<PAGE> 1
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 8
Returns & Lipper Rankings 12
Top 10 Equity Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 17
Notes to Financial Statements 22
Report of Independent Accountants 26
The MainStay Funds 27
</TABLE>
<PAGE> 2
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 3
MainStay Capital Appreciation Fund Highlights
1998 MARKET RECAP
- - The U.S. stock market was highly volatile throughout 1998, but provided
double-digit returns for the fourth year in a row.
- - In general, companies benefited from low inflation throughout 1998 and
declining interest rates in the second half of the year.
- - Financial problems in Asia, Russia, and Latin America led most investors to
seek highly liquid, predominantly domestic stocks with steady growth and
relatively predictable earnings.
- - Technology and pharmaceutical stocks generally showed strong performance,
while energy and commodity-related stocks tended to underperform.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Capital Appreciation Fund
returned 39.24% for Class A shares and 38.15% for Class B and Class C shares,*
excluding all sales charges.
- - The Fund benefited from seeking to remain fully invested throughout the year
and from careful security selection among the leading large-capitalization
companies in the technology and pharmaceutical sectors.
- - Our decision to reduce the Fund's positions in problem sectors such as energy
contributed positively to performance.
- - All share classes outperformed the average Lipper* capital appreciation fund,
which returned 19.96% for the year.
- -------
* See footnote and table on page 12 for more information on Lipper Inc.
Performance for Class C shares include the historical performance of Class B
shares from 1/1/98 through 8/31/98.
3
-
<PAGE> 4
$10,000 Invested in the MainStay
Capital Appreciation Fund
versus S&P 500 and Inflation
CLASS A SHARES SEC Returns: 1-year 31.59%, 5-year 21.08%, 10-year 21.95%
<TABLE>
<CAPTION>
MAINSTAY CAPITAL
APPRECIATION FUND S&P 500* INFLATION+
----------------- -------- ----------
<S> <C> <C> <C>
12/88 9450.00 10000.00 10000.00
12/89 11913.00 13162.00 10464.00
12/90 12403.00 12754.00 11118.00
12/91 20882.00 16631.00 11449.00
12/92 23179.00 17897.00 11788.00
12/93 26427.00 19694.00 12111.00
12/94 26024.00 19954.00 12426.00
12/95 35337.00 27444.00 12749.00
12/96 42108.00 33740.00 13171.00
12/97 52255.00 44996.00 13395.00
12/98 72762.00 57855.00 13611.00
</TABLE>
CLASS B & CLASS C SHARES
Class B SEC Returns: 1-year 33.15%, 5-year 21.71%, 10-year 22.36%
Class C SEC Returns: 1-year 37.15%, 5-year 21.89%, 10-year 22.36%
<TABLE>
<CAPTION>
MAINSTAY CAPITAL
APPRECIATION FUND S&P 500* INFLATION+
----------------- -------- ----------
<S> <C> <C> <C>
12/88 10000.00 10000.00 10000.00
12/89 12606.00 13162.00 10464.00
12/90 13124.00 12754.00 11118.00
12/91 22097.00 16631.00 11449.00
12/92 24528.00 17897.00 11788.00
12/93 27965.00 19694.00 12111.00
12/94 27539.00 19954.00 12426.00
12/95 37206.00 27444.00 12749.00
12/96 44111.00 33740.00 13171.00
12/97 54456.00 44996.00 13395.00
12/98 75232.00 57855.00 13611.00
</TABLE>
Past performance is no guarantee of future results. The Class A graph assumes an
initial investment of $10,000 made on 12/31/88 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 12/31/88 through 12/31/94. Performance data for the two classes vary after
this date based on differences in their load and expense structures. The Class B
graph assumes an initial investment of $10,000 made on 12/31/88. Returns shown
do not reflect the Contingent Deferred Sales Charge (CDSC), as it would not
apply to the period shown. The Class C graph assumes an initial investment of
$10,000 made on 12/31/88 and includes the historical performance of Class B
shares for periods 12/31/88 through 8/31/98. Performance data for the two
classes vary after this date based on differences in their load. Returns shown
do not reflect the 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) 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. It is not possible to make an investment directly into an
index.
(+) 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> 5
Portfolio Management Discussion and Analysis
As years go, 1998 was one of the most volatile in recent memory. Despite its ups
and downs, however, the S&P 500(*) Index closed the year with a 28.58% gain,
making 1998 the fourth year in a row domestic stocks in general have returned
more than 20%.
With financial problems in Asia, Russia, and Latin America, declining oil
prices, and weaknesses in other commodities, many investors sought refuge in
stocks they felt were least likely to be affected by these difficulties. The
market focused on large-capitalization growth stocks that appeared to have
steady and predictable earnings prospects. Purely domestic issues continued to
do well, while oil and commodity-related stocks tended to show poor performance.
The technology sector as a whole made strong advances and pharmaceutical
companies generally performed well as new drug introductions and aggressive
marketing helped push earnings and stock prices higher.
Declining interest rates improved earnings prospects for many companies in the
latter half of the year, and subdued inflation also helped strengthen the stock
market's advance. Despite international tensions and impeachment action against
President Clinton, the stock market remained relatively strong at the end of the
year.
HOW DID THE MAINSTAY CAPITAL APPRECIATION FUND PERFORM IN THIS MARKET
ENVIRONMENT?
Quite well. The MainStay Capital Appreciation Fund returned 39.24% for Class A
shares and 38.15% for Class B and Class C shares(+) for the year ended 12/31/98,
excluding all sales charges. All share classes strongly outperformed the average
Lipper(++) capital appreciation fund, which returned 19.96% for the year and the
S&P 500 Index, which returned 28.58% in 1998.
HOW DID THE FUND MANAGE TO DO SO WELL?
A number of factors contributed positively to the Fund's performance, but we
believe the most important factor was sticking to our strict investment
disciplines. In investing the Fund's assets, we seek companies with strong
growth prospects, considering factors such as steady revenue growth and
increasing earnings per share. The Fund's emphasis on large-capitalization
companies helped performance during the volatile market environment of 1998, as
these were the stocks most investors favored when problems in foreign markets
caused a flight to quality. We also reduced the Fund's positions in sectors we
felt were weak, such as energy. By concentrating on winners and largely avoiding
losers, the Fund had an excellent year.
WHICH SECTORS CONTRIBUTED MOST STRONGLY TO PERFORMANCE?
We don't spend a lot of time on sector weightings. Instead, we choose stocks for
the Fund based on their individual merits after extensive quantitative analysis
and fundamental research. As a result of the Fund's selection process, we found
a number of technology stocks that we believed had strong growth potential and
they contributed to the Fund's significant outperformance. The Fund was
overweighted
VOLATILITY
- --------------------------------------------------------------------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
COMMODITIES
- --------------------------------------------------------------------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
INFLATION
- --------------------------------------------------------------------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
The portion of a company's profit allocated to each share of outstanding
common stock.
- --------------------------------------------------------------------------------
* See footnote on page 4 for more information on the S&P 500 Index.
(+) Performance for Class C shares include the historical performance of Class
B shares from 1/1/98 through 8/31/98.
(++) See footnote and table on page 12 for more information on Lipper Inc.
5
<PAGE> 6
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<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
12/98 39.24
</TABLE>
CLASS B & CLASS C SHARES
<TABLE>
<CAPTION>
CLASS B & CLASS C SHARES
------------------------
<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
12/98 36.15
</TABLE>
in technology stocks through all four quarters of 1998.
Pharmaceutical stocks also had an excellent year, and the Fund had a number of
holdings that did well. New drug introductions, direct-to-consumer advertising,
and a long pipeline of FDA-approved drugs awaiting release helped advance the
sector as a whole.
Consumer staples as a group showed relatively weak performance in 1998, as many
global consumer product companies faced pressure from the emerging markets. The
Fund did not own many of these stocks. Instead, the Fund was more concentrated
in relatively defensive, purely domestic companies in this sector,
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.
WEIGHTING
- --------------------
The proportion of a portfolio allocated to a specific security or sector, i.e.,
a fund is said to be over-weighted in a sector when that portion of the
portfolio is greater than the sector's general relationship to the market as a
whole.
6
<PAGE> 7
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Retail 17.4%
Computer Software & Services 10.30%
Health Care-Drugs 10.10%
Financial-Miscellaneous 8.00%
Communications-Equipment 6.90%
All Others 47.30%
</TABLE>
such as supermarkets, which performed well at a time when the market seemed to
prefer stable growth and relatively predictable earnings. The supermarket
industry is rapidly consolidating, which has helped improve margins and profits.
CAN YOU GIVE SOME EXAMPLES OF TECHNOLOGY STOCKS THAT DID WELL?
Certainly. Lucent Technologies was the Fund's best-performing stock in 1998 and
also its largest holding. The company has done exceedingly well, with the value
of the Fund's position more than tripling during the year. Cisco Systems is
another technology stock that showed outstanding performance, with an increase
of 149%(sec.) in 1998.
In January, the Fund purchased EMC Corp., a stock it had owned and sold a few
years ago. The company is a leader in corporate data storage systems, hardware,
and software. We believed EMC had excellent potential, based on increasing
dominance in the company's market sector and rapidly accelerating earnings. The
Fund's position almost doubled in value during the year.
Compuware Corp. is a computer software company that was also among the Fund's
best-performing stocks, and it more than doubled in value during the year.
DID ALL OF THE FUND'S TECHNOLOGY STOCKS DO THAT WELL?
No, the Fund held a few issues that showed relatively weak performance. Computer
Associates is an example. The company's management team announced that it might
have difficulty closing some large contracts, which led to lower earnings
expectations. As a result, Computer Associates was among the worst-
performing stocks in the Fund's investment portfolio in 1998, returning -25% for
the year.
- -------
(sec.) Returns reflect performance
for the one-year period
ended 12/31/98.
7
<PAGE> 8
WHAT ABOUT PHARMACEUTICAL STOCKS?
Given the positive fundamentals in the pharmaceutical industry and the high unit
volume growth these companies can generate in a low-inflation environment,
pharmaceuticals were generally excellent performers. Stand-out companies among
drug stocks included Eli Lilly, a stock the Fund has held for some time, and
Schering-Plough Corp., which was up sharply in 1997 also. Schering-Plough's
product for allergy sufferers, Claritin, boosted sales and earnings to record
levels and helped the stock more than double in value in 1998. Overall,
pharmaceutical stocks accounted for a substantial portion of the Fund's positive
total return. During the year, we also increased the Fund's position in Merck, a
major drug company profiting from successful products such as Fosamax,
Singulair, and many others. The stock increased 39% over the course of the year,
contributing positively to performance. Although we increased the Fund's
position in Pfizer, our timing could have been better. In the first half of the
year, many investors were selling the stock to take profits after the release of
its drug Viagra. Since the Fund seeks long-term capital appreciation, however,
we looked at the company's fundamentals and continued to hold the stock in the
Fund's portfolio, which had a modestly positive impact for the year.
DID THE FUND REMAIN OVERWEIGHTED IN FINANCIAL STOCKS IN 1998?
No, over the course of the year, we decreased the Fund's weighting in financial
stocks for a number of reasons. First, we believed that growth was slowing in
the financial sector. Second, the huge mergers in the financial industry
produced companies that were more difficult to analyze and evaluate.
The NationsBank merger with BankAmerica is a good example. The merger agreement
had barely been completed when BankAmerica announced it would take a large
write-off because of exposure to a faltering hedge fund. Since the stock no
longer fit the Fund's growth criteria and risk profile, we sold the Fund's
position, which had a slightly negative impact.
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART GRAPHIC]
<TABLE>
<S> <C>
Common Stocks 96.6%
Cash, Equivalents and Other Assets, Less Liabilities 3.4%
</TABLE>
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.
8
<PAGE> 9
Another mega merger in the financial sector was Travelers and Citicorp joining
to form Citigroup. With management facing a substantial reorganization in an
uncertain financial environment, we decided to cut back on our holdings in
Citigroup in October, which had a negative impact on performance.
We also sold the Fund's holdings in MGIC Investment Corp., a mortgage lender
that saw decelerating growth as interest rates dropped in the second half of the
year. The decision was positive for the Fund and allowed us to invest in more
profitable securities. Washington Mutual was another stock sold to reduce the
Fund's financial holdings. The stock had appreciated significantly over the last
few years, and we decided to take profits when the company's earnings growth
rate slowed. The impact for 1998 was slightly negative.
Not all of the Fund's financial holdings underperformed. SunAmerica was one of
the Fund's best performers in 1998, as news of its sale to AIG propelled its
stock price to new highs. At year end, the Fund had a weighting similar to that
of the S&P 500 in the financial sector.
WHAT WERE SOME OF THE MAJOR PURCHASES THE FUND MADE DURING THE YEAR?
In addition to the purchases already mentioned, the Fund purchased Fred Meyer, a
large supermarket chain. We liked the company's fundamentals and believed it
might benefit from consolidation in the supermarket industry. The Fund bought
the stock midyear at an average price of about $40, and shortly after we bought
it, the company announced that it would be acquired by Kroger, another of the
Fund's investments. By the end of the year, Fred Meyer stock was trading around
$60, for an increase of about 50% from the Fund's purchase price.
In the second quarter, the Fund purchased Colgate-Palmolive. The company has a
long record of stable growth and was having success with its launch of Total
toothpaste in the U.S. in early 1998. Despite the company's international
exposure, we believed it could still produce strong earnings advances due to the
diversity of its revenue streams and the cost-cutting program it had underway.
For the year, the stock was up 28%, which was in line with the S&P 500 Index.
As new money came into the Fund over the course of the year, we used much of it
to add to the Fund's most successful positions, including Lucent Technologies,
Cisco Systems, EMC Corp., and others. So our buying strategy paralleled our
investment strategy of sticking with the winners in the Fund's investment
portfolio.
WERE ALL OF THE FUND'S PURCHASES EQUALLY SUCCESSFUL?
No. The Fund purchased HBO & Company, a leading provider of health care software
systems, during the third quarter of 1998. The company looked attractive given
its size, market share, and growth rate. But shortly after the Fund purchased
the stock, the company decided to merge with McKesson, a leading drug
distributor. Miscommunication about the merger caused the stock to underperform
the market. Although the stock provided a positive return, on a relative basis,
it had a negative impact on the Fund's performance.
9
-
<PAGE> 10
WHAT ELSE DID THE FUND SELL DURING 1998?
Perhaps the Fund's most significant sales were in the energy sector. In light of
declining oil prices and weakening prospects for oil services companies we sold
the Fund's positions in Diamond Offshore, Halliburton, and ENSCO. Since the
impact of energy service stocks was almost uniformly negative in 1998, we viewed
the sales as positive for the portfolio, even though the Fund lost a modest
amount of money on each of these transactions. The wisdom of reallocating the
assets was further underscored as oil prices continued to decline.
The Fund also sold toy maker Mattel during the first half of the year as
fundamentals deteriorated. We were pleased to sell the Fund's position at a gain
over its original purchase price, although the sale had a slightly negative
impact on the Fund's performance in 1998. Later developments at the company
confirmed that the Fund's sale of this position was a good decision.
DID THE FUND MAKE OTHER SIGNIFICANT SALES?
Yes. The Fund sold Tenet Healthcare Corp. and United Healthcare Corp., both of
which were experiencing decelerating earnings growth rates. Tenet is a large
hospital chain that is grappling with lower medicare reimbursements. United
Healthcare, like many HMOs, is battling rising medical costs and an inability to
smoothly integrate acquisitions. We believe both sales were positive for the
Fund because they freed up cash allowing us to pursue other investment
opportunities.
