sales had a smaller impact on
performance.
Were there convertibles that performed poorly?
The Fund's convertible securities in the energy sector suffered from declining
oil prices and lower demand in Asia. Among those that were negatively impacted
were Apache, EDI, and Chesapeake Energy, all of which detracted from the Fund's
performance.
Consolidated Natural Gas was a security the Fund bought at a premium long after
its call date. When it was unexpectedly called at par, the Fund lost the amount
paid for the premium, which had a negative impact on performance.
During the reporting period, the Fund also bought some convertibles for Coltec
Industries, which supplies parts for Boeing aircraft. The industry came under
some pressure from Asian economic difficulties, and the securities had a
negative impact on the Fund's performance during the reporting period.
8
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- -------------------------------------------------------------------
<S> <C>
Convertible Bonds 7.5%
Convertible Preferred Stocks 4.4%
Corporate Bonds 11.1%
Common Stocks 72.4%
Cash, Equivalents & Other Assets, Less Liabilities 4.6%
</TABLE>
Actual percentages will vary over time.
What happened in the high-yield portion of the Fund?
The first half of 1998 was generally a successful period for high-yield bonds,
with yield spreads widening toward the end of the second quarter, providing more
appropriate compensation for higher-risk investments. During most of the period,
however, the Fund emphasized higher-quality high-yield securities, providing
strong performance with a lower risk profile than the market as a whole.
Which of the Fund's high-yield securities were strong performers?
CD Radio is a satellite company that hopes to do for radio what Direct TV did
for television. The company seeks to provide satellite radio communications on a
national scale, and its bonds were top performers.
Although most investors were running away from Asia at the end of 1997, we
identified an opportunity in First Pacific Capital, a successful Hong Kong
conglomerate. During the first half of 1998, the company completed an asset sale
and showed strong bond performance as its debt coverage increased. We enlarged
the Fund's position in First Pacific Capital during the reporting period, and
the bonds have contributed positively to performance.
MBI Finance is a financial company whose bonds the Fund purchased and sold at a
profit. Stone Container showed strong performance during the reporting period,
as did ITT PubliMedia, which the Fund sold realizing a substantial gain.
Did the Fund have high-yield securities that performed poorly?
Yes, but generally the impact was minor. The Fund had negative results with UIH
Australia, which hasn't yet benefited from the consolidating Australian cable
market. The Fund purchased high-yield bonds of IPC Magazine Group during the
reporting period, but the bonds failed to realize the potential we believed they
had. The Fund also had disappointing results from
9
<PAGE>
High-yield securities run greater risks of price fluctuations, loss of principal
and interest, default or bankruptcy by the issuer, and other risks, which is why
these securities are considered 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.
Applied Finance. All three of these bonds had a somewhat negative impact on
performance.
How was the Fund allocated at the end of the first half of the year?
At the end of June 1998, the Fund was allocated approximately 72.4% in common
stocks, 11.9% in convertible securities, and 11.1% in high-yield bonds.
Overall, what is the Fund's outlook for the future?
While past performance is no guarantee of future results, history suggests that
growth and value tend to alternate as the market's discipline of choice. Given
the steady concentration on growth investments over the last several years, we
believe the market is poised for an inflection point, where value stocks may
come into favor, or at least receive greater investor attention.
With spreads widening in the high-yield market, we are starting to increase the
Fund's allocation among single-B+ securities as the compensation begins to
justify the additional risk. In the convertible market, we will continue to use
careful research and evaluation of both risk and reward potential to determine
which securities offer the most attractive opportunities for the Fund going
forward.
No matter where the markets may move, the Fund will continue to seek maximum
long-term total return from a combination of common stocks, convertible
securities, and high-yield securities.
Denis Laplaige
Steven Tananbaum
Neil Feinberg
Portfolio Managers
MacKay Shields Financial Corporation
- ----------
+ Debt rated B by Standard & Poor's is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet
its financial commitment on the obligation. Adverse business, financial or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
Past performance is no guarantee of future results.
10
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================================
Fund average annual total returns*
================================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 10.58%
Class B 10.08%
<CAPTION>
================================================================================================
Fund SEC returns*
================================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 4.50%
Class B 5.08%
<CAPTION>
================================================================================================
Lipper+ category return as of 6/30/98
================================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
flexible portfolio fund 10.52%
<CAPTION>
================================================================================================
Fund per share net asset values & distributions for the six months ended 6/30/98
================================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.86 $0.0708 $0.0000
Class B $10.85 $0.0386 $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 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 six 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 6/30/98.
11
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
American Standard Companies, Inc. $2,757,219
Shaw Industries, Inc. 2,726,588
Mark IV Industries, Inc. 2,471,738
International Business Machines Corp. 2,353,656
Coltec Industries, Inc. 1,729,125
Xerox Corp. 1,580,269
Travelers Group, Inc. 1,473,188
Cirrus Logic, Inc., 6.00%, due 12/15/03 1,332,450
Continental Airlines, Inc. 1,159,669
Raychem Corp. 1,135,200
<CAPTION>
10 Largest Purchases for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF PURCHASE
================================================================================
<S> <C>
International Business Machines Corp. Common Stock $3,485,283
Mark IV Industries, Inc., 4.75%, due 11/1/04
and Common Stock 2,750,726
American Standard Companies, Inc. Common Stock 2,487,697
Shaw Industries, Inc., Common Stock 2,261,401
Coltec Industries, Inc. Common Stock 2,124,354
Foundation Health Systems, Inc., Class A Common Stock 1,834,727
Xerox Corp. Common Stock 1,682,091
Adaptec, Inc., 4.75%, due 2/1/04 and Common Stock 1,645,106
Raychem Corp. Common Stock 1,562,248
Travelers Group, Inc. Common Stock 1,522,771
<CAPTION>
10 Largest Sales for the six months ended 6/30/98
================================================================================
SECURITY AMOUNT OF SALE
================================================================================
<S> <C>
Foundation Health Systems, Inc., Class A Common Stock $1,614,862
Pride International, Inc., (zero coupon), due 4/24/18 1,219,449
International Business Machine Corp. Common Stock 1,198,220
Philip Morris Companies, Inc. Common Stock 897,960
Adaptec, Inc., 4.75%, due 2/1/04 and Common Stock 884,633
Echlin, Inc. Common Stock 826,012
Motorola, Inc. Common Stock 816,610
Columbia/HCA Healthcare Corp., 7.69%, due 6/15/25,
8.85%, due 1/1/07 and Common Stock 776,351
Owens Corning Capital LLC, 6.50% Preferred Stock 761,250
AT&T Corp. Common Stock 682,851
</TABLE>
- ----------
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.
12
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
CONVERTIBLE SECURITIES (11.9%)+
BONDS (7.5%)
AUTO PARTS (0.8%)
Mark IV Industries, Inc.
4.75%, due 11/1/04.................. $ 250,000 $ 231,563
4.75%, due 11/1/04 (c).............. 250,000 231,563
-----------
463,126
-----------
CAPITAL GOODS (0.0%) (b)
Paliburg International Finance, Ltd.
3.50%, due 2/6/01 (e)............... 40,000 29,400
-----------
CELLULAR TELEPHONE (0.3%)
United States Cellular Corp.
(zero coupon), due 6/15/15.......... 500,000 188,750
-----------
COMPUTER PERIPHERIALS (0.3%)
Adaptec, Inc.
4.75%, due 2/1/04 (a)............... 250,000 197,500
-----------
CONGLOMERATES (0.2%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (e).............. 140,000 123,550
-----------
DRUGS (0.4%)
Ivax Corp.
6.50%, due 11/15/01................. 35,000 31,325
Roche Holdings, Inc.
(zero coupon), due 4/20/10.......... 400,000 228,000
-----------
259,325
-----------
ELECTRICAL EQUIPMENT (0.1%)
Credence Systems Corp.
5.25%, due 9/15/02.................. 45,000 34,988
-----------
HEALTH CARE (0.8%)
HEALTHSOUTH Corp.
3.25%, due 4/1/03................... 500,000 493,125
-----------
NON-DEFENSE ELECTRONICS (0.3%)
Cymer, Inc.
3.50%, due 8/6/04 (c)............... 250,000 189,062
-----------
PERSONNEL SERVICES (0.4%)
Metamor Worldwide, Inc.
2.94%, due 8/15/04.................. 250,000 244,375
-----------
PUBLISHING (0.9%)
World Color Press, Inc.
6.00%, due 10/1/07.................. 500,000 557,500
-----------
SOFTWARE (0.5%)
Bea Systems, Inc.
4.00%, due 6/15/05 (c).............. 250,000 266,250
-----------
TECHNOLOGY (2.5%)
Cirrus Logic, Inc.
6.00%, due 12/15/03................. 1,645,000 1,332,450
Samsung Electronics, Inc.
(zero coupon), due 12/31/07 (e)..... 25,000 20,000
Thermo Electron Corp.
4.25%, due 1/1/03 (c)............... 200,000 214,000
-----------
1,566,450
-----------
Total Convertible Bonds
(Cost $4,497,882)................... 4,613,401
-----------
<CAPTION>
Shares
==========
<S> <C> <C>
PREFERRED STOCKS (4.4%)
AEROSPACE (0.6%)
Coltec Capital Trust
5.25% (c)........................... 8,000 384,000
-----------
AUTO PARTS (0.4%)
Tower Automotive Capital, Inc.
6.75% (c)........................... 5,000 240,625
-----------
BIOTECHNOLOGY (0.4%)
Alkermes, Inc.
6.50%............................... 5,000 208,125
-----------
BUILDING MATERIALS (0.9%)
Owens Corning Capital LLC
6.50% (c)........................... 10,000 545,000
-----------
ENERGY (0.2%)
Chesapeake Energy Corp.
7.00% (c)........................... 3,000 128,250
-----------
</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 Strategic Value Fund
<TABLE>
<CAPTION>
Shares Value
=================================
<S> <C> <C>
PREFERRED STOCKS (Continued)
RESTAURANTS & LODGING (0.4%)
Suiza Capital Trust II
5.50% (c)........................... 5,000 $ 247,500
-----------
SOFTWARE (1.1%)
Microsoft Corp.
$2.196, Series A.................... 7,000 665,000
-----------
TELECOMMUNICATION SERVICES (0.4%)
Omnipoint Corp.
7.00% (c)........................... 5,000 242,500
-----------
Total Preferred Stocks
(Cost $2,577,135)................... 2,661,000
-----------
Total Convertible Securities
(Cost $7,075,017)................... 7,274,401
-----------
<CAPTION>
Principal
Amount
============
<S> <C> <C>
CORPORATE BONDS (11.1%)
AEROSPACE (0.1%)
Newport News Shipbuilding, Inc.
9.25%, due 12/1/06.................. $ 70,000 74,375
-----------
AIRLINES (0.1%)
Valujet, Inc.
10.25%, due 4/15/01................. 45,000 43,538
-----------
BANKS (0.3%)
B.F. Saul Real Estate Investment Trust
Series B
9.75%, due 4/1/08................... 50,000 49,375
First Nationwide Holdings, Inc.
12.25%, due 5/15/01................. 25,000 27,312
Tokai Preferred Capital Co. L.L.C.
9.98%, due 12/29/49, 11.0914%
beginning 6/30/98 (c)(i)............ 145,000 135,031
-----------
211,718
-----------
BUILDING MATERIALS (0.5%)
Triangle Pacific Corp.
10.50%, due 8/1/03.................. 300,000 312,000
-----------
BUILDINGS (0.2%)
Greystone Homes, Inc.
10.75%, due 3/1/04.................. 120,000 129,600
-----------
CABLE (1.3%)
Continental Cablevision, Inc.
11.00%, due 6/1/07.................. 200,000 217,457
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99............ 240,000 232,800
Primestar, Inc.
10.9375%, due 4/1/99 (d)(g)......... 170,000 170,000
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01........... 285,000 174,206
-----------
794,463
-----------
CASINOS (0.4%)
Casino America, Inc.
12.50%, due 8/1/03.................. 65,000 73,450
Empress River Casino Finance Corp.
10.75%, due 4/1/02.................. 100,000 108,000
Grand Casinos, Inc.
10.125%, due 12/1/03................ 15,000 16,425
Penn National Gaming, Inc.
10.625%, due 12/15/04 (c)........... 25,000 26,250
-----------
224,125
-----------
CELLULAR TELEPHONE (0.3%)
Centennial Cellular Corp.
8.875%, due 11/1/01................. 30,000 31,162
International Wireless
Communications Holdings, Inc.
(zero coupon), due 8/15/01.......... 200,000 36,000
Millicom International Cellular S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01 (f)........ 175,000 135,188
Rogers Cantel, Inc.
8.30%, due 10/1/07 (f).............. 15,000 14,700
-----------
217,050
-----------
CHEMICALS (0.1%)
Octel Developments, PLC
10.00%, due 5/1/06 (c).............. 45,000 45,900
-----------
COMPUTERS & OFFICE EQUIPMENT (0.2%)
American Business Information, Inc.
9.50%, due 6/15/08 (c).............. 75,000 75,375
Cooperative Computing
9.00%, due 2/1/08 (c)............... 35,000 31,500
-----------
106,875
-----------
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
CORPORATE BONDS (Continued)
CONGLOMERATES (0.1%)
Hutchison Whampoa Ltd.
7.45%, due 8/1/17 (c)............... $ 95,000 $ 75,611
-----------
CONSUMER DURABLES (0.1%)
Samsonite Corp.
10.75%, due 6/15/08 (c)............. 75,000 74,438
-----------
COSMETICS (0.1%)
Jafra Cosmetics International, Inc.
11.75%, due 5/1/08 (c).............. 65,000 65,000
-----------
DOMESTIC OIL & GAS (0.3%)
Houston Exploration Co. (The)
Series B
8.625%, due 1/1/08.................. 55,000 55,000
Mariner Energy, Inc.
10.50%, due 8/1/06.................. 50,000 50,750
Northern Offshore ASA
10.00%, due 5/15/05 (c)............. 95,000 90,725
-----------
196,475
-----------
ELECTRIC UTILITIES (0.7%)
CMS Energy Corp.
7.00%, due 1/15/05.................. 225,000 228,375
Empresa Electrica del
Norte Grande S.A.
10.50%, due 6/15/05 (c)............. 45,000 45,900
ESI Tractebel Acquisition Corp.
7.99%, due 12/30/11 (c)............. 150,000 150,000
-----------
424,275
-----------
ENERGY (0.2%)
Conproca, S.A.
12.00%, due 6/16/10 (c)(e).......... 75,000 76,125
Nuevo Energy Co.
8.875%, due 6/1/08 (c).............. 70,000 71,225
-----------
147,350
-----------
FINANCE (0.6%)
CB Richard Ellis Services, Inc.
8.875%, due 6/1/06.................. 100,000 99,250
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (h).............. 280,000 112,000
Resource America, Inc.
12.00%, due 8/1/04.................. 100,000 107,000
Traffic Stream Infrastructure Co., Ltd.
14.25%, due 5/1/06 (c).............. 80,000 64,000
-----------
382,250
-----------
FOOD, BEVERAGES & TOBACCO (0.3%)
Fresh Foods, Inc.
10.75%, due 6/1/06 (c).............. 35,000 35,000
Global Health Sciences, Inc.
11.00%, due 5/1/08 (c).............. 65,000 64,187
Colorado Prime Corp.
12.50%, due 5/1/04 (c).............. 15,000 14,775
Standard Commercial Corp.
8.875%, due 8/1/05.................. 75,000 73,500
-----------
187,462
-----------
HEALTH CARE (0.7%)
Fountain View, Inc.
11.25%, due 4/15/08 (c)............. 120,000 122,100
Medaphis Corp.
9.50%, due 2/15/05 (c).............. 80,000 78,400
Quest Diagnostic, Inc.
10.75%, due 12/15/06................ 120,000 134,100
Sun Healthcare Group, Inc.
9.375%, due 5/1/08 (c).............. 65,000 65,650
-----------
400,250
-----------
INDUSTRIAL (0.3%)
Snyder Oil Corp.
8.75%, due 6/15/07.................. 60,000 60,900
Thermadyne Holdings Corp.
(zero coupon), due 6/1/08
12.50%, beginning 6/1/03 (c)........ 200,000 109,000
-----------
169,900
-----------
MEDIA (0.3%)
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning 12/1/02........... 150,000 87,750
General Media, Inc.
10.625%, due 12/31/00............... 15,000 13,950
Rogers Communications, Inc.
8.875%, due 7/15/07 (f)............. 30,000 30,225
Tri-State Outdoor Media
11.00%, due 5/15/08 (c)............. 75,000 75,938
-----------
207,863
-----------
MINING (0.1%)
Great Central Mines Ltd.
8.875%, due 4/1/08 (c)(e)........... 60,000 58,950
-----------
</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>
Principal
Amount Value
=================================
<S> <C> <C>
CORPORATE BONDS (Continued)
OIL SERVICES (0.1%)
Pool Energy Services Co.
8.625%, due 4/1/08 (c).............. $ 60,000 $ 58,500
-----------
PAPER & FOREST PRODUCTS (0.6%)
SD Warren Co.
12.00%, due 12/15/04................ 100,000 110,625
Stone Container Financial Co. of Canada
11.50%, due 8/15/06 (c)(f).......... 200,000 226,000
-----------
336,625
-----------
PERSONAL SERVICES (0.1%)
Loewen Group, Inc. (The)
6.70%, due 10/1/99 (c).............. 50,000 49,818
-----------
PUBLISHING (0.4%)
IPC Magazines Group PLC
(zero coupon), due 3/15/08
10.75%, beginning
3/15/03 (c)(j)...................... (pound)95,000 90,349
Regional Independent Media Group
(zero coupon), due 7/1/08
12.875%, beginning
7/1/03 (c)(j)....................... 45,000 41,014
Regional Independent Media Group
10.50%, due 7/1/08 (c).............. $ 125,000 126,875
-----------
258,238
-----------
REAL ESTATE (0.2%)
LNR Property Corp.
9.375%, due 3/15/08 (c)............. 95,000 95,238
-----------
RESTAURANTS & LODGING (0.6%)
Advantica Restaurant Group, Inc.
11.25%, due 1/15/08................. 65,000 69,062
Extended Stay America, Inc.
9.15%, due 3/15/08 (c).............. 55,000 54,175
FRI-MRD
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 (g)....... 250,000 230,625
-----------
353,862
-----------
STEEL, ALUMINUM &
OTHER METALS (0.3%)
Ivaco, Inc.
11.50%, due 9/15/05 (f)............. 50,000 54,750
Schuff Steel Co.
10.50%, due 6/1/08 (c).............. 70,000 69,300
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05................. 30,000 32,175
-----------
156,225
-----------
SUPERMARKETS (0.0%) (b)
Penn Traffic Co. (The)
10.25%, due 2/15/02................. 20,000 15,900
-----------
TECHNOLOGY (0.1%)
Electronic Retailing Systems
International, Inc.
(zero coupon), due 2/1/04
13.25%, beginning 2/1/00............ 80,000 33,600
Samsung Electronic America, Inc.
9.75%, due 5/1/03 (c)............... 35,000 32,725
-----------
66,325
-----------
TELECOMMUNICATION SERVICES (0.6%)
Fonorola, Inc.
12.50%, due 8/15/02 (f)............. 70,000 77,525
Globalstar L.P. Capital Corp.
11.50%, due 6/1/05 (c).............. 80,000 77,900
Impsat Corp.
12.375%, due 6/15/08 (c)............ 40,000 40,400
Orion Network System, Inc.
(zero coupon), due 1/15/07
12.50%, beginning 1/15/02........... 100,000 76,000
T/SF Communications Corp.
Series B
10.375%, due 11/1/07................ 75,000 76,312
-----------
348,137
-----------
TEXTILE & APPAREL (0.3%)
Delta Mills, Inc.
9.625%, due 9/1/07.................. 110,000 108,075
Norton McNaught, Inc.
12.50%, due 6/1/05 (c).............. 50,000 50,000
-----------
158,075
-----------
TRANSPORTATION (0.5%)
Cathay International Holdings, Inc.
13.00%, due 4/15/08 (c)............. 115,000 101,200
Equimar Shipholdings Ltd.
9.875%, due 7/1/07.................. 35,000 31,850
</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 unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
CORPORATE BONDS (Continued)
TRANSPORTATION (Continued)
Pacific & Atlantic (Holdings) Inc.
11.50%, due 5/30/08 (c)............. $ 60,000 $ 56,400
Pegasus Shipping Hellas, Ltd.
11.875%, due 11/15/04............... 110,000 111,375
-----------
300,825
-----------
Total Corporate Bonds
(Cost $6,731,425)................... 6,747,236
-----------
<CAPTION>
Shares
============
<S> <C> <C>
COMMON STOCKS (72.4%)
AEROSPACE/DEFENSE
ELECTRONICS (2.8%)
Coltec Industries, Inc. (a)........... 87,000 1,729,125
-----------
AIRLINES (3.1%)
Continental Airlines, Inc.
Class B (a)......................... 19,050 1,159,669
Northwest Airlines Corp. (a).......... 18,600 717,262
-----------
1,876,931
-----------
AUTO MANUFACTURING (1.3%)
General Motors Corp. ................. 11,950 798,409
-----------
AUTO PARTS (5.5%)
LucasVarity PLC ADR (k)............... 22,400 891,800
Mark IV Industries, Inc............... 14,300 2,471,737
-----------
3,363,537
-----------
BANKS (3.2%)
Bankers Trust New York Corp........... 1,800 208,913
KeyCorp............................... 21,000 748,125
Nationsbank Corp...................... 13,100 1,002,150
-----------
1,959,188
-----------
BUILDING PRODUCTS (1.7%)
Hussmann International, Inc........... 53,800 1,008,750
-----------
CHEMICALS (0.9%)
Agrium, Inc........................... 35,000 441,875
Geon Co. (The)........................ 6,000 137,625
-----------
579,500
-----------
COMPUTERS & OFFICE EQUIPMENT (7.1%)
International Business
Machines Corp....................... 20,500 2,353,656
Lexmark International Group, Inc.
Class A (a)......................... 7,000 427,000
Xerox Corp............................ 15,550 1,580,269
-----------
2,780,656
-----------
COMPUTER PERIPHERIALS (0.8%)
Adaptec, Inc. (a)..................... 35,000 500,938
-----------
CONGLOMERATES (4.5%)
American Standard Cos., Inc. (a)...... 61,700 2,757,219
-----------
CONTAINERS (1.1%)
Crown Cork & Seal Co., Inc............ 4,000 190,000
Owens-Illinois, Inc. (a).............. 11,000 492,250
-----------
682,250
-----------
ELECTRIC UTILITIES (2.4%)
Central & South West Corp............. 11,500 309,062
Energy East Corp...................... 17,800 740,925
OGE Energy Corp. ..................... 104 2,808
Texas Utilities Co. .................. 10,500 437,062
-----------
1,489,857
-----------
ELECTRONIC COMPONENTS (1.9%)
Raychem Corp.......................... 38,400 1,135,200
-----------
ENERGY (1.6%)
Coastal Corp. (The)................... 9,100 635,294
Seagull Energy Corp. (a).............. 20,700 342,844
-----------
978,138
-----------
HEALTH CARE (5.4%)
Aetna, Inc............................ 8,500 647,062
Allegiance Corp....................... 17,500 896,875
Foundation Health Systems, Inc.