Adaptec is a technology company the Fund sold at a loss, after the Asian crisis
and slower earnings growth undercut the fundamental reasons for owning the
stock. The stock continued to decline even further throughout most of the year.
So again, we consider the decision a positive one for the Fund's shareholders.
Hewlett-Packard Co. was a long-standing position in the Fund that simply failed
to live up to earnings expectations. The Fund sold the stock at a huge gain over
its original cost, but at a slight loss for the year.
WHICH STOCKS WERE THE FUND'S WORST PERFORMERS IN 1998?
By far the worst stock was Cendant, which was plagued by news of accounting
irregularities at its merger partner, CUC International. The stock, which was a
major holding, was down nearly 44% for the year. As of year end, the Fund
continued to own Cendant stock as we believe the market has overpenalized a
company that is exhibiting strong operating momentum and generating $1.5 billion
of free cash flow.
Other poor performers included HEALTHSOUTH, a nationwide rehabilitation and
outpatient surgery company, which surprised the market by missing third quarter
earnings projections and preannouncing that problems would continue in 1999.
Conseco is an insurance company that acquired Green Tree Financial and suffered
from negative perceptions of its top management. Despite these and a few other
weak performers, the Fund was still able to outperform the market by a
substantial margin.
10
- -
<PAGE> 11
WERE THERE OTHER ASPECTS OF THE FUND'S MANAGEMENT THAT HELPED OR HURT
PERFORMANCE?
Our focus during the year was primarily on the kinds of stocks the market
wanted--large-capitalization issues with consistent growth records and
relatively dependable and predictable earnings. While we couldn't predict the
problems in Russia or Brazil, we have always believed that stocks with superior
fundamentals are likely to get stronger on a relative basis when macroeconomic
problems arise. While we also couldn't predict specific company shortfalls, we
believe the Fund's diversification and stock selection process helped contribute
to excellent performance in 1998.
WERE THERE SPECIFIC WAYS YOU SOUGHT TO MANAGE THE FUND'S RISK DURING THE YEAR?
Selling the Fund's energy stocks was one step we took, with a positive overall
impact on performance. We also avoided a heavy overweighting in technology.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We continue to view the markets as highly volatile and generally unpredictable.
So instead of trying to time our investments or dodge and weave with the market,
we will continue to select companies with strong growth characteristics and
solid performance records. The Fund invests for the long-term and we believe the
market is willing to pay a premium for companies that can show consistent growth
potential over time. Despite one of the most tumultuous markets in history, we
view 1998 as a confirmation of the Fund's approach to seeking 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.
11
<PAGE> 12
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 39.24% 22.45% 22.64% 17.16%
Class B 38.15% 21.89% 22.36% 16.95%
Class C 38.15% 21.89% 22.36% 16.95%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 31.59% 21.08% 21.95% 16.64%
Class B 33.15% 21.71% 22.36% 16.95%
Class C 37.15% 21.89% 22.36% 16.95%
</TABLE>
FUND LIPPER+ RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 32 out of n/a n/a 14 out of
250 funds 111 funds
Class B 35 out of 13 out of 3 out of 5 out of
250 funds 95 funds 55 funds 41 funds
Class C n/a n/a n/a n/a
Average Lipper
capital
appreciation
fund 19.96% 14.96% 14.09% 11.36%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $48.74 $0.0000 $2.1410
Class B $47.54 $0.0000 $2.1410
Class C $47.54 $0.0000 $2.1410
</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.
12
- -
<PAGE> 13
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 load and 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%. Class C shares, first offered to the public on
9/1/98, are sold with no initial sales charge, but are subject to a CDSC of
1% if redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of the
Class B shares for periods from inception (5/1/86) up to 8/31/98. Performance
data for the two classes after this date vary based on differences in their
load.
(+) Lipper 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
12/31/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class C shares on 9/1/98.
13
-
<PAGE> 14
Top 10 Equity Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Lucent Technologies Inc. $109,989,000
Tyco International Ltd. 107,477,089
Cisco Systems, Inc. 106,558,031
EMC Corp. 99,526,500
Lilly (Eli) & Co. 94,954,050
MCI WorldCom, Inc. 94,586,590
Compuware Corp. 92,859,375
Schering-Plough Corp. 92,278,550
Safeway Inc. 92,247,187
Sun Microsystems 90,933,750
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
Colgate-Palmolive Co. $50,081,934
HBO & Co. 47,117,701
EMC Corp. 39,175,201
Pfizer Inc. 36,814,184
Fred Meyer, Inc. 36,056,241
Chancellor Media Corp. 32,716,644
Clear Channel Communications, Inc. 31,785,006
Providian Financial Corp. 31,461,800
IMS Health Inc. 28,590,100
Walt Disney Co. (The) 27,925,205
</TABLE>
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Household International, Inc. $37,608,889
MGIC Investment Corp. 37,121,446
Gillette Co. 28,428,000
Hewlett-Packard Co. 27,909,573
Walt Disney Co. (The) 27,800,789
Lucent Technologies Inc. 27,629,528
BankAmerica Corp. 26,261,476
Tenet Healthcare Corp. 26,041,219
Tyco International Ltd. 23,962,259
Mattel, Inc. 23,808,884
</TABLE>
- -------
This breakdown is pro-
vided for informational
purposes only. The
Fund's holdings may
change daily. All pur-
chases 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
are excluded. See Portfolio of
Investments for specific
type of security held.
14
- -
<PAGE> 15
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.6%)+
BANKS (1.9%)
SouthTrust Corp.............. 407,750 $ 15,061,266
Wells Fargo & Co............. 1,087,300 43,424,044
--------------
58,485,310
--------------
BROADCAST/MEDIA (3.4%)
Chancellor Media Corp. (a)... 759,000 36,337,125
Clear Channel Communications,
Inc. (a).................... 652,600 35,566,700
Cumulus Media Inc. (a)....... 600,000 9,975,000
Fox Entertainment Group, Inc.
(a)......................... 595,000 14,986,562
Univision Communications Inc.
(a)......................... 255,000 9,227,812
--------------
106,093,199
--------------
CHEMICALS (1.0%)
Monsanto Co.................. 631,700 30,005,750
--------------
COMMUNICATIONS--EQUIPMENT (6.9%)
Cisco Systems, Inc. (a)...... 1,148,100 106,558,031
Lucent Technologies Inc...... 999,900 109,989,000
--------------
216,547,031
--------------
COMPUTER SOFTWARE & SERVICES (10.3%)
Computer Associates
International, Inc.......... 570,787 24,329,796
Compuware Corp. (a).......... 1,188,600 92,859,375
Equifax Inc.................. 796,200 27,220,088
HBO & Co..................... 1,523,100 43,693,931
Microsoft Corp. (a).......... 601,000 83,351,187
Oracle Corp. (a)............. 1,196,000 51,577,500
--------------
323,031,877
--------------
COMPUTER SYSTEMS (6.0%)
EMC Corp. (a)................ 1,170,900 99,526,500
Sun Microsystems (a)......... 1,062,000 90,933,750
--------------
190,460,250
--------------
CONSUMER FINANCE (1.4%)
Providian Financial Corp..... 602,550 45,191,250
--------------
ELECTRONICS--SEMICONDUCTORS (1.8%)
Intel Corp................... 485,100 57,514,669
--------------
- --------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Shares Value
<S> <C> <C>
FINANCIAL--MISCELLANEOUS (8.0%)
Associates First Capital
Corp. Class A............... 1,585,600 $ 67,189,800
Citigroup Inc................ 820,000 40,590,000
Fannie Mae................... 484,700 35,867,800
Freddie Mac.................. 437,400 28,184,963
SunAmerica Inc............... 1,003,200 81,384,600
--------------
253,217,163
--------------
HEALTH CARE DISTRIBUTORS (1.8%)
Cardinal Health Inc.......... 738,750 56,052,656
--------------
HEALTH CARE--DRUGS (10.1%)
Elan Corp. PLC ADR (a) (b)... 660,400 45,939,075
Lilly (Eli) & Co............. 1,068,400 94,954,050
Merck & Co., Inc............. 291,400 43,036,137
Pfizer Inc................... 325,700 40,854,994
Schering-Plough Corp......... 1,670,200 92,278,550
--------------
317,062,806
--------------
HEALTH CARE--MEDICAL PRODUCTS (5.4%)
Guidant Corp................. 777,300 85,697,325
Medtronic, Inc............... 1,155,900 85,825,575
--------------
171,522,900
--------------
HEALTH CARE--MISCELLANEOUS (2.9%)
HEALTHSOUTH Corp. (a)........ 1,560,900 24,096,394
Johnson & Johnson............ 818,484 68,650,345
--------------
92,746,739
--------------
HOUSEHOLD PRODUCTS (1.7%)
Colgate-Palmolive Co......... 564,700 52,446,513
--------------
INSURANCE (2.6%)
American International Group,
Inc......................... 547,912 52,941,997
Conseco, Inc................. 947,500 28,957,969
--------------
81,899,966
--------------
LEISURE TIME (1.9%)
Harley-Davidson, Inc......... 1,255,200 59,465,100
--------------
MANUFACTURING--DIVERSIFIED (4.4%)
Illinois Tool Works Inc...... 490,400 30,956,500
Tyco International Ltd....... 1,424,717 107,477,089
--------------
138,433,589
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 16
MainStay Capital Appreciation Fund
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL (1.3%)
Waste Management, Inc........ 859,700 $ 40,083,513
--------------
RETAIL (17.4%)
Bed Bath & Beyond, Inc.
(a)......................... 1,180,800 40,294,800
CVS Corp..................... 1,173,100 64,520,500
Dollar General Corp.......... 1,186,921 28,041,009
Fred Meyer, Inc. (a)......... 820,800 49,453,200
Home Depot, Inc. (The)....... 1,338,700 81,911,706
Kohl's Corp. (a)............. 1,110,700 68,238,631
Kroger Co. (a)............... 855,900 51,781,950
Safeway Inc. (a)............. 1,513,800 92,247,187
Staples, Inc. (a)............ 1,636,100 71,477,119
--------------
547,966,102
--------------
SPECIALIZED SERVICES (3.4%)
Cendant Corp. (a)............ 2,292,328 43,697,503
IMS Health Inc............... 435,900 32,883,206
Service Corp.
International............... 837,000 31,858,312
--------------
108,439,021
--------------
TELECOMMUNICATIONS--LONG DISTANCE (3.0%)
MCI WorldCom, Inc. (a)....... 1,318,280 94,586,590
--------------
(Cost $1,553,809,408)....... 3,041,251,994
--------------
<CAPTION>
Principal
Amount
-----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (4.3%)
COMMERCIAL PAPER (4.3%)
American Express Credit Corp.
5.85%, due 1/5/99........... $15,000,000 14,990,247
Ford Motor Credit Co.
5.62%, due 1/7/99........... 25,000,000 24,976,543
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
General Electric Capital
Corp.
5.53%, due 1/8/99........... $21,860,000 $ 21,836,444
Halifax PLC
5.60%,due 1/6/99............ 30,000,000 29,976,615
Salomon Smith Barney Holdings
Inc.
5.57%, due 1/20/99.......... 23,657,000 23,587,347
Xerox Credit Corp.
5.20%, due 1/4/99........... 21,000,000 20,990,899
--------------
Total Short-Term Investments
(Cost $136,358,095)......... 136,358,095
--------------
Total Investments
(Cost $1,690,167,503) (c)... 100.9% 3,177,610,089(d)
Liabilities in Excess of
Cash, and Other Assets...... (0.9) (28,149,668)
---- -----------
Net Assets................... 100.0% $3,149,460,421
===== ==============
</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 December 31, 1998, net unrealized appreciation was $1,487,442,586, 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 $1,508,591,197 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $21,148,611.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 17
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$1,690,167,503)........................................... $3,177,610,089
Cash........................................................ 3,967
Receivables:
Fund shares sold.......................................... 18,920,116
Investment securities sold................................ 10,303,094
Dividends and interest.................................... 555,476
Other assets................................................ 38,951
--------------
Total assets........................................ 3,207,431,693
--------------
LIABILITIES:
Payables:
Investment securities purchased........................... 47,286,924
Fund shares redeemed...................................... 6,291,914
NYLIFE Distributors....................................... 2,269,486
MainStay Management....................................... 1,353,411
Transfer agent............................................ 427,091
Custodian................................................. 21,899
Trustees.................................................. 21,826
Accrued expenses............................................ 298,721
--------------
Total liabilities................................... 57,971,272
--------------
Net assets.................................................. $3,149,460,421
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 81,003
Class B................................................... 579,126
Class C .................................................. 337
Additional paid-in capital.................................. 1,650,080,631
Accumulated net realized gain on investments................ 11,276,738
Net unrealized appreciation on investments.................. 1,487,442,586
--------------
Net assets.................................................. $3,149,460,421
==============
CLASS A
Net assets applicable to outstanding shares................. $ 394,847,838
==============
Shares of beneficial interest outstanding................... 8,100,298
==============
Net asset value and offering price per share outstanding.... $ 48.74
Maximum sales charge (5.50% of offering price).............. 2.84
--------------
Maximum offering price per share outstanding................ $ 51.58
==============
CLASS B
Net assets applicable to outstanding shares................. $2,753,012,409
==============
Shares of beneficial interest outstanding................... 57,912,585
==============
Net asset value and offering price per share outstanding.... $ 47.54
==============
CLASS C
Net assets applicable to outstanding shares................. $ 1,600,174
==============
Shares of beneficial interest outstanding................... 33,661
==============
Net asset value and offering price per share outstanding.... $ 47.54
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 18
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 11,901,911
Interest.................................................. 5,470,645
------------
Total income............................................ 17,372,556
------------
Expenses:
Management................................................ 17,938,412
Distribution--Class B..................................... 16,545,235
Distribution--Class C..................................... 1,108
Service--Class A.......................................... 713,699
Service--Class B.......................................... 5,513,797
Service--Class C.......................................... 384
Transfer agent............................................ 4,899,150
Shareholder communication................................. 453,599
Recordkeeping............................................. 275,485
Custodian................................................. 223,924
Registration.............................................. 211,921
Professional.............................................. 145,098
Trustees.................................................. 77,749
Miscellaneous............................................. 101,708
------------
Total expenses before waiver............................ 47,101,269
Fees waived by Manager...................................... (4,592,655)
------------
Net expenses............................................ 42,508,614
------------
Net investment loss......................................... (25,136,058)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................ 127,423,848
Net change in unrealized appreciation on investments........ 738,696,408
------------
Net realized and unrealized gain on investments............. 866,120,256
------------
Net increase in net assets resulting from operations........ $840,984,198
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $8,468.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 19
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (25,136,058) $ (16,994,618)
Net realized gain on investments.......................... 127,423,848 96,408,190
Net change in unrealized appreciation on investments...... 738,696,408 290,211,529
-------------- --------------
Net increase in net assets resulting from operations...... 840,984,198 369,625,101
-------------- --------------
Distributions to shareholders:
From net realized gain on investments:
Class A................................................. (16,348,271) (7,157,066)
Class B................................................. (118,109,099) (63,640,592)
Class C................................................. (53,596) --
-------------- --------------
Total distributions to shareholders................... (134,510,966) (70,797,658)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 605,025,203 226,767,009
Class B................................................. 625,714,322 525,712,343
Class C................................................. 1,433,793 --
Net asset value of shares issued to shareholders in
reinvestment of distributions:
Class A................................................. 15,045,166 6,842,740
Class B................................................. 115,889,976 62,561,489
Class C................................................. 44,608 --
-------------- --------------
1,363,153,068 821,883,581
Cost of shares redeemed:
Class A................................................. (528,505,344) (173,693,435)
Class B................................................. (477,612,621) (330,598,281)
Class C................................................. (3,507) --
-------------- --------------
Increase in net assets derived from capital share
transactions......................................... 357,031,596 317,591,865
-------------- --------------
Net increase in net assets............................ 1,063,504,828 616,419,308
NET ASSETS:
Beginning of year........................................... 2,085,955,593 1,469,536,285
-------------- --------------
End of year................................................. $3,149,460,421 $2,085,955,593
============== ==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
<PAGE> 20
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
--------------------------------------------------
Year ended December 31,
--------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 36.60 $ 30.56 $ 25.90 $ 19.11
-------- -------- -------- --------
Net investment income (loss) (a)............................ (0.14) (0.16) (0.08) 0.03
Net realized and unrealized gain (loss) on investments...... 14.42 7.48 5.05 6.81
-------- -------- -------- --------
Total from investment operations............................ 14.28 7.32 4.97 6.84
-------- -------- -------- --------
Less distributions:
From net realized gain on investments..................... (2.14) (1.28) (0.31) (0.05)
-------- -------- -------- --------
Net asset value at end of period............................ $ 48.74 $ 36.60 $ 30.56 $ 25.90
======== ======== ======== ========
Total investment return (b)................................. 39.24% 24.10% 19.16% 35.79%
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss)............................ (0.34%) (0.48%) (0.3%) 0.2%
Expenses................................................ 1.23% 1.09% 1.1% 1.1%
Net Expenses (after waiver)............................. 1.04% 1.09% 1.1% 1.1%
Portfolio turnover rate..................................... 29% 35% 16% 29%
Net assets at end of period (in 000's)...................... $394,848 $216,292 $126,958 $ 44,434
</TABLE>
- -------
<TABLE>
<C> <S>
* The Fund changed its fiscal year end from August 31 to December 31.
** Class C shares were first offered on September 1, 1998.
+ 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.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
- -
<PAGE> 21
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------------------------------- -------------
September 1 September 1**
Year ended December 31, through Year ended through
----------------------------------------------- December 31, August 31, December 31,
1998 1997 1996 1995 1994* 1994 1998
---------- ---------- ---------- -------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 36.02 $ 30.25 $ 25.77 $ 19.11 $ 19.93 $ 19.47 $36.15
---------- ---------- ---------- -------- -------- -------- ------
(0.45) (0.34) (0.22) (0.08) (0.03) (0.12) (0.10)
14.11 7.39 5.01 6.79 (0.65) 1.13 13.63
---------- ---------- ---------- -------- -------- -------- ------
13.66 7.05 4.79 6.71 (0.68) 1.01 13.53
---------- ---------- ---------- -------- -------- -------- ------
(2.14) (1.28) (0.31) (0.05) (0.14) (0.55) (2.14)
---------- ---------- ---------- -------- -------- -------- ------
$ 47.54 $ 36.02 $ 30.25 $ 25.77 $ 19.11 $ 19.93 $47.54
========== ========== ========== ======== ======== ======== ======
38.15% 23.45% 18.56% 35.11% (3.40%) 5.36% 37.66%
(1.09%) (1.00%) (0.8%) (0.4%) (0.5%)+ (0.6%) (1.09%)+
1.98% 1.61% 1.6% 1.7% 1.8%+ 1.8% 1.98%+
1.79% 1.61% 1.6% 1.7% 1.8%+ 1.8% 1.79%+
29% 35% 16% 29% 11% 31% 29%
$2,753,012 $1,869,664 $1,342,578 $856,221 $499,133 $472,497 $1,600
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
-
<PAGE> 22
MainStay Capital Appreciation 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
Capital Appreciation Fund (the "Fund").
The Fund currently offers three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on May 1, 1986 and
September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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 limited 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
22
- -
<PAGE> 23
Notes to Financial Statements
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.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required. A
permanent book-tax difference of $25,136,058 has been reclassified from
accumulated net investment loss to additional paid-in capital, due to net
investment loss incurred by the Fund in 1998.
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
23
-
<PAGE> 24
MainStay Capital Appreciation Fund
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%. 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 year
ended December 31, 1998 the Manager earned $17,938,412 and waived $4,592,655 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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plans provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $249,244 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $2,052,866
for the period ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $4,899,150.
24
- -
<PAGE> 25
Notes to Financial Statements (continued)
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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 $63,495 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$275,485 for the year ended December 31, 1998.
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities and short-term securities, were $939,322
and $693,143, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
---------------------------------- --------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold..................................... 14,362 15,214 33 6,499 15,460
Shares issued in reinvestment of
distributions................................. 321 2,531 1 194 1,803
------- ------- -- ------ ------
14,683 17,745 34 6,693 17,263
Shares redeemed................................. (12,493) (11,731) -- (4,938) (9,753)
------- ------- -- ------ ------
Net increase.................................... 2,190 6,014 34 1,755 7,510
======= ======= == ====== ======
</TABLE>
- -------
*First offered on September 1, 1998.
25
-
<PAGE> 26
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Capital Appreciation Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
26
- -
<PAGE> 27
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a secondary consideration. Advisors, Inc.(2)
EQUITY INCOME FUND To realize maximum long-term total return from a MacKay Shields Financial
combination of capital appreciation and income. Corporation(2)
RESEARCH VALUE FUND To seek long-term capital appreciation by investing John A. Levin & Co.,
primarily in securities of large-capitalization Inc.
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.
27
-
<PAGE> 28
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
28
- -
<PAGE> 29
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
29
-
<PAGE> 30
MAINSTAY CAPITAL APPRECIATION FUND
ANNUAL REPORT
DECEMBER 31, 1998
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY(R) LOGO]
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.
(C)1999. All rights reserved. MSAN05-02/99
[RECYCLE LOGO]
[MAINSTAY(R) BACKCOVER LOGO]
<PAGE> 31
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Blue Chip Growth Fund
Highlights 3
$10,000 Invested in the MainStay Blue
Chip Growth Fund versus S&P 500 and
Inflation--Class A, Class B, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 & 12/31/98 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Fund & Lipper Returns 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Financial Statements 15
Notes to Financial Statements 19
Report of Independent Accountants 24
The MainStay Funds 25
</TABLE>
<PAGE> 32
PRESIDENT'S LETTER
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 33
MainStay Blue Chip Growth Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - Declining interest rates and low inflation had a positive impact on growth
stocks.
- - International economic weakness, especially the ailing Asian markets, dampened
economic growth in the U.S. and Europe.
- - The near-collapse of a large hedge fund added to concerns about a lack of
liquidity in the market.
- - Global fears of recession and financial market instability prompted three
successive interest rate cuts by the Federal Reserve Board.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - The MainStay Blue Chip Growth Fund commenced operations on June 1, 1998.
- - The Fund returned 16.40% for Class A shares and 16.00% for Class B and Class C
shares,* for the since-inception period from 6/1/98 through 12/31/98.
- - The Fund benefited from emphasis on financial services, technology, and media
stocks, which showed strong performance during the reporting period.
- - Weaknesses in Asia and declining oil prices caused some of the Fund's holdings
to underperform.
- - All share classes outperformed the average Lipper* growth fund, which returned
10.23% over the same since-inception period.
- -------
* See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from inception (6/1/98) through 8/31/98.
3
<PAGE> 34
$10,000 Invested in the MainStay
Blue Chip Growth Fund versus
S&P 500 and Inflation
CLASS A SHARES SEC Returns: since inception 10.00%
<TABLE>
<CAPTION>
MAINSTAY BLUE CHIP GROWTH
FUND S&P 500* INFLATION
------------------------- -------- ----------
<S> <C> <C> <C>
6/1/98 9450 10000 10000
6/98 9809 10406 10006
9/98 8524 9371 10043
12/98 11000 11367 10098
</TABLE>
CLASS B SHARES SEC Returns: since inception 11.00%
<TABLE>
<CAPTION>
MAINSTAY BLUE CHIP GROWTH
FUND S&P 500* INFLATION+
------------------------- -------- ---------
<S> <C> <C> <C>
6/1/98 10000 10000 10000
6/98 10380 10406 10006
9/98 9010 9371 10043
12/98 11100 11367 10098
</TABLE>
CLASS C SHARES SEC Returns: since inception 15.00%
<TABLE>
<CAPTION>
MAINSTAY BLUE CHIP GROWTH
FUND S&P 500* INFLATION+
------------------------- -------- ---------
<S> <C> <C> <C>
6/1/98 10000 10000 10000
6/98 10380 10406 10006
9/98 9010 9371 10043
12/98 11500 11367 10098
</TABLE>
4
<PAGE> 35
- --------------------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/1/98 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 6/1/98. Returns shown reflect a 5%
Contingent Deferred Sales Charge (CDSC), which would apply for the period
shown. The Class C graph assumes an initial investment of $10,000 made on
6/1/98 and includes the performance of Class B shares for periods 6/1/98
through 8/31/98. Performance data for the two classes vary after this date
based on differences in their load. Returns shown reflect the 1% CDSC, 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.
* "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. It is not possible to make an investment
directly into an index.
(+) 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.
5
<PAGE> 36
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.
CREDIT SPREADS
- --------------------
Difference in the value of two options, when the value of the one sold exceeds
the value of the one bought.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Portfolio Management Discussion and Analysis
After climbing through the first half of the year even as volatility increased,
all major U.S. equity indices posted negative returns for the third quarter, as
stocks tumbled on both domestic and international news. Lower corporate
profits, expectations of slower growth in the second half of the year and the
General Motors strike contributed to a July sell-off. In August, Russia
defaulted on its domestic debt, weak commodity prices dampened the economic
outlook for Latin America, and ongoing economic instability in Asia impacted
markets worldwide. In addition, a large hedge fund faced major difficulties,
requiring a bailout by a consortium of Wall Street firms. The announcement of
this bailout package, orchestrated by the Federal Reserve Board, forced
corporate credit spreads to widen significantly and liquidity to decrease. The
return of the S&P 500(*) Index in August was one of the ten worst in its
history.
In a market reversal, the U.S. stock market roared back with a vengeance during
the fourth quarter of 1998. Buoyed by low inflation, solid economic growth,
better-than-expected U.S. corporate earnings reports and a long-awaited series
of interest-rate reductions by the Federal Reserve Board, the S&P 500 Index
rebounded to the 1100-point range, up nearly 15% from its third-quarter low of
957. The year ended with the strongest fourth-quarter returns in twenty years
for most major U.S. large-capitalization equity indices and large gains in many
technology-related stocks.
GIVEN THIS CONTEXT, HOW DID THE MAINSTAY BLUE CHIP GROWTH FUND PERFORM IN 1998?
The MainStay Blue Chip Growth Fund commenced operations on 6/1/98. For the seven
months ended 12/31/98, the Fund returned 16.40% for Class A shares and 16.00%
for Class B and Class C shares,(+) excluding all sales charges. All share
classes outperformed the average Lipper(++) growth fund, which returned 10.23%
for the same seven-month period.
HOW WAS THE FUND ABLE TO OUTPERFORM ITS PEERS?
The Fund was able to outperform its peers because of its weighting in certain
sectors. The Fund benefited from our decision to emphasize financial services
stocks, which outperformed the market as interest rates declined, and to
increase the Fund's holdings in technology and media stocks. As a result, the
Fund participated in the significant rally that swept the market during the
fourth quarter.
WHICH SECTOR HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE?
Technology. This sector contained some of the Fund's best performers. At the end
of July, the MainStay Blue Chip Growth Fund had a 12.5% weighting in technology
stocks. When the market plunged in the third quarter, we took advantage of lower
prices in technology stocks and boosted some of the Fund's holdings. By
November, we had increased the Fund's technology weighting to 17.5%, as we added
to the Fund's Microsoft position and other holdings. In December, the Fund
purchased additional shares of Dell
6
- -------
* See footnote on page 5 for more information on the S&P 500.
(+) Performance figures for Class C shares include the historical performance
of Class B shares from inception (6/1/98) through 8/31/98.
(++) See footnote and table on page 11 for more information on Lipper Inc.
<PAGE> 37
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
<TABLE>
<CAPTION>
TOTAL RETURNS
-----------------------------------------------
CLASS A CLASS B & CLASS C
------- -----------------
<S> <C> <C>
Period End
6/98 3.8% 3.8%
12/98 16.4% 16%
Class C share returns reflect the historical performance of
the Class B shares for periods 6/98 through 8/98.
See footnote * on page 11 for more information on
performance.
</TABLE>
Computer, Texas Instruments, Sun Microsystems, Cisco Systems, Hewlett-Packard,
and BMC Software for the Fund, among others. As a result, the Fund's commitment
to the sector increased to 25%, nearly double the 12.6% technology weighting of
the S&P 500.
WHAT OTHER MARKET SECTORS CONTRIBUTED SIGNIFICANTLY TO PERFORMANCE?
The Fund's holdings in the media sector aided performance during the second half
of 1998. One stock that performed particularly well for the Fund was MediaOne
(formerly U.S. West Cable), the nation's third-largest cable operator. The Fund
purchased MediaOne in June and it rose in value through the end of the year,
representing a 3.2% portfolio position. Going forward, we believe that MediaOne
will benefit strongly from cable's potential for Internet access, the company's
25% ownership stake in Time Warner Entertainment, and general consolidation
within the industry.
The Fund also purchased Clear Channel, one of the country's largest
owner-operators of radio stations and outdoor advertising systems. We started to
buy the stock for the Fund in June and it rose through year end. This had a
positive impact on the Fund's investment portfolio. Recently, Clear Channel
acquired foreign media properties. We believe that this, combined with the
ongoing consolidation in the radio industry, should help contribute to Clear
Channel's success. Although, the Fund's weighting in the media sector decreased
from 17.5% in July to 10.1% in December--the Fund was still overweighted
relative to the 3.6% weighting for the S&P 500.
WERE THERE ANY SIGNIFICANT SALES DURING THE REPORTING PERIOD?
Yes. The Fund had taken small positions in Smith International, Schlumberger,
and Halliburton, with the belief that these oil service stocks were
significantly undervalued given reasonable expectations for oil demand. When oil
prices fell, the value of these three stocks declined approximately 20% each. As
a result of this and reduced growth expectations, we sold the Fund's positions
and have not reentered the sector.
7
<PAGE> 38
CORRECTION
- --------------------
Reverse movement, usually downward, in the price of an individual stock, bond,
commodity, or index.
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
<TABLE>
<CAPTION>
<S> <C>
RETAIL 10.8%
COMPUTER SOFTWARE & SERVICES 10.7%
BROADCAST/MEDIA 10.1%
COMPUTER SYSTEMS 9.9%
BANKS 7.9%
ALL OTHER 50.6%
</TABLE>
Actual percentages will vary over time
The Fund had also purchased Molex, a capital goods company, and Sigma Aldrich, a
specialty chemical company, in June. Both fell victim to reduced earnings
expectations due to Asia-related economic weakness, which in turn resulted in a
drop in the price of their shares. We sold the Fund's holdings in each of these
companies in August, in order to provide liquidity for more attractive
investments.