Class A (a)......................... 30,300 799,162
Integrated Health Services, Inc. ..... 24,902 933,825
-----------
3,276,924
-----------
INSURANCE (6.7%)
America Financial Corp................ 8,500 552,500
Chubb Corp. .......................... 6,100 490,288
CIGNA Corp. .......................... 12,750 879,750
</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 Value Fund
<TABLE>
<CAPTION>
Shares Value
=================================
<S> <C> <C>
COMMON STOCKS (Continued)
INSURANCE (Continued)
Equitable Cos., Inc. (The)............ 9,500 $ 711,906
Travelers Group, Inc. ................ 24,300 1,473,187
-----------
4,107,631
-----------
MEDICAL EQUIPMENT (0.4%)
PSS World Medical, Inc. (a)........... 15,000 219,375
-----------
OIL SERVICES (1.2%)
Union Pacific Resources Group, Inc. .. 41,900 735,869
-----------
OILS (4.0%)
Apache Corp........................... 13,037 410,666
Noble Affiliates, Inc................. 16,500 627,000
Occidental Petroleum Corp............. 5,700 153,900
Oryx Energy Co. (a)................... 34,800 769,950
Unocal Corp. ......................... 13,000 464,750
-----------
2,426,266
-----------
PAPER & FOREST PRODUCTS (1.1%)
Bowater, Inc.......................... 7,500 354,375
Georgia-Pacific Corp. (Timber Group).. 13,200 303,600
-----------
657,975
-----------
POLLUTION & RELATED (1.6%)
Browning-Ferris Industries, Inc. ..... 28,400 986,900
-----------
RAILROADS (0.7%)
CSX Corp.............................. 4,000 182,000
Union Pacific Corp.................... 6,000 264,750
-----------
446,750
-----------
RECREATION & ENTERTAINMENT (1.3%)
Harrah's Entertainment, Inc. (a)...... 35,000 813,750
-----------
RETAIL (1.3%)
Federated Department
Stores, Inc. (a).................... 4,300 231,394
Toys "R" Us, Inc. (a)................. 23,400 551,362
-----------
782,756
-----------
STEEL, ALUMINUM &
OTHER METALS (1.5%)
Reynolds Metals Co.................... 16,000 895,000
-----------
TELECOMMUNICATION (1.7%)
AT&T Corp............................. 6,500 371,312
US West, Inc. (a)..................... 14,000 655,375
-----------
1,026,687
-----------
TELECOMMUNICATION EQUIPMENT (1.0%)
Andrew Corp. (a)...................... 32,100 579,806
-----------
TELECOMMUNICATION SERVICES (0.7%)
GTE Corp.............................. 7,500 417,188
-----------
TEXTILE/HOME FURNISHING &
APPAREL (4.5%)
Shaw Industries, Inc.................. 154,700 2,726,587
-----------
TIRE & RUBBER (0.7%)
Goodyear Tire & Rubber Co. (The)...... 7,000 451,063
-----------
TOBACCO (0.4%)
Philip Morris Cos., Inc............... 6,000 236,250
-----------
TRANSPORTATION (0.3%)
FDX Corp. (a)......................... 3,000 188,250
-----------
Total Common Stocks
(Cost $43,746,294).................. 44,194,994
-----------
WARRANTS (0.0%) (b)
CABLE (0.0%) (b)
UIH Australia/Pacific, Inc.
expire 5/15/06 (a)(c)............... 30 150
-----------
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.
18
<PAGE>
Portfolio of Investments unaudited (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
=================================
<S> <C> <C>
WARRANTS (Continued)
TELECOMMUNICATION SERVICES (0.0%) (b)
Rocky Mountain Internet, Inc.
expire 7/29/03 (a)(g)............... $ 321 $ 1,877
-----------
Total Warrants
(Cost $491)......................... 2,177
-----------
SHORT-TERM INVESTMENTS (6.5%)
COMMERCIAL PAPER (6.5%)
General Electric Corp.
5.62%, due 7/6/98................... 1,830,000 1,828,572
Goldman Sachs Group L.P. (The)
6.25%, due 7/1/98................... 805,000 805,000
Morgan Stanley, Dean Witter,
Discover & Co.
6.25%, due 7/1/98................... 1,350,000 1,350,000
-----------
Total Short-Term Investments
(Cost $3,983,572)................... 3,983,572
-----------
Total Investments
(Cost $61,536,798) (l) ............. 101.9% 62,202,380(m)
Liabilities in Excess of
Cash and Other Assets .............. (1.9) (1,136,787)
---------- -----------
Net Assets............................ 100.0% 61,065,593
========== ===========
</TABLE>
- ----------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating Rate. Rate shown is the rate in effect at June 30, 1998.
(e) Euro-Dollar bonds.
(f) Yankee bonds.
(g) Restricted security.
(h) Issue in default.
(i) PIK ("Payment in Kind")--interest or dividend payment is made with
additional securities.
(j) Foreign bond denominated in (pound) pound sterling.
(k) ADR--American Depository Receipt.
(l) The cost for Federal income tax purposes is $61,537,976.
(m) At June 30, 1998, net unrealized appreciation was $664,404, 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 $3,236,173 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $2,571,769.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $61,536,798) ...... $ 62,202,380
Receivables:
Investment securities sold .......................................... 2,988,323
Fund shares sold .................................................... 266,181
Dividends and interest .............................................. 242,821
Unamortized organization expense ...................................... 159,210
------------
Total assets ...................................................... 65,858,915
------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 4,399,445
Custodian ........................................................... 158,266
MainStay Management ................................................. 38,308
NYLIFE Distributors ................................................. 36,831
Fund shares redeemed ................................................ 15,374
Transfer agent ...................................................... 14,983
Organization ........................................................ 3,000
Trustees ............................................................ 100
Accrued expenses ...................................................... 42,161
Unrealized depreciation on forward foreign currency contracts ......... 3,612
Dividend payable ...................................................... 81,242
------------
Total liabilities ................................................. 4,793,322
------------
Net assets ............................................................ $ 61,065,593
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 17,628
Class B ............................................................. 38,636
Additional paid-in capital ............................................ 59,283,291
Accumulated undistributed net investment income ....................... 6,418
Accumulated undistributed net realized gain on investments ............ 1,057,650
Net unrealized appreciation on investments ............................ 665,582
Net unrealized depreciation on forward foreign currency contracts ..... (3,612)
------------
Net assets ............................................................ $ 61,065,593
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 19,147,549
============
Shares of beneficial interest outstanding ............................. 1,762,790
============
Net asset value per share outstanding ................................. $ 10.86
Maximum sales charge (5.50% of offering price) ........................ 0.63
------------
Maximum offering price per share outstanding .......................... $ 11.49
============
CLASS B
Net assets applicable to outstanding shares ........................... $ 41,918,044
============
Shares of beneficial interest outstanding ............................. 3,863,559
============
Net asset value and offering price per share outstanding .............. $ 10.85
============
</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 six months ended June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a) ..................................................................... $ 264,678
Interest ............................................................................ 463,075
-----------
Total income .................................................................... 727,753
-----------
Expenses:
Management ........................................................................ 167,960
Distribution--Class B ............................................................. 105,799
Transfer agent .................................................................... 53,876
Service--Class A .................................................................. 20,720
Service--Class B .................................................................. 35,267
Shareholder communication ......................................................... 27,368
Registration ...................................................................... 23,727
Amortization of organization expense .............................................. 18,052
Professional ...................................................................... 15,934
Custodian ......................................................................... 11,637
Recordkeeping ..................................................................... 9,176
Trustees .......................................................................... 476
Miscellaneous ..................................................................... 9,128
-----------
Total expenses .................................................................. 499,120
-----------
Net investment income ............................................................... 228,633
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain on investments .................................................... 1,012,792
Net change in unrealized appreciation (depreciation) on investments:
Security transactions ............................................................. 209,118
Forward foreign currency contracts ................................................ (3,612)
-----------
Net unrealized gain on investments and foreign currency transactions ................ 205,506
-----------
Net realized and unrealized gain on investments and foreign currency transactions ... 1,218,298
-----------
Net increase in net assets resulting from operations ................................ $ 1,446,931
===========
</TABLE>
- ----------
(a) Dividends recorded net of foreign withholding taxes of $441.
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>
Six months October 22, 1997**
ended through
June 30, 1998* December 31, 1997
-------------- ------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ....................................................... $ 228,633 $ 43,730
Net realized gain on investments ............................................ 1,012,792 243,180
Net change in unrealized appreciation on investments ........................ 209,118 456,464
Net change in unrealized depreciation on forward foreign currency contracts . (3,612) --
------------ ------------
Net increase in net assets resulting from operations ........................ 1,446,931 743,374
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A ................................................................... (114,440) (34,556)
Class B ................................................................... (111,160) (20,217)
From net realized gain on investments:
Class A ................................................................... -- (111,511)
Class B ................................................................... -- (86,811)
------------ ------------
Total dividends and distributions to shareholders ....................... (225,600) (253,095)
------------ ------------
Capital share transactions: Net proceeds from sale of shares:
Class A ................................................................... 6,247,787 4,223,379
Class B ................................................................... 30,848,837 11,097,588
Net asset value of shares issued to shareholders in reinvestment of dividends
and distributions:
Class A ................................................................... 90,585 120,532
Class B ................................................................... 75,619 96,515
------------ ------------
37,262,828 15,538,014
Cost of shares redeemed:
Class A ................................................................... (1,523,182) (32,189)
Class B ................................................................... (1,841,694) (49,794)
------------ ------------
Increase in net assets derived from capital share transactions .......... 33,897,952 15,456,031
------------ ------------
Net increase in net assets .............................................. 35,119,283 15,946,310
NET ASSETS:
Beginning of period ........................................................... 25,946,310 10,000,000
------------ ------------
End of period ................................................................. $ 61,065,593 $ 25,946,310
============ ============
Accumulated undistributed net investment income at end of period .............. $ 6,418 $ 3,385
============ ============
</TABLE>
- ----------
* Unaudited.
** Commencement of operations.
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 A Class B Class A Class B
---------- ---------- ---------- ----------
Six months October 22, 1997**
ended through
June 30, 1998* December 31, 1997
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period .......... $ 10.29 $ 10.29 $ 10.00 $ 10.00
-------- -------- -------- --------
Net investment income ........................... 0.07 0.04 0.03 0.02
Net realized and unrealized gain on investments . 0.57 0.56 0.38 0.38
-------- -------- -------- --------
Total from investment operations ................ 0.64 0.60 0.41 0.40
-------- -------- -------- --------
Less dividends and distributions:
From net investment income ...................... (0.07) (0.04) (0.03) (0.02)
From net realized gain on investments ........... -- -- (0.09) (0.09)
-------- -------- -------- --------
Total dividends and distributions ............... (0.07) (0.04) (0.12) (0.11)
-------- -------- -------- --------
Net asset value at end of period ................ $ 10.86 $ 10.85 $ 10.29 $ 10.29
======== ======== ======== ========
Total investment return (a) ..................... 6.21% 5.81% 4.11% 4.04%
Ratios (to average net assets)/Supplemental Data:
Net investment income ......................... 1.49%+ 0.74%+ 1.66%+ 0.91%+
Expenses ...................................... 1.76%+ 2.51%+ 2.73%+ 3.48%+
Portfolio turnover rate ......................... 71% 71% 29% 29%
Net assets at end of period (in 000's) .......... $ 19,148 $ 41,918 $ 13,622 $ 12,325
</TABLE>
- ----------
* Unaudited.
** 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.
23
<PAGE>
MainStay Strategic 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 twenty-two 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.
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.
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
24
<PAGE>
Notes to Financial Statements unaudited
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 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.
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.
Forward foreign currency contract open at June 30, 1998:
<TABLE>
<CAPTION>
Contract Amount Contract Amount Unrealized
Foreign Currency Sale Contract Sold Purchased (Depreciation)
- ------------------------------ --------------- --------------- --------------
<S> <C> <C> <C>
Pound Sterling vs. US$, expiring 9/9/98............. (pound)98,400 $159,910 $(3,612)
=======
</TABLE>
25
<PAGE>
MainStay Strategic Value Fund
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 securities held at June 30, 1998:
<TABLE>
<CAPTION>
Principal Percent
Acquisition Amount/ 6/30/98 of
Security Date Shares Cost Value Net Assets
- -------- ----------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 ................... 1/14/98 $250,000 $212,008 $230,625 0.4%
Primestar, Inc.
10.402%, due 4/1/99 ......................... 4/1/98 170,000 170,000 170,000 0.3
Rocky Mountain Internet, Inc.
Warrants expire 7/29/03 ..................... 6/8/98 321 0(a) 1,877 0.0(b)
-------- -------- ---
$382,008 $402,502 0.7%
======== ======== ===
</TABLE>
- ----------
(a) Warrants have no cost.
(b) Less than one tenth of a percent.
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.
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.
26
<PAGE>
Notes to Financial Statements unaudited (continued)
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 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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 0.75%. For the six months ended June 30, 1998, the Manager
earned $167,960.
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.
27
<PAGE>
MainStay Strategic Value 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 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.
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 $14,787 for the six
months ended June 30, 1998. The Fund was also advised that NYLIFE Distributors
retained contingent deferred sales charges for redemption of Class B shares of
$25,334 for the six months ended June 30, 1998.
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 six months ended June
30, 1998, amounted to $48,956.
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 June 30, 1998, New York Life held shares of Class A with a net asset
value of $9,952,291, which represents 52.0% of the Class A 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 $545 for the six months ended June
30, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$9,176 for the six months ended June 30, 1998.
28
<PAGE>
Notes to Financial Statements unaudited
Note 4--Purchases and Sales of Securities (in 000's):
During the six months ended June 30, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $66,607 and $29,896, 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 June 30, 1998.
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
Six months ended October 22** through
June 30, 1998* December 31, 1997
------------------ -------------------
Class A Class B Class A Class B
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares sold ................................................ 571 2,827 414 1,093
Shares issued in reinvestment of dividend
and distributions ........................................ 9 7 12 10
------ ------ ------ ------
580 2,834 426 1,103
Shares redeemed ............................................ (140) (168) (3) (5)
------ ------ ------ ------
Net increase ............................................... 440 2,666 423 1,098
====== ====== ====== ======
</TABLE>
- ----------
* Unaudited.
** Commencement of operations.
29
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
30
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
STRATEGIC VALUE FUND(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
31
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
32
<PAGE>
MainStay Strategic Value Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
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 Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA18-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Small Cap Growth Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Industry--Top 5 6
Portfolio Composition 8
Fund & Lipper Returns 9
Top 10 Holdings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R)500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
2
<PAGE>
MainStay Small Cap Growth Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o Modest inflation, low interest rates, and solid economic growth in the
United States provided a positive backdrop for equities during the
reporting period.
o With investors focused on liquidity, small-capitalization stocks generally
underperformed large-capitalization issues in June of 1998.
o The impact of Asian financial difficulties spread to Latin America and
Russia, giving investors additional reasons for caution.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Small Cap Growth Fund commenced operations on 6/1/98.
o The Fund returned 8.70% and 8.60% for Class A shares and Class B shares,
respectively, excluding all sales charges, for the since-inception period
from 6/1/98 through 6/30/98.
o Individual security selection, combined with favorable timing, allowed the
Fund to provide positive returns in June.
o The portfolio managers' experience researching large-capitalization stocks
for other MainStay Funds has helped them identify opportunities in
small-cap stocks in key industry sectors.
o Both share classes outperformed the average Lipper* small-cap fund, which
returned 0.78% for the since-inception period.
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Portfolio Management Discussion and Analysis
Modest inflation, low interest rates, and solid economic growth made June a
positive period for stocks in general. A flight to quality prompted by Asian
concerns, however, caused investors to focus primarily on liquid,
large-capitalization issues, which tended to outperform smaller-capitalization
stocks. Among small-cap equities, growth stocks outperformed value issues,
accounting for the bulk of the positive performance of the Russell 2000 Index*
in June of 1998.
Generally speaking, May and June were weak periods for small-cap stock
performance, with returns improving during the brief reporting period. The
small-cap market offers select opportunities among initial public offerings,
although these issues may be more volatile and may involve greater risk than
small-cap stocks with more established histories.
Given this context, how did the MainStay Small Cap Growth Fund perform in the
period from 6/1/98 through 6/30/98?
The MainStay Small Cap Growth Fund began operations on 6/1/98. For the one-month
period ended 6/30/98, the Fund returned 8.70% and 8.60% for Class A shares and
Class B shares, respectively, excluding all sales charges. Both share classes
also outperformed the average Lipper+ small-cap fund, which returned 0.78% for
the month of June.
What factors contributed positively to the Fund's performance?
A variety of factors helped the Fund perform better than its peers. Since the
small-capitalization market suffered in May and early June, we were able to
purchase many of the Fund's securities at very attractive prices. In addition,
we are familiar with many strong small-capitalization companies whose stocks
have come to our attention as competitors, suppliers, or other providers of
products and services to the large-cap companies we regularly research for other
MainStay Funds. As a result, we were able to quickly invest in a number of
companies with positive fundamentals and what we perceive to be excellent growth
prospects, reflecting opportunities similar to their larger-capitalization
counterparts. We believe that MacKay Shields' dual capabilities in large- and
small-capitalization equities gives us a strategic advantage.
Can you give us some examples?
Certainly. AgriBioTech, a seed and biotechnology company, was up 40% in just one
month. The company is benefiting from acquisitions in its specialized market
sector. We knew about the stock from our extensive research into Monsanto, which
is its large-cap counterpart, but is not held in the Fund.
AmeriSource Health is a wholesale distributor of drugs to pharmacies and
hospitals that benefited from acquisition rumors and was up 24% in June. We knew
about the stock from our extensive
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Flight to quality
- -----------------
When investors in general move to improve the quality or liquidity of the
securities they own, because of economic, industry, or market concerns that
suggest lower quality securities or those that are less liquid may likely be
more vulnerable to negative market events.
- ----------
* The Russell 2000 Index is an unmanaged index that measures the performance
of the 2,000 smallest companies in the Russell 3000 Index, which, in turn,
is an unmanaged index that includes the 3,000 largest U.S. companies based
on total market capitalization. The Russell 2000 Index represents
approximately 10% of the total market capitalization of the Russell 3000
Index. Total returns reflect reinvestment of all dividends and capital
gains. The MainStay Small Cap Growth Fund does not seek to track this
index.
+ See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- --------------------------------------------------------------------
<S> <C>
6/98 8.70 Class A
6/98 8.60 Class B
</TABLE>
See footnote * on page 9 for more information on performance.
research for other MainStay Funds into Cardinal Health, a large-capitalization
company in a similar segment of the health care industry.
Were there other companies that the Fund learned about in this way?
There were several. American Disposal Services is a solid waste company we
selected for the Fund because of the profile we had established over the years
in our research into its large-cap counterpart, United Waste, which is not held
in the Fund's portfolio. We also learned about Daisytek, a small but successful
printer-supply and toner-cartridge company, from our investigation into the
laser printer market and Hewlett Packard, which the Fund did not invest in. Both
American Disposal Services and Daisytek provided positive performance during the
month of June.
Equity Corp. is a small-cap company in the funeral home and cemetery business
that came to our attention while researching Service Corp. for other MainStay
Funds. Service Corp. is a larger name in the same business. Duane Reade is a
small-cap drug chain whose potential became evident while we were researching
CVS for other MainStay Funds. Our fundamental research into Kroger and Safeway
for other MainStay Funds led us to investigate Dominick's Supermarkets, a
smaller Chicago food chain. And we couldn't research Bed, Bath, & Beyond for
other MainStay Funds, without learning about its smaller counterpart, Linens 'n
Things. All of these "smaller cousins" have provided solid performance for the
Fund in June.
Do you limit the Fund to companies that flow out of MacKay Shields'
large-capitalization stock research?
Absolutely not. The Fund's management team includes professionals who specialize
exclusively in small-capitalization stocks. Their in-depth analysis of smaller
companies may uncover a wide range of potential opportunities in additon to
those that emerge from our firm's ongoing research into larger issues for other
MainStay Funds.
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.
Volatility
- ----------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
5
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ---------------------------------------------
<S> <C>
Commercial Services 14.0%
Medical/Health Care 13.5%
Retail 12.1%
Computer-Software/Services 7.0%
Finance 5.1%
All Other 48.3%
</TABLE>
Actual percentages will vary over time.
Can you briefly describe how the Fund invests?
We're bottom-up investors, which means we pick stocks for the Fund individually,
based on their quantitative and fundamental merits. Unlike many managers, we
don't start by saying we need some technology or retail companies in the
portfolio. Instead, we look at each stock individually, and if certain
technology or retail stocks happen to meet the Fund's stringent investment
criteria, we'll select them for the Fund and create a weighting in those
sectors.
As a result of your bottom-up process, in which sectors was the Fund most
heavily weighted as of 6/30/98?
The Fund's largest sector was capital goods and technology with about 27% of the
Fund's net assets. About 17% of that was in technology and the rest in capital
goods. About 23% of the Fund's net assets were invested in consumer cyclicals,
14% in health care, 13% in financials, and about 10% in consumer staples and 10%
in basic materials.
What were some of the best-performing stocks in the Fund?
We already mentioned AgriBioTech, which was the Fund's best-performing stock in
June. We also saw strong performance from another technology holding, Sapient, a
technology consultant that returned more than 20%.
One of the consumer cyclical stocks the Fund purchased was ITT Educational
Services, which is benefiting from the move toward a technology-oriented society
by providing postsecondary technical degree programs and was up 33% in June.
United Natural Foods is a distributor that's benefiting from the growing market
in natural, whole foods. Watsco is a distributor of air conditioning and heating
products that benefited from some Sun Belt acquisitions and rose 23% during the
reporting period.
In the health care sector, HealthCare Financial Partners capitalized on the need
for receivables management among doctors
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.
6
<PAGE>
and clinics. Their services helped the stock rise 26% in June.
Which of the Fund's stocks were negative performers?
There were very few in June. CORT Business Services is a furniture rental
business that was severely punished when it announced that top-line growth would
be lower than expected. The stock dropped 21% in June, but we continued to hold
it in the Fund's investment portfolio, believing that the company would reach
its growth target and benefit from increasing acquisition activity.
Black Box is a network service, computing parts, and equipment company that
suffered from rumors that its earnings would be lower than anticipated. The
stock was down 15%, but we have continued to hold it in the Fund's investment
portfolio and believe that the concerns may be overstated.
Of course, past performance is no guarantee of future results--and as with any
performance, up or down, a one-month period may not be indicative of longer-term
results.
Was the Fund able to benefit from any initial public offerings?
Yes. The small-cap market offers opportunities in this area, but they require
careful research and an understanding of the volatility and risks associated
with initial public offerings. During June, the Fund was able to benefit from an
initial public offering for an Internet search engine provider. When the stock
price rose to an attractive level, we sold the Fund's position and invested the
profits in issues we believed would provide more attractive long-term potential.
What is your outlook going forward?
We believe that as long as inflation and interest rates remain low and economic
growth continues at a modest rate, the outlook for stocks will remain positive.
We do not believe that the effects of Asian economic difficulties are over, and
we recognize that growth may slow in the second half of 1998. Nevertheless, we
believe that there are many attractive small-capitalization stocks that are
likely to perform well in most market environments.
Our stock selection process will continue to focus on issues we believe have
fundamental strengths and enduring potential as the Fund seeks long-term capital
appreciation by investing primarily in securities of small-capitalization
companies.
Edmund C. Spelman
Rudolph C. Carryl
Portfolio Managers
MacKay Shields Financial Corporation
Stocks of small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than those of companies with larger
capitalizations. Small-capitalization companies may be more vulnerable to
adverse business or market developments than large-capitalization companies.
Past performance is no guarantee of future results.
7
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------------
<S> <C>
Common Stocks 92.9%
Cash, Equivalents & Other Assets, Less Liabilities 7.1%
</TABLE>
Actual percentages will vary over time.
8
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 8.70%
Class B 8.60%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 2.72%
Class B 3.60%
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
small-cap fund 0.78%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.87 $0.0000 $0.0000
Class B $10.86 $0.0000 $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 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 six 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
6/1/98) through 6/30/98.
9
<PAGE>
Top 10 Holdings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
ITT Educational Services, Inc. $306,375
United Natural Foods, Inc. 302,100
AAR Corp. 298,581
IDEXX Laboratories, Inc. 286,063
HNC Software Inc. 285,688
AmeriSource Health Corp. 282,456
Central Parking Corp. 282,100
Sapient Corp. 279,575
Cerner Corp. 277,463
Bally Total Fitness Holding Corp. 277,200
</TABLE>
- ----------
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.