The Fund also took some profits selling some of its drug company holdings, as
these stocks reached record-high valuations.
HOW WAS THE FUND AFFECTED BY THE MARKET'S THIRD QUARTER CORRECTION?
Shifting political, economic, and financial factors played an important role in
the performance of the markets in 1998 as did investor psychology. While the
U.S. equity market did not flinch when the U.S. bombed Iraq, political
repercussions from the Clinton scandal and the hedge fund bailout sent jitters
through the world's financial system. Emerging-market investors were crushed by
Russia's default and the near collapse of the Japanese banking system.
The effect of these events was a dramatic third-quarter market correction. We
continued to emphasize companies with a strong domestic growth profile and took
advantage of the market's steep decline by increasing the Fund's weightings in
several sectors, including technology, financial services, media, and business
services.
WHICH OF THE FUND'S STOCKS WERE THE BEST OVERALL PERFORMERS?
Charles Schwab, a financial services holding company, was the Fund's best
performer for the seven-month period, jumping an incredible 168%(sec.) as a
result of explosive growth in mutual fund business and Internet trading. Sun
Microsystems also contributed significantly to the Fund's performance,
increasing 78% as a result of its alliance with AOL and Netscape. Walgreen was
up 57%, in response to very strong prescription drug sales.
8
- -------
(sec.) Returns are for the period in which the securities were held in the
portfolio.
<PAGE> 39
WHICH OF THE FUND'S STOCKS WERE THE WORST OVERALL PERFORMERS?
Besides the three oil service companies, Halliburton, Schlumberger, and Smith
International, a machinery company named Sundstrand was weak due to exposure to
the ailing Asian markets. While the Fund sold the first three, it continues to
hold Sundstrand, because we believe it is undervalued given its earnings
outlook, and we continue to expect healthy performance from this company in
1999.
WERE THERE SECTORS IN WHICH THE FUND WAS UNDERWEIGHTED?
Yes. As of December 31, 1998, the Fund was underweighted in consumer staples and
manufacturing and had no positions in consumer cyclicals, transportation, and
utility stocks. We expect the Fund's underweightings to remain as they were at
the end of 1998 for the early months of the new year.
WHAT RISKS DO YOU SEE GOING FORWARD?
Financial instability in markets around the world continues to be a concern. We
will continue to closely monitor these events and their impact on the U.S.
economy. As the U.S. Senate's impeachment trial of the President proceeds, we
will also be on the lookout for any fallout in the financial markets.
We manage risk in the Fund through careful portfolio diversification. No one
industry represents more than 25% of the total portfolio and no one stock
represents more than 5% of the Fund's total assets. As specific sectors become
over- or under-valued, we also manage risk either by taking profits or by
increasing the Fund's investment.
WHAT DO YOU FORESEE FOR 1999?
We anticipate that inflation will remain dormant for the foreseeable future. In
our opinion, the Federal Reserve Board could possibly move to reduce interest
rates further, if warranted by a slowing economy or another foreign economic
crisis. Although we believe the domestic economy will slow, it should be able to
avoid recession. We also expect that corporate profits will continue to make
modest progress.
PORTFOLIO COMPOSITION AS OF 12/31/98
<TABLE>
<CAPTION>
<S> <C>
COMMON STOCKS 96.80%
CASH, EQUIVALENTS & OTHER ASSETS, LESS LIABILITIES 3.20%
</TABLE>
Actual percentages will vary over time.
9
CYCLICAL STOCK
- --------------------
Stock that tends to rise quickly when the economy turns up and to fall quickly
when the economy turns down. Examples include housing, automobiles, and paper.
<PAGE> 40
Equity valuations at the end of 1998 were not cheap, and unforseen problems
could create difficulties for the markets. Southeast Asia remains sluggish.
Boris Yeltsin of Russia remains in ill health. Brazil has failed to pass the
austerity measures required for additional funding from the International
Monetary Fund. The U.S. Senate has begun the impeachment trial of William
Jefferson Clinton. And while Long-Term Capital Management is no longer front
page news, there are still many unregulated and unaccountable hedge funds in
operation.
Amid all of these question marks, we will continue to focus on the industry
leaders--companies with visible, consistent earnings that are selling at
reasonable valuations. We do not anticipate a material change in the sector
weightings 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
10
Past performance is no guarantee of future results.
<PAGE> 41
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS(*)
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A 16.40%
Class B 16.00%
Class C 16.00%
</TABLE>
FUND SEC RETURNS(*)
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A 10.00%
Class B 11.00%
Class C 15.00%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Average Lipper
growth fund 10.23%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $11.64 $0.0000 $0.0000
Class B $11.60 $0.0000 $0.0000
Class C $11.60 $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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (6/1/98) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
(+) Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
average listed above is not class specific. Life of fund return is for
the period of the initial offering of Class A and Class B shares (on
6/1/98) through 12/31/98. The Fund's Class C shares were first offered to
the public on 9/1/98.
11
<PAGE> 42
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
MediaOne Group, Inc. $1,865,900
Clear Channel Communications, Inc. 1,727,650
Cisco Systems, Inc. 1,684,547
Microsoft Corp. 1,664,250
Mellon Bank Corp. 1,601,875
CBS Corp. 1,598,200
Marsh & McLennan Cos., Inc. 1,577,813
State Street Corp. 1,565,156
Home Depot, Inc. (The) 1,560,281
Lowe's Cos., Inc. 1,535,625
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
MediaOne Group, Inc. $1,616,926
Clear Channel Communications, Inc. 1,568,181
Marsh & McLennan Cos., Inc. 1,541,473
Mellon Bank Corp. 1,515,490
CBS Corp. 1,433,922
International Business Machines Corp. 1,333,596
State Street Corp. 1,317,525
Microsoft Corp. 1,276,978
Schlumberger Ltd. 1,267,977
Lowe's Cos., Inc. 1,240,194
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Schlumberger Ltd. $968,534
First Data Corp. 543,639
Halliburton Co. 498,216
Guidant Corp. 390,323
General Re Corp. 300,775
Tellabs, Inc. 273,541
Sigma-Aldrich Corp. 240,985
Lilly (Eli) & Co. 232,780
General Electric Co. 232,717
Smith International Inc. 199,816
</TABLE>
12
- -------
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.
<PAGE> 43
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.8%)+
AEROSPACE/DEFENSE (2.1%)
Sundstrand Corp. ............... 23,000 $ 1,193,125
-----------
BANKS (7.9%)
Bank of New York Co., Inc.
(The).......................... 9,600 386,400
Mellon Bank Corp. .............. 23,300 1,601,875
Northern Trust Corp. ........... 11,800 1,030,288
State Street Corp. ............. 22,500 1,565,156
-----------
4,583,719
-----------
BEVERAGES--SOFT DRINKS (1.7%)
Coca-Cola Co. (The)............. 7,000 468,125
PepsiCo, Inc. .................. 12,700 519,906
-----------
988,031
-----------
BROADCAST/MEDIA (10.1%)
CBS Corp. ...................... 48,800 1,598,200
Clear Channel Communications,
Inc. (a)....................... 31,700 1,727,650
Infinity Broadcasting Corp.
Class A (a).................... 25,000 684,375
MediaOne Group, Inc. (a)........ 39,700 1,865,900
-----------
5,876,125
-----------
COMMUNICATIONS--EQUIPMENT (6.2%)
Cisco Systems, Inc. (a)......... 18,150 1,684,547
Lucent Technologies Inc. ....... 12,100 1,331,000
Tellabs, Inc. (a)............... 8,100 555,356
-----------
3,570,903
-----------
COMPUTER SOFTWARE & SERVICES
(10.7%)
Automatic Data Processing,
Inc. .......................... 12,700 1,018,381
BMC Software, Inc. (a).......... 10,200 454,537
Ceridian Corp. (a).............. 13,000 907,562
Computer Sciences Corp. (a)..... 15,000 966,563
Microsoft Corp. (a)............. 12,000 1,664,250
SunGard(R) Data Systems Inc.
(a)............................ 30,800 1,222,375
-----------
6,233,668
-----------
COMPUTER SYSTEMS (9.9%)
Dell Computer Corp. (a)......... 10,600 775,788
EMC Corp. (a)................... 16,800 1,428,000
Hewlett-Packard Co. ............ 10,300 703,619
International Business Machines
Corp. ......................... 8,300 1,533,425
Sun Microsystems, Inc. (a)...... 15,500 1,327,188
-----------
5,768,020
-----------
- -------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
COSMETICS/PERSONAL CARE (1.0%)
Gillette Co. (The).............. 12,000 $ 579,750
-----------
ELECTRICAL EQUIPMENT (2.9%)
General Electric Co. ........... 9,000 918,562
Honeywell Inc. ................. 10,300 775,719
-----------
1,694,281
-----------
ELECTRONICS (3.8%)
Intel Corp. .................... 11,500 1,363,469
Texas Instruments Inc. ......... 10,000 855,625
-----------
2,219,094
-----------
ENTERTAINMENT (3.7%)
Time Warner Inc. ............... 21,000 1,303,312
Viacom Inc. Class B (a)......... 6,000 444,000
Walt Disney Co. (The)........... 13,600 408,000
-----------
2,155,312
-----------
FINANCE (0.9%)
T. Rowe Price Associates,
Inc. .......................... 14,500 496,625
-----------
FOOD (0.6%)
Ralston Purina Co. ............. 11,300 365,837
-----------
FOOD & HEALTH CARE DISTRIBUTORS
(0.6%)
Sysco Corp. .................... 13,200 362,175
-----------
HEALTH CARE (4.1%)
Abbott Laboratories............. 2,000 98,000
Bristol-Myers Squibb Co. ....... 7,600 1,016,975
Johnson & Johnson............... 4,000 335,500
Warner-Lambert Co. ............. 12,200 917,287
-----------
2,367,762
-----------
HEALTH CARE--DRUGS (2.7%)
Lilly (Eli) & Co. .............. 4,000 355,500
Merck & Co., Inc. .............. 4,300 635,056
Pfizer Inc. .................... 4,400 551,925
-----------
1,542,481
-----------
HEALTH CARE--MEDICAL PRODUCTS
(1.7%)
Baxter International Inc. ...... 8,200 527,363
Becton, Dickinson & Co. ........ 10,000 426,875
-----------
954,238
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE> 44
MainStay Blue Chip Growth Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOUSEHOLD PRODUCTS (1.0%)
Procter & Gamble Co. (The)...... 6,200 $ 566,138
-----------
INSURANCE (3.4%)
American International Group,
Inc. .......................... 4,050 391,331
Marsh & McLennan Cos., Inc. .... 27,000 1,577,813
-----------
1,969,144
-----------
INVESTMENT BANK/BROKERAGE (2.1%)
Charles Schwab Corp. (The)...... 12,750 716,391
Merrill Lynch & Co., Inc. ...... 7,200 480,600
-----------
1,196,991
-----------
PUBLISHING (5.2%)
Gannett Co., Inc. .............. 15,000 992,812
McGraw-Hill Cos., Inc. (The).... 3,200 326,000
New York Times Co. (The)........ 34,000 1,179,375
Tribune Co. .................... 7,600 501,600
-----------
2,999,787
-----------
RETAIL (10.8%)
Home Depot, Inc. (The).......... 25,500 1,560,281
Lowe's Cos., Inc. .............. 30,000 1,535,625
Rite Aid Corp. ................. 25,000 1,239,062
Tiffany & Co. .................. 15,500 804,063
Walgreen Co. ................... 1,500 87,844
Wal-Mart Stores, Inc............ 12,500 1,017,969
-----------
6,244,844
-----------
SPECIALIZED SERVICES (3.7%)
Interpublic Group of Cos., Inc.
(The).......................... 16,800 1,339,800
Omnicom Group Inc. ............. 14,000 812,000
-----------
2,151,800
-----------
Total Common Stocks
(Cost $47,080,463)............. 56,079,850
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
SHORT-TERM INVESTMENT (2.3%)
REPURCHASE AGREEMENT (2.3%)
State Street Bank and Trust
Company, 4.80%, due 1/4/99,
with a maturity value of
$1,343,716
(Collateralized by $1,010,000
U.S. Treasury Note, 8.125%,
due 08/15/19 market
value--$1,376,125)............. $1,343,000 $ 1,343,000
-----------
Total Short-Term Investment
(Cost $1,343,000).............. 1,343,000
-----------
Total Investments
(Cost $48,423,463) (b)......... 99.1% 57,422,850(c)
Cash and Other Assets,
Less Liabilities............... 0.9 535,725
----- ---------
Net Assets...................... 100.0% $57,958,575
===== =========
</TABLE>
- -------
(a) Non-income producing security.
(b) The cost for Federal income tax purposes is $48,493,257.
(c) At December 31, 1998, net unrealized appreciation was $8,929,593 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 $9,142,582 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $212,989.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE> 45
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$48,423,463).............................................. $57,422,850
Cash........................................................ 425
Receivables:
Fund shares sold.......................................... 608,791
Dividends and interest.................................... 36,537
Unamortized organization expense............................ 59,713
-----------
Total assets........................................ 58,128,316
-----------
LIABILITIES:
Payables:
MainStay Management....................................... 44,004
NYLIFE Distributors....................................... 32,609
Transfer agent............................................ 14,627
Custodian................................................. 14,064
Fund shares redeemed...................................... 13,514
Trustees.................................................. 383
Accrued expenses............................................ 50,540
-----------
Total liabilities................................... 169,741
-----------
Net assets.................................................. $57,958,575
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 16,635
Class B................................................... 33,169
Class C................................................... 103
Additional paid-in capital.................................. 49,950,666
Accumulated net realized loss on investments................ (1,041,385)
Net unrealized appreciation on investments.................. 8,999,387
-----------
Net assets.................................................. $57,958,575
===========
CLASS A
Net assets applicable to outstanding shares................. $19,360,965
===========
Shares of beneficial interest outstanding................... 1,663,458
===========
Net asset value per share outstanding....................... $ 11.64
Maximum sales charge (5.50% of offering price).............. 0.68
-----------
Maximum offering price per share outstanding................ $ 12.32
===========
CLASS B
Net assets applicable to outstanding shares................. $38,477,780
===========
Shares of beneficial interest outstanding................... 3,316,938
===========
Net asset value and offering price per share outstanding.... $ 11.60
===========
CLASS C
Net assets applicable to outstanding shares................. $ 119,830
===========
Shares of beneficial interest outstanding................... 10,327
===========
Net asset value and offering price per share outstanding.... $ 11.60
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 46
STATEMENT OF OPERATIONS
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 146,952
Interest.................................................. 64,129
-----------
Total income............................................ 211,081
-----------
Expenses:
Management................................................ 189,170
Distribution--Class B..................................... 83,013
Distribution--Class C..................................... 191
Transfer agent............................................ 64,715
Service--Class A.......................................... 19,546
Service--Class B.......................................... 27,682
Service--Class C.......................................... 64
Shareholder communication................................. 40,152
Registration.............................................. 21,393
Professional.............................................. 19,608
Custodian................................................. 14,065
Recordkeeping............................................. 8,769
Organization.............................................. 7,840
Trustees.................................................. 781
Miscellaneous............................................. 28,538
-----------
Total expenses.......................................... 525,527
-----------
Net investment loss......................................... (314,446)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (1,041,385)
Net unrealized appreciation on investments.................. 8,999,387
-----------
Net realized and unrealized gain on investments............. 7,958,002
-----------
Net increase in net assets resulting from operations........ $ 7,643,556
===========
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
(a) Dividends recorded net of foreign withholding taxes of $33.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 47
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (314,446)
Net realized loss on investments.......................... (1,041,385)
Net unrealized appreciation on investments................ 8,999,387
-----------
Net increase in net assets resulting from operations...... 7,643,556
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 17,005,699
Class B................................................. 35,664,242
Class C................................................. 125,295
Cost of shares redeemed:
Class A................................................. (302,462)
Class B................................................. (2,156,973)
Class C................................................. (20,782)
-----------
Increase in net assets derived from capital share
transactions......................................... 50,315,019
-----------
Net increase in net assets............................ 57,958,575
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $57,958,575
===========
</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.
17
<PAGE> 48
FINANCIAL HIGHLIGHTS selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
---------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.00 $ 10.00 $ 8.60
------- ------- ------
Net investment loss (a)..................................... (0.07) (0.10) (0.06)
Net realized and unrealized gain on investments............. 1.71 1.70 3.06
------- ------- ------
Total from investment operations............................ 1.64 1.60 3.00
------- ------- ------
Net asset value at end of period............................ $ 11.64 $ 11.60 $11.60
======= ======= ======
Total investment return (b)................................. 16.40% 16.00% 34.88%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss..................................... (1.66%)+ (2.41%)+ (2.41%)+
Expenses................................................ 2.34%+ 3.09%+ 3.09%+
Portfolio turnover rate..................................... 21% 21% 21%
Net assets at end of period (in 000's)...................... $19,361 $38,478 $ 120
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ 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.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 49
Notes to Financial Statements
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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
19
<PAGE> 50
MainStay Blue Chip Growth Fund
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.
REPURCHASE AGREEMENTS. The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to determine that the value, including
accrued interest, exceeds the repurchase price. In the event of the seller's
default of the obligation to repurchase, the Fund has the right to liquidate the
collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings.
ORGANIZATIONAL COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $67,553 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $314,446 have been reclassified from
accumulated net investment loss to additional paid-in capital, due to net
investment loss incurred by the Fund in 1998.
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.
20
<PAGE> 51
Notes to Financial Statements (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.
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 Gabelli Asset
Management Company, Inc. (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 December 31, 1998 the Manager
earned $189,170.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the
21
<PAGE> 52
MainStay Blue Chip Growth Fund
Fund's Class B and Class C shares. The Distribution Plan provides that the Class
B shares and Class C 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 or Class C
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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $18,599 for the period ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $9,233 for
the period ended December 31, 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 accrued for the period ended December 31,
1998, amounted to $64,715.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MainStay Management or NYLIFE Distributors, are paid an annual fee of $45,000,
$2,000 for each Board meeting and $1,000 for each Committee meeting attended
plus reimbursement for travel and out-of-pocket expenses. The Trust allocates
this expense in proportion to the net assets of the respective Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $10,476,000 and $1,160,000, respectively. This
represents 54.1% and 3.0% of the net assets at period end for Class A and B,
respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $701 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$8,769 for the period ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, a capital loss
carryforward of $344,621 is available, to the extent provided by regulations, to
offset future realized gains through 2006. In addition, the Fund intends to
elect, to the extent provided by the regulations, to treat $626,970 of
qualifying capital losses that arose during the year as if they arose on January
1, 1999.
22
<PAGE> 53
Notes to Financial Statements (continued)
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $54,680 and $6,557, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998* through
December 31, 1998
-------------------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold............................................... 1,693 3,538 12
Shares redeemed........................................... (30) (221) (2)
----- ----- --
Net increase.............................................. 1,663 3,317 10
===== ===== ==
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
</TABLE>
23
<PAGE> 54
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Blue Chip Growth Fund (one
of the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
24
<PAGE> 55
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
25
<PAGE> 56
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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.
26
<PAGE> 57
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
27
<PAGE> 58
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN19-02/99
[RECYCLE LOGO]
MAINSTAY BLUE CHIP GROWTH FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 59
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification of Holdings--Top 5 7
Quality Breakdown 9
Returns & Lipper Rankings 11
Portfolio of Investments 12
Financial Statements 14
Notes to Financial Statements 20
Report of Independent Accountants 25
The MainStay Funds 26
</TABLE>
<PAGE> 60
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 61
MainStay California Tax Free Fund Highlights
1998 MARKET RECAP
- - Seeking to take advantage of lower interest rates, many municipalities issued
securities, dramatically increasing the supply of new issues in California.
- - Despite lower interest rates, the oversupply, combined with modest demand,
left municipal prices virtually flat throughout the year, which caused
practically all of the California municipal market's total return to come from
coupon payments.
- - While municipal bonds tend to show less appreciation than government bonds
when interest rates decline, municipals greatly underperformed Treasuries in
1998.
- - Despite early concerns over the potential impact of the Asian crisis,
California's technology companies had a strong year, and the State's economy
strengthened enough to merit a minor upgrade from major rating agencies.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay California Tax Free Fund
returned 5.33% for Class A shares and 5.07% for Class B and Class C shares,*
excluding all sales charges.
- - The Fund's shifting duration strategy alternately helped and hurt performance
as the market made minor moves that were largely unpredictable.
- - Diversification across various locations and types of municipal issuers helped
the Fund manage risk, and concentration on stronger credits helped improve the
quality of the Fund's portfolio.
- - Although Funds that could invest in lower-rated municipals tended to have
higher yields, we believe that municipal "junk bonds" did not adequately
compensate investors for the risks they had to assume.
- - All share classes underperformed the average Lipper* California municipal debt
fund, which returned 5.77% for the year ended 12/31/98.
- -------
* See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the performance of Class B
shares from 1/1/98 through 8/31/98.
3
-
<PAGE> 62
$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 0.59%, 5-Year 4.23%, since inception 6.00%
[BAR GRAPH]
<TABLE>
<CAPTION>
MAINSTAY CALIFORNIA TAX FREE LEHMAN BROTHERS MUNICIPAL
YEAR END FUND BOND INDEX* INFLATION(+)
- -------- ---------------------------- ------------------------- ------------
<S> <C> <C> <C>
10/1/91 9550.00 10000.00 10000.00
12/91 9748.00 10335.00 10051.00
12/92 10516.00 11247.00 10349.00
12/93 11852.00 12678.00 10632.00
12/94 11273.00 11975.00 10908.00
12/95 12984.00 14066.00 11192.00
12/96 13430.00 14689.00 11563.00
12/97 14491.00 16038.00 11758.00
12/98 15263.00 17077.00 11947.00
</TABLE>
CLASS B & CLASS C SHARES Class B SEC Returns: 1-Year 0.07%, 5-Year 4.63%,
since inception 6.52%
Class C SEC Returns: 1-Year 4.07%, 5-Year 4.97%,
since inception 6.52%
<TABLE>
<CAPTION>
MAINSTAY CALIFORNIA TAX FREE LEHMAN BROTHERS MUNICIPAL
YEAR END FUND BOND INDEX* INFLATION(+)
- -------- ---------------------------- ------------------------- ------------
<S> <C> <C> <C>
10/1/91 9550.00 10000.00 10000.00
12/91 9748.00 10335.00 10051.00
12/92 10516.00 11247.00 10349.00
12/93 11852.00 12678.00 10632.00
12/94 11273.00 11975.00 10908.00
12/95 12984.00 14066.00 11192.00
12/96 13430.00 14689.00 11563.00
12/97 14491.00 16038.00 11758.00
12/98 15263.00 17077.00 11947.00
</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. Performance data for the two
classes vary after this date based on differences in their load and expense
structures. Returns shown do not reflect the Contingent Deferred Sales Charge
(CDSC), as it would not apply to the period shown. (The $10,000 invested in the
Lehman Brothers Municipal Bond Index begins on 9/30/91.) The Class C graph
assumes an initial investment of $10,000 made on 10/1/91 and includes the
historical performance of Class A shares for periods 10/1/91 through 12/31/94
and Class B shares for periods 1/1/95 through 8/31/98. Performance data varies
after this date based on differences in their load and expense structures.
Returns shown do not reflect the 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. It is not possible to make an investment
directly into an index.
(+) 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> 63
Portfolio Management Discussion and Analysis
When interest rates decline, bond prices rise. While municipal bonds typically
appreciate less than government bonds, in 1998 their underperformance was more
severe than usual. Historically, when a 30-year municipal bond yields 80% of a
Treasury bond it is more than fully valued. Conversely, when it yields 90%, it
is undervalued. But at the end of 1998, the ratio for municipal bonds nationwide
was 98% or severely undervalued, and during early October, when Treasuries were
at their peak, the ratio rose to 103%.
California municipal bonds followed this national trend and at year-end 1998
were exceedingly inexpensive on a relative basis. Nevertheless, the municipal
market seemed unable to generate investor enthusiasm during 1998 as the stock
market soared to new highs and long-term Treasury bonds provided total returns
over 20%.
Seeking to take advantage of lower interest rates, many California
municipalities issued securities, sending the supply of new issues to high
levels. This oversupply, combined with lackluster demand, left prices virtually
flat throughout most of the year. As a result, practically all of the total
return opportunities in the municipal bond market came from coupon payments.
Early in the year, the Asian financial crisis raised questions about the
potential impact on California's economy. While the problems are not yet fully
resolved, several Asian markets regained a measure of stability during 1998,
easing investor concerns. In the third quarter of the year, investors turned
their attention to difficulties in Russia and Brazil and Federal Reserve Board
moves to reduce interest rates. While these events had a dramatic impact on the
stock and taxable bond markets, they had little effect on California municipal
bonds. During the year, California debt received a modest upgrade by Moody's and
Standard & Poor's, which was a positive development for investors.
HOW DID THE MAINSTAY CALIFORNIA TAX FREE FUND PERFORM IN THIS MARKET
ENVIRONMENT?
The MainStay California Tax Free Fund returned 5.33% for Class A shares and
5.07% for Class B and Class C shares(*) for the year ended 12/31/98, excluding
all sales charges. All share classes under-performed the average Lipper(+)
general municipal debt fund, which returned 5.77% for the year.
WHAT WERE THE PRIMARY REASONS THE FUND UNDERPERFORMED ITS PEERS?
The MainStay California Tax Free Fund must limit its long-term investments to
securities that at the time of purchase are in the top four rating categories by
Moody's or S&P, or deemed by the subadvisor to be of comparable quality. This
high-quality profile sets the Fund at a slight disadvantage to other funds that
can invest in lower-quality bonds with higher yields. The effect was magnified
in 1998, when flat municipal prices meant that virtually all of the total return
for
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.
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.
COUPON
- --------------------
The interest rate an issuer promises to pay on a debt security until maturity,
expressed as an annual percentage of the face value.
- -------
* Performance for Class C shares include the historical performance of Class B
shares from 1/1/98 through 8/31/98.
+ See footnote and table on page 11 for more information on Lipper Inc.
5
-
<PAGE> 64
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[BAR GRAPH]
<TABLE>
<CAPTION>
YEAR END TOTAL RETURN %
- -------- --------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.71
12/94 -4.88
12/95 15.18
12/96 3.44
12/97 7.90
12/98 5.33
</TABLE>
See footnote * on page 11 for more information on performance.
CLASS B & CLASS C SHARES
[BAR GRAPH]
<TABLE>
<CAPTION>
YEAR END TOTAL RETURN %
- -------- ------------------
<S> <C>
12/91 2.07
12/92 7.88
12/93 12.71
12/94 -4.88
12/95 14.91
12/96 3.10
12/97 7.63
12/98 5.07
</TABLE>
Class B returns reflect the historical performance of the Class A shares for
periods 12/91 through 12/94.
Class C share returns reflect the historical performance of the Class B shares
for periods 12/91 through 8/98.
See footnote * on page 11 for more information on performance.
municipal bonds came from coupon payments. The Fund's duration strategy also
impacted the Fund's performance. In the first quarter, the Fund's duration was
longer than what we take to be the average in the municipal universe. But we
changed the Fund's duration strategy to neutral just when the market rebounded,
which had a negative impact on the portfolio in the second quarter. Since
midyear, the Fund has generally had a long duration, which was a plus in the
third quarter, but negative in the fourth quarter of 1998.
WHY HAS THE FUND MAINTAINED A LONG DURATION?
The Fund's long duration reflects our belief that municipal bonds are at their
FEDERAL RESERVE BOARD
- --------------------
The seven-member governing board of the Federal Reserve System, which is the
central bank of the United States. The Board sets policies on reserve
requirements, bank regulations, sets the discount rate, tightens or loosens the
availability of credit in the economy, and regulates the purchase of securities
on margin.
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.
6
<PAGE> 65
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/98
<TABLE>
<CAPTION>
Education/ County/City/Special District - Utility - Other Hospital/Nursing Home/
Dormitory General Obligation Water Revenue Health Care All Other
<S> <C> <C> <C> <C> <C>
20.2% 17.5% 11% 9.3% 8.3% 33.7%
</TABLE>
Actual percentages will vary over time.
most attractive level compared to Treasuries since 1986. At year end, the Fund
was positioned to benefit from lower interest rates, with about 25% of the
portfolio in zero-coupon bonds and noncallable bonds. These securities tend to
perform especially well in declining rate environments.
WAS 1998 A PARTICULARLY DIFFICULT MARKET FOR CALIFORNIA MUNICIPAL INVESTORS?
In many ways it was. Given the historical relationship of municipals and
Treasuries, we would have expected more interest in municipal bonds. But given
the oversupply in the market, which flattened price performance severely, the
Fund faced a challenge to find ways to remain competitive.
HOW DID THE FUND ADDRESS THAT CHALLENGE?
One way was by taking a more aggressive stance on the coupon structure of the
Fund's holdings. We pared back on coupons such as 5.00% and 5.125% and added
zero-coupon bonds, noncallable bonds, and 4.50% to 4.75% coupons. These coupons
generally do much better in a declining interest-rate environment, either
because they have a longer duration or are likely to reach their par value later
than bonds with slightly higher coupons. When a bond reaches its par value, it
may be priced as if it had reached its call date, which lowers the bond's
duration and typically has a negative impact on total return. We believe
shifting the Fund's coupon structure helped position the portfolio positively in
the general market environment.
WHAT IS THE OVERALL CREDIT QUALITY OF THE SECURITIES IN THE FUND'S INVESTMENT
PORTFOLIO?
As of 12/31/98, it was about AA,(++) which is relatively high quality. About 55%
of the credits in the Fund were rated AAA(sec.) and 15% of the Fund's assets
were invested in lower-rated BBB* credits, with the rest of the portfolio
invested in between.
ZERO-COUPON SECURITY
- --------------------
A security that makes no periodic interest payments but instead is sold at a
deep discount from its face value. The buyer receives the rate of return by
gradual appreciation of the security, which is redeemed at face value upon
maturity.
NONCALLABLE SECURITY
- --------------------
A security that cannot be redeemed at the option of the issuer prior to
maturity.
- -------
++ Debt rated AA differs from the highest-rated issues only in small degree. The
obligor's capacity to meet its financial commitment on the obligation is very
strong.
sec. 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.
* Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
7
-
<PAGE> 66
In recent years, there has been a continuing increase in insured credits, or
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.