10
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
=================================
<S> <C> <C>
COMMON STOCKS (92.9%)+
AEROSPACE/DEFENSE (2.0%)
AAR Corp. ............................... 10,100 $ 298,581
------------
BANKS (3.4%)
Cullen/Frost Bankers, Inc. .............. 4,700 254,975
Imperial Bancorp (a) .................... 8,700 261,000
------------
515,975
------------
BIOTECHNOLOGY (1.7%)
AgriBioTech, Inc. (a) ................... 9,000 249,188
------------
COMMERCIAL SERVICES (14.0%)
Central Parking Corp. ................... 6,200 282,100
CORT Business Services Corp. (a) ........ 7,400 233,100
Equity Corporation International (a) .... 10,500 252,000
ITT Educational Services, Inc. (a) ...... 9,500 306,375
InaCom Corp. (a) ........................ 7,800 247,650
Iron Mountain Inc. (a) .................. 6,100 272,975
Metzler Group, Inc. (The) (a) ........... 7,500 274,687
Pre-Paid Legal Services, Inc. (a) ....... 7,300 230,406
------------
2,099,293
------------
COMPUTER--SOFTWARE/SERVICES (7.0%)
Black Box Corp. (a) ..................... 6,700 222,356
HNC Software Inc. (a) ................... 7,000 285,688
Sapient Corp. (a) ....................... 5,300 279,575
Visio Corp. (a) ......................... 5,600 267,400
------------
1,055,019
------------
ELECTRONIC--PARTS/WIRES (3.5%)
EFTC Corp. (a) .......................... 19,700 256,100
Sanmina Corp. (a) ....................... 6,300 273,262
------------
529,362
------------
ENVIRONMENTAL CONTROL (1.7%)
Tetra Tech, Inc. (a) .................... 10,700 259,475
------------
FINANCE (5.1%)
HealthCare Financial
Partners, Inc. (a) .................... 4,400 269,775
Sirrom Capital Corp. .................... 10,300 267,800
Triad Guaranty Inc. (a) ................. 6,900 234,600
------------
772,175
------------
Shares Value
=================================
FOOD (3.7%)
Aurora Foods Inc. (a) ................... 12,000 $ 253,500
United Natural Foods, Inc. (a) .......... 10,600 302,100
------------
555,600
------------
INSTRUMENTS--ELECTRONIC (1.6%)
Waters Corp. (a) ........................ 4,000 235,750
------------
INSURANCE (4.8%)
CMAC Investment Corp .................... 3,900 239,850
Enhance Financial Services
Group Inc. ............................ 7,200 243,000
Frontier Insurance Group, Inc. .......... 10,890 245,706
------------
728,556
------------
LEISURE TIME (3.5%)
Bally Total Fitness Holding Corp. (a) .. 7,700 277,200
Intrawest Corp. ......................... 12,100 241,244
------------
518,444
------------
MACHINERY (5.1%)
Applied Power Inc. ...................... 7,600 261,250
IDEX Corp. .............................. 6,900 238,050
Watsco, Inc. ............................ 7,400 260,387
------------
759,687
------------
MANUFACTURING--DIVERSIFIED (1.6%)
SPS Technologies, Inc. (a) .............. 4,100 239,850
------------
MEDICAL/HEALTH CARE (13.5%)
AmeriSource Health Corp. (a) ............ 4,300 282,456
Assisted Living Concepts, Inc. (a) ...... 13,500 232,875
Cerner Corp. (a) ........................ 9,800 277,463
Curative Health Services, Inc. (a) ...... 8,100 230,850
Health Care and
Retirement Corp. (a) .................. 6,000 236,625
IDEXX Laboratories, Inc. (a) ............ 11,500 286,063
RehabCare Group, Inc. (a) ............... 10,600 254,400
Schein Pharmaceutical, Inc. (a) ......... 8,800 234,300
------------
2,035,032
------------
POLLUTION & RELATED (1.8%)
American Disposal Services, Inc. (a) .... 5,900 276,562
------------
PUBLISHING (1.8%)
Consolidated Graphics, Inc. (a) ......... 4,500 265,500
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Small Cap Growth Fund
<TABLE>
<CAPTION>
Shares Value
=================================
<S> <C> <C>
COMMON STOCKS (Continued)
RETAIL (12.1%)
Daisytek International Corp. (a) ........ 10,000 $ 254,375
Dominick's Supermarkets, Inc. (a) ....... 5,300 236,513
Duane Reade Inc. (a) .................... 8,400 252,000
Linens `n Things, Inc. (a) .............. 8,800 268,950
Men's Wearhouse, Inc. (The) (a) ......... 7,950 262,350
Ocular Sciences, Inc. (a) ............... 8,400 273,000
Pier 1 Imports, Inc. .................... 11,600 276,950
------------
1,824,138
------------
TELECOMMUNICATIONS (3.2%)
Alpine Group, Inc. (The) (a) ............ 11,800 244,850
Gilat Satellite Networks (a) ............ 7,200 240,750
------------
485,600
------------
TEXTILES (1.8%)
Interface, Inc. ......................... 13,050 263,447
------------
Total Common Stocks
(Cost $13,104,937) .................... 13,967,234
------------
<CAPTION>
Principal
Amount
==============
<S> <C> <C>
SHORT-TERM INVESTMENTS (8.4%)
U.S. GOVERNMENT (8.4%)
Federal Home Loan Bank
5.45%, due 7/1/98 ..................... $ 1,260,000 1,260,000
------------
Total Short-Term Investments
(Cost $1,260,000) ..................... 1,260,000
------------
Total Investments
(Cost $14,364,937) (b) ................ 101.3% 15,227,234(c)
Liabilities in Excess of Cash,
and Other Assets ...................... (1.3) (193,887)
------------ ------------
Net Assets .............................. 100.0% $ 15,033,347
============ ============
</TABLE>
- ----------
(a) Non-income producing security.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1998, net unrealized appreciation was $862,297, based on cost
for Federal income tax purposes. This consisted of aggregate gross
unrealized appreciation for all investments on which there was an excess of
market value over cost of $1,011,318 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $149,021.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $14,364,937) ...... $15,227,234
Receivables:
Investment securities sold .......................................... 1,440,000
Fund shares sold .................................................... 166,695
Dividends and interest .............................................. 2,026
Unamortized organization expense ...................................... 57,047
-----------
Total assets ...................................................... 16,893,002
-----------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 1,808,592
Organization ........................................................ 20,536
MainStay Management ................................................. 10,312
NYLIFE Distributors ................................................. 3,995
Custodian ........................................................... 1,299
Transfer agent ...................................................... 561
Trustees ............................................................ 84
Accrued expenses ...................................................... 14,276
-----------
Total liabilities ................................................. 1,859,655
-----------
Net assets ............................................................ $15,033,347
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 10,538
Class B ............................................................. 3,301
Additional paid-in capital ............................................ 13,876,798
Accumulated net investment loss ....................................... (15,417)
Accumulated undistributed net realized gain on investments ............ 295,830
Net unrealized appreciation on investments ............................ 862,297
-----------
Net assets ............................................................ $15,033,347
===========
CLASS A
Net assets applicable to outstanding shares ........................... $11,449,393
===========
Shares of beneficial interest outstanding ............................. 1,053,775
===========
Net asset value per share outstanding ................................. $ 10.87
Maximum sales charge (5.50% of offering price) ........................ 0.63
-----------
Maximum offering price per share outstanding .......................... $ 11.50
===========
CLASS B
Net assets applicable to outstanding shares ........................... $ 3,583,954
===========
Shares of beneficial interest outstanding ............................. 330,113
===========
Net asset value and offering price per share outstanding .............. $ 10.86
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations
for the period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .................................................. $ 1,039
Interest ................................................... 14,898
----------
Total income ............................................. 15,937
----------
Expenses:
Management ................................................. 10,312
Shareholder communication .................................. 6,028
Professional ............................................... 3,981
Service--Class A ........................................... 2,106
Service--Class B ........................................... 472
Custodian .................................................. 1,675
Distribution--Class B ...................................... 1,417
Registration ............................................... 1,089
Recordkeeping .............................................. 1,000
Organization ............................................... 953
Transfer agent ............................................. 561
Trustees ................................................... 84
Miscellaneous .............................................. 1,676
----------
Total expenses ........................................... 31,354
----------
Net investment loss .......................................... (15,417)
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................. 295,830
Net unrealized appreciation on investments ................... 862,297
----------
Net realized and unrealized gain on investments .............. 1,158,127
----------
Net increase in net assets resulting from operations ......... $1,142,710
==========
</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.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .............................................. $ (15,417)
Net realized gain on investments ................................. 295,830
Net unrealized appreciation on investments ....................... 862,297
------------
Net increase in net assets resulting from operations ............. 1,142,710
------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................ 1,552,697
Class B ........................................................ 2,369,288
Cost of shares redeemed:
Class A ........................................................ --
Class B ........................................................ (31,348)
------------
Increase in net assets derived from capital
share transactions ......................................... 3,890,637
------------
Net increase in net assets ................................... 5,033,347
NET ASSETS:
Beginning of period ................................................ 10,000,000
------------
End of period ...................................................... $ 15,033,347
============
Accumulated net investment loss at end of period ................... $ (15,417)
============
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
---------- ----------
June 1, 1998*
through
June 30, 1998**
--------------------------
<S> <C> <C>
Net asset value at beginning of period ........ $ 10.00 $ 10.00
------- -------
Net investment loss (a) ....................... (0.01) (0.02)
Net realized and unrealized gain
on investments............................... 0.88 0.88
------- -------
Total from investment operations .............. 0.87 0.86
------- -------
Net asset value at end of period .............. $ 10.87 $ 10.86
======= =======
Total investment return (b) ................... 8.70% 8.60%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss ....................... (1.36%)+ (2.11%)+
Expenses .................................. 2.90%+ 3.65%+
Portfolio turnover rate ....................... 6% 6%
Net assets at end of period (in 000's) ........ $11,449 $ 3,584
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ 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.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Small Cap Growth Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 long-term capital appreciation by
investing primarily in securities of small-cap companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
large-capitalization companies.
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, and (d) by appraising over-the-counter securities not
quoted on the NASDAQ system at prices supplied by the pricing agent or brokers
selected by
17
<PAGE>
MainStay Small Cap Growth Fund
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.
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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
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.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 1.00% of the average
daily net assets of the Fund. For the period ended June 30, 1998, the Manager
earned $10,312.
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 0.50% 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 (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 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.
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 $2,989 for the period
ended June 30, 1998.
19
<PAGE>
MainStay Small Cap Growth Fund
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 ended June 30,
1998 amounted to $3,218.
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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $9,783,000 and $1,086,000, respectively. This represents
85.4% and 30.3% of the net assets at period end for Class A and B, respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $13,542 and $733, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
-----------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold ................................. 154 233
Shares redeemed ............................. -- (3)
---- ----
Net increase ................................ 154 230
==== ====
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
20
<PAGE>
This page intentionally left blank
21
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
22
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
23
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
24
<PAGE>
MainStay Small Cap Growth Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MainStay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay
Small Cap Growth 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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA24-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Small Cap Value Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Industry--Top 5 6
Portfolio Composition 7
Fund & Lipper Returns 8
Top 10 Holdings 9
Portfolio of Investments 10
Unaudited Financial Statements 12
Notes to Financial Statements 16
The MainStay Funds 20
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Small Cap Value Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o Modest inflation, low interest rates, and solid economic growth in the
United States provided a positive backdrop for equities during the
reporting period.
o The best-performing stocks in June were highly liquid, large-capitalization
issues, particularly in the growth sector.
o Concerns about the impact of Asian economic difficulties and potential
earnings disappointments caused poor performance among small-capitalization
value stocks and cyclical issues in June of 1998.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Small Cap Value Fund commenced operations on 6/1/98.
o The Fund returned -3.50% and -3.60% for Class A shares and Class B shares,
respectively, excluding all sales charges, for the since-inception period
from 6/1/98 through 6/30/98.
o The Fund's initial results reflected performance in a period when both
small-capitalization stocks and the value management style were generally
out of favor.
o Initial investments have positioned the portfolio for longer-term value
opportunities.
o Both share classes underperformed the average Lipper* small-cap fund, which
returned 0.78% for the since-inception period.
- ----------
* See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Portfolio Management Discussion and Analysis
Modest inflation, low interest rates, and solid economic growth made June a
positive period for stocks in general. During the reporting period, however,
investors became increasingly concerned about the possibility of an economic
slowdown and the potential for earnings disappointments. When these factors
combined with the problems in Asian markets, the best-performing sector of the
stock market became highly liquid, large-capitalization issues that could be
quickly sold if the market experienced a setback.
During June, investors not only retreated from small-capitalization stocks, but
also from the value management discipline, as growth stocks tended to
outperform. Despite the setbacks small-cap value stocks experienced, these
issues appear to be well positioned if the market should experience any
sustained difficulties or if investors begin to reconsider the wisdom of
investing in equities trading at enormous price-earnings multiples.
Given this context, how did the MainStay Small Cap Value Fund perform in the
period from 6/1/98 through 6/30/98?
The MainStay Small Cap Value Fund commenced operations on 6/1/98. For the
one-month period ended 6/30/98, the Fund returned -3.50% and -3.60% for Class A
shares and Class B shares, respectively, excluding all sales charges. Both share
classes underperformed the average Lipper* small-cap fund, which returned 0.78%
for the month of June.
What were the primary reasons why the Fund underperformed its peers?
By definition, value stocks tend to have lower price-to-book ratios and lower
growth prospects than growth-oriented investments. Over the last several years,
the stock market has seen extraordinary growth, and value stocks in general have
been out of favor. To compensate, some value managers have tried to "bend the
rules" to improve their returns by investing in growth issues.
Dalton, Greiner, Hartman, Maher & Co., however, has stuck to its disciplines,
seeking companies with true value characteristics. We don't expect these stocks
to outperform in a single month. Instead, in June, we hoped to position the
portfolio for strong performance over the longer term. In doing so, we selected
stocks for the Fund with the strongest value characteristics. In many cases,
these holdings were particularly out of favor in the Fund's first month of
operations. These positions in the basic materials, capital goods, and
technology sectors generally underperformed the market.
In the future, we will seek to emphasize noncyclical sectors in the Fund's
investment portfolio. With Asian difficulties raising questions about the
possibility of an economic slowdown, we believe cyclical issues are likely to be
among the first to feel the impact.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Liquidity
- ---------
Securities are said to be liquid when they can be easily bought or sold in large
volume without subtantially affecting their price. Some securities, such as
private placements or stocks that have few shares outstanding, are considered
illiquid either because there are few market participants interested in buying
or selling the securities or because purchases and sales may cause wide price
swings.
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.
- ----------
* See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
{THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- --------------------------------------------------------------------
<S> <C>
6/98 -3.50 Class A
6/98 -3.60 Class B
</TABLE>
See footnote * on page 8 for more information on performance.
How many stocks did the Fund own as of June 30, 1998?
At the end of the reporting period, the Fund owned 70 stocks. Since the Fund is
new, most of the positions were relatively small.
What were some of the Fund's largest purchases?
The largest purchases were Claire's Stores, Gaylord Entertainment, Hollinger
International, Jones Intercable, and Plantronics. According to our disciplined
research process, these stocks all appeared to be undervalued and have
characteristics that could make their value increase over time. In the
aggregate, these stocks contributed positively to the Fund's performance.
Were there any sales during the month of June?
We deleted four stocks from the portfolio due to changes in their fundamental
outlook. While we typically seek investments the Fund can retain for the long
term, we believe it may be prudent for the Fund to sell stocks when their
prospects are weakening. We're looking for issues that can add value to the
Fund's investment portfolio, and we have very strict sell disciplines that came
into play with these stocks.
Which of the Fund's holdings provided the best performance during the month?
During June 1998, the Fund held four stocks that appreciated over 10%. These
included Skyline, Claire's Stores, NCI Building Systems, and Jones Intercable.
All of these companies continued to have positive earnings trends and remain
attractive value holdings for the Fund.
Which of the Fund's stocks were the worst performers?
The difficulties in Asia brought a number of technology holdings under careful
review by investors. Two of the Fund's
Price-earnings multiples
- ------------------------
The number of times the price of a stock exceeds its anticipated earnings per
share.
Price-to-book ratio
- -------------------
The price of a stock divided by its book value per share.
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.
5
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ---------------------------------------------
<S> <C>
Real Estate 9.7%
Electronic--Parts/Wires 9.1%
Medical--Health Care 7.5%
Banks 6.6%
Building Products 6.6%
All Other 60.5%
</TABLE>
Actual percentages will vary over time.
technology stocks, General Scanning and Komag, were the Fund's worst performers,
both declining by more than 25% on deteriorating fundamentals and investor
concerns.
What do you believe were the best decisions you made for the Fund in June?
Our best and most important decision was to invest the Fund in a widely
diversified group of undervalued small-cap stocks. We believe the Fund is well
positioned now, particularly if one or more of the concerns that have been
motivating investors should come to pass.
Undervalued stocks tend to outperform in troubled or declining markets, and
given the high multiples at which certain growth stocks are trading--and the
current relationship between corporate earnings and profits--we believe
investors will eventually have to embrace stocks that have lower price/earnings
ratios and strong catalysts for improvement.
Were there any sectors that you emphasized or underweighted in the Fund?
We select stocks for the Fund individually, but as of the end of June 1998, the
Fund's sector weightings closely approximated those in the Russell 2000 Index.+
What is your outlook for the future?
Despite a difficult June, we believe small-cap value stocks are very
attractively priced relative to larger-capitalization issues. We intend to focus
on the value characteristics in our proprietary research model and believe the
noncyclical and financial sectors may offer attractive opportunities. Wherever
the markets may move, the Fund will continue to seek long-term capital
appreciation by investing primarily in securities of small-cap companies.
Timothy Dalton, Jr.
Kenneth Greiner
Portfolio Managers
Dalton, Greiner, Hartman, Maher & Co.
- ----------
+ The Russell 2000 Index is an unmanaged index that measures the performance
of the 2,000 smallest companies in the Russell 3000 Index, which in turn,
is an unmanaged index that includes the 3,000 largest U.S. companies based
on total market capitalization. The Russell 2000 Index represents
approximately 10% of the total market capitalization of the Russell 3000
Index. The Fund does not seek to track this index.
Stocks of small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than those of companies with larger
capitalizations. Small-capitalization companies may be more vulnerable to
adverse business or market developments than large-capitalization companies.
Past performance is no guarantee of future results.
6
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------------
<S> <C>
Common Stocks 91.1%
Cash, Equivalents & Other Assets, Less Liabilities 8.9%
</TABLE>
Actual percentages will vary over time.
7
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -3.50%
Class B -3.60%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -8.81%
Class B -8.42%
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
small-cap fund 0.78%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $9.65 $0.0000 $0.0000
Class B $9.64 $0.0000 $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 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 six 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 for the period from the initial offering of both share classes
(on 6/1/98) through 6/30/98.
8
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
Plantronics, Inc. $355,350
Jones Intercable, Inc. 307,500
Claire's Stores, Inc. 270,600
Hussman International, Inc. 256,875
Gaylord Entertainment Co. 245,100
Hollinger International Inc. 243,100
Trigon Healthcare, Inc. 238,838
LNR Property Corp. 233,187
DII Group, Inc. (The) 226,931
Simpson Manufacturing Co., Inc. 224,025
</TABLE>
- ----------
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.
9
<PAGE>
MainStay Small Cap Value Fund
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (91.1%)+
AUTO PARTS (4.9%)
Aftermarket Technology Corp. (a) .............. 10,000 $ 187,500
Borg-Warner Automotive, Inc. ................... 2,400 115,350
Coachmen Industries, Inc. ...................... 6,200 161,975
Titan International, Inc. ...................... 11,200 190,400
-----------
655,225
-----------
BANKS (6.6%)
BancorpSouth, Inc. ............................. 5,800 121,800
Colonial BancGroup, Inc. (The) ................. 800 25,800
ISB Financial Corp. ............................ 5,600 148,400
Local Financial Corp. (a) ...................... 14,000 182,000
SIS Bancorp, Inc. .............................. 4,700 182,125
Staten Island Bancorp, Inc. .................... 9,700 220,675
-----------
880,800
-----------
BUILDING PRODUCTS (6.6%)
Hussman International, Inc. .................... 13,700 256,875
NCI Building Systems, Inc. (a) ................. 3,200 184,800
Simpson Manufacturing Co., Inc. (a) ............ 5,800 224,025
Skyline Corp. .................................. 6,400 208,800
-----------
874,500
-----------
COMMERCIAL SERVICES (1.2%)
Inacom Corp. (a) ............................... 5,000 158,750
-----------
COMPUTER--HARDWARE (3.4%)
Cybex Computer Products Corp. (a) .............. 7,300 167,900
Hutchinson Technology Inc. (a) ................. 7,200 196,200
Komag, Inc. (a) ................................ 17,000 90,845
-----------
454,945
-----------
COMPUTER--SOFTWARE/SERVICES (0.4%)
THQ Inc. (a) ................................... 1,500 46,125
-----------
ELECTRONIC--PARTS/WIRES (9.1%)
Coherent, Inc. (a) ............................. 9,000 154,407
DII Group, Inc. (The) (a) ...................... 13,300 226,931
Etec Systems, Inc. (a) ......................... 5,600 197,050
Exar Corp. (a) ................................. 8,100 170,100
General Scanning Inc. (a) ...................... 8,200 73,287
Harmon Industries, Inc. ........................ 7,500 178,125
Optek Technology, Inc. (a) ..................... 6,200 118,575
Tech-Sym Corp. (a) ............................. 3,400 94,563
-----------
1,213,038
-----------
Shares Value
==========================
ENERGY--OIL/GAS (1.5%)
Giant Industries, Inc. ......................... 11,600 $ 201,550
-----------
FOOD (3.9%)
Lancaster Colony Corp. ......................... 5,900 223,462
Sbarro, Inc. ................................... 6,200 168,175
Tasty Baking Co. ............................... 7,900 122,944
-----------
514,581
-----------
FOREST/PAPER PRODUCTS (1.3%)
FiberMark, Inc. (a) ............................ 10,700 171,200
-----------
HOUSEHOLD PRODUCTS (1.5%)
Oneida Ltd. .................................... 6,400 196,000
-----------
INSURANCE (2.6%)
American Heritage Life
Investment Corp. ............................. 6,500 150,313
Berkley (W.R.) Corp., .......................... 5,000 200,313
-----------
350,626
-----------
MACHINERY (2.3%)
IDEX Corp. ..................................... 3,300 113,850
Specialty Equipment Cos., Inc. (a) ............. 8,500 192,313
-----------
306,163
-----------
MANUFACTURING--DIVERSIFIED (5.4%)
CLARCOR Inc. ................................... 10,100 212,100
Matthews International Corp. ................... 6,300 154,744
Plantronics, Inc. (a) .......................... 6,900 355,350
-----------
722,194
-----------
MEDIA (4.2%)
Gaylord Entertainment Co. ...................... 7,600 245,100
Jones Intercable, Inc. (a) ..................... 12,300 307,500
-----------
552,600
-----------
MEDICAL--HEALTH CARE (7.5%)
Arrow International, Inc. ...................... 6,300 172,856
Beverly Enterprises, Inc. (a) .................. 16,200 223,763
Physician Reliance Network, Inc. (a) ........... 13,900 158,981
Trigon Healthcare, Inc. (a) .................... 6,600 238,838
West Co., Inc. (The) ........................... 7,000 198,187
-----------
992,625
-----------
</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.
10
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
==========================
<S> <C> <C>
COMMON STOCKS (Continued)
METALS (1.2%)
Hawk Corp. (a) ................................. 9,300 $ 163,912
-----------
OFFICE PRODUCTS (1.1%)
Hunt Corp. ..................................... 6,200 146,862
-----------
PUBLISHING (3.4%)
Banta Corp. .................................... 6,600 203,775
Hollinger International Inc. ................... 14,300 243,100
-----------
446,875
-----------
REAL ESTATE (9.7%)
Bedford Property Investors, Inc. ............... 4,900 89,425
Berkshire Realty Co., Inc. ..................... 11,300 132,069
Boykin Lodging Co. ............................. 6,400 138,800
Bradley Real Estate, Inc. ...................... 5,000 105,625
CB Richard Ellis Services Inc. (a) ............. 5,300 177,219
LNR Property Corp. ............................. 9,100 233,187
Pan Pacific Retail Properties, Inc. ............ 6,400 130,400
Tower Realty Trust, Inc. ....................... 6,400 143,200
Urban Shopping Centers, Inc. ................... 4,300 135,450
-----------
1,285,375
-----------
RETAIL (4.2%)
Claire's Stores, Inc. .......................... 13,200 270,600
Haverty Furniture Cos., Inc. ................... 8,700 192,488
Lydall, Inc. (a) ............................... 6,900 100,481
-----------
563,569
-----------
TELECOMMUNICATIONS (3.6%)
Electromagnetic Sciences, Inc. (a) ............. 5,700 108,300
Norstan, Inc. (a) .............................. 6,200 155,387
Powerwave Technologies, Inc. (a) .............. 13,200 221,100
-----------
484,787
-----------
TRANSPORTATION (2.4%)
Arnold Industries, Inc. ........................ 13,200 194,700
Varlen Corp. ................................... 3,700 127,650
-----------
322,350
-----------
Shares Value
==========================
UTILITIES--ELECTRIC POWER (3.1%)
TNP Enterprises, Inc. .......................... 6,700 $ 206,862
Washington Water Power
Co., (The) ................................... 9,300 208,669
-----------
415,531
-----------
Total Common Stocks
(Cost $12,477,622)............................ 12,120,183
-----------
<CAPTION>
Principal
Amount
===========
<S> <C> <C>
SHORT-TERM INVESTMENT (14.1%)
TIME DEPOSIT (14.1%)
Cayman Bank of New York
5.13%, due 7/1/98 ............................ $1,881,000 1,881,000
-----------
Total Short-Term Investment
(Cost $1,881,000) ............................ 1,881,000
-----------
Total Investments
(Cost $14,358,622) (b) ....................... 105.2% 14,001,183(c)
Liabilities in Excess of Cash,
and Other Assets ............................. (5.2) (697,755)
---------- -----------
Net Assets ..................................... 100.0% $13,303,428
========== ===========
</TABLE>
- ----------
(a) Non-income producing security.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1998, net unrealized depreciation was $357,439, 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 $232,597 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $590,036.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $14,358,622) ............................................. $14,001,183
Cash ......................................................................................................... 183
Receivables:
Investment securities sold ................................................................................. 1,634,233
Fund shares sold ........................................................................................... 459,445
Dividends and interest ..................................................................................... 15,716
Unamortized organization expense ............................................................................. 57,047
-----------
Total assets ............................................................................................. 16,167,807
-----------
LIABILITIES:
Payables:
Investment securities purchased ............................................................................ 2,814,690
Organization ............................................................................................... 20,536
MainStay Management ........................................................................................ 9,465
NYLIFE Distributors ........................................................................................ 3,593
Custodian .................................................................................................. 1,676
Transfer agent ............................................................................................. 561
Trustees ................................................................................................... 84
Accrued expenses ............................................................................................. 13,774
-----------
Total liabilities ........................................................................................ 2,864,379
-----------
Net assets ................................................................................................... $13,303,428
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A .................................................................................................... $ 10,313
Class B .................................................................................................... 3,477
Additional paid-in capital ................................................................................... 13,661,125
Accumulated net investment loss .............................................................................. (4,891)
Accumulated net realized loss on investments ................................................................. (9,157)
Net unrealized depreciation on investments ................................................................... (357,439)
-----------
Net assets ................................................................................................... $13,303,428
===========
CLASS A
Net assets applicable to outstanding shares .................................................................. $ 9,950,620
===========
Shares of beneficial interest outstanding .................................................................... 1,031,303
===========
Net asset value per share outstanding ........................................................................ $ 9.65
Maximum sales charge (5.50% of offering price) ............................................................... 0.56
-----------
Maximum offering price per share outstanding ................................................................. $ 10.21
===========
CLASS B
Net assets applicable to outstanding shares .................................................................. $ 3,352,808
===========
Shares of beneficial interest outstanding .................................................................... 347,700
===========
Net asset value and offering price per share outstanding ..................................................... $ 9.64
===========
</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 period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .................................................... $ 15,455
Interest ..................................................... 9,759
---------
Total income ............................................... 25,214
---------
Expenses:
Management ................................................... 9,465
Shareholder communication .................................... 6,028
Professional ................................................. 3,981
Service--Class A ............................................. 1,957
Service--Class B ............................................. 409
Custodian .................................................... 1,676
Distribution--Class B ........................................ 1,227
Registration ................................................. 1,089
Recordkeeping ................................................ 1,000
Organization ................................................. 953
Transfer agent ............................................... 561
Trustees ..................................................... 84
Miscellaneous ................................................ 1,675
---------
Total expenses ............................................. 30,105
---------
Net investment loss ............................................ (4,891)
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments ............................... (9,157)
Net unrealized depreciation on investments ..................... (357,439)
---------
Net realized and unrealized loss on investments ................ (366,596)
---------
Net decrease in net assets resulting from operations ........... $(371,487)
=========
</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.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .............................................. $ (4,891)
Net realized loss on investments ................................. (9,157)
Net unrealized depreciation on investments ....................... (357,439)
-----------
Net decrease in net assets resulting from operations ............. (371,487)
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................ 1,284,230
Class B ........................................................ 2,393,495
Cost of shares redeemed:
Class A ........................................................ (2,810)
Class B ........................................................ --
-----------
Increase in net assets derived from
capital share transactions................................... 3,674,915
-----------
Net increase in net assets ................................... 3,303,428
NET ASSETS:
Beginning of period ................................................ 10,000,000
-----------
End of period ...................................................... $13,303,428
===========
Accumulated net investment loss at end of period ................... $ (4,891)
===========
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
--------- ---------
June 1, 1998*
through
June 30, 1998**
-------------------------
<S> <C> <C>
Net asset value at beginning of period ........ $10.00 $10.00
------ ------
Net investment loss (a) ....................... (0.00)(b) (0.01)
Net realized and unrealized loss
on investments................................ (0.35) (0.35)
------ ------
Total from investment operations .............. (0.35) (0.36)
------ ------
Net asset value at end of period .............. $9.65 $9.64
====== ======
Total investment return (c) ................... (3.50%) (3.60%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income ..................... (0.39%)+ (1.14%)+
Expenses .................................. 3.05%+ 3.80%+
Portfolio turnover rate ....................... 4% 4%
Net assets at end of period (in 000's) ........ $9,950 $3,353
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ Annualized.
(a) Per share data based on average shares outstanding during the period.
(b) Less than one cent per share.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Small Cap 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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Small Cap Value Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 long-term capital appreciation by
investing primarily in securities of small-cap companies.
Small-capitalization companies may be more volatile in price and have
significantly lower trading volumes than companies with larger capitalizations.
They may be more vulnerable to adverse business or market developments than
large-capitalization companies.
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, and (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
16
<PAGE>
Notes to Financial Statements unaudited
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.
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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
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.
17
<PAGE>
MainStay Small Cap Value Fund
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to Dalton, Greiner,
Hartman, Maher & Co. (the "Sub-Adviser"), a partnership 51% owned by Value Asset
Management. Under the supervision of the Trust's Board of Trustees and the
Manager, the Sub-Adviser is responsible for the day-to-day portfolio management
of 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 1.00% of the average
daily net assets of the Fund. For the period ended June 30, 1998, the Manager
earned $9,465.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and the Sub-Adviser, the Manager pays the Sub-Adviser a monthly fee at an annual
rate of 0.50% of the average daily net assets on assets up to $250 million,
0.45% on assets from $250 million to $500 million and 0.40% on assets in excess
of $500 million.
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 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.
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 $1,624 for the period
ended June 30, 1998.
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 ended June 30,
1998, amounted to $2,861.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
Trustees' Fees. Trustees, other than those affiliated with New York Life,
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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $8,685,000 and $964,000, respectively. This represents 87.3%
and 28.8% of the net assets at period end for Class A and B, respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $12,928 and $441, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
----------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold .............................. 131 248
Shares redeemed .......................... -- --
--- ---
Net increase ............................. 131 248
=== ===
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
19
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
SMALL CAP VALUE FUND(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
20
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
21
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
22
<PAGE>
MainStay Small Cap Value Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] Mainstay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay
Small Cap 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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA25-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Blue Chip Growth Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Industry--Top 5 6
Portfolio Composition 7
Fund & Lipper Returns 8
Top 10 Holdings 9
Portfolio of Investments 10
Unaudited Financial Statements 12
Notes to Financial Statements 16
The MainStay Funds 20
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Blue Chip Growth Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o Low interest rates and low inflation helped stocks move higher in June
1998, with financial issues among the many beneficiaries.
o Continued strength in the domestic economy caused individual investors to
pour money into the stock market during the reporting period.
o Merger and acquisition activity among large-capitalization issues provided
opportunities for equity investors.
o Oil and energy-related stocks and those with exposure to Asian difficulties
generally underperformed during the one-month reporting period.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Blue Chip Growth Fund commenced operations on 6/1/98.
o The Fund returned 3.80% for both Class A shares and Class B shares,
excluding all sales charges, for the since-inception period from 6/1/98
through 6/30/98.
o Both share classes outperformed the average Lipper* growth fund, which
returned 3.59% for the since-inception period.
- ----------
* See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Portfolio Management Discussion and Analysis
For the period from June 1 through June 30, 1998, the market for
large-capitalization growth stocks benefited from declining interest rates,
low inflation, and continued strength in the domestic economy. Individual
investors continued to provide a favorable flow of funds as strong merger and
acquisition activity generated opportunities in the equity market. The effects
of financial difficulties in Asia, which began in the second half of 1997, were
still being felt in certain sectors of the domestic equity market.
During the one-month reporting period, the S&P 500* reached an all-time record
high. Low interest rates had a particularly positive impact on financial stocks,
which benefited from increased lending at favorable rates. Overall, the period
was a positive one for equity investors, although declining oil prices and
reduced demand in Asian markets caused some sectors to underperform.
Given this context, how did the MainStay Blue Chip Growth Fund perform in the
period from 6/1/98 through 6/30/98?
The MainStay Blue Chip Growth Fund commenced operations on 6/1/98. For the
one-month period ended 6/30/98, the Fund returned 3.80% for both Class A shares
and Class B shares, excluding all sales charges. Both share classes outperformed
the average Lipper+ growth fund, which returned 3.59% for the month of June.
Why was the Fund able to outperform its peers?
In a rising stock market, it generally pays to be fully invested. The best
decision we made for the Fund during the reporting period was to be fully
invested on day one. The Fund also benefited from our decision to emphasize
financial stocks, which did well as long-term interest rates dropped to record
lows. The strength of the U.S. economy had a positive impact on our technology
holdings, and the Fund participated in the strong wave of merger and acquisition
activity that swept the market during the reporting period.
What kind of characteristics do you look for in the large-capitalization equity
market?
As the name of the Fund implies, we look for blue chip companies, or ones with
leading market characteristics and financial characteristics that we believe
indicate sustainable growth potential. We prefer to invest the Fund's assets in
companies that we believe have superior earnings-per-share growth prospects and
above-average or expanding market shares, profit margins, and returns on equity.
What were some of the Fund's most significant purchases during June?
The most significant purchases were Mellon Bank, Northern Trust Corp.,
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.
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
- ----------
* See footnote on page 2 for more information on the S&P 500.
+ See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- -----------------------------------------------------
<S> <C>
6/98 3.80% Class A
6/98 3.80% Class B
</TABLE>
See footnote * on page 8 for more information on performance.
Computer Sciences, and Home Depot. We purchased these stocks for the Fund
because we believed they offered superior relative earnings growth prospects
over the next 12 to 18 months. They have highly visible growth and we believed
their valuations were reasonable at the time of purchase. While past performance
is no guarantee of future results, each of these stocks had a strongly positive
impact on the Fund's first-month performance.
Can you explain why some of these issues performed so well?
Mellon Bank and Northern Trust benefited from lower interest rates, which are
typically good for firms in financial services. Computer Sciences, which was up
25% for the one-month period, rose as management guided earnings expectations
higher after winning new outsourcing contracts. Home Depot was part of a
generally strong retail sector and benefited indirectly from Asian difficulties,
as investors concentrated on purely domestic issues.
Which of the Fund's stocks benefited from merger and acquisition activity?
General Re, a reinsurance company, was up 17% during the one-month reporting
period. The company is being acquired by Berkshire Hathaway. American
International Group, a major insurance and financial services company, rose in
reaction to the General Re acquisition and benefited from lower interest rates.
AIG increased 16% during the month of June. MediaOne is a media company, which
benefited from the announcement of an AT&T merger with Telecommunications Inc.
Did you purchase any other stocks for the portfolio that benefited from growth
in the telecommunications industry?
Yes. We purchased Cisco Systems, Inc., which rose 21% during the month of June,
benefiting from the strong business environment in the computer networking
industry.
Were there other market sectors that you stressed in the Fund?
The Fund is overweighted in financials, media, health care, oil services, and
com-
Blue chip
- ---------
Common stock of a nationally recognized company with a long record of growth and
dividend payment and a reputation for quality management, products, and
services. Blue chip stocks may often have relatively high prices and moderate
dividend yields.
Earnings per share
- ------------------
The amount of a company's profit allocated to each outstanding share of common
stock. The amount is calculated after taxes and after payments to preferred
shareholders and bond holders.
5
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ----------------------------------------------
<S> <C>
Media 11.8%
Medical/Health Care 10.7%
Banks 10.6%
Computer--Software/Services 8.0%
Insurance 5.9%
All Other 53.0%
</TABLE>
Actual percentages will vary over time.
panies that engage in outsourcing. One health care issue that performed well was
Merck & Co., a pharmaceutical firm that was up 13% for the month of June. The
company benefited from being significantly undervalued relative to its peer
group. It has also initiated two major restructuring moves, which helped draw
attention to the stock and its future prospects.
Aren't all the returns you've mentioned rather high for just one month?
Yes, they are. It's important to remember that past performance is no guarantee
of future results. The Fund started operations at a very favorable time and
while many of its holdings performed well over the one-month period, others
underperformed.
Which of the Fund's stocks under-performed in June 1998?
Oil service stocks generally underperformed as oil prices continued to decline.
Smith International, Schlumberger, and Halliburton were oil service holdings in
the Fund that did poorly, returning -28%, -13%, and -7%, respectively. The Fund
continues to own these oil service stocks because we believe they are
significantly undervalued given reasonable expectations for oil demand.
Was the Fund's performance affected by difficulties in Asia?
Yes, to a modest extent. As most investors know, a financial crisis in Asia at
the end of 1997 has had lingering effects on production and demand for products
from several Pacific markets. Sunstrand (down 10%), Molex (down 8%), and
Sigma-Aldrich (down 8%) were Fund holdings that suffered from reduced demand for
capital goods and specialty chemicals as a result of Asian difficulties.
Were there sectors in which the Fund was underweighted?
Yes. During the reporting period, the Fund was underweighted in technology,
6
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------------
<S> <C>
Common Stocks 87.7%
Cash, Equivalents & Other Assets, Less Liabilities 12.3%
</TABLE>
Actual percentages will vary over time.
consumer staples, capital goods, utilities, transportation, basic industry,
consumer cyclicals, and telephones. Our investment process did not indicate
enough strength in the blue chip companies in these sectors to warrant full
market weightings. As it happens, being underweighted in these sectors
contributed positively to the Fund's performance.
Looking over the last month, is there anything you might have done differently?
With the benefit of hindsight, the Fund's entry into some of the stocks in the
oil service, capital goods, and specialty chemicals industries may have been
early. But since the Fund outperformed its benchmark, the S&P 500 Index, we
believe our decision-making process had a positive impact on the Fund's overall
performance during the reporting period.
What is your outlook going forward?
Basically, it's positive. We expect a moderation in economic growth due to the
influence of Asian difficulties. That may put a crimp in U.S. exports, which
leads us to believe that interest rates may decline. At the end of June, the
Fund continued to emphasize companies with a strong domestic growth profile in
financial services, media, health care, and companies that engage in
outsourcing. We do not anticipate a material change in the composition of the
portfolio in the near term. The Fund will continue to seek capital appreciation
by investing primarily in securities of large-capitalization companies, with
current income as a secondary investment objective.
Howard Ward
Portfolio Manager
Gabelli Asset Management Company
Past performance is no guarantee of future results.
7
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 3.80%
Class B 3.80%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -1.91%
Class B -1.20%
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
growth fund 3.59%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.38 $0.0000 $0.0000
Class B $10.38 $0.0000 $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 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 six 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 for the period from the initial offering of both share classes
(on 6/1/98) through 6/30/98.
8
<PAGE>
Top 10 Holdings as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Holding Amount
================================================================================
<S> <C>
Mellon Bank Corp. $508,263
Northern Trust Corp. 495,625
Computer Sciences Corp. 480,000
Clear Channel Communications, Inc. 436,500
Marsh & McLennan Cos., Inc. 417,019
Home Depot, Inc. (The) 415,312
MediaOne Group Inc. 408,619
Gannett Co., Inc. 355,313
Merck & Co., Inc. 347,750
Automatic Data Processing, Inc. 342,512
</TABLE>
- ----------
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.
9
<PAGE>
MainStay Blue Chip Growth Fund
<TABLE>
<CAPTION>
Shares Value
============================
<S> <C> <C>
COMMON STOCKS (87.7%)+
ADVERTISING/PROMOTIONS (2.0%)
Interpublic Group of Cos., Inc. (The). 5,200 $ 315,575
----------
AEROSPACE/DEFENSE (1.4%)
AlliedSignal Inc...................... 2,500 110,937
United Technologies Corp.............. 1,200 111,000
----------
221,937
----------
BANKS (10.6%)
Bank of New York Co., Inc. (The)...... 2,800 169,925
Citicorp.............................. 1,000 149,250
Mellon Bank Corp...................... 7,300 508,263
Northern Trust Corp................... 6,500 495,625
State Street Corp..................... 4,500 312,750
----------
1,635,813
----------
BEVERAGES--SOFT DRINKS (0.7%)
Coca-Cola Co. (The)................... 500 42,750
PepsiCo, Inc.......................... 1,700 70,019
----------
112,769
----------
CHEMICALS--SPECIALTY (0.8%)
Sigma-Aldrich Corp.................... 3,600 126,450
----------
COMPUTERS--HARDWARE (3.5%)
Cisco Systems, Inc. (a)............... 1,500 138,094
Dell Computer Corp. (a)............... 600 55,687
Hewlett-Packard Co.................... 2,900 173,638
Sun Microsystems, Inc. (a)............ 4,000 173,750
----------
541,169
----------
COMPUTERS--SOFTWARE/SERVICES (8.0%)
BMC Software, Inc. (a)................ 2,200 114,262
Computer Associates
International, Inc.................. 3,400 188,912
Computer Sciences Corp. (a)........... 7,500 480,000
EMC Corp. (a)......................... 3,500 156,844
Microsoft Corp. (a)................... 200 21,675
SunGard (R) Data Systems Inc. (a)..... 7,300 280,138
----------
1,241,831
----------
COSMETICS/RELATED (2.1%)
Avon Products, Inc.................... 1,200 93,000
Gillette Co. (The).................... 4,000 226,750
----------
319,750
----------
DATA PROCESSING/MANAGEMENT (4.4%)
Automatic Data Processing, Inc........ 4,700 342,512
First Data Corp....................... 10,000 333,125
----------
675,637
----------
ELECTRONICS (1.5%)
Intel Corp............................ 1,500 111,187
Molex Inc............................. 5,000 116,875
----------
228,062
----------
ENERGY--SERVICES (5.4%)
Baker Hughes Inc...................... 4,600 158,987
Halliburton Co........................ 4,100 182,706
Schlumberger N.V...................... 5,000 341,563
Smith International, Inc. (a)......... 4,300 149,694
----------
832,950
----------
FINANCE (5.0%)
American Express Co................... 1,000 114,000
Charles Schwab Corp. (The)............ 8,500 276,250
Merrill Lynch & Co., Inc.............. 1,500 138,375
T. Rowe Price Associates, Inc......... 6,500 244,156
----------
772,781
----------
FOODS/FOOD SERVICE (1.5%)
Ralston Purina Co..................... 1,100 128,494
Sysco Corp............................ 4,200 107,625
----------
236,119
----------
INSTRUMENTS--ELECTRONIC (1.1%)
Honeywell Inc......................... 2,000 167,125
----------
INSURANCE (5.9%)
American International Group, Inc..... 1,100 160,600
General Re Corp....................... 1,300 329,550
Marsh & McLennan Cos., Inc............ 6,900 417,019
----------
907,169
----------
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
============================
<S> <C> <C>
COMMON STOCKS (Continued)
MACHINERY (0.9%)
Sundstrand Corp....................... 2,500 $ 143,125
----------
MEDIA (11.8%)
CBS Corp.............................. 8,800 279,400
Clear Channel
Communications, Inc. (a)............ 4,000 436,500
Gannett Co., Inc...................... 5,000 355,313
McGraw-Hill Cos., Inc. (The).......... 2,000 163,125
MediaOne Group Inc. (a)............... 9,300 408,619
Walt Disney Co. (The)................. 1,700 178,606
----------
1,821,563
----------
MEDICAL/HEALTH CARE (10.7%)
Abbott Laboratories................... 2,000 81,750
Baxter International Inc.............. 3,500 188,344
Becton, Dickinson and Co.............. 2,500 194,062
Bristol-Myers Squibb Co............... 2,000 229,875
Johnson & Johnson..................... 2,500 184,375
Lilly (Eli) & Co...................... 2,500 165,156
Merck & Co., Inc...................... 2,600 347,750
Pfizer Inc............................ 100 10,869
Schering-Plough Corp.................. 1,000 91,625
SmithKline Beecham Plc (b)............ 2,000 121,000
Warner-Lambert Co..................... 500 34,688
----------
1,649,494
----------
PUBLISHING (3.1%)
New York Times Co. (The).............. 4,000 317,000
Tribune Co............................ 2,400 165,150
----------
482,150
----------
RETAIL (5.5%)
Home Depot, Inc. (The)................ 5,000 415,312
Lowe's Cos., Inc...................... 6,000 243,375
Tiffany & Co.......................... 3,000 144,000
Walgreen Co........................... 1,000 41,313
----------
844,000
----------
TELECOMMUNICATIONS EQUIPMENT (1.8%)
Tellabs, Inc. (a)..................... 3,900 279,338
----------
Total Common Stocks
(Cost $13,004,637).................. 13,554,807
----------
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (6.4%)
U.S. GOVERNMENT (6.4%)
United States Treasury Bill
4.90%, due 8/20/98.................. $1,008,000 $ 1,001,139
-----------
Total Short-Term Investments
(Cost $1,001,139)................... 1,001,139
-----------
Total Investments
(Cost $14,005,776) (c).............. 94.1% 14,555,946 (d)
Cash and Other Assets,
Less Liabilities.................... 5.9 907,643
----- -----------
Net Assets............................ 100.0% $15,463,589
===== ===========
</TABLE>
- ----------
(a) Non-income producing security.
(b) ADR--American Depository Receipt.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1998, net unrealized appreciation was $550,170, 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 $719,605 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $169,435.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $14,005,776) .................................................. $ 14,555,946
Cash .............................................................................................................. 1,928,393
Receivables:
Fund shares sold ................................................................................................ 615,663
Dividends and interest .......................................................................................... 10,083
Unamortized organization expense .................................................................................. 57,047
------------
Total assets ................................................................................................... 17,167,132
------------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................. 1,653,427
Organization .................................................................................................... 20,443
MainStay Management ............................................................................................. 9,868
NYLIFE Distributors ............................................................................................. 3,961
Custodian ....................................................................................................... 1,675
Transfer agent .................................................................................................. 561
Trustees ........................................................................................................ 84
Accrued expenses .................................................................................................. 13,524
------------
Total liabilities .............................................................................................. 1,703,543
------------
Net assets ........................................................................................................ $ 15,463,589
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ......................................................................................................... $ 10,014
Class B ......................................................................................................... 4,882
Additional paid-in capital ........................................................................................ 14,914,802
Accumulated net investment loss ................................................................................... (16,631)
Accumulated undistributed net realized gain on investments ........................................................ 352
Net unrealized appreciation on investments ........................................................................ 550,170
------------
Net assets ........................................................................................................ $ 15,463,589
============
CLASS A
Net assets applicable to outstanding shares ....................................................................... $ 10,398,115
============
Shares of beneficial interest outstanding ......................................................................... 1,001,446
============
Net asset value per share outstanding ............................................................................. $ 10.38
Maximum sales charge (5.50% of offering price) .................................................................... 0.60
------------
Maximum offering price per share outstanding ...................................................................... $ 10.98
============
CLASS B
Net assets applicable to outstanding shares ....................................................................... $ 5,065,474
============
Shares of beneficial interest outstanding ......................................................................... 488,181
============
Net asset value and offering price per share outstanding .......................................................... $ 10.38
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Operations
for the period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .................................................... $ 8,591
Interest ..................................................... 5,654
---------
Total income ................................................ 14,245
---------
Expenses:
Management ................................................... 9,868
Shareholder communication .................................... 6,028
Professional ................................................. 3,981
Service--Class A ............................................. 1,969
Service--Class B ............................................. 498
Custodian .................................................... 1,675
Distribution--Class B ........................................ 1,494
Registration ................................................. 1,089
Recordkeeping ................................................ 1,000
Organization ................................................. 953
Transfer agent ............................................... 561
Trustees ..................................................... 84
Miscellaneous ................................................ 1,676
---------
Total expenses .............................................. 30,876
---------
Net investment loss ............................................ (16,631)
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................... 352
Net unrealized appreciation on investments ..................... 550,170
---------
Net realized and unrealized gain on investments ................ 550,522
---------
Net increase in net assets resulting from operations ........... $ 533,891
=========
</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.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss ............................................. $ (16,631)
Net realized gain on investments ................................ 352
Net unrealized appreciation on investments ...................... 550,170
------------
Net increase in net assets resulting from operations ............ 533,891
------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ...................................................... 1,013,661
Class B ...................................................... 3,917,976
Cost of shares redeemed:
Class A ...................................................... --
Class B ...................................................... (1,939)
------------
Increase in net assets derived from capital share transactions 4,929,698
------------
Net increase in net assets ................................... 5,463,589
NET ASSETS:
Beginning of period ............................................... 10,000,000
------------
End of period ..................................................... $ 15,463,589
============
Accumulated net investment loss at end of period .................. $ (16,631)
============
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
------- -------
June 1, 1998*
through
June 30, 1998**
---------------------------
<S> <C> <C>
Net asset value at beginning of period ........ $10.00 $10.00
---------- ----------
Net investment loss (a) ....................... (0.01) (0.01)
Net realized and unrealized gain on investments 0.39 0.39
---------- ----------
Total from investment operations .............. 0.38 0.38
---------- ----------
Net asset value at end of period .............. $10.38 $10.38
========== ==========
Total investment return (b) ................... 3.80% 3.80%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss ........................ (1.53%)+ (2.28%)+
Expenses ................................... 2.98%+ 3.73%+
Portfolio turnover rate ....................... 0%(c) 0%(c)
Net assets at end of period (in 000's) ........ $10,398 $5,066
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ 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) Less than one percent.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Blue Chip Growth 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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Blue Chip Growth Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 capital appreciation by investing
primarily in securities of large-capitalization companies. Current income is a
secondary investment objective.