The increase in insured credits has made it more difficult to find securities
that provide yield advantages in the municipal market.
HOW HAS THE FUND DEALT WITH THIS CHALLENGE?
By diversifying the portfolio across various quality ratings allowed by the
prospectus, seeking bonds we believe provide attractive compensation for their
level of risk. When yield spreads across different ratings are narrow, we may
prefer the potential safety of higher-quality bonds as opposed to gaining a
couple of basis points in yield from a lower-quality issue. Even when a bond is
insured, we look at the quality of the underlying credit to make sure the return
is commensurate with other bonds that may be available.
Several of the Fund's more significant sales in 1998 were designed to improve
the quality of the portfolio by seeking bonds with better underlying credit
quality. For example, the Fund sold Anaheim Finance Authority zero-coupon bonds
due 2018 and 2022. Although the bonds were insured, the underlying credit was
rated Baa3,(#) and the Fund sold the securities to purchase bonds with higher
underlying quality. The Fund also sold Statewide Community, and purchased United
Air Lines 5.70% bonds due 2033, a lower-rated credit that we also eventually
replaced to improve the credit quality of the portfolio. We believe most
investors want to strike an appropriate balance between quality and return, so
we feel these transactions had a beneficial impact on the Fund.
DID THE FUND HOLD BBB-RATED BONDS PRIMARILY FOR THEIR HIGHER YIELDS?
While lower-rated credits generally provide higher yields, which is an advantage
for shareholders, most of the BBB-rated bonds in the Fund were also selected for
their prerefunding potential.
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 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.
ARE PREREFUNDING CANDIDATES GOOD MUNICIPAL INVESTMENTS?
We think they are, and many of the Fund's most significant purchases in 1998
were bought at least partially for their prerefunding potential. We added to the
BASIS POINT
- --------------------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
- -------
(#) Bonds rated Baa are considered as medium- grade obligations (i.e., they are
neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. The modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
8
<PAGE> 67
Fund's Foothill Transportation zero-coupon bond holdings for their long
duration and prerefunding potential. The Fund also purchased State University
College 5.90% bonds due 2021 for their high coupon and their prospects for
prerefunding if rates continue to decline. Both of these issues had a positive
impact on performance.
DID YOU MAKE ANY PURCHASES FOR THE FUND FOR OTHER REASONS?
Of course, we may have a variety of reasons for purchasing bonds for the
portfolio. During 1998, the Fund purchased East Bay Municipal District 4.75%
bonds due 2021, because we liked the liquidity of the bonds and the discount
coupon, and they contributed positively to the Fund's performance. The Fund also
purchased Santa Monica California 5.25% bonds due 2013 because they were not
callable. That helped extend the Fund's call protection and we believe the bonds
will perform well if rates decline, but for the year, their impact on
performance was neutral. The Fund also bought San Francisco B.A.R.T. 4.75% bonds
due 2023, which we felt had a good trading name and an attractive discount
coupon. Unfortunately, the Fund purchased the bonds near the market high, so
they had a negative impact on performance. Another of the Fund's largest
purchases was California Education Facility bonds with an attractive 5.625%
coupon, due in 2023. The Fund bought the bonds to add to the yield of the
portfolio, and they had a positive impact on performance.
WERE THERE OTHER MAJOR SALES YOU MADE FOR THE FUND?
Yes. I mentioned repositioning the Fund's coupon structure. One bond we sold in
line with that objective was Los Angeles California 5.00% bonds due 2021. We
believe the 5.00% coupons may be more vulnerable if rates decline, so we used
the proceeds to purchase bonds that had a better coupon, given the current
environment. In terms of performance, the sale was positive for the portfolio.
QUALITY BREAKDOWN--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
AAA AA A BBB CASH, EQUIVALENTS &
- --- -- - --- OTHER ASSETS, LESS
LIABILITIES
-------------------
<S> <C> <C> <C> <C>
55 18.80 6.30 15.60 4.30
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided
by Standard & Poor's.
See the prospectus for details.
CALL PROTECTION
- --------------------
The length of time during which a security cannot be redeemed by the issuer. To
avoid subjecting a portfolio to the risk of having to reinvest at lower rates,
it may be advantageous to purchase bonds that increase call protection over
time.
9
-
<PAGE> 68
WHICH BONDS WERE THE FUND'S STRONG PERFORMERS IN 1998?
Foothill Transportation zero-coupon bonds of 2027 were the Fund's
best-performing securities for 1998. In addition to benefiting from prerefunding
potential, we were able to purchase the bonds for the Fund near a market low,
which contributed significantly to the gains. San Diego Gas & Electric 5.90%
bonds due 2018 also performed well for the Fund, since noncallable bonds
generally do well when interest rates decline.
WERE ANY OF THE FUND'S BONDS PREREFUNDED DURING THE YEAR?
Yes. The Fund owned Escondido California zero-coupon bonds due 2012, which were
prerefunded and added significantly to the Fund's performance.
WAS THE FUND OVERWEIGHTED OR UNDERWEIGHTED IN ANY SECTORS AT YEAR END?
The Fund seeks diversification across different portions of the state and a wide
variety of municipal sectors. It invests in everything from roads, airports, and
hospitals to water, pollution control, and education bonds. During the fourth
quarter, however, we reduced the Fund's exposure to electric-utility bonds
because we believed that Proposition 9, which was on the California ballot in
November and was designed to limit the ability of some utilities to recover
certain costs, could have been detrimental to the industry. If it passed, we
wanted the Fund to be underweighted in utilities. Since the proposition was
rejected, we may increase the Fund's utility holdings again in the future.
While the Fund also seeks a variety of coupons and maturities, at the end of the
year, the Fund had more zero-coupon, noncallable, and deep-discount bonds than
the average fund, seeking to take advantage of lower interest rates. Because of
the Fund's quality constraints, it was underweighted in lower-rated credits.
During the year, the Fund also underweighted housing credits, which we believe
had a positive impact, since housing bonds tend to perform poorly in a declining
interest-rate environment as prepayment potential increases.
WHAT MAJOR RISKS DO INVESTORS FACE, AND HOW ARE YOU MANAGING THEM?
Since the Fund has a long duration, it would tend to underperform if interest
rates began to rise. We manage this risk by continually monitoring the economy,
inflation, and anticipated action by the Federal Reserve Board. If inflation
were to increase, we would probably reduce the Fund's duration.
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
We have positioned the Fund to seek to take advantage of lower interest rates
and a return to the historical relationship between municipal and Treasury
bonds. We believe if rates continue to decline, the Fund's overweighted
positions in zero-coupon bonds, noncallable issues, and deep-discount bonds
should contribute positively to performance. We believe our concentration on
prerefunding candidates may also help the Fund enjoy gains if municipal rates
drop as much as 50 basis points.
Ravi Akhoury
James Flood
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.
10
- -
<PAGE> 69
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
1 YEAR 5 YEARS LIFE OF FUND THROUGH 12/31/98
<S> <C> <C> <C>
Class A 5.33% 5.19% 6.67%
Class B 5.07% 4.97% 6.52%
Class C 5.07% 4.97% 6.52%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
1 YEAR 5 YEARS LIFE OF FUND THROUGH 12/31/98
<S> <C> <C> <C>
Class A 0.59% 4.23% 6.00%
Class B 0.07% 4.63% 6.52%
Class C 4.07% 4.97% 6.52%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
1 YEAR 5 YEARS LIFE OF FUND THROUGH 12/31/98
<S> <C> <C> <C>
Class A 78 out of 47 out 36 out of
107 funds of 44 funds
62 funds
Class B 95 out of n/a 80 out of
107 funds 81 funds
Class C n/a n/a n/a
Average Lipper
CA municipal
debt fund 5.77% 5.67% 7.17%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $9.98 $0.4579 $0.0097
Class B $9.95 $0.4310 $0.0097
Class C $9.95 $0.1405 $0.0097
</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 load and expense structures. Class
A shares are sold with a maximum initial sales charge of 4.5% and a 12b-1
fee of .25%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year 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 and
Class B shares for periods 1/1/95 up to 8/31/98. Performance data for the
two classes after this date vary based on differences in their load and
expense structures.
(+) Lipper 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
12/31/98. Class B shares were first offered to the public on 1/3/95;
Class C shares on 9/1/98.
11
-
<PAGE> 70
MainStay California Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (95.7%)+
CALIFORNIA (93.8%)
California Educational
Facilities
Authority Revenue
Pooled College & University
Projects, Series A
5.625%, due 7/1/23............ $ 1,100,000 $ 1,144,000
Project B
6.30%, due 4/1/21 (b)......... 500,000 545,000
Stanford University, Series N
5.20%, due 12/1/27............ 1,200,000 1,221,000
California Health Facilities
Financing
Authority, Hospital Sutter A
6.70%, due 1/1/13 (b)......... 1,000,000 1,023,990
California Housing Finance
Agency
Revenue, Home Mortgage
Series C
8.30%, due 8/1/19 (a)......... 20,000 20,306
California Pollution Control
Financing Authority Revenue
San Diego Gas & Electric Co.
Series A
5.90%, due 6/1/14............. 400,000 450,500
California State University
Revenue & Colleges
Housing Systems
5.90%, due 11/1/21............ 1,800,000 1,973,250
California Statewide Community
Development Corp.
7.00%, due 9/1/09............. 240,000 262,500
Capistrano Unified School
District
Community Facility, Special
Tax
8.375%, due 10/1/20 (d)....... 1,250,000 1,379,687
East Bay Municipal Utilities
District Waste System Revenue
4.75%, due 6/1/21............. 1,500,000 1,441,875
Eden Township Hospital District
Revenue
7.40%, due 11/1/19 (b)........ 770,000 812,204
Escondido California Union High
School District
(zero coupon), due 11/1/12.... 1,350,000 712,125
Foothill-Eastern Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/27..... 6,700,000 1,528,806
(zero coupon), due 1/1/29..... 545,000 111,899
Inglewood Redevelopment Agency
Tax Allocation
Series A
5.25%, due 5/1/17............. 500,000 525,000
- -------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal
Amount Value
<S> <C> <C>
CALIFORNIA (CONTINUED)
Laguna Salada Union
School District, Series B
(zero coupon), due 8/1/23..... $ 700,000 $ 200,375
Los Angeles California Harbor
Department Revenue
8.70%, due 9/1/15 (b)......... 540,000 559,715
Los Angeles County
Transportation Commission
Sales Tax Revenue, Series A
7.40%, due 7/1/15............. 400,000 416,312
Modesto California Irrigation
District
Financing Authority Revenue
Domestic Water Project D
4.75%, due 9/1/22............. 750,000 720,000
Oakland California General
Obligation
Measure K
5.90%, due 12/15/22........... 1,000,000 1,106,250
Palo Alto California Unified
School District, Series B
5.375%, due 8/1/18............ 700,000 726,250
Rancho Cucamonga California
Redevelopment Agency
Tax Allocation
6.75%, due 9/1/20............. 2,000,000 2,080,180
San Diego California Industrial
Development Revenue
San Diego Gas and Electric Co.
Series A
5.90%, due 6/1/18............. 1,000,000 1,075,000
San Diego County Water
Authority
Revenue, Series A
4.75%, due 5/1/20............. 1,000,000 968,750
San Francisco California Bay
Area
Rapid Transit District Sales
Tax
Revenue
4.75%, due 7/1/23............. 1,000,000 960,000
San Francisco City & County
Airports Commission
International Airport Revenue
Second Series, Issue 15B
4.50%, due 5/1/28............. 600,000 550,500
San Marino California Unified
School District, Series B
5.00%, due 6/1/23............. 1,000,000 1,013,750
Santa Monica-Malibu Unified
School District
5.25%, due 8/1/13............. 1,250,000 1,348,438
5.25%, due 8/1/17............. 1,000,000 1,058,750
Simi Valley California Unified
School District, Refundable &
Capital Improvement Projects
5.25%, due 8/1/22............. 500,000 525,000
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
- -
<PAGE> 71
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (CONTINUED)
CALIFORNIA (CONTINUED)
South Tahoe California Joint
Powers
Financing Authority Revenue
Project 1A
7.20%, due 10/1/23............ $ 1,000,000 $ 1,140,000
Walnut California Improvement
Agency Tax Allocation
7.90%, due 9/1/09 (b)......... 750,000 769,613
-----------
28,371,025
-----------
PUERTO RICO (1.9%)
Puerto Rico Commonwealth
General Obligation
Public Improvement
4.75%, due 7/1/23............. 600,000 570,750
-----------
Total Long-Term Municipal Bonds
(Cost $28,501,552)............ 28,941,775
-----------
SHORT-TERM INVESTMENTS (2.3%)
California Health Facility
Finance
Authority Revenue
Series B
5.10% due 7/1/12 (b)(c)...... 200,000 200,000
Series C
5.10% due 7/1/22 (b)(c)....... 200,000 200,000
Chula Vista California
Industrial
Development Revenue
San Diego Gas, Series A
5.00%, due 7/1/21 (c)......... 100,000 100,000
Irvine Ranch California Water
District
Certificates Participation
Improvement Project
5.00%, due 8/1/16 (c)......... 200,000 200,000
-----------
Total Short-Term Investments
(Cost $700,000)............... 700,000
-----------
Total Investments
(Cost $29,201,552) (e)........ 98.0% 29,641,775(f)
Cash and Other Assets,
Less Liabilities.............. 2.0 603,246
---- ---------
Net Assets..................... 100.0% $30,245,021
---- ---------
---- ---------
</TABLE>
- -------
(a) Interest on these securities is subject to alternative minimum tax.
(b) Segregated as collateral for futures contracts.
(c) Variable rate securities that may be tendered back to the issuer at any
time prior to maturity at par.
(d) Prerefunding security-issuer will issue new bonds and use the proceeds to
purchase Treasury securities that mature at or near the same date as the
original issue's call date.