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, and (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
16
<PAGE>
Notes to Financial Statements unaudited
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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
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.
17
<PAGE>
MainStay Blue Chip Growth Fund
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company, ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to Gabelli Asset
Management Company (the "Sub-Adviser"), a majority owned subsidiary of Gabelli
Funds, Inc. Under the supervision of the Trust's Board of Trustees and the
Manager, the Sub-Adviser is responsible for the day-to-day portfolio management
of 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 1.00% of the average
daily net assets of the Fund. For the period ended June 30, 1998 the Manager
earned $9,868.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and Gabelli Asset Management Company, the Manager pays the Sub-Adviser a monthly
fee at an annual rate of 0.50% on assets up to $500 million, and 0.40% on assets
in excess of $500 million.
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 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.
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 $2,429 for the period
ended June 30, 1998.
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 ended June 30,
1998, amounted to $3,536.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
Trustees' Fees. Trustees, other than those affiliated with New York Life,
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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $9,342,000 and $1,038,000 respectively. This represents
89.8% and 20.5% of the net assets at period end for Class A and B, respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $13,013 and $8, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
------------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold .................................. 101 388
Shares redeemed .............................. -- --
--- ---
Net increase ................................. 101 388
=== ===
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
19
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
BLUE CHIP GROWTH FUND(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
20
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
21
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
22
<PAGE>
MainStay Blue Chip Growth Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay Blue
Chip Growth 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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA19-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Equity Income Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Industry--Top 5 6
Portfolio Composition 8
Fund & Lipper Returns 9
Top 10 Holdings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 22
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R)500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Equity Income Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o During June 1998, the stock market benefited from moderate economic growth,
modest inflation, and low interest rates.
o Problems in Asia drew investors to highly liquid, large-capitalization
growth stocks, and away from smaller value-oriented names.
o With declining prices for oil and other commodities, some sectors typically
associated with income-producing equities tended to lag the overall market.
o The convertible market provided a variety of opportunities for income with
capital appreciation potential.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Equity Income Fund commenced operations on 6/1/98.
o The Fund returned 0.30% for both Class A shares and Class B shares,
excluding all sales charges, for the since-inception period from 6/1/98
through 6/30/98.
o The Fund looked for value opportunities among securities with attractive
income and capital appreciation potential.
o Both share classes underperformed the average Lipper* equity income fund,
which returned 0.62% for the since-inception period.
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Portfolio Management Discussion and Analysis
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Supply and demand
- -----------------
In the stock market, an oversupply of a product or service can reduce demand and
lower stock prices. When demand increases relative to supply, stock prices may
recover.
For the period from June 1 through June 30, 1998, moderate economic growth, low
interest rates, and modest inflation helped the stock market as a whole continue
its sustained advance. Sectors traditionally associated with income-producing
equities, however, faced a variety of problems that caused them to lag the
overall market. Metals companies suffered from declining copper prices. They
were also hurt by an oversupply of aluminum as Russia, a major global provider,
worked to improve its financial situation. Oil and energy-related stocks
suffered from declining oil prices caused in part by reduced demand from Asian
manufacturing companies. Tobacco stocks suffered from litigation concerns and
their prices fell to extremely low levels.
Many of these events created buying opportunities among income-producing equity
securities. Although some stock prices suffered, most companies continued to
provide attractive dividend yields. In the convertible market, a variety of
opportunities developed, despite recent difficulties with high-profile issuers
that failed to perform.
Given this context, how did the MainStay Equity Income Fund perform in the
period from 6/1/98 through 6/30/98?
The MainStay Equity Income Fund commenced operations on 6/1/98. For the
one-month period ended 6/30/98, the Fund returned 0.30% for both Class A shares
and Class B shares, excluding all sales charges. Both share classes
underperformed the average Lipper* equity income fund, which returned 0.62% for
the since-inception period.
What were the key factors that accounted for the Fund's performance relative to
its peers?
During the month of June 1998, the Fund was just getting started. We set a four-
to eight-week goal to approach full investment, believing that this time frame
would allow the Fund to take advantage of selective opportunities over time. As
a result, at the end of June, the Fund was about 25% invested in cash. In
addition, some of the sectors the Fund invested in provided attractive yields,
but as of the end of the reporting period underperformed the market in general.
Can you highlight some of the securities you selected as the Fund got underway?
Yes. We were particularly attracted to several stocks in the real estate
investment trust (or REIT) sector. Starwood Hotels & Resorts is a company that
offers a 4.5% yield and participates in the gaming and hotel industries, with
high-quality companies like Westin, St. Regis, Caesar's, and the Phoenician. The
stock has suffered a bit with the acquisition of ITT Sheraton, but we see
excellent upside potential going forward.
As investors moved away from companies with Asian exposure, domestic retail
compa-
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end 6/98 Total Return %
- -----------------------------------------------------------
<S> <C>
Class A 0.30
Class B 0.30
</TABLE>
See footnote * on page 9 for more information on performance.
nies flourished. We believe that the next tier of beneficiaries may be retail
REIT companies, such as General Growth Properties, which offers a convertible
yielding 7.25%. We believe these securities offer an attractive mix of upside
potential and downside cushioning with attractive yields.
Were there other sectors that attracted your attention?
We don't invest the Fund's assets by sector. We're bottom-up investors, choosing
securities one-by-one, based on their individual characteristics and fundamental
merits. The Fund's sector weightings result entirely from this security
selection process. Having said that, we did find some opportunities for the Fund
among metals stocks that we believed had been beaten down by the market.
One example is Phelps Dodge, a copper company that has suffered from the
dramatic decline in the price of copper. We believe that the company has good
asset value and that its securities are currently underestimated by the market.
During the reporting period, the securities provided a 3% yield. While copper
prices could still decline further, we believe that if they rise, the Fund will
participate in the appreciation potential of the stock.
Reynolds Metals is an aluminum company that has suffered from overproduction of
aluminum in Russia--a nation that has been seeking to recover from its financial
problems. We believe Reynolds Metals is a world-class company and offers
substantial downside protection. Since the overproduction will probably be
temporary, we see attractive upside potential in the stock.
Aren't utilities known for their equity-income characteristics?
Absolutely, and they have been performing very well over the past year. Since
most utility companies are entirely domestic, they've been attractive to
investors seeking a refuge from Asian exposure. Utilities
Bottom-up investing
- -------------------
Security selection based on the specific fundamental merits of individual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares market sectors, and uses relative security values to narrow the
range of issues to examine.
Weighting
- ---------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be overweighted in a sector when that portion of the portfolio
is greater than the sector's general relationship to the market as a whole.
5
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- --------------------------------------------------
<S> <C>
Metals 11.9%
Energy-Oil/Gas 9.6%
Electronic-Parts/Wires 7.4%
Real Estate 6.8%
Utilities-Electric Power 5.4%
All Other 58.9%
</TABLE>
Actual percentages will vary over time.
offer attractive yields, deregulation has largely been discounted by the market,
and many utilities are repurchasing their stock or have high insider ownership.
Some of the stocks we've purchased for the Fund are Texas Utilities, Energy
East, and Scana. We believe Texas Utilities is very well managed, maintains good
control over its cost structure, and may be an active acquirer in the months
ahead. We currently plan to add more utility names to the Fund in the future.
What about energy-related stocks?
The Fund is currently overweighted in the energy sector compared to the S&P
500.+ These stocks have suffered as a result of the decline in oil prices, but
offer attractive dividend yields. The Fund purchased Amoco and YPF Sociedad
Anonima, an Argentine energy name, and may add selectively to this area. We
intend to focus the Fund on large-capitalization stocks, which we believe may be
able to weather volatile commodity prices better than smaller companies.
Where else did the Fund invest?
We believe in a concept called "growth at a reasonable price." We look for
companies that we believe have stronger-than-average growth opportunities and
are currently undervalued or reasonably priced given their future earnings
potential and profit outlook. Two stocks that fit into this category are
Sherwin-Williams, the paint company, and Worthington Industries, a steel
processing company.
Sherwin-Williams provides a 2% dividend, which may appear low. But the company
has been a solid, relatively predictable growth company for many years. We
believe the stock is attractive and purchased it for the portfolio.
Worthington Industries has suffered as the price of steel has declined, but as a
processor rather than a steel producer, is not as vulnerable as other
steel-related companies.
- ----------
+ See footnote on page 2 for more information on the S&P 500.
6
<PAGE>
We believe the stock represents good value at current prices and may show
strength if the market comes to regard the stock as unfairly punished.
It sounds like the Fund is using more than one strategy.
Yes. We are combining our in-depth value research process with our extensive
experience in convertibles and our insight into growth equities. We believe this
combination will provide advantages over equity income managers who are skilled
in only one or two of these areas.
Did you find other value opportunities in June?
Yes. One area we believe is undervalued is tobacco. Right now, the litigation
the industry is facing has brought stock prices well below asset values. At
Philip Morris, for example, we believe that the assets of the company's
international tobacco and food businesses are worth more than the stock price,
even with reasonable estimates of the litigation risk. The company has had
consistent growth, is engaged in food and beverages, and as of 6/30/98, provided
an attractive 4% yield. That's the kind of value opportunity we seek for the
Fund, even though there may be some ups and downs ahead.
What is your outlook going forward?
We believe that stocks are at record highs, yet profit growth has been modest.
In our opinion, equity income-producing securities provide an attractive way to
hedge gains in the stock market. We also believe their income-producing
component may offer a measure of downside protection if stocks in general should
suffer a setback. We're investing in value stocks because we believe they have
more to offer and less room to fall in a market downturn.
We want investors to remember that the Fund isn't just managed for yield. It
seeks to realize maximum long-term total return from a combination of capital
appreciation and income.
Denis Laplaige
Neil Feinberg
Michael Sheridan
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
7
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------------
<S> <C>
Common Stocks 53.5%
Convertible Bonds 14.8%
Convertible Preferred Stocks 6.7%
Cash, Equivalents & Other Assets, Less Liabilities 25.0%
</TABLE>
Actual percentages will vary over time.
8
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 0.30%
Class B 0.30%
================================================================================
<CAPTION>
===============================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -5.22%
Class B -4.70%
================================================================================
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
equity income fund 0.62%
================================================================================
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.03 $0.0000 $0.0000
Class B $10.03 $0.0000 $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 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 six 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 for the period from the initial offering of both share classes
(on 6/1/98) through 6/30/98.
9
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
===============================================================================
HOLDING AMOUNT
===============================================================================
<S> <C>
World Color Press, Inc., 6.00%, due 10/1/07 $473,875
Starwood Hotels & Resorts 434,812
Texas Utilities Co. 416,250
Advanced Micro Devices, Inc., 6.00%, due 5/15/05 410,000
World Access Inc., 4.50%, due 10/1/02 410,000
General Growth Properties, Inc., 7.25% 404,000
SCANA Corp. 384,581
Weyerhaeuser Co. 369,500
Reynolds Metals Co. 335,625
Amoco Co. 333,000
</TABLE>
- ----------
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.
10
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
LONG-TERM BONDS (14.8%)+
CONVERTIBLE BONDS (14.8%)
ELECTRONIC--PARTS/WIRES (3.8%)
Advanced Micro Devices, Inc.
6.00%, due 5/15/05.................. $500,000 $ 410,000
----------
MANUFACTURING--DIVERSIFIED (2.7%)
Mascotech, Inc.
4.50%, due 12/15/03................. 300,000 288,000
----------
PUBLISHING (4.5%)
World Color Press, Inc.
6.00%, due 10/1/07.................. 425,000 473,875
----------
TELECOMMUNICATIONS (3.8%)
World Access Inc.
4.50%, due 10/1/02.................. 400,000 410,000
----------
Total Convertible Bonds
(Cost $1,537,543)................... 1,581,875
----------
Total Long-Term Bonds
(Cost $1,537,543)................... 1,581,875
----------
<CAPTION>
Shares
==========
<S> <C> <C>
COMMON STOCKS (53.5%)
CHEMICALS (3.7%)
Lubrizol Corp......................... 7,000 211,750
M.A. Hanna Co......................... 10,000 183,125
----------
394,875
----------
CONSTRUCTION--BUILDINGS (1.9%)
Owens Corning......................... 5,000 204,062
----------
ELECTRONIC--PARTS/WIRES (3.6%)
SCANA Corp............................ 12,900 384,581
----------
ENERGY--OIL/GAS (6.7%)
Amoco Co. ............................ 8,000 333,000
Snyder Oil Corp....................... 7,000 139,562
YPF Sociedad Anonima (a).............. 8,000 240,500
----------
713,062
----------
<CAPTION>
Shares Value
==============================
<S> <C> <C>
FINANCE (1.2%)
Sirrom Capital Corp................... 5,000 $ 130,000
----------
FOREST/PAPER PRODUCTS (3.5%)
Weyerhaeuser Co....................... 8,000 369,500
----------
HOTELS/MOTELS (4.4%)
Felcor Suite Hotels, Inc.............. 1,000 31,375
Starwood Hotels & Resorts............. 9,000 434,812
----------
466,187
----------
INSURANCE (2.2%)
Everest Reinsurance Holdings, Inc..... 6,000 230,625
----------
MACHINERY (1.0%)
McDermott International, Inc.......... 3,000 103,313
----------
METALS (11.9%)
Barrick Gold Corp. ................... 10,000 191,875
Cyprus Amax Minerals Co............... 13,800 182,850
Phelps Dodge Corp. ................... 5,000 285,938
Reynolds Metals Co.................... 6,000 335,625
Worthington Industries, Inc........... 18,000 271,125
----------
1,267,413
----------
PAINTS/RELATED (2.8%)
Sherwin-Williams Co. (The)............ 9,000 298,125
----------
REAL ESTATE (3.0%)
Highwoods Properties, Inc............. 10,000 323,125
----------
TOBACCO (2.2%)
Philip Morris Cos., Inc............... 6,000 236,250
----------
UTILITIES--ELECTRIC POWER (5.4%)
Energy East Corp...................... 2,500 104,063
OGE Energy Corp. ..................... 2,200 59,400
Texas Utilities Co. .................. 10,000 416,250
----------
579,713
----------
Total Common Stocks
(Cost $5,734,516)................... 5,700,831
----------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Equity Income Fund
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
PREFERRED STOCKS (6.7%)
ENERGY--OIL/GAS (2.9%)
Tesoro Petroleum Corp., 7.25%......... 18,500 $ 305,250
-----------
REAL ESTATE (3.8%)
General Growth Properties, Inc.
7.25%............................... 16,000 404,000
-----------
Total Preferred Stocks
(Cost $694,844)..................... 709,250
-----------
<CAPTION>
Principal
Amount
==========
<S> <C> <C>
SHORT-TERM INVESTMENT (27.1%)
FEDERAL AGENCY (27.1%)
Federal Home Loan Bank
5.45%, due 7/1/98................... $2,895,000 2,895,000
-----------
Total Short-Term Investment
(Cost $2,895,000)................... 2,895,000
-----------
Total Investments
(Cost $10,861,903) (b).............. 102.1% 10,886,956 (c)
Liabilities in Excess of Cash,
and Other Assets.................... (2.1) (226,883)
---------- -----------
Net Assets............................ 100.0% $10,660,073
========== ===========
</TABLE>
- ----------
(a) ADR--American Depository Receipt.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1998, net unrealized appreciation was $25,053, 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 $135,296 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $110,243.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $10,861,903) ...... $10,886,956
Cash .................................................................. 441
Receivables:
Investment securities sold .......................................... 2,970,000
Fund shares sold .................................................... 40,567
Dividends and interest .............................................. 28,884
Unamortized organization expense ...................................... 57,047
-----------
Total assets ...................................................... 13,983,895
-----------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 3,278,461
Organization ........................................................ 20,537
MainStay Management ................................................. 5,895
NYLIFE Distributors ................................................. 2,836
Custodian ........................................................... 1,675
Transfer agent ...................................................... 561
Trustees ............................................................ 84
Accrued expenses ...................................................... 13,773
-----------
Total liabilities ................................................. 3,323,822
-----------
Net assets ............................................................ $10,660,073
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 9,160
Class B ............................................................. 1,464
Additional paid-in capital ............................................ 10,610,446
Accumulated undistributed net investment income ....................... 13,854
Accumulated undistributed net realized gain on investments ............ 96
Net unrealized appreciation on investments ............................ 25,053
-----------
Net assets ............................................................ $10,660,073
===========
CLASS A
Net assets applicable to outstanding shares ........................... $ 9,191,848
===========
Shares of beneficial interest outstanding ............................. 916,018
===========
Net asset value per share outstanding ................................. $ 10.03
Maximum sales charge (5.50% of offering price) ........................ 0.58
-----------
Maximum offering price per share outstanding .......................... $ 10.61
===========
CLASS B
Net assets applicable to outstanding shares ........................... $ 1,468,225
===========
Shares of beneficial interest outstanding ............................. 146,410
===========
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.
13
<PAGE>
Statement of Operations
for the period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends ...................................................... $12,992
Interest ....................................................... 26,640
-------
Total income ................................................. 39,632
-------
Expenses:
Shareholder communication ...................................... 6,028
Management ..................................................... 5,895
Professional ................................................... 3,981
Service--Class A ............................................... 1,861
Service--Class B ............................................... 244
Custodian ...................................................... 1,675
Registration ................................................... 1,089
Recordkeeping .................................................. 1,000
Organization ................................................... 953
Distribution--Class B .......................................... 731
Transfer agent ................................................. 561
Trustees ....................................................... 84
Miscellaneous .................................................. 1,676
-------
Total expenses ............................................... 25,778
-------
Net investment income ............................................ 13,854
-------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ................................. 96
Net unrealized appreciation on investments ....................... 25,053
-------
Net realized and unrealized gain on investments .................. 25,149
-------
Net increase in net assets resulting from operations ............. $39,003
=======
</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.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ............................................ $ 13,854
Net realized gain on investments ................................. 96
Net unrealized appreciation on investments ....................... 25,053
-----------
Net increase in net assets resulting from operations ............. 39,003
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................ 159,565
Class B ........................................................ 461,505
-----------
Increase in net assets derived from capital share transactions 621,070
-----------
Net increase in net assets ................................... 660,073
NET ASSETS:
Beginning of period ................................................ 10,000,000
-----------
End of period ...................................................... $10,660,073
===========
Accumulated undistributed net investment income at end of period ... $ 13,854
===========
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
--------- ---------
June 1, 1998*
through
June 30, 1998**
-----------------------
<S> <C> <C>
Net asset value at beginning of period ............. $10.00 $10.00
--------- ---------
Net investment income .............................. 0.01 0.01
Net realized and unrealized gain on investments .... 0.02 0.02
--------- ---------
Total from investment operations ................... 0.03 0.03
--------- ---------
Net asset value at end of period ................... $10.03 $10.03
========= =========
Total investment return (a) ........................ 0.30% 0.30%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .......................... 1.73%+ 0.98%+
Expenses ....................................... 2.97%+ 3.72%+
Portfolio turnover rate ............................ 5% 5%
Net assets at end of period (in 000's) ............. $9,192 $1,468
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is not
annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Equity Income Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 realize maximum long-term total return
from a combination of capital appreciation 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
17
<PAGE>
MainStay Equity Income Fund
Exchange, and (f) by appraising all other securities and other assets, including
debt securities for which prices are supplied by a pricing agent but are not
deemed by the 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 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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
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.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 0.70% of the average
daily net assets of the Fund. For the period ended June 30, 1998, the Manager
earned $5,895.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and the Sub-Adviser, the Manager pays the Sub-Adviser a monthly fee at an annual
rate of 0.35% 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 (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 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.
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 $703 for the period
ended June 30, 1998.
19
<PAGE>
MainStay Equity Income Fund
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 ended June 30,
1998 amounted to $2,243.
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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $9,027,000 and $1,003,000, respectively. This represents
98.2% and 68.3% of the net assets at period end for Class A and B, respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $8,422 and $455, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
------------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold .................................. 16 46
Shares redeemed .............................. -- --
------- -------
Net increase ................................. 16 46
======= =======
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
20
<PAGE>
This page intentionally left blank
21
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY INCOME FUND To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
22
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
23
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
24
<PAGE>
MainStay Equity Income Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay
Equity 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. This semiannual report is also
available in Spanish. For a copy, please call 1-800-MAINSTAY (1-800-624-6782),
option 3.
(C)1998. All rights reserved. MSSA20-08/98
[RECYCLED SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Growth Opportunities Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Industry--Top 5 6
Portfolio Composition 7
Fund & Lipper Returns 8
Top 10 Holdings 9
Portfolio of Investments 10
Unaudited Financial Statements 12
Notes to Financial Statements 16
The MainStay Funds 20
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R)500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Growth Opportunities Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o Low interest rates and low inflation helped stocks move higher in June
1998, with a strong U.S. economy benefiting domestically oriented issues.
o Consumer companies prospered as the market turned its attention to growth
stocks.
o Financial difficulties in Asian markets reduced demand and led to excess
industrial capacity in the Pacific region.
o Commodity-oriented and export-related industries were adversely affected by
problems in Asia and declining commodity prices worldwide.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Growth Opportunities Fund commenced operations on 6/1/98.
o The Fund returned 6.40% and 6.30% for Class A shares and Class B shares,
respectively, excluding all sales charges, for the since-inception period
from 6/1/98 through 6/30/98.
o The Fund benefited from large, well-established companies and positive
trends in telecommunications and the Internet.
o Both share classes outperformed the S&P 500,* which returned 4.06% from
6/1/98 through 6/30/98.
o Both share classes outperformed the average Lipper+ growth & income fund,
which returned 1.68% for the since-inception period.
- ----------
* See footnote on page 2 for more information on the S&P 500.
+ See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Growth versus value
- -------------------
Growth investments typically include stocks with rising prices and positive
earnings trends. Value stocks typically include equities that are currently
trading below their fair market value, even if they have the potential to
increase in value over time.
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.
Portfolio Management Discussion and Analysis
For the period from June 1 through June 30, 1998, the equity markets benefited
from declining interest rates, low inflation, and continued strength in the
domestic economy. The most significant influence in the market was the effect of
Asian difficulties on the United States. Many commodity-oriented and
export-related industries were adversely affected by reduced demand and excess
industrial capacity in Asian markets.
As investors moved away from stocks with Asian influences, purely domestic
equities benefited from increasing wages and strong consumer confidence. Retail
consumer stocks did particularly well in this environment.
Given this context, how did the MainStay Growth Opportunities Fund perform in
the period from 6/1/98 through 6/30/98?
The MainStay Growth Opportunities Fund commenced operations on 6/1/98. For the
one-month period ended 6/30/98, the Fund returned 6.40% and 6.30% for Class A
shares and Class B shares, respectively, excluding all sales charges. Both share
classes outperformed the S&P 500 Index,* which returned 4.06% over the same
period. Both share classes also outperformed the average Lipper+ growth & income
fund, which returned 1.68% for the month of June.
Why was the Fund able to outperform its peers?
Anticipating moderate overall economic growth, we established the Fund with a
growth orientation and an emphasis on domestic issues with a consistent earnings
growth profile. The Fund also tended to avoid cyclically oriented sectors that
might suffer from declining commodity prices. These decisions proved very
favorable for the Fund in a market environment where the S&P 500 reached new
peaks and the market rewarded companies with consistent track records. While
past performance is no guarantee of future results, we believe the Fund's first
month was extremely positive.
What were the Fund's most significant purchases during the reporting period?
The Fund's three largest holdings as of 6/30/98, were General Electric, Cisco
Systems, and Tyco International. Each of these stocks fit the Fund's desired
profile of being a well-established company with a strong management team and
excellent track record. We believe each of these investments offers predictable
growth with reasonable valuations, and each of these stocks outperformed the
market during the month of June.
Why did these issues do so well?
We believe investors have placed a premium on consistent earnings growth. As
- ----------
* See footnote on page 2 for more information on the S&P 500.
+ See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end Total Return %
- --------------------------------------------------------------------
<S> <C>
6/98 6.40 Class A
6/98 6.30 Class B
</TABLE>
See footnote * on page 8 for more information on performance.
the markets move higher, investors become increasingly concerned about companies
that may be prone to surprises. While past performance can't guarantee future
results, investors tend to prefer companies whose track records suggest the
possibility of reliable future growth potential.
Which of the Fund's holdings were the strongest performers during the reporting
period?
America Online was the Fund's best performer in June, with a total return of
26.2%. The company continued to exhibit strong revenue generation and operating
performance with its online services. There was also some speculation that the
company would merge with a large communications or media company, which helped
the stock price appreciate.
Cisco Systems was also a strong performer, with a total return of 21.7% for the
month of June. Cisco Systems is a leading company in the computer hardware
industry. We believe the company and the industry will both continue to benefit
as explosive Internet growth creates strong demand for their products.
Comcast Corp. and MediaOne Group also generated impressive returns of 18.6% and
18.5%, respectively. Both of these cable stocks, which we view as value-oriented
investments, appreciated as the growth potential of their industry became more
fully apparent. AT&T recently announced a merger with Telecommunications, Inc.
that further emphasized the industry's growth potential.
Did the Fund own stocks that under-performed?
Yes. Schlumberger is a diversified energy service provider that suffered with
the decline in the price of oil. The stock was also negatively impacted by the
recent acquisition of Camco International, which investors did not fully embrace
because of its high purchase price. During June 1998, the price of Schlumberger
stock dropped 12.5%.
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
5
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- ---------------------------------------------
<S> <C>
Medical/Health Care 13.1%
Computer-Software/Services 12.3%
Banks 7.8%
Retail 7.7%
Insurance 6.3%
All Other 52.8%
</TABLE>
Actual percentages will vary over time.
Are there sectors in which the Fund is currently overweighted?
The Fund is currently overweighted in technology and consumer staples--sectors
we believe have strong growth potential. Both sectors contributed positively to
the Fund's overall performance. In the technology area, the Fund is concentrated
in the less cyclical software and computer services sector, which is benefiting
from increased spending by corporations on the year 2000 computer problem. The
Fund's technology holdings outperformed the market by a wide margin in the month
of June. Consumer staples matched the market's performance. The Fund's media
holdings outperformed while more traditional consumer products companies lagged
the market.
In what sectors is the Fund currently underweighted?
The Fund is currently underweighted in basic materials, energy, and capital
goods. Our decision to continue to underweight the Fund in basic materials and
energy was timely, since both sectors underperformed the market during the
reporting period. While the Fund was underweighted in capital goods, the Fund's
holdings outperformed the sector in June, largely as a result of our decision to
focus the Fund's capital goods stock purchases on companies that exhibited
relatively stable earnings growth.
What is your outlook going forward?
We're cautiously optimistic. As long as inflation and interest rates remain
subdued and corporate earnings continue to grow, we believe the stock market can
continue to progress upward. Our primary concern is corporate earnings, which
may experience more impact from Asian difficulties than the market has currently
discounted. For this reason, at the end of June, we favored domestically
oriented sectors such as financials and consumer staples for the Fund. The Fund
also focused on technology companies whose earnings prospects are more
6
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- ------------------------------------------------------------
<S> <C>
Common Stocks 92.5%
Cash, Equivalents & Other Assets, Less Liabilities 7.5%
</TABLE>
Actual percentages will vary over time.
closely tied to domestic need than Asian developments. No matter where the
markets may move, the Fund will continue to seek long-term growth of capital,
with income as a secondary consideration.
James Agostisi
Patricia S. Rossi
Portfolio Managers
Madison Square Advisors, Inc.
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.
7
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 6.40%
Class B 6.30%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A 0.55%
Class B 1.30%
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
growth & income fund 1.68%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $10.64 $0.0000 $0.0000
Class B $10.63 $0.0000 $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 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 six 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. The 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 6/1/98) through 6/30/98.
8
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
================================================================================
HOLDING AMOUNT
================================================================================
<S> <C>
General Electric Co. $273,000
Cisco Systems, Inc. 239,362
Tyco International Ltd. 220,500
Software.Net Corp. 191,250
America Online, Inc. 190,800
SunGard (R) Data Systems Inc. 184,200
Bristol-Myers Squibb Co. 183,900
Lucent Technologies Inc. 183,013
Networks Associates, Inc. 177,137
Compuware Corp. 173,825
</TABLE>
- ----------
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.
9
<PAGE>
MainStay Growth Opportunities Fund
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMMON STOCKS (92.5%)+
AEROSPACE/DEFENSE (1.4%)
Raytheon Co. Class A (a) ................. 3,000 $ 172,875
------------
AUTO PARTS (1.2%)
Dana Corp. ............................... 2,700 144,450
------------
BANKS (7.8%)
Bank of New York Co., Inc. (The) ......... 2,200 133,513
BankBoston Corp. ......................... 2,400 133,500
Chase Manhattan Corp. (The) .............. 2,000 151,000
First Union Corp. ........................ 2,300 133,975
Fleet Financial Group, Inc. .............. 1,600 133,600
NationsBank Corp. ........................ 1,700 130,050
Norwest Corp. ............................ 3,400 127,075
------------
942,713
------------
BIOTECHNOLOGY (1.0%)
Centocor, Inc. (a) ....................... 3,400 123,250
------------
CHEMICALS (1.1%)
Monsanto Co. ............................. 2,300 128,512
------------
COMMERCIAL SERVICES (3.8%)
Cendant Corp. (a) ........................ 6,400 133,600
Service Corp. International .............. 3,900 167,213
Servicemaster Co. (The) .................. 4,200 159,862
------------
460,675
------------
COMMUNICATION EQUIPMENT (4.3%)
Ascend Communications, Inc. (a) .......... 2,000 99,125
Cisco Systems, Inc. (a) .................. 2,600 239,362
Lucent Technologies Inc. ................. 2,200 183,013
------------
521,500
------------
COMPUTER--SOFTWARE/SERVICES (12.3%)
America Online, Inc. (a) ................. 1,800 190,800
Comdisco, Inc. ........................... 8,400 159,600
Compuware Corp. (a) ...................... 3,400 173,825
EMC Corp. (a) ............................ 3,400 152,363
EarthLink Network, Inc. (a) .............. 1,700 130,475
Fiserv, Inc. (a) ......................... 3,900 165,628
Keane, Inc. (a) .......................... 2,800 156,800
Networks Associates, Inc. (a) ............ 3,700 177,137
SunGard (R) Data Systems Inc. (a) ........ 4,800 184,200
------------
1,490,828
------------
COSMETICS/RELATED (2.3%)
Gillette Co. (The) ....................... 2,400 136,050
Procter & Gamble Co. (The) ............... 1,600 145,700
------------
281,750
------------
ENERGY--OIL/GAS (3.8%)
Halliburton Co. .......................... 2,400 106,950
Mobil Corp. .............................. 1,600 122,600
Schlumberger N.V ......................... 1,600 109,300
Texaco Inc. .............................. 2,100 125,344
------------
464,194
------------
FINANCE (2.5%)
American Express Co. ..................... 1,400 159,600
Freddie Mac .............................. 3,000 141,187
------------
300,787
------------
FOOD (3.5%)
Aurora Foods Inc. (a) .................... 7,000 147,875
Hershey Foods Corp. ...................... 1,900 131,100
Sysco Corp. .............................. 5,900 151,187
------------
430,162
------------
FOREST/PAPER PRODUCTS (1.8%)
Boise Cascade Corp. ...................... 2,900 94,975
Fort James Corp. ......................... 2,800 124,600
------------
219,575
------------
INSURANCE (6.3%)
Allstate Corp. (The) ..................... 1,400 128,188
American General Corp. ................... 2,000 142,375
Conseco, Inc. ............................ 2,000 93,500
EXEL Ltd. ................................ 1,700 132,281
Provident Cos., Inc. ..................... 3,400 117,300
Travelers Group Inc. ..................... 2,500 151,562
------------
765,206
------------
LEISURE TIME (1.4%)
Carnival Corp. ........................... 4,200 166,425
------------
MANUFACTURING--DIVERSIFIED (4.1%)
General Electric Co. ..................... 3,000 273,000
Tyco International Ltd. .................. 3,500 220,500
------------
493,500
------------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE>
Portfolio of Investments June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMMON STOCKS (Continued)
MEDIA (6.2%)
CBS Corp. ................................ 4,400 $ 139,700
Clear Channel
Communications, Inc. (a) ............... 1,400 152,775
Comcast Corp. ............................ 4,200 170,494
MediaOne Group Inc. (a) .................. 3,500 153,781
Viacom Inc. (a) .......................... 2,400 139,800
------------
756,550
------------
MEDICAL/HEALTH CARE (13.1%)
American Home Products Corp. ............. 3,200 165,600
Bristol-Myers Squibb Co. ................. 1,600 183,900
Cardinal Health, Inc. .................... 1,500 140,625
Glaxo Wellcome PLC (b) ................... 2,500 149,531
Johnson & Johnson ........................ 1,900 140,125
Lilly (Eli) & Co. ........................ 2,500 165,156
McKesson Corp. ........................... 2,100 170,625
Medtronic, Inc. .......................... 2,600 165,750
SmithKline Beecham PLC (b) ............... 2,300 139,150
Warner-Lambert Co. ....................... 2,500 173,438
------------
1,593,900
------------
REAL ESTATE (2.1%)
Chelsea GCA Realty, Inc. ................. 3,300 132,000
Glenborough Realty Trust Inc. ............ 4,800 126,600
------------
258,600
------------
RETAIL (7.7%)
American Stores Co. ...................... 5,000 120,938
Costco Cos., Inc. (a) .................... 2,600 163,963
Kroger Co. (The) (a) ..................... 3,200 137,200
Newell Co. ............................... 3,300 164,381
Software.Net Corp. (a) ................... 10,000 191,250
Wal-Mart Stores, Inc. .................... 2,600 157,950
------------
935,682
------------
TELECOMMUNICATIONS (3.9%)
Bell Atlantic Corp. ...................... 3,200 146,000
Teleport Communications
Group Inc. (a) ......................... 2,800 151,900
U S West, Inc. ........................... 95 4,493
Worldcom, Inc. (a) ....................... 3,400 164,687
------------
467,080
------------
UTILITIES (0.9%)
CMS Energy Corp. ......................... 2,400 105,600
------------
Total Common Stocks
(Cost $10,524,634) ....................... 11,223,814
------------
<CAPTION>
Principal
Amount Value
==============================
<S> <C> <C>
SHORT-TERM INVESTMENTS (11.5%)
COMMERCIAL PAPER (10.8%)
Xerox Corp. 6.30%, due 7/1/98 ......... $ 1,305,000 $ 1,305,000
------------
Total Commercial Paper
(Cost $1,305,000) ...................... 1,305,000
------------
U.S. GOVERNMENT (0.7%)
Federal Home Loan Mortgage Corp.
5.47%, due 7/22/98 ..................... 63,000 62,799
Federal National Mortgage Association
5.50%, due 7/22/98 ..................... 25,000 24,920
------------
Total U.S. Government
(Cost $87,719) ......................... 87,719
------------
Total Short-Term Investments
(Cost $1,392,719) ...................... 1,392,719
------------
Total Investments
(Cost $11,917,353) (c) ................. 104.0% $ 12,616,533(d)
Liabilities in Excess of Cash,
and Other Assets ....................... (4.0) (489,694)
------------ ------------
Net Assets ............................... 100.0% $ 12,126,839
============ ============
</TABLE>
- ----------
(a) Non-income producing security.
(b) ADR--American Depository Receipt.
(c) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(d) At June 30, 1998, net unrealized appreciation was $699,180, 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 $804,544 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $105,364.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $11,917,353) ...... $ 12,616,533
Cash .................................................................. 1,497
Receivables:
Investment securities sold .......................................... 1,192,498
Fund shares sold .................................................... 128,337
Dividends and interest .............................................. 8,781
Unamortized organization expense ...................................... 57,047
------------
Total assets ...................................................... 14,004,693
------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 1,831,962
Organization ........................................................ 20,536
MainStay Management ................................................. 6,192
NYLIFE Distributors ................................................. 3,070
Custodian ........................................................... 1,676
Transfer agent ...................................................... 561
Trustees ............................................................ 84
Accrued expenses ...................................................... 13,773
------------
Total liabilities ................................................. 1,877,854
------------
Net assets ............................................................ $ 12,126,839
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 9,323
Class B ............................................................. 2,079
Additional paid-in capital ............................................ 11,416,295
Accumulated net investment loss ....................................... (8,749)
Accumulated undistributed net realized gain on investments ............ 8,711
Net unrealized appreciation on investments ............................ 699,180
------------
Net assets ............................................................ $ 12,126,839
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 9,917,047
============
Shares of beneficial interest outstanding ............................. 932,262
============
Net asset value per share outstanding ................................. $ 10.64
Maximum sales charge (5.50% of offering price) ........................ 0.62
------------
Maximum offering price per share outstanding .......................... $ 11.26
============
CLASS B
Net assets applicable to outstanding shares ........................... $ 2,209,792
============
Shares of beneficial interest outstanding ............................. 207,861
============
Net asset value and offering price per share outstanding .............. $ 10.63
============
</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 period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .................................................... $ 9,525
Interest ..................................................... 8,035
---------
Total income ............................................... 17,560
---------
Expenses:
Management ................................................... 6,192
Shareholder communication .................................... 6,028
Professional ................................................. 3,981
Service--Class A ............................................. 1,925
Service--Class B ............................................. 286
Custodian .................................................... 1,676
Registration ................................................. 1,089
Recordkeeping ................................................ 1,000
Organization ................................................. 953
Distribution--Class B ........................................ 859
Transfer agent ............................................... 561
Trustees ..................................................... 84
Miscellaneous ................................................ 1,675
---------
Total expenses ............................................. 26,309
---------
Net investment loss ............................................ (8,749)
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................... 8,711
Net unrealized appreciation on investments ..................... 699,180
---------
Net realized and unrealized gain on investments ................ 707,891
---------
Net increase in net assets resulting from operations ........... $ 699,142
=========
</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.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .............................................. $ (8,749)
Net realized gain on investments ................................. 8,711
Net unrealized appreciation on investments ....................... 699,180
------------
Net increase in net assets resulting from operations ............. 699,142
------------
Capital share transactions: Net proceeds from sale of shares:
Class A ........................................................ 325,201
Class B ........................................................ 1,102,496
------------
Increase in net assets derived from capital share transactions 1,427,697
------------
Net increase in net assets ................................... 2,126,839
NET ASSETS:
Beginning of period ................................................ 10,000,000
------------
End of period ...................................................... $ 12,126,839
============
Accumulated net investment loss at end of period ................... $ (8,749)
============
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
--------- ---------
June 1, 1998*
through
June 30, 1998**
------------------------
<S> <C> <C>
Net asset value at beginning of period ........ $ 10.00 $ 10.00
--------- ---------
Net investment loss (a) ....................... (0.01) (0.01)
Net realized and unrealized gain on investments 0.65 0.64
--------- ---------
Total from investment operations .............. 0.64 0.63
--------- ---------
Net asset value at end of period .............. $ 10.64 $ 10.63
========= =========
Total investment return (b) ................... 6.40% 6.30%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss ....................... (0.89)%+ (1.64)%+
Expenses .................................. 2.88% + 3.63% +
Portfolio turnover rate ....................... 2% 2%
Net assets at end of period (in 000's) ........ $ 9,917 $ 2,210
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ 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.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Growth Opportunities 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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Growth Opportunities Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 long-term growth of capital, with
income as a secondary consideration.
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, and (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
16
<PAGE>
Notes to Financial Statements unaudited
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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
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.
17
<PAGE>
MainStay Growth Opportunities Fund
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to Madison Square
Advisors, Inc. (the "Sub-Adviser"), a registered investment adviser and indirect
wholly-owned subsidiary of New York Life. Under the supervision of the Trust's
Board of Trustees and the Manager, the Sub-Adviser is responsible for the
day-to-day portfolio management of 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 0.70% of the average
daily net assets of the Fund. For the period ended June 30, 1998, the Manager
earned $6,192.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and the Sub-Adviser, the Manager pays the Sub-Adviser a monthly fee at an annual
rate of 0.35% 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 (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 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.
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 $1,187 for the period
ended June 30, 1998.
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 ended June 30,
1998, amounted to $2,386.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
Trustees' Fees. Trustees, other than those affiliated with New York Life,
Madison Square Advisors, Inc., 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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $9,576,000 and $1,063,000, respectively. This represents
96.6% and 48.1% of the net assets at period end for Class A and Class B,
respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $10,752 and $236, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
-----------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold .................................. 32 108
Shares redeemed .............................. -- --
--- ---
Net increase ................................. 32 108
=== ===
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
19
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH OPPORTUNITIES FUND(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
20
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
21
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
22
<PAGE>
MainStay Growth Opportunities Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] Mainstay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay
Growth Opportunities 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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA22-08/98
[GRAPHIC]
<PAGE>
Table of Contents
President's Letter 2
MainStay Research Value Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Industry--Top 5 6
Portfolio Composition 7
Fund & Lipper Returns 8
Top 10 Holdings 9
Portfolio of Investments 10
Unaudited Financial Statements 12
Notes to Financial Statements 16
The MainStay Funds 20
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Research Value Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o In a market that favored growth equities, a small group of
large-capitalization companies accounted for most of the positive
performance in the stock market.
o Strong economic signals, low interest rates, and low inflation generally
helped stocks move higher in June 1998.
o Bonds rallied and the U.S. dollar remained strong against most foreign
currencies during the reporting period.
o Economic weakness throughout Asian markets had a negative impact on U.S.
corporate profitability.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Research Value Fund commenced operations on 6/1/98.
o The Fund returned -1.30% for both Class A shares and Class B shares,
excluding all sales charges, for the since-inception period from 6/1/98
through 6/30/98.
o The Fund benefited from positions in MediaOne Group and Texas Instruments,
but was negatively impacted by holdings with earnings shortfalls or Asian
difficulties.
o Both share classes underperformed the average Lipper* growth & income fund,
which returned 1.68% for the since-inception period.
- ----------
* See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Inflation
- ---------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Mergers and acquisitions
- ------------------------
A merger is a combination of two companies, an acquisition is the purchase of a
company, division, or business unit. Companies that engage in mergers and
acquisitions often pay shareholders a premium, or an amount over the current
share price, to complete the transaction quickly and under favorable terms.
Growth versus value
- -------------------
Growth investments typically include stocks with rising prices and positive
earnings trends. Value stocks typically include equities that are currently
trading below their fair market value, even if they have the potential to
increase in value over time.
Portfolio Management Discussion and Analysis
For the period from June 1 through June 30, 1998, the stock market as a whole
advanced, with a backdrop of low interest rates, low inflation, and continued
economic growth. Declining interest rates caused bonds to rally and the U.S.
dollar remained strong relative to most foreign currencies. Merger and
acquisition activity also attracted investors to the equity markets.
During the month of June, the stock market had tiered performance, with a small
group of large-capitalization stocks accounting for the bulk of the market's
return. Most components of the S&P 500 Index* experienced sluggish relative
performance. The effects of financial difficulties in Asia, which began in the
second half of 1997, were still being felt in various sectors of the domestic
equity market. Oil and gold prices continued to decline and commodity prices in
general were down.
Given this context, how did the MainStay Research Value Fund perform in the
period from 6/1/98 through 6/30/98?
The MainStay Research Value Fund commenced operations on 6/1/98. For the
one-month period ended 6/30/98, the Fund returned -1.30% for both Class A shares
and Class B shares, excluding all sales charges. Both share classes
underperformed the average Lipper+ growth & income fund, which returned 1.68%
for the month of June.
Why did the Fund underperform its peers?
The market environment in June was extremely tiered, with gains being
concentrated in a small number of growth stocks trading at high price/earnings
multiples. Outside of these market leaders, the unweighted average return for
the vast majority of stocks in the S&P 500 Index was negative. As a
value-oriented Fund, the Research Value Fund's investments were in a sector of
the market that did not perform well relative to the S&P 500 Index as a whole.
In addition, the Fund generally purchases stocks with a long-term investment
horizon that seek to perform well over a full market cycle. The Fund's first
month of operations was really an attempt to establish positions that we believe
will generally perform well over time, but that at the time of purchase, were
generally trading at what we believe to be less than their full value.
How was the Fund invested as of June 30, 1998?
We purchase securities for the Fund as we identify opportunities, and by the end
of June, the Fund was 90.7% invested in common stocks and held 9.3% in cash and
cash equivalents.
Which of the Fund's holdings were the best performers during June?
MediaOne Group was up 18.5% during the reporting period, as the market reacted
- ----------
* See footnote on page 2 for more information on the S&P 500 Index.
+ See footnote and table on page 8 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period end 6/98 Total Return %
- -----------------------------------------------------------
<S> <C>
Class A (1.30)
Class B (1.30)
</TABLE>
See footnote * on page 8 for more information on performance.
favorably to ongoing cable television infrastructure acquisitions at high
prices. Texas Instruments was up 13.4%, reflecting strength in its core Digital
Signal Processing semiconductor business and a favorable response to the
company's announcement that it will divest its Dynamic Random Access Memory
(DRAM) semiconductor business. Ace Ltd., a property/casualty insurance company,
rose 9.5% when the market reacted favorably to a value-enhancing acquisition.
As of June 30, 1998, Texas Instruments and Ace Ltd. each represented over 2% of
the Fund's portfolio, so their contributions had a positive impact on the Fund's
performance.
Which of the Fund's holdings underperformed?
IKON Office Solutions preannounced a quarterly earnings shortfall and dropped
31.3%. Sealed Air Corp., a containers-paper/plastic company, fell 31.3% when a
warning circulated about the impact of Asian difficulties and U.S. dollar
strength on the company's near-term profits. The Fund also held Getchell Gold
Corp., which fell as gold prices continued to decline and was down 19.1% for the
month of June.
Each of these holdings was a relatively small position, which helped insulate
the Fund's overall performance from the negative impact of these sizable price
declines.
Is the Fund overweighted or underweighted in any particular sectors?
We're not top-down portfolio managers who seek to invest in or avoid particular
sectors. Instead, we use a bottom-up, value-oriented stock selection process for
the Fund, which results in investments across a wide range of market sectors,
based on where we perceive long-term value opportunities. When appropriate, we
seek to reduce risk by avoiding overweighting a particular sector.
Top-down investing
- ------------------
Top-down investing starts with general economic trends, compares market sectors,
and uses relative security values to narrow the range of issues to examine. The
opposite of "bottom-up" investing, in which security selection is based on the
specific fundamental merits of individual issues.
5
<PAGE>
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Percentage
- --------------------------------------------------
<S> <C>
Insurance 12.6%
Energy-Oil/Gas 8.7%
Banks 6.5%
Aerospace/Defense 6.0%
Manufacturing-Diversified 5.1%
All Other 61.1%
</TABLE>
Actual percentages will vary over time.
As a result of this process, on June 30, 1998, the Fund was slightly
overweighted in capital goods and financial stocks, and underweighted in
consumer staples and health care. We believe these sector weightings contributed
positively to the Fund's performance during the reporting period. Financial
stocks, in particular, benefited from greater lending activity in a low interest
rate environment.
What is your outlook going forward?
We remain cautious, but optimistic. We will pursue investments for the Fund that
our research-intensive process identifies as having attractive return potential
with limited risk of capital loss. We are currently looking into securities in a
number of industries that have significantly underperformed the broad indices
for extended periods of time. In particular, we will seek to identify companies
with catalysts that we believe could create value for shareholders going
forward.
Regardless of where the markets may move, the Fund will continue to seek
long-term capital appreciation by investing primarily in securities of
large-capitalization companies--and we will continue to apply our proprietary
"value" method in selecting stocks for the Fund.
John A. Levin
Jeffrey A. Kigner
G. Todd Silva
Portfolio Managers
John A. Levin & Co.
Past performance is no guarantee of future results.
6
<PAGE>
PORTFOLIO COMPOSITION AS OF 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Percentage
- --------------------------------------------------------------
<S> <C>
Common Stocks 90.7%
Cash, Equivalents & Other Assets, Less Liabilities 9.3%
</TABLE>
Actual percentages will vary over time.