(e) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(f) At December 31, 1998, net unrealized appreciation was $440,223, 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 $630,980 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $190,757.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
<PAGE> 72
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$29,201,552).............................................. $29,641,775
Cash........................................................ 297,922
Receivables:
Investment securities sold................................ 490,692
Interest.................................................. 449,270
Fund shares sold.......................................... 25,463
-----------
Total assets........................................ 30,905,122
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 571,814
Shareholder communication................................. 21,739
MainStay Management....................................... 20,532
Custodian................................................. 8,421
NYLIFE Distributors....................................... 8,616
Transfer agent............................................ 5,799
Fund shares redeemed...................................... 890
Trustees.................................................. 240
Accrued expenses.......................................... 21,798
Variation margin on futures contracts..................... 252
-----------
Total liabilities................................... 660,101
-----------
Net assets.................................................. $30,245,021
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 19,244
Class B................................................... 11,092
Additional paid-in capital.................................. 29,714,880
Accumulated undistributed net realized gain on
investments............................................... 59,582
Net unrealized appreciation on investments.................. 440,223
-----------
Net assets.................................................. $30,245,021
===========
CLASS A
Net assets applicable to outstanding shares................. $19,204,304
===========
Shares of beneficial interest outstanding................... 1,924,360
===========
Net asset value per share outstanding....................... $ 9.98
Maximum sales charge (4.50% of offering price).............. 0.47
-----------
Maximum offering price per share outstanding................ $ 10.45
===========
CLASS B
Net assets applicable to outstanding shares................. $11,040,466
===========
Shares of beneficial interest outstanding................... 1,109,242
===========
Net asset value and offering price per share outstanding.... $ 9.95
===========
CLASS C
Net assets applicable to outstanding shares................. $ 251
===========
Shares of beneficial interest outstanding................... 25
===========
Net asset value and offering price per share outstanding.... $ 9.95
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 73
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.................................................. $1,566,543
----------
Expenses:
Management................................................ 138,287
Shareholder communication................................. 55,033
Service--Class A.......................................... 46,921
Service--Class B.......................................... 22,223
Transfer agent............................................ 43,552
Professional.............................................. 24,584
Distribution--Class B..................................... 22,223
Custodian................................................. 18,663
Recordkeeping............................................. 8,531
Registration.............................................. 7,505
Trustees.................................................. 841
Miscellaneous............................................. 22,382
----------
Total expenses before reimbursement..................... 410,745
Expense reimbursement from Manager.......................... (45,570)
----------
Net expenses............................................ 365,175
----------
Net investment income....................................... 1,201,368
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions..................................... 159,601
Future transactions....................................... 35,366
----------
Net realized gain on investments............................ 194,967
Net change in unrealized appreciation on investments........ 33,522
----------
Net realized and unrealized gain on investments............. 228,489
----------
Net increase in net assets resulting from operations........ $1,429,857
==========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 74
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 1,201,368 $ 1,128,924
Net realized gain on investments.......................... 194,967 407,293
Net change in unrealized appreciation on investments...... 33,522 237,577
----------- -----------
Net increase in net assets resulting from operations...... 1,429,857 1,773,794
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (829,959) (847,841)
Class B................................................. (371,405) (285,056)
Class C................................................. (4) --
From net realized gain on investments:
Class A................................................. (51,770) (216,082)
Class B................................................. (28,842) (85,569)
----------- -----------
Total dividends and distributions to shareholders..... (1,281,980) (1,434,548)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 3,054,557 2,581,223
Class B................................................. 4,619,693 2,238,857
Class C................................................. 250 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 461,490 648,114
Class B................................................. 228,712 235,604
Class C................................................. 3 --
----------- -----------
8,364,705 5,703,798
Cost of shares redeemed:
Class A................................................. (2,614,618) (3,369,454)
Class B................................................. (1,139,633) (374,371)
----------- -----------
Increase in net assets derived from capital share
transactions......................................... 4,610,454 1,959,973
----------- -----------
Net increase in net assets............................ 4,758,331 2,299,219
NET ASSETS:
Beginning of year........................................... 25,486,690 23,187,471
----------- -----------
End of year................................................. $30,245,021 $25,486,690
=========== ===========
Accumulated distribution in excess of net investment income
at end of year............................................ $ -- $ (784)
=========== ===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
<PAGE> 75
This page intentionally left blank
17
-
<PAGE> 76
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------------
September 1
Year ended December 31, through Year ended
---------------------------------------------- December 31, August 31,
1998 1997 1996 1995 1994* 1994
------- ------- ------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period...... $ 9.93 $ 9.78 $ 9.95 $ 9.10 $ 9.57 $ 10.38
------- ------- ------- ------- ------- -------
Net investment income....................... 0.44 0.48 0.49 0.50 0.17 0.53
Net realized and unrealized gain (loss) on
investments............................... 0.08 0.27 (0.16) 0.85 (0.47) (0.51)
------- ------- ------- ------- ------- -------
Total from investment operations............ 0.52 0.75 0.33 1.35 (0.30) 0.02
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income................ (0.46) (0.48) (0.50) (0.50) (0.17) (0.52)
From net realized gain on investments..... (0.01) (0.12) -- -- -- (0.31)
------- ------- ------- ------- ------- -------
Total dividends and distributions........... (0.47) (0.60) (0.50) (0.50) (0.17) (0.83)
------- ------- ------- ------- ------- -------
Net asset value at end of period............ $ 9.98 $ 9.93 $ 9.78 $ 9.95 $ 9.10 $ 9.57
======= ======= ======= ======= ======= =======
Total investment return (a)................. 5.33% 7.90% 3.44% 15.18% (3.11%) (0.12%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income................... 4.42% 4.88% 5.0% 5.3% 5.5%+ 5.4%
Net expenses............................ 1.24% 1.24% 1.24% 1.24% 0.99%+ 0.99%
Expenses (before reimbursement)......... 1.40% 1.26% 1.3% 1.4% 1.2%+ 1.1%
Portfolio turnover rate..................... 104% 108% 79% 107% 24% 96%
Net assets at end of period (in 000's)...... $19,204 $18,199 $18,098 $19,825 $16,667 $17,356
</TABLE>
- -------
<TABLE>
<C> <S>
* The Fund changed its fiscal year end from August 31 to
December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one thousand.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 77
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------- -------------
September 1**
Year ended December 31, through
------------------------------------------- December 31,
1998 1997 1996 1995 1998
------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C>
$ 9.90 $ 9.75 $ 9.91 $ 9.10 $ 9.95
------- ------ ------ ------ ------
0.42 0.45 0.45 0.52 0.13
0.07 0.27 (0.16) 0.81 0.02
------- ------ ------ ------ ------
0.49 0.72 0.29 1.33 0.15
------- ------ ------ ------ ------
(0.43) (0.45) (0.45) (0.52) (0.14)
(0.01) (0.12) -- -- (0.01)
------- ------ ------ ------ ------
(0.44) (0.57) (0.45) (0.52) (0.15)
------- ------ ------ ------ ------
$ 9.95 $ 9.90 $ 9.75 $ 9.91 $ 9.95
======= ====== ====== ====== ======
5.07% 7.63% 3.10% 14.91% 1.51%
4.17% 4.63% 4.7% 5.1% 4.17%+
1.49% 1.49% 1.49% 1.49% 1.49%+
1.65% 1.51% 1.6% 1.7% 1.65%+
104% 108% 79% 107% 104%
$11,040 $7,288 $5,089 $1,963 --(b)
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
<PAGE> 78
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 three classes of shares. Class A shares, whose
distribution commenced on October 1, 1991, are offered at net asset value per
share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on January 3, 1995
and September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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 for 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
20
- -
<PAGE> 79
Notes to Financial Statements
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 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.
Permanent book-tax differences of $51,600 and $784 have been reclassified from
accumulated undistributed net realized gain on investments and additional
paid-in capital, respectively, to accumulated distribution in excess of net
investment income due to recharacterization of distributions.
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
21
-
<PAGE> 80
MainStay California Tax Free Fund
distributions are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles.
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities, or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when direct allocations of expenses can be made. The investment
income and expenses (other than expenses incurred under the Distribution Plan)
and realized and 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 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 Fund's
average daily net assets. 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%, 1.49% and 1.49% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the year ended December
31, 1998 the Manager earned $138,287 and reimbursed the Fund $45,570.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Advisor a monthly fee of 0.25% of
the average daily net assets of the Fund. To
22
- -
<PAGE> 81
Notes to Financial Statements (continued)
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.25% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B shares and Class C
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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $5,765 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges for redemptions of Class B shares of $14,309
for the year ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $43,552.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, NYLIFE Distributors beneficially held shares of
Class A of the Fund with a net asset value of $2,705,800, which represents 14.1%
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 $726 for the year ended December
31, 1998.
23
-
<PAGE> 82
MainStay California Tax Free Fund
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$8,531 for the year ended December 31, 1998.
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $31,304 and $28,160, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
---------------------------------- ---------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold................................... 308 465 -- 262 229
Shares issued in reinvestment of dividends and
distributions............................... 46 23 -- 66 24
---- ---- -- ---- ---
354 488 -- 328 253
Shares redeemed............................... (263) (115) -- (345) (39)
---- ---- -- ---- ---
Net increase (decrease)....................... 91 373 --(a) (17) 214
==== ==== == ==== ===
</TABLE>
- -------
<TABLE>
<C> <S>
* First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
24
- -
<PAGE> 83
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay California Tax Free Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
25
-
<PAGE> 84
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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> 85
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
4 "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
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> 86
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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> 87
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
*As of December 31, 1998.
[MAINSTAY.LOGO]
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.
(C)1999. All rights reserved. MSAN04-02/99
[RECYCLE.LOGO]
MAINSTAY CALIFORNIA TAX FREE FUND
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE> 88
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Convertible Fund Highlights 3
$10,000 Invested in the MainStay
Convertible Fund versus First Boston
Convertible Securities Index and
Inflation--Class A, Class B, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 10
Returns & Lipper Rankings 12
Top 10 Holdings 13
10 Largest Purchases 13
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 29
Notes to Financial Statements 34
Report of Independent Accountants 41
The MainStay Funds 42
</TABLE>
<PAGE> 89
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 90
MainStay Convertible Fund Highlights
1998 MARKET RECAP
- - The U.S. stock market was highly volatile throughout 1998, but provided
double-digit returns for the fourth year in a row, with advances in
large-capitalization issues masking corrections among small-cap and mid-cap
stocks.
- - In general, companies benefited from low inflation throughout 1998 and
declining interest rates in the second half of the year.
- - Financial problems in Asia, Russia, and Latin America caused severe setbacks
in the convertible market from July through October, particularly for
lower-rated issues as a general flight to high-quality bonds caused prices to
drop in the high-yield market.
- - The convertible market saw tight yield spreads, and throughout the year, many
new issues carried low coupons and high premiums.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Convertible Fund returned 1.23%
for Class A shares and 0.53% for Class B and C shares,* excluding all sales
charges.
- - The Fund continued its risk-averse approach to convertible investing, which
provided lower volatility than the market as a whole, but detracted from
performance during the market recovery in the fourth quarter of 1998.
- - In the July to October period, the Fund sought opportunities among securities
whose prices were severely reduced.
- - All three share classes underperformed the average Lipper* convertible fund,
which returned 4.40% for the year.
- - Since June of 1997, the Fund has been closed to new investors.
- -------
* See footnote and table on page 12 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 91
$10,000 Invested in the MainStay
Convertible Fund versus First Boston
Convertible Securities Index and Inflation
CLASS A SHARES SEC Returns: 1-Year -4.34%, 5-Year 7.83%, 10-Year 11.74%
[LINE GRAPH]
<TABLE>
<CAPTION>
FIRST BOSTON CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX* INFLATION (+)
------------------------- ------------------------ ------------
<S> <C> <C> <C>
12/88 9450 10000 10000
12/89 10087 11376 10464
12/90 9412 10594 11118
12/91 13973 13681 11449
12/92 15805 16087 11788
12/93 19672 19073 12111
12/94 19408 18173 12426
12/95 24011 22387 12749
12/96 26923 25053 13171
12/97 29983 29224 13395
12/98 30352 32632 13611
</TABLE>
CLASS B & CLASS C SHARES
Class B Shares SEC Returns: 1-Year -4.47%, 5-Year 8.22%, 10-Year 12.09%
Class C Shares SEC Returns: 1-Year -0.47%, 5-Year 8.51%, 10-Year 12.09%
[LINE GRAPH]
<TABLE>
<CAPTION>
FIRST BOSTON CONVERTIBLE
MAINSTAY CONVERTIBLE FUND SECURITIES INDEX* INFLATION (+)
------------------------- ------------------------ ------------
<S> <C> <C> <C>
12/88 10000 10000 10000
12/89 10674 11376 10464
12/90 9959 10594 11118
12/91 14787 13681 11449
12/92 16724 16087 11788
12/93 20817 19073 12111
12/94 20538 18173 12426
12/95 25266 22387 12749
12/96 28144 25053 13171
12/97 31148 29224 13395
12/98 31312 32632 13611
</TABLE>
- -------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 12/31/88 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 12/31/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 12/31/88.
Performance data for the two classes vary after this date based on
differences in their load and expense structures. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. The Class C graph assumes an initial investment of
$10,000 made on 12/31/88 and includes the historical performance of Class B
shares for periods 12/31/88 through 8/31/98. Performance data for the two
classes vary after this date based on differences in their load. Returns
shown do not reflect the 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 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. It is not possible to make an investment directly into an
index.
+ 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> 92
Portfolio Management Discussion and Analysis
As years go, 1998 was one of the most volatile in recent memory. Despite the
market's ups and downs, however, the S&P 500(*) Index closed the year with a
28.58% gain, making 1998 the fourth year in a row domestic stocks in general
have returned more than 20.00%. Advances in large-cap growth stocks, however,
tended to mask corrections among various sectors of the small- and mid-cap
markets.
In the third quarter of 1998, financial problems in Asia, Russia, and Latin
America, declining commodity prices, and problems at a leading hedge fund,
caused a general flight to quality. As many investors rushed to purchase the
largest names and most liquid stocks and bonds, the convertible and high-yield
bond markets experienced severe setbacks, with liquidity all but evaporating for
many lower-rated issuers. Beginning in late September, the Federal Reserve Board
began to ease interest rates in a series of moves that ultimately had a positive
effect on both the stock and bond markets. There was a rapid stock market
recovery in the fourth quarter, which left many defensively positioned investors
at a relative disadvantage. For the year, convertible securities provided only
modest returns--well below those provided by large-capitalization stocks and
long-term Treasury bonds.
HOW DID THE MAINSTAY CONVERTIBLE FUND PERFORM IN THIS MARKET ENVIRONMENT? The
MainStay Convertible Fund returned 1.23% for Class A shares and 0.53% for Class
B and Class C shares(+) for the year ended 12/31/98, excluding all sales
charges. All share classes underperformed the average Lipper convertible fund,
which returned 4.40% for the year.
WHY DID THE FUND UNDERPERFORM ITS PEERS?
A number of factors contributed to the Fund's underperformance, but the most
important was the decision to have the Fund remain defensively positioned in a
highly volatile market. Although the Fund seeks to participate in the upside
potential of the securities it selects, it also typically seeks a measure of
downside protection. When we believe that securities are overpriced or likely to
have the full downside potential of equities (i.e. trade at over 150% of par
value), we tend to avoid them. While that strategy placed the Fund in the top
quartile for much of the year, it resulted in underperformance when the stock
market rallied in early July and at the end of the year.
In 1998, the markets seemed to favor securities that didn't fit our style of
managing risk and reward. We saw a number of new issues that carried low coupons
and high premiums, with little room to provide protection in the event of a
market decline. We also saw preferred stock issues that we believed would behave
less like convertibles and more like common stock with a slightly higher
dividend. We used these securities sparingly, since they carried most of the
downside risk of the underlying stock with only slightly better protection.
During the year, we also saw a tremendous interest in Internet stocks that
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
HEDGE FUND
- --------------------
A private investment partnership or off-shore investment corporation that may
take both long and short positions, use leverage and derivative securities, and
invest across many markets. Hedge funds may use high-risk or speculative
investment strategies and move large amounts of money in and out of the markets
quickly.
- -------
* "S&P 500(R)" is a trademark 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. It is not possible to make an investment
directly into an index.
(+) Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
5
<PAGE> 93
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.
FEDERAL RESERVE BOARD
- --------------------
The seven-member governing board of the Federal Reserve System, which is the
central bank of the United States. The Board sets policies on reserve
requirements, establishes bank regulations, sets the discount rate, tightens or
loosens the availability of credit in the economy, and regulates the purchase of
securities on margin.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[BAR CHART]
<TABLE>
<CAPTION>
Year end Total Return %
- ---------- --------------
<S> <C>
12/86 1.03
12/87 -8.58
12/88 9.78
12/89 6.74
12/90 -6.7
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
12/98 1.23
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/86 through 12/94.