7
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -1.30%
Class B -1.30%
================================================================================
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -6.73%
Class B -6.24%
================================================================================
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
growth & income fund 1.68%
================================================================================
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $9.87 $0.0000 $0.0000
Class B $9.87 $0.0000 $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 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 six 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
6/1/98) through 6/30/98.
8
<PAGE>
<TABLE>
<CAPTION>
Top 10 Holdings as of 6/30/98
================================================================================
Holding Amount
================================================================================
<S> <C>
Aetna Inc. $319,725
Black & Decker Corp. (The) 314,150
Owens-Illinois, Inc. 313,250
EXEL Ltd. 311,250
Ace, Ltd. 308,100
Tribune Co. 295,894
General Electric Co. 291,200
International Business Machines Corp. 287,031
First Data Corp. 273,163
Unocal Corp. 271,700
</TABLE>
- ----------
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.
9
<PAGE>
MainStay Research Value Fund
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMMON STOCKS (90.7%)+
AEROSPACE/DEFENSE (6.0%)
Lockheed Martin Corp. ................ 1,600 $ 169,400
Northrop Grumman Corp. ............... 2,400 247,500
United Technologies Corp. ............ 2,650 245,125
----------
662,025
----------
AUTO/PARTS (2.0%)
TRW Inc. ............................. 4,100 223,963
----------
BANKS (6.5%)
Bank of New York Co., Inc. (The)...... 2,500 151,719
Citicorp.............................. 800 119,400
First Union Corp. .................... 3,700 215,525
NationsBank Corp. .................... 3,000 229,500
----------
716,144
----------
BEVERAGES (1.5%)
Anheuser-Busch Cos. Inc. ............. 3,500 165,156
----------
BIOTECHNOLOGY (2.6%)
Genentech, Inc. (a)................... 2,200 149,325
Monsanto Co. ......................... 2,400 134,100
----------
283,425
----------
BUILDING PRODUCTS (2.8%)
Black & Decker Corp. (The)............ 5,150 314,150
----------
CHEMICALS (1.4%)
Du Pont (E. I.) de Nemours & Co. ..... 2,100 156,712
----------
COMPUTERS--HARDWARE (4.4%)
Hewlett-Packard Co. .................. 3,300 197,588
International Business Machines Corp. 2,500 287,031
----------
484,619
----------
CONTAINERS/PACKAGING (3.9%)
Owens-Illinois, Inc. (a).............. 7,000 313,250
Sealed Air Corp. (a).................. 3,300 121,275
----------
434,525
----------
COSMETICS/RELATED (2.1%)
Kimberly-Clark Corp. ................. 5,100 233,962
----------
DATA PROCESSING/MANAGEMENT (2.5%)
First Data Corp. ..................... 8,200 273,163
----------
ELECTRONIC--PARTS/WIRES (4.1%)
Philips Electronics NV--NY............. 1,100 93,500
Rockwell International Corp. ......... 2,800 134,575
Texas Instruments, Inc. .............. 3,900 227,419
----------
455,494
----------
ENERGY--OIL/GAS (8.7%)
Amerada Hess Corp. ................... 3,800 206,387
Chevron Corp. ........................ 2,500 207,656
MarketSpan Corp. ..................... 9,000 269,438
Unocal Corp. ......................... 7,600 271,700
----------
955,181
----------
FOOD (1.7%)
General Mills, Inc. .................. 2,700 184,612
----------
INSURANCE (12.6%)
Ace, Ltd. ............................ 7,900 308,100
Aetna Inc. ........................... 4,200 319,725
EXEL Ltd. ............................ 4,000 311,250
Partnerre Ltd. ....................... 3,700 188,700
TIG Holdings, Inc. ................... 6,100 140,300
Tokio Marine & Fire
Insurance Co. Ltd. (The)............ 2,300 117,012
----------
1,385,087
----------
MACHINERY (2.5%)
FMC Corp. (a)......................... 400 27,275
Sundstrand Corp. ..................... 4,400 251,900
----------
279,175
----------
MANUFACTURING--DIVERSIFIED (5.1%)
General Electric Co. ................. 3,200 291,200
Minnesota Mining &
Manufacturing Co. .................. 3,300 271,219
----------
562,419
----------
MEDIA (1.8%)
MediaOne Group Inc. .................. 4,600 202,112
----------
MEDICAL/HEALTH CARE (4.1%)
Lilly (Eli) & Co. .................... 3,800 251,038
Pfizer Inc. .......................... 1,900 206,506
----------
457,544
----------
</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 June 30, 1998 unaudited
<TABLE>
<CAPTION>
Shares Value
==============================
<S> <C> <C>
COMMON STOCKS (Continued)
METALS (3.1%)
Allegheny Teledyne Inc. .............. 5,200 $ 118,950
Getchell Gold Corp. (a)............... 5,300 79,500
Inland Steel Industries, Inc. ........ 5,200 146,575
-----------
345,025
-----------
PUBLISHING (2.7%)
Tribune Co. .......................... 4,300 295,894
-----------
RETAIL (3.3%)
Fortune Brands, Inc. ................. 6,500 249,844
IKON Office Solutions, Inc. .......... 7,600 110,675
-----------
360,519
-----------
TELECOMMUNICATIONS (3.8%)
Bell Atlantic Corp. .................. 5,600 255,500
Loral Space &
Communications Ltd. (a)............. 5,600 158,200
U S West, Inc. ....................... 126 5,905
-----------
419,605
-----------
TOBACCO (1.5%)
Philip Morris Cos., Inc. ............. 4,100 161,437
-----------
Total Common Stocks
(Cost $10,116,174).................. 10,011,948
-----------
Total Investments
(Cost $10,116,174) (b).............. 90.7% 10,011,948 (c)
Cash and Other Assets,
Less Liabilities.................... 9.3 1,020,773
------- -----------
Net Assets............................ 100.0% $11,032,721
======= ===========
</TABLE>
- ----------
(a) Non-income producing security.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At June 30, 1998, net unrealized depreciation was $104,226, 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 $225,058 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $329,284.
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 June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $10,116,174) ...... $ 10,011,948
Cash .................................................................. 968
Receivables:
Investment securities sold .......................................... 1,146,163
Fund shares sold .................................................... 95,527
Dividends and interest .............................................. 4,498
Unamortized organization expense ...................................... 57,047
------------
Total assets ...................................................... 11,316,151
------------
LIABILITIES:
Payables:
Investment securities purchased ..................................... 236,500
Organization ........................................................ 20,536
MainStay Management ................................................. 7,354
NYLIFE Distributors ................................................. 2,946
Custodian ........................................................... 1,676
Transfer agent ...................................................... 561
Trustees ............................................................ 84
Accrued expenses ...................................................... 13,773
------------
Total liabilities ................................................. 283,430
------------
Net assets ............................................................ $ 11,032,721
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share)
unlimited number of shares authorized:
Class A ............................................................. $ 9,495
Class B ............................................................. 1,679
Additional paid-in capital ............................................ 11,149,707
Accumulated net investment loss ....................................... (12,857)
Accumulated net realized loss on investments .......................... (11,077)
Net unrealized depreciation on investments ............................ (104,226)
------------
Net assets ............................................................ $ 11,032,721
============
CLASS A
Net assets applicable to outstanding shares ........................... $ 9,375,594
============
Shares of beneficial interest outstanding ............................. 949,549
============
Net asset value per share outstanding ................................. $ 9.87
Maximum sales charge (5.50% of offering price) ........................ 0.57
------------
Maximum offering price per share outstanding .......................... $ 10.44
============
CLASS B
Net assets applicable to outstanding shares ........................... $ 1,657,127
============
Shares of beneficial interest outstanding ............................. 167,930
============
Net asset value and offering price per share outstanding .............. $ 9.87
============
</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 period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .................................................... $ 6,154
Interest ..................................................... 8,336
---------
Total income ............................................... 14,490
---------
Expenses:
Management ................................................... 7,354
Shareholder communication .................................... 6,028
Professional ................................................. 3,981
Service--Class A ............................................. 1,902
Service--Class B ............................................. 261
Custodian .................................................... 1,676
Registration ................................................. 1,089
Recordkeeping ................................................ 1,000
Organization ................................................. 953
Distribution--Class B ........................................ 783
Transfer agent ............................................... 561
Trustees ..................................................... 84
Miscellaneous ................................................ 1,675
---------
Total expenses ............................................. 27,347
---------
Net investment loss ............................................ (12,857)
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments ............................... (11,077)
Net unrealized depreciation on investments ..................... (104,226)
---------
Net realized and unrealized loss on investments ................ (115,303)
---------
Net decrease in net assets resulting from operations ........... $(128,160)
=========
</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.
13
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss .............................................. $ (12,857)
Net realized loss on investments ................................. (11,077)
Net unrealized depreciation on investments ....................... (104,226)
------------
Net decrease in net assets resulting from operations ............. (128,160)
------------
Capital share transactions:
Net proceeds from sale of shares:
Class A ........................................................ 495,045
Class B ........................................................ 670,357
Cost of shares redeemed:
Class A ........................................................ (4,521)
Class B ........................................................ --
------------
Increase in net assets derived from capital share
transactions ............................................... 1,160,881
------------
Net increase in net assets ................................... 1,032,721
NET ASSETS:
Beginning of period ................................................ 10,000,000
------------
End of period ...................................................... $ 11,032,721
============
Accumulated net investment loss at end of period ................... $ (12,857)
============
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
--------- ---------
June 1, 1998*
through
June 30, 1998**
------------------------
<S> <C> <C>
Net asset value at beginning of period ........... $10.00 $10.00
--------- ---------
Net investment loss (a) .......................... (0.01) (0.02)
Net realized and unrealized loss on investments .. (0.12) (0.11)
--------- ---------
Total from investment operations ................. (0.13) (0.13)
--------- ---------
Net asset value at end of period ................. $9.87 $9.87
========= =========
Total investment return (b) ...................... (1.30%) (1.30%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income ........................ (1.40%)+ (2.15%)+
Expenses ..................................... 3.07% + 3.82% +
Portfolio turnover rate .......................... 2% 2%
Net assets at end of period (in 000's) ........... $9,376 $1,657
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
+ 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.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
MainStay Research 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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Research Value Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 long-term capital appreciation by
investing primarily in securities of large-capitalization companies.
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, and (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.
16
<PAGE>
Notes to Financial Statements unaudited
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.
Organizational Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
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.
17
<PAGE>
MainStay Research Value Fund
Note 3--Fees and Related Party Policies:
Manager and Sub-Adviser. MainStay Management, Inc. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to John A. Levin & Co.,
Inc., (the "Sub-Adviser"). The Sub-Adviser is an indirect wholly-owned
subsidiary of Baker, Fentress & Company, a closed-end investment company listed
on the New York Stock Exchange. Under the supervision of the Trust's Board of
Trustees and the Manager, the Sub-Adviser is responsible for the day-to-day
portfolio management of 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 0.85% of the average
daily net assets of the Fund. For the period ended June 30, 1998, the Manager
earned $7,354.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and the Sub-Adviser, the Manager pays the Sub-Adviser a monthly fee at an annual
rate of 0.425% on assets up to $250 million, 0.3825% on assets from $250 million
to $500 million and 0.34% on assets in excess of $500 million.
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 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.
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 $792 for the period
ended June 30, 1998.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
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 ended June 30,
1998, amounted to $2,328.
Trustees' Fees. Trustees, other than those affiliated with New York Life,
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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $8,883,000 and $987,000, respectively. This represents 94.7%
and 59.6% of the net assets at period end for Class A and B, respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $10,322 and $195, respectively.
Note 5--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
------------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold .................................. 50 68
Shares redeemed .............................. -- --
------- -------
Net increase ................................. 50 68
======= =======
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
19
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
20
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Global High Yield Fund(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S. (primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
21
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
22
<PAGE>
MainStay Research Value Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] MAINSTAY(R) FUNDS
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay
Research 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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA23-08/98
[RECYCLE SYMBOL]
<PAGE>
Table of Contents
President's Letter 2
MainStay Global High Yield Fund Highlights 3
Portfolio Management Discussion and Analysis 4
Performance from 6/1/98 through 6/30/98 5
Diversification by Country--Top 5 6
Quality Breakdown 8
Fund & Lipper Returns 9
Top 10 Holdings 10
Portfolio of Investments 11
Unaudited Financial Statements 13
Notes to Financial Statements 17
The MainStay Funds 24
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
The first half of 1998 was a dynamic period, with active markets reflecting
strong investor preferences. In general, investors chose large-capitalization
stocks over small-cap issues, and growth investing over value disciplines.
Established economies generally outperformed emerging markets--and domestic and
European stocks and bonds performed well, while many securities with ties to
Asia tended to underperform.
Generally, long-term bonds outpaced shorter-term securities, Treasuries outpaced
corporate and mortgage-backed bonds, and the strength of the U.S. dollar was
reflected in the weakness of the Japanese yen. Against this backdrop, the S&P
500* advanced to record levels and the yield on 30-year Treasury bonds dropped
to all-time lows during the reporting period. This presented investors with
opportunities or challenges, depending on their investment orientation.
Putting market results in perspective
After several years of steady U.S. stock market growth, perhaps a word of
caution is in order. The positive results many investors have experienced in
recent years, although worth celebrating, have been well above historical norms+
and most likely can't be sustained forever.
Many of the stocks that have been leading the market are trading at historically
high prices relative to their earnings and profit projections. If inflation,
unemployment, or wage pressures increase--or if other events upset the
economy--it's difficult to say what may lie ahead. To avoid disappointments, you
need to have realistic expectations and strategies that are appropriate for
various economic scenarios.
New choices from MainStay(R)
Diversification may help investors reduce risk in uncertain markets. Responding
to this need, MainStay has launched seven new Funds and introduced four new
subadvisors, giving you more ways to diversify with choices that suit your
particular approach to investing.
The new introductions have increased our Fund selections by nearly 50% and have
tripled the number of subadvisors available through MainStay. Each subadvisor
follows a disciplined investment process, with proprietary research, strict buy
and sell disciplines, and careful attention to risk management.
The value of your Registered Representative
Because the future is always uncertain, it helps to work with a professional who
can put market events in historical perspective. With MainStay, you have a
Registered Representative who understands your financial circumstances and can
help you select appropriate Funds and subadvisors for your personal investment
style. Together, you can develop a strategic approach that may help you feel
more comfortable, wherever the markets may move.
This semiannual report can help. It provides information on the performance and
holdings of your MainStay investment, with commentary from the portfolio
managers. At MainStay, we're working hard to earn your trust--by providing the
information, selection, and service you need to pursue your investment goals.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
July 1998
- ----------
* "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. 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.
+ Source: Ibbotson Associates, Chicago. Used with permission. All rights
reserved.
- --------------------------------------------------------------------------------
2
<PAGE>
MainStay Global High Yield Fund Highlights
================================================================================
MARKET RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o Despite strong market fundamentals in many emerging market countries,
rising interest rates and investor uncertainty translated into generally
negative returns.
o The impact of Asian financial difficulties spread to Latin America and
Russia.
o Negative news appeared to be fully priced into the emerging markets, but
volatility remained an investment concern.
o Sovereign and corporate credits in many nations offered yields that
appeared to be more than sufficient to compensate for underlying risks.
================================================================================
FUND RECAP FOR THE ONE-MONTH PERIOD ENDED 6/30/98
================================================================================
o The MainStay Global High Yield Fund commenced operations on 6/1/98.
o The Fund returned -2.90% and -3.00% for Class A shares and Class B shares,
respectively, excluding all sales charges, for the since-inception period
from 6/1/98 through 6/30/98.
o The Fund invested primarily in Mexico and South America, but also held some
high-yield U.K. credits.
o Both share classes outperformed the average Lipper* emerging market debt
fund, which returned -3.91% for the since-inception period.
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
3
<PAGE>
Portfolio Management Discussion and Analysis
The month of June was an unfortunate period for bond investors in most emerging
markets. Despite strong underlying fundamentals in many countries, rising
interest rates, price volatility, or other investment concerns led to negative
total returns. The strength of the U.S. dollar relative to most foreign
currencies also posed a risk for investors who were not fully hedged.
Much of the difficulty during June was the result of financial problems in Asian
markets, where earlier economic setbacks finally developed into reduced
production and worldwide demand. Asia's trading partners were negatively
impacted, and the difficulties spread throughout Latin America and into Russia.
The best news to come out of this situation is that most of the difficulties
have now been fully priced into the markets and the outlook for the future
appears to be improving. While total returns were down in most emerging markets
in June, yield spreads over U.S. Treasuries continue to make emerging-market
debt an attractive alternative for investors seeking high current yield.
Given this context, how did the MainStay Global High Yield Fund perform in the
period from 6/1/98 through 6/30/98?
The MainStay Global High Yield Fund began operations on 6/1/98. For the
one-month period ended 6/30/98, the Fund returned -2.90% and -3.00% for Class A
shares and Class B shares, respectively, excluding all sales charges. Both share
classes outperformed the average Lipper* emerging market debt fund, which
returned -3.91% for the month of June.
Why was the Fund able to outperform its peers?
We believe that global high-yield debt investing is a two-stage process. First,
we need to evaluate countries and their economies to seek ones we believe are
likely to provide relative value for the Fund. Next, we need to ask which
securities in those markets are likely to provide attractive risk and reward
characteristics. This two-step approach gave us an opportunity to select solid
markets and attractive securities for the Fund at a time when overall
performance was weak. We believe our country and security selection will work to
the advantage of shareholders as the year progresses.
By their very nature, high-yield securities run greater risks of price
fluctuations, loss of principal and interest, default or bankruptcy by the
issuer, and other risks, which is why these securities are considered
speculative. In addition, 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.
Which countries did you find appealing for the Fund in June?
We invested a majority of the Fund's assets in Latin American countries. As of
6/30/98, about 20% of the Fund's net assets were invested in Mexican bonds, 18%
in Brazilian debt, 10% in bonds from Argentina, and 6% in Venezuelan
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.
Total return
- ------------
The performance of an investment with all income and capital gains reinvested.
Yield spread
- ------------
The difference in yield between securities in different markets, such as
Argentina and the United States; different market sectors, such as Treasuries
and corporate bonds; or between different securities in a single sector, such as
corporate bonds with different credit ratings.
- ----------
* See footnote and table on page 9 for more information on Lipper Analytical
Services, Inc.
4
<PAGE>
PERFORMANCE FROM 6/1/98 THROUGH 6/30/98
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Period End Total Return
- --------------------------------------------
<S> <C>
6/98 -2.90 Class A
6/98 -3.00 Class B
</TABLE>
See footnote * on page 9 for more information on performance.
securities. The Fund also invested 6.3% in U.K. bonds, 4.4% in Philippine
securities, and smaller amounts in bonds of other nations.
We believe Mexico is one of the better credits in the emerging-market universe,
and believe its bonds will do well as long as the U.S. economy remains strong.
We also felt the Brazilian economy might be vulnerable to Asian difficulties and
underweighted Brazilian securities in the Fund. Nevertheless, with Brazilian
10-year government bonds yielding 600 basis points over U.S. Treasuries, we felt
strongly that the potential rewards for the Fund more than compensated for the
risks.
What about other Latin American countries?
Argentina has experienced robust economic growth for some time, with no hint of
inflation. Their currency is pegged to the U.S. dollar, but their inflation
performance has been much better than other countries with similar currency ties
to the U.S. We think the political situation is stable and the yields are
attractive, so the Fund made a commitment to that market, particularly with
Argentine floating-rate notes offering close to 500 basis points over U.S.
Treasuries as of 6/30/98.
Although Venezuela has suffered somewhat as oil prices have declined, in recent
years the country has not had a problem servicing its debt. The country
continues to maintain a current account surplus and its foreign currency
reserves are ample. With a yield advantage over U.S. Treasuries of approximately
650 basis points at the end of the reporting period, we again felt that owning
Venezuelan government debt would more than compensate the Fund for any risk it
assumed.
Did the Fund invest only in government bonds?
In Venezuela, it did. But in other countries, we identified what we believed to
be attractive opportunities for the Fund among corporate issuers. Some of these
bonds were quasi-government issues, with either broad government ownership or
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.
Floating-rate note
- ------------------
A debt instrument with a variable interest rate that is reset periodically and
tied to a specific index or money market rate.
5
<PAGE>
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
DIVERSIFICATION BY COUNTRY--TOP 5 as of 6/30/98
- -----------------------------------------------
<S> <C>
Mexico 19.6%
Brazil 17.5%
Argentina 9.9%
Venezuela 7.0%
United Kingdom 6.3%
All Other 39.7%
</TABLE>
Actual percentages will vary over time.
government guarantees. National Power in the Philippines would be an example.
It's 100% state owned and state guaranteed, so it's effectively a sovereign
issue, even though it's not a government security. Another instance is Korea
Electric Power. It's 70% owned by the state, so we consider its bonds
quasi-sovereign issues, although there's no government guarantee.
Do you look for special backing in other corporate securities?
Yes. In fact, we think bonds of companies with a major corporate owner may offer
advantages that other corporate debt securities don't. For example, in Argentina
the Fund invested in CIA Transporte Energia bonds. The company handles 95% of
all the electrical transmission to greater Buenos Aires and has a 90-year
concession from the government to operate the electric power grid for most of
the country. In addition to guaranteed business, one of their owners is in the
U.K., National Grid, PLC, which operates in England and Wales.
The CIA Transporte Energia bonds are unique in Argentina because Standard &
Poor's has given them a higher rating than the sovereign debt. The bonds are
rated BBB and yielded about 10.25% during the reporting period, while government
bonds in Argentina are only rated BB.++
Another example of this concept was C.T.I. Holding, which the Fund sold in June.
C.T.I. Holding is an Argentine cellular telephone operator, which is about 40%
owned by G.T.E. They're able to leverage off of G.T.E.'s management expertise.
Although they've just begun to turn a profit, they're gaining customers faster
than they anticipated.
Did the Fund own other notable corporate bonds?
In Mexico, the Fund invested in Grupo Televisa, the nation's largest
broadcasting company. The company has a number of issues outstanding, and we
believe they were well priced, given the quality of the company. We were
attracted to the bonds because
Sovereign issue
- ---------------
A bond issued by a foreign government, which may be subject to risks that are
tied to the nation's ability to meet its business, financial, and political
obligations.
- ----------
+ Debt rated BBB by Standard & Poor's exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
++ Debt rated BB by Standard & Poor's is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
6
<PAGE>
the company has sufficient cash to pay off its debt and is in the process of
doing so as it concentrates on restructuring.
The Fund also invested in Innova S de R.L., a satellite dish company that's
largely owned by Grupo Televisa and another company NewsCorp., which is a world
leader in satellite communications. Although the bonds suffered from rising
rates, we feel that the company is well positioned in a rapidly growing market.
Did the Fund carry substantial currency risk during the reporting period?
No. The Fund invested primarily in dollar-denominated bonds and most of its
other positions were fully hedged. As of 6/30/98, the Fund's currency exposure
was minimal.
Did the Fund have any direct exposure to Asian markets?
The Fund did own some South Korean bonds for KEPCO, the Korean Electric Power
Company. While the Korean economy has suffered in recent months, we believe it's
likely to bottom out in the next few quarters, and we think the country has a
healthy current account and a large trade surplus, so we don't believe the kind
of liquidity crisis we saw last year is likely to be repeated.
Isn't the Fund taking a big risk by investing in Korea?
High-yield bonds, by their very nature, involve high risk. Our job is to
identify when the rewards are worth the risks. We believe that South Korea has a
huge industrial base, a hard-working labor force, and very cheap assets. In
recent months, major multinational companies have been looking at Korean assets
with an eye on buying them. We believe that if Ford, Kimberly Clark, and U.S.
Steel are interested in buying Korean assets, the bonds have underlying value,
particularly when they're providing yield spreads of 500 to 600 basis points
over U.S. Treasuries.
Did the Fund own any high-yield securities in developed markets?
Yes. The Fund owned a couple of high-yield issues in the United Kingdom.
Although they outperformed other issues in the Fund's investment portfolio, in a
rising interest rate environment, their total returns were flat. Nevertheless,
the bonds offer attractive yields and we believe they are sound investments.
What is your outlook for the future?
We believe that the MainStay Global High Yield Fund offers attractive
opportunities for investors who are seeking high current yields and are willing
to accept the higher risks of global high-yield bonds. We will continue to
evaluate global markets, economies, and issuers, seeking bonds that offer yield
advantages that more than compensate for inherent risk. The Fund will continue
to seek maximum current income by investing primarily in high-yield debt
securities of non-U.S. issuers, with capital appreciation as a secondary
objective.
Joseph Portera
Maureen McFarland
Portfolio Managers
MacKay Shields Financial Corporation
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.
High-yield securities run greater risks of price fluctuations, loss of principal
and interest, default or bankruptcy by the issuer, and other risks, which is why
these securities are considered speculative.
Past performance is no guarantee of future results.
7
<PAGE>
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
QUALITY BREAKDOWN as of 6/30/98
Percentage
- --------------------------------------------------------------------
<S> <C>
BBB 4.9%
BB 39.4%
B 42.0%
Not Rated 4.3%
Cash, Equivalents & Other Assets, Less Liabilities 9.4%
</TABLE>
Actual percentages will vary over time.
8
<PAGE>
Fund & Lipper Returns as of 6/30/98
<TABLE>
<CAPTION>
================================================================================
Fund average annual total returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -2.90%
Class B -3.00%
<CAPTION>
================================================================================
Fund SEC returns*
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Class A -7.27%
Class B -7.85%
<CAPTION>
================================================================================
Lipper+ category return as of 6/30/98
================================================================================
Life of Fund
through 6/30/98
<S> <C>
Average Lipper
emerging market debt fund -3.91%
<CAPTION>
================================================================================
Fund per share net asset values & distributions for the period ended 6/30/98
================================================================================
NAV 6/30/98 Income Capital Gains
<S> <C> <C> <C>
Class A $9.71 $0.0000 $0.0000
Class B $9.70 $0.0000 $0.0000
</TABLE>
- ----------
* Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that upon redemption, shares may be worth
more or less than their original cost. Total returns shown are based on NAV
and assume no deduction for CDSC or applicable sales charges. In compliance
with SEC guidelines, SEC returns include the maximum sales charge and show
the percentage change for each of the required periods. All returns assume
capital gain and dividend distributions are reinvested. Performance figures
reflect 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 discontinued 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 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 six 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. The 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 6/1/98 through 6/30/98.
9
<PAGE>
Top 10 Holdings as of 6/30/98
<TABLE>
<CAPTION>
========================================================================================
Holding COUNTRY Amount
========================================================================================
<S> <C> <C>
Republic of Brazil, 9.375%, due 4/7/08 Brazil $845,500
United Mexican States, 11.375%, due 9/15/16 Mexico 667,500
National Power Corp., 9.625%, due 5/15/28 Philippines 457,195
Republic of Argentina, Series L, 6.625%, due 3/31/05 Argentina 419,544
Conproca S.A., 12.00%, due 6/16/10 Mexico 406,000
Ford Brasil Ltda., Series EMTN, 9.25%, due 1/22/07 Brazil 384,000
Republic of Turkey, Series REGS, 9.875%, due 2/23/05 Turkey 382,000
Republic of Bulgaria, Series A, 6.5625%, due 7/28/24 Bulgaria 381,875
Republic of Panama, 8.875%, due 9/30/27 Panama 377,000
Republic of Venezuela, Series DL, 6.625%, due 12/18/07 Venezuela 368,973
</TABLE>
- ----------
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.
10
<PAGE>
Portfolio of Investments* June 30, 1998 unaudited
<TABLE>
<CAPTION>
Principal
Amount** Value
==============================
<S> <C> <C>
LONG-TERM BONDS (90.6%)+
BRADY BONDS (17.0%)
ARGENTINA (4.1%)
Republic of Argentina
Series L
6.625%, due 3/31/05 (b)............. $475,000 $ 419,544
-----------
BULGARIA (3.7%)
Republic of Bulgaria
Series A
6.5625%, due 7/28/24 (b)............ 500,000 381,875
-----------
ECUADOR (2.1%)
Republic of Ecuador
Series PAR
3.50%, due 2/28/25
4.00%, beginning 2/28/01............ 400,000 215,000
-----------
PERU (3.5%)
Republic of Peru
Series 20 year
3.25%, due 3/17/17 (b).............. 650,000 362,375
-----------
VENEZUELA (3.6%)
Republic of Venezuela
Series DL
6.625%, due 12/18/07 (b)............ 452,381 368,973
-----------
Total Brady Bonds
(Cost $1,831,270)................... 1,747,767
-----------
CORPORATE BONDS (30.4%)
ARGENTINA (3.8%)
CIA Transporte Energia
Series REGS
9.25%, due 4/1/08................... 200,000 192,000
Mastellone Hermanos S.A.
Series REGS
11.75%, due 4/1/08.................. 200,000 200,000
-----------
392,000
-----------
Principal
Amount** Value
==============================
BRAZIL (9.3%)
Comtel Brasileira Ltda.
Series REGS
10.75%, due 9/26/04................. $300,000 $ 279,000
Espirito Santo Centrais
Series REGS
10.00%, due 7/15/07................. 350,000 294,000
Ford Brasil Ltda.
Series EMTN
9.25%, due 1/22/07.................. 400,000 384,000
-----------
957,000
-----------
CAYMAN ISLANDS (1.6%)
JG Summit (Cayman) Ltd.
3.50%, due 12/23/03................. 300,000 165,000
-----------
GERMANY (1.9%)
Euronet Services Inc.
Series DTCU
(zero coupon), due 7/1/06
12.375%, beginning 7/1/02 (a) ...... DM580,000 198,823
-----------
MEXICO (4.8%)
Conproca S.A.
12.00%, due 6/16/10 (c)............. $400,000 406,000
Petroleos Mexicanos
Series REGS
9.00%, due 6/1/07................... 100,000 96,750
-----------
502,750
-----------
SOUTH KOREA (2.7%)
Korea Electric Power
6.375%, due 12/1/03................. 350,000 273,420
-----------
UNITED KINGDOM (6.3%)
IPC Magazines Group PLC
9.625%, due 3/15/08 (c)............. (pound)200,000 313,678
TM Group Holdings
12.25%, due 5/15/08 (c)............. 200,000 335,369
-----------
649,047
-----------
Total Corporate Bonds
(Cost $3,212,870)................... 3,138,040
-----------
</TABLE>
- ----------
+ Percentages indicated are based on Fund net assets.
* Investments are grouped by country of issuance, although they may be
denominated in another currency, including U.S. dollars.
** Indicates currency investments are denominated in.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE>
MainStay Global High Yield Fund
<TABLE>
<CAPTION>
Principal
Amount** Value
==============================
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (30.5%)
ARGENTINA (2.0%)
Province of Tucuman
Series REGS
9.45%, due 8/1/04................... $223,215 $ 205,358
-----------
BRAZIL (8.2%)
Republic of Brazil
9.375%, due 4/7/08.................. 950,000 845,500
-----------
COLOMBIA (3.0%)
Republic of Colombia
7.625%, due 2/15/07................. 350,000 315,000
-----------
MEXICO (6.5%)
United Mexican States
11.375%, due 9/15/16................ 600,000 667,500
-----------
PANAMA (3.7%)
Republic of Panama
8.875%, due 9/30/27................. 400,000 377,000
-----------
TURKEY (3.7%)
Republic of Turkey
Series REGS
9.875%, due 2/23/05................. 400,000 382,000
-----------
VENEZUELA (3.4%)
Republic of Venezuela
9.25%, due 9/15/27.................. 450,000 347,344
-----------
Total Governments & Federal Agencies
(Cost $3,269,501)................... 3,139,702
-----------
YANKEE BONDS (12.7%)
MEXICO (8.3%)
Grupo Televisa S.A.
Series B
11.875%, due 5/15/06................ 300,000 333,000
Series REGS
(zero coupon), due 5/15/08
13.25%, beginning 5/15/01........... 200,000 162,000
Innova S de R.L.
12.875%, due 4/1/07................. 350,000 357,000
-----------
852,000
-----------
Principal
Amount** Value
==============================
PHILIPPINES (4.4%)
National Power Corp.
9.625%, due 5/15/28................. $500,000 $ 457,195
-----------
Total Yankee Bonds
(Cost $1,346,500)................... 1,309,195
-----------
Total Long-Term Bonds
(Cost $9,660,141)................... 9,334,704
-----------
SHORT-TERM INVESTMENT (1.9%)
COMMERCIAL PAPER (1.9%)
UNITED STATES (1.9%)
Goldman Sachs Group L.P. (The)
6.25%, due 7/1/98................... 200,000 200,000
-----------
Total Short-Term Investment
(Cost $200,000)..................... 200,000
-----------
Total Investments
(Cost $9,860,141) (d)............... 92.5% 9,534,704(e)
Cash and Other Assets,
Less Liabilities.................... 7.5 771,838
------ -----------
Net Assets............................ 100.0% $10,306,542
====== ===========
</TABLE>
- ----------
(a) Segregated as collateral for forward foreign currency contracts.
(b) Floating rate. Rate shown is the rate in effect at June 30, 1998.
(c) May be sold to institutional investors only.
(d) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(e) At June 30, 1998 net unrealized depreciation for securities was $325,437,
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 $9,881 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $335,318.
(f) The following abbreviations are used in the above portfolio:
DM --Deutsche Mark
(pound) --Pound Sterling
$ --U.S. Dollar
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE>
Statement of Assets and Liabilities as of June 30, 1998 unaudited
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost $9,860,141) ................................................... $ 9,534,704
Cash denominated in foreign currencies (identified cost $199,137) ................................................. 198,180
Receivables:
Investment securities sold ...................................................................................... 915,602
Fund shares sold ................................................................................................ 224,479
Interest ........................................................................................................ 218,526
Unrealized appreciation on forward foreign currency contracts ..................................................... 3,283
Unamortized organization expense .................................................................................. 57,047
-----------
Total assets ................................................................................................... 11,151,821
-----------
LIABILITIES:
Payables:
Investment securities purchased ................................................................................. 798,145
MainStay Management ............................................................................................. 5,148
Custodian ....................................................................................................... 3,182
NYLIFE Distributors ............................................................................................. 2,781
Transfer agent .................................................................................................. 561
Trustees ........................................................................................................ 84
Accrued expenses .................................................................................................. 35,378
-----------
Total liabilities .............................................................................................. 845,279
-----------
Net assets ........................................................................................................ $10,306,542
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized:
Class A ......................................................................................................... $ 9,105
Class B ......................................................................................................... 1,513
Additional paid-in capital ........................................................................................ 10,598,798
Accumulated undistributed net investment income ................................................................... 42,517
Accumulated net realized loss on investments ...................................................................... (24,258)
Accumulated undistributed net realized gain on foreign currency transactions ...................................... 79
Net unrealized depreciation on investments ........................................................................ (325,437)
Net unrealized appreciation on translation of other assets and liabilities in foreign currencies
and forward foreign currency contracts .......................................................................... 4,225
-----------
Net assets ........................................................................................................ $10,306,542
===========
CLASS A
Net assets applicable to outstanding shares ....................................................................... $ 8,838,283
===========
Shares of beneficial interest outstanding ......................................................................... 910,469
===========
Net asset value per share outstanding ............................................................................. $ 9.71
Maximum sales charge (4.50% of offering price) .................................................................... 0.46
-----------
Maximum offering price per share outstanding ...................................................................... $ 10.17
===========
CLASS B
Net assets applicable to outstanding shares ....................................................................... $ 1,468,259
===========
Shares of beneficial interest outstanding ......................................................................... 151,331
===========
Net asset value and offering price per share outstanding .......................................................... $ 9.70
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE>
Statement of Operations
for the period June 1, 1998* through June 30, 1998 unaudited
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest ......................................................................................................... $ 70,068
---------
Expenses:
Shareholder communication ........................................................................................ 6,028
Management ....................................................................................................... 5,808
Professional ..................................................................................................... 5,558
Custodian ........................................................................................................ 3,182
Service--Class A ................................................................................................. 1,835
Registration ..................................................................................................... 1,089
Recordkeeping .................................................................................................... 1,000
Amortization of organization expense ............................................................................. 953
Distribution--Class B ............................................................................................ 707
Transfer agent ................................................................................................... 561
Service--Class B ................................................................................................. 239
Trustees ......................................................................................................... 84
Miscellaneous .................................................................................................... 2,166
---------
Total expenses before waiver .................................................................................... 29,210
Fees waived by Manager ............................................................................................. (1,659)
---------
Net expenses .................................................................................................... 27,551
---------
Net investment income .............................................................................................. 42,517
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions ............................................................................................ (24,258)
Foreign currency transactions .................................................................................... 79
---------
Net realized loss on investments and foreign currency transactions ................................................. (24,179)
---------
Net unrealized appreciation (depreciation) on investments:
Security transactions ............................................................................................ (325,437)
---------
Translation of other assets and liabilities in foreign currencies and forward foreign currency contracts.......... 4,225
---------
Net unrealized loss on investments and foreign currency transactions ............................................... (321,212)
---------
Net realized and unrealized loss on investments and foreign currency transactions .................................. (345,391)
---------
Net decrease in net assets resulting from operations ............................................................... $(302,874)
=========
</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.
14
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
June 30, 1998**
---------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ............................................................... $ 42,517
Net realized loss on investments .................................................... (24,258)
Net realized gain on foreign currency transactions .................................. 79
Net unrealized depreciation on investments .......................................... (325,437)
Net unrealized appreciation on translation of other assets and liabilities in foreign
currencies and forward foreign currency contracts .................................. 4,225
-----------
Net decrease in net assets resulting from operations ................................ (302,874)
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A ............................................................................ 104,213
Class B ............................................................................ 505,203
-----------
Increase in net assets derived from capital share transactions ................... 609,416
-----------
Net increase in net assets ....................................................... 306,542
NET ASSETS:
Beginning of period ................................................................... 10,000,000
-----------
End of period ......................................................................... $10,306,542
===========
Accumulated undistributed net investment income at end of period ...................... $ 42,517
===========
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE>
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B
------- -------
June 1, 1998*
through
June 30, 1998**
------------------------
<S> <C> <C>
Net asset value at beginning of period .......................... $10.00 $10.00
------ ------
Net investment income ........................................... 0.04 0.04
Net realized and unrealized loss on investments ................. (0.33) (0.34)
Net realized and unrealized gain on foreign currency transactions 0.00(b) 0.00(b)
------ ------
Total from investment operations ................................ (0.29) (0.30)
------ ------
Net asset value at end of period ................................ $9.71 $9.70
====== ======
Total investment return (a) ..................................... (2.90%) (3.00%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income ........................................ 5.21%+ 4.46%+
Net expenses ................................................. 3.24%+ 3.99%+
Expenses (before waiver) ..................................... 3.44%+ 4.19%+
Portfolio turnover rate ......................................... 8% 8%
Net assets at end of period (in 000's) .......................... $8,838 $1,468
</TABLE>
- ----------
* Commencement of Operations.
** Unaudited.
+ 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.
16
<PAGE>
Notes to Financial Statements unaudited
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 twenty-two funds (collectively referred
to as the "Funds"). These financial statements and notes relate only to MainStay
Global High Yield Fund (the "Fund").
The Fund commenced operations on June 1, 1998 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 to provide maximum current income by
investing primarily in high yield debt securities of non-U.S. issuers. Capital
appreciation is a secondary objective.
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.
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
17
<PAGE>
MainStay Global High Yield Fund
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 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 period-end
to credit loss in the event of a counterparty's failure to perform its
obligations.
Forward foreign currency contracts open at June 30, 1998:
<TABLE>
<CAPTION>
Contract Contract
Amount Amount Unrealized
Sold Purchased Appreciation
------------------- ------------ ------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts
- -------------------------------
Deutsche Mark vs. U.S. Dollar, expiring 7/24/98............... DM 360,000 $ 200,781 $ 1,031
Pound Sterling vs. U.S. Dollar, expiring 7/24/98..............(pound) 397,148 $ 664,000 2,252
--------
Net unrealized appreciation on forward foreign currency contracts $ 3,283
========
</TABLE>
Organization Costs. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $58,000 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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
18
<PAGE>
Notes to Financial Statements unaudited (continued)
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.
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,
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 period. Net currency gains or losses from valuing
foreign currency denominated assets and liabilities other than investments at
period end exchange rates are reflected in unrealized foreign exchange gains.
19
<PAGE>
MainStay Global High Yield Fund
Foreign currency held at June 30, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- -------------------------------------- -------- --------
<S> <C> <C>
Deutsche Mark DM 357,715 $199,137 $198,180
======== ========
</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. (the "Manager"), an indirect
wholly-owned subsidiary of New York Life Insurance Company ("New York Life"),
serves as the Fund's manager pursuant to a management agreement and provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for the Fund. The Manager
has delegated its portfolio management responsibilities to MacKay-Shields
Financial Corporation (the "Sub-Adviser"), a registered investment adviser and
indirect wholly-owned subsidiary of New York Life. Under the supervision of the
Trust's Board of Trustees and the Manager, the Sub-Adviser is responsible for
the day-to-day portfolio management of 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 0.70% of the Fund's
average daily net assets. The Manager has voluntarily agreed to reduce its fee
payable to an annual percentage of 0.50% of the Fund's average daily net assets.
For the period ended June 30, 1998, the Manager earned $5,808 and waived $1,659
of its fee.
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 0.35% of the average daily net assets of the Fund. To the extent that
the Manager has agreed to voluntarily reduce its fee, the Sub-Adviser has
voluntarily agreed to do so proportionately.
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 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.
20
<PAGE>
Notes to Financial Statements unaudited (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 $117 for the period
ended June 30, 1998.
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 amounted to $2,210 for the
period ended June 30, 1998.
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 June 30, 1998, New York Life held shares of Class A and Class B with
net asset values of $8,739,000 and $970,000, respectively. This represents 98.9%
and 66.1% of the net assets at period end for Class A and B, respectively.
Other. Fees for recordkeeping services provided to the Fund by the Manager
amounted to $1,000 for the period ended June 30, 1998.
Note 4--Purchases and Sales of Securities (in 000's):
During the period ended June 30, 1998, purchases and sales of securities, other
than U.S. Government securities, securities subject to repurchase transactions
and short-term securities, were $10,478 and $794, 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 June 30, 1998.
21
<PAGE>
MainStay Global High Yield Fund
Note 6--Capital Share Transactions (in 000's):
<TABLE>
<CAPTION>
June 1, 1998* through
June 30, 1998**
------------------------
Class A Class B
------- -------
<S> <C> <C>
Shares sold.................................. 10 51
Shares redeemed.............................. -- --
-- --
Net increase 10 51
== ==
</TABLE>
- ----------
* Commencement of operations.
** Unaudited.
22
<PAGE>
This page intentionally left blank
23
<PAGE>
The MainStay(R) Funds
<TABLE>
<S> <C> <C>
====================================================================================================================================
AGGRESSIVE GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund(1) Seeks long-term capital appreciation by investing MacKay Shields Financial
primarily in securities of small-cap companies. Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Small Cap Value Fund(1) To seek long-term capital appreciation by investing Dalton, Greiner,
primarily in securities of small-cap companies. Hartman, Maher & Co.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund(3) To provide long-term growth of capital commensurate MacKay Shields
with an acceptable level of risk by investing in a Financial Corporation(2)
portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund To seek long-term growth of capital. Dividend income, MacKay Shields
if any, is an incidental consideration. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund(3) To seek capital appreciation by investing primarily in Gabelli Asset
securities of large-capitalization companies. Current Management Company
income is a secondary investment objective.
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index Fund To provide investment results that correspond to the Monitor Capital
total return performance (and reflect reinvestment of Advisors, Inc.(2)
dividends) of publicly traded common stocks represented
by the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index" or the "Index").(4)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GROWTH & INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Opportunities Fund(3) To seek long-term growth of capital, with income as a Madison Square
secondary consideration. Advisors, Inc.(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund To realize maximum long-term total return from a MacKay Shields
combination of capital appreciation and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Research Value Fund To seek long-term capital appreciation by investing John A. Levin & Co., Inc.
primarily in securities of large-capitalization companies.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
(1) Stocks of small-capitalization companies may be more volatile in price and
have significantly lower trading volumes than those of companies with
larger capitalizations. Small-capitalization companies may be more
vulnerable to adverse business or market developments than
large-capitalization companies.
(2) An indirect wholly owned subsidiary of New York Life Insurance Company.
(3) 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.
24
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
GROWTH & INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund To realize maximum long-term total return from a MacKay Shields
combination of capital growth and income. It is not Financial Corporation(2)
designed or managed primarily to produce
current income.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Value Fund(3,5) To seek maximum long-term total return from a MacKay Shields
combination of common stocks, convertible securities, Financial Corporation(2)
and high-yield securities. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Convertible Fund(5,6) To seek capital appreciation together with current MacKay Shields
income. Certain of the Fund's investments are Financial Corporation(2)
speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return Fund To realize current income consistent with reasonable MacKay Shields
opportunity for future growth of capital and income. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
GLOBAL HIGH YIELD FUND(3,5) To seek to provide maximum current income by MacKay Shields
investing primarily in high-yield debt securities Financial Corporation(2)
of non-U.S. issuers. Capital appreciation is a
secondary objective. Certain of the Fund's
investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
International Bond Fund(3) To seek to provide competitive overall return MacKay Shields
commensurate with an acceptable level of risk Financial Corporation(2)
by investing primarily in a portfolio consisting
of non-U.S.(primarily government) debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
High Yield Corporate Maximum current income through investment in a MacKay Shields
Bond Fund(3,5) diversified portfolio of high-yield debt securities. Financial Corporation(2)
Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher
risk. Certain of the Fund's investments are speculative.
- ------------------------------------------------------------------------------------------------------------------------------------
Strategic Income Fund(3,5) To provide current income and competitive overall MacKay Shields
return by investing primarily in domestic and foreign Financial Corporation(2)
debt securities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) "Standard & Poor's(R) 500 Composite Stock Price Index" and "S&P 500(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed by
Monitor Capital Advisors, Inc. The Equity Index Fund is not sponsored,
endorsed, sold, or promoted by Standard & Poor's and Standard & Poor's
makes no representation regarding the advisability of investing in the
Equity Index Fund. 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.
(5) High-yield securities run greater risks of price fluctuations, loss of
principal and interest, default or bankruptcy by the issuer, and other
risks, which is why these securities are considered speculative.
(6) As of 6/2/97, this Fund was closed to new investors.
25
<PAGE>
<TABLE>
<S> <C> <C>
====================================================================================================================================
INCOME FUNDS (continued)
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
Government Fund(7) To seek a high level of current income, consistent with MacKay Shields
safety of principal. Financial Corporation(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund To seek as high a level of current income as is MacKay Shields
considered consistent with the preservation of capital Financial Corporation(2)
and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government.
Although the Fund attempts to maintain a stable net
asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX-FREE INCOME FUNDS
====================================================================================================================================
FUND OBJECTIVE SUBADVISOR
- ------------------------------------------------------------------------------------------------------------------------------------
California Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and California Financial Corporation(2)
personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal
securities issued by the State of California and its
political subdivisions, agencies, and instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
New York Tax Free Fund(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and personal Financial Corporation(2)
income tax of New York State and its political
subdivisions, including New York City, consistent with
preservation of capital. The Fund invests primarily in
municipal securities issued by the State of New York
and its political subdivisions, agencies, and
instrumentalities.
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Free Bond Fund(9) To provide a high level of current income free from MacKay Shields
regular federal income tax, consistent with the Financial Corporation(2)
preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be
subject to state and local taxes.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prospectus contains information on advisory fees, other expenses, and share
classes. Please read it carefully before you invest or send money. Shares must
be offered in the investor's state of residence.
(7) Although some of the instruments the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed and the
Fund's net asset value will fluctuate.
(8) 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.
(9) Some of the Fund's income may be subject to the Alternative Minimum Tax.
Capital gains, if any, may also be taxed.
26
<PAGE>
MainStay Global High Yield Fund
Semiannual Report
June 30, 1998
Unaudited
[LOGO] Mainstay(R) Funds
OFFICERS & TRUSTEES*
Richard M. Kernan, Jr. Chairman and Trustee
Stephen C. Roussin President, Chief Executive
Officer, and Trustee
Edward J. Hogan Trustee
Harry G. Hohn Trustee
Nancy Maginnes Kissinger Trustee
Terry L. Lierman Trustee
John B. McGuckian Trustee
Donald E. Nickelson Trustee
Donald K. Ross Trustee
Richard S. Trutanic Trustee
Walter W. Ubl Trustee
Jefferson C. Boyce Senior Vice President
Anthony W. Polis Chief Financial Officer
Richard W. Zuccaro Tax Vice President
A. Thomas Smith III Secretary
Dechert Price & Rhoads
Legal Counsel
* As of July 27, 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 owned subsidiary of
New York Life Insurance Company.
This report is provided for the information of shareholders of the MainStay
Global High Yield 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. This semiannual
report is also available in Spanish. For a copy, please call 1-800-MAINSTAY
(1-800-624-6782), option 3.
(C)1998. All rights reserved. MSSA21-08/98
[GRAPHIC]