See footnote * on page 12 for more information on performance.
CLASS B & CLASS C SHARES
[BAR CHART]
<TABLE>
<CAPTION>
Year 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
12/98 0.53
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 12/86 through 8/98.
See footnote * on page 12 for more information on performance.
traded at levels we felt were unrealistic. Although these issues continued to
advance through the end of the year, their downside risks far surpassed our
comfort level, so the Fund failed to participate in many Internet issues even
though they surpassed the market's expectations. In short, our willingness to
sacrifice upside potential to protect investors on the downside was the primary
reason the Fund underperformed its peers in the volatile markets of 1998.
WHAT WERE SOME OF THE POSITIVE FACTORS THAT INFLUENCED THE FUND'S PERFORMANCE?
Generally speaking, the Fund maintained a portfolio of higher-quality
securities, which was also part of our risk management strategy and worked well
for investors in difficult periods. The average
6
<PAGE> 94
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Semiconductors 9.6%
Computer and Office Equipment 9.1%
Health Care 6.2%
Auto Parts 6.0%
Real Estate 5.5%
All Other 63.6%
</TABLE>
Actual percentages will vary over time. This chart does not include short
positions in common stock.
quality of the Fund's investments at year end was BB+,(++) which we believe was
higher than the average convertible fund.
DID YOU MAINTAIN THE CREDIT QUALITY OF THE FUND'S INVESTMENTS THROUGHOUT THE
YEAR?
During October, liquidity problems in the high-yield market presented purchasing
opportunities among lower-rated securities. With high-yield bond prices
generally dropping precipitously, the Fund was able to purchase some lower-rated
bonds at what we felt were bargain prices. That lowered the overall quality of
the portfolio investments, but enhanced the Fund's return potential in ways that
met our investment criteria. In general, the purchases we made for the Fund
during this period had a positive impact on the portfolio's performance as the
markets calmed in the fourth quarter.
For example, the Fund purchased convertible securities of Amkor, a semiconductor
packaging company, when they were trading in the high 40s. By the end of the
year, they were trading in the low 90s. The Fund also purchased convertible
securities of PhyCor, a company that manages physicians and their practices.
Unfortunately, the clinics PhyCor organized performed below expectations and the
performance of the convertibles was weak after we purchased them. Nevertheless,
we believe the company has good potential and may show stronger performance in
1999.
WHAT OTHER SIGNIFICANT ACTIONS DID YOU TAKE DURING THE REPORTING PERIOD?
Perhaps the most important decision was to stick to our disciplines and not take
on risks that we felt were inappropriate for the Fund. The Fund continued to
hold or add to issues that we believed had strong upside potential and
sufficient downside protection, like Unisys, which was the Fund's best
performing holding in 1998. At the beginning of the year, we held the company's
8.25% convertibles. As the price of the stock rose, the securities were
converted into common stock. To reduce downside risk for the Fund, we sold the
stock at a profit and purchased Unisys preferred, which offered attractive
current yield and greater downside protection.
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.
- -------
(++) Debt rated BB or less is more 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
obligations. Ratings may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
7
<PAGE> 95
BULL MARKET/BEAR MARKET
- --------------------
A bull market occurs when security prices are rising, a bear market occurs when
security prices decline.
WERE THERE OTHER SIGNIFICANT PURCHASES IN THE FUND'S PORTFOLIO?
In the first quarter, the Fund purchased convertible securities of Network
Associates, which provides computer network consultation, installation, and
support, including software to ensure the integrity of networks and personal
computers. The company performed well in a business environment where security
is increasingly important and more people are using the Internet. Given the
company's success, we sold the Fund's position in the third quarter at a
substantial profit, which had a positive impact on performance.
In the second quarter of 1998, we purchased Time Warner convertible bonds. The
company was benefiting from improved operating conditions in the cable industry
and from developments in telephony and high-speed data transmission. With
improving fundamentals and substantial free cash flow, we felt the company had
the liquidity, upside potential, and downside protection that are hallmarks of
the Fund's investment strategy. The purchase had a strong positive impact on the
Fund's performance and we sold both the convertibles and preferred stock when
they reached the Fund's price targets.
Another security we purchased in the first quarter of the year was a convertible
bond issue of Newell Corp. In the wake of the market downturn that resulted in
part from the Asian crisis, we felt the securities were attractively priced and
represented good value. The company acquires major brands--from ballpoint pens
to Rolodexes and household products--and attempts to streamline their
manufacturing and distribution process. This "integration" process has been
highly successful and has helped the company's securities provide solid
performance for the Fund.
WHAT SECURITIES WERE SIGNIFICANT SALES FOR THE FUND'S PORTFOLIO?
One convertible security we purchased for the Fund during the year was a bond
issued by Loews that was exchangeable into the common stock of Diamond Offshore,
an oil services company with exposure to deep-water drilling. Although the Asian
crisis and low oil prices generally had a negative impact on oil services stocks
in 1998, the bonds showed strong performance for a variety of reasons.
First, Loews is an investment-grade issuer, which helped provide the downside
protection we look for in convertibles. Second, we purchased the bonds when
Diamond Offshore was down in price, which also lowered the price of the bonds
and gave the Fund more upside potential. Third, since oil companies have largely
tapped shallow reserves, whenever oil showed signs of recovery, deep-water names
tended to lead the rally. During October, we were able to take advantage of a
rise in the common stock price of Diamond Offshore and sell the bonds at a
substantial profit, which had a positive impact on the Fund's performance.
WERE THERE OTHER SIGNIFICANT SALES DURING THE YEAR?
The Fund sold a number of securities in what we refer to as the "stealth bear
market" in 1998. While the S&P 500 was climbing, several smaller-capitalization
stocks were experiencing corrections, and our careful research helped the Fund
get out of issues that faced potential problems before they had a major impact
on the portfolio.
8
<PAGE> 96
One example would be the Fund's convertible bond holdings of Premier Technology,
a company that was making strategic acquisitions in the communications industry.
Although they had rapid earnings growth, our analysis showed that their cash
flow was lagging their growth rate. Sensing potential difficulties, we sold the
Fund's convertibles in the second quarter of 1998. Shortly thereafter, the
company missed a quarterly earnings estimate and their stock and bond prices
plummeted.
BEA Software is a company that produces "middleware," or software used to
integrate the complex systems, software platforms, and applications used by
large enterprises. When the securities reached the Fund's valuation target early
in the third quarter of 1998, the Fund sold them. The sale not only provided a
profit for the Fund, but was also well timed, since shortly after the Fund sold,
the company had to lower its 1999 earnings estimates, and the stock dropped more
than 65% from its high.
Our research also paid off with Family Golf, a company that was acquiring
driving ranges across the nation. Although Family Golf was growing rapidly and
enjoyed economies of scale that "mom and pop" operations couldn't provide, we
believed that to continue their growth trend, the company would need to raise
additional capital in the market, which we considered unlikely. As a result, we
sold the Fund's Family Golf bonds at a profit, which not only contributed
positively to performance, but helped the Fund avoid a subsequent decline.
WHAT WERE THE FUND'S BEST-PERFORMING SECURITIES IN 1998?
We've already discussed most of them. In order of their contribution to the
portfolio's performance, the top performers were Unisys, Time Warner, Newell
Corp., Network Associates, and Loews/Diamond Offshore. The Fund also made a
highly profitable investment in Bay Networks, a networking company that paid a
substantial premium when it was acquired by Northern Telecom.
WHICH OF THE FUND'S SECURITIES WERE WEAK PERFORMERS DURING THE YEAR?
Servico is a hotel owner and operator that suffered from heavy leverage and the
poor performance of the hotel sector as a whole. Although Servico convertibles
showed weak performance, they continue to provide a 15% coupon, and we have
confidence in the company's asset value, so we continue to hold the securities
in the Fund's portfolio.
Cendant was perhaps the most publicized problem in 1998. The company was formed
in 1997 from the merger of HFS and CUC International. When accounting
irregularities were uncovered at CUC International, however, Cendant's
convertible preferred dropped precipitously, and the surprise announcement
resulted in a loss for the Fund.
The health care industry has wide representation in the convertible market and
has been hurt by a number of factors, including escalating costs and changes in
government policy. A good example is Sun Health Care, a nursing home company
that provides contract therapy to
ECONOMIES OF SCALE
- --------------------
Production and purchasing efficiencies enjoyed by larger organizations, by
spreading costs over a larger base or purchasing items at volume discounts.
9
<PAGE> 97
patients at its own and other nursing homes. Formerly, the government reimbursed
the company based on cost. But a new Perspective Payment System will reimburse
nursing homes on a per diem basis, which may create new cost pressures.
Uncertain about how this change would affect Sun Health Care's business,
investor interest in the company declined, and the Fund has sold most of its Sun
Health Care convertibles with a negative impact on performance. Integrated
Health is another contract therapy provider that faced similar difficulties, and
its securities also detracted from the performance of the Fund.
WHAT WERE THE BEST DECISIONS YOU MADE FOR THE FUND IN 1998?
If you look at the Fund's top performers and significant sales, you'll see the
advantages of our bottom-up investment disciplines and ongoing research. We
select securities one at a time, after careful analysis of their individual
merits from a quantitative and fundamental perspective. Convertible research
requires an analysis of both the stock and bond to understand how their shifting
relationship is likely to impact performance. We believe our vigilance helped us
identify strong securities and spot potential weaknesses--both of which
benefited the portfolio in 1998.
Although we lagged the market when it rose at year end, we still believe our
risk-averse approach to investing was beneficial for investors, particularly as
the markets become increasingly volatile. While securities that performed like
equities helped many portfolios in the latter part of the year, we were pleased
to have fewer of those securities in the Fund and thus maintain a lower risk
profile.
DOES THE FUND CURRENTLY HAVE ANY SIGNIFICANTLY OVERWEIGHTED OR UNDERWEIGHTED
POSITIONS?
The Fund is currently overweighted in the Real Estate Investment Trust, or REIT,
sector. The securities the Fund owns have underperformed in a strong market, but
we believe they have attractive risk/reward profiles and will continue to
provide steady returns. The Fund sold some of its oil exploration and oil
services
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Convertible Bonds 45.8%
Convertible Perferred Stocks 32.4%
Common Stocks 11.8%
Purchased Options 4.2%
Preferred Stocks 0.6%
Corporate Bonds 0.8%
Cash Equivalents & Other Assets, Less Liabilities 4.6%
</TABLE>
Actual percentages will vary over time. This chart does not include short
positions in common stock and written call options.
10
<PAGE> 98
holdings in the first half of the year, but remains overweighted in the energy
sector. We believe that eventually the price of oil will rise and the Fund's
energy holdings will provide attractive appreciation potential.
Currently, the Fund is underweighted in media, where rising stock prices have
caused convertible securities to have more of the downside of equities than we
prefer to see. While the Fund may have missed some opportunity in this sector,
we prefer to balance upside potential with a measure of downside protection.
WHAT MAJOR RISKS WILL THE MARKETS FACE GOING FORWARD?
The period from July through October showed exactly the kinds of risks
convertible investors may face. During that period, we generally saw widening
yield spreads, low liquidity, and sinking prices. While that's a devastating
combination for any bond investor, convertible investors may face extra
vulnerability because the fate of the securities they own may be tied to the
performance of stocks that are experiencing greater volatility themselves.
That's why we believe our concentration on risk management has been positive for
the portfolio, even if it meant lagging other funds in rising markets.
WHAT'S YOUR OUTLOOK FOR THE FUTURE?
We believe the low prices the convertible security market saw in October may
have a positive impact on future performance. But we continue to view volatility
as a major concern and believe that careful security selection will be the key
to solid performance in the year ahead. Whatever the markets bring, we will
continue to focus on both risk and reward as the Fund seeks capital appreciation
together with current income.
Denis Laplaige
Neil Feinberg
Thomas Wynn
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
11
<PAGE> 99
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 1.23% 9.06% 12.38% 9.76%
Class B 0.53% 8.51% 12.09% 9.54%
Class C 0.53% 8.51% 12.09% 9.54%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A -4.34% 7.83% 11.74% 9.27%
Class B -4.47% 8.22% 12.09% 9.54%
Class C -0.47% 8.51% 12.09% 9.54%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 33 out of n/a n/a n/a
59 funds
Class B 36 out of 19 out of 8 out of 5 out of
59 funds 25 funds 17 funds 7 funds
Class C n/a n/a n/a n/a
Average Lipper
convertible
securities 4.40% 10.68% 11.66% 8.77%
fund
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $12.49 $0.5674 $0.6443
Class B $12.49 $0.4612 $0.6443
Class C $12.49 $0.2634 $0.6443
</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 load and
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%. Class C shares, first offered to the public on 9/1/98, are sold with no
initial sales charge, but are subject to a CDSC of 1% if redeemed within
one year of purchase and an annual 12b-1 fee of 1%. Performance figures for
this class include the historical performance of Class B shares for periods
from inception (5/1/86) up to 8/31/98. Performance data for the two classes
after this date vary based on differences in their load.
(+) Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
averages listed above are not class specific. Life of Fund return is from
the period of the Class B shares' initial offering through 12/31/98.
Class A shares were first offered to the public on 1/3/95; Class B shares
on 5/1/86; Class C shares on 9/1/98.
12
<PAGE> 100
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
MascoTech, Inc., 4.50%, due 12/15/03 $27,128,500
Unisys Corp., $3.75, Series A 26,772,375
International Paper Co., 5.25% 25,861,275
World Color Press, Inc. 6.00%, due 10/1/07 25,495,875
Owens Corning Capital L.L.C., 6.50% 17,505,000
Merrill Lynch & Co., Inc. 7.25%, Series SAI 16,680,550
Xilinx, Inc., 5.25% due 11/1/02 14,922,500
El Paso Energy Capital Trust I, 4.75% 14,721,562
Advanced Micro Devices, Inc., 6.00%, due 5/15/05 14,241,000
Amkor Technologies, Inc., 5.75%, due 5/1/03 13,699,063
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
S & P 500 Depository Receipts $168,027,619
Hilton Hotels Corp., 5.00%, due 5/15/06 and Common
Stock 62,303,638
World Color Press, Inc., 6.00%, due 10/1/07 and
Common Stock 57,199,398
Owens Corning Capital L.L.C., 6.50% Preferred
Stock and Owens Corning Common Stock 47,067,072
Time Warner, Inc. Common Stock 44,633,611
MascoTech, Inc., 4.50%, due 12/15/03 and Common
Stock 41,906,771
Suiza Capital Trust II, 5.50% Preferred Stock and
Common Stock 39,315,953
Xilinx Inc., 5.25%, due 11/1/02 and Common Stock 39,242,363
Unisys Corp., $3.75, Series A Preferred Stock and
Common Stock 38,874,504
Integrated Health Services, Inc., 5.75%, due
1/1/01, 6.00% due 1/1/03 and Common Stock 32,351,025
</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> 101
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
S & P 500 Depository Receipts $168,172,548
Hilton Hotels, Corp., 5.00%, due 5/15/06 and Common
Stock 58,835,203
Microsoft Corp. Series A Preferred Stock and Common
Stock 53,769,263
Time Warner, Inc., (zero coupon), due 6/22/13 and
Common Stock 50,411,377
Unisys Corp. Common Stock 43,449,154
Newell Financial Trust I Preferred Stock and Common
Stock 41,725,906
Integrated Health Services, Inc., 5.75%, due 1/1/01
and
Common Stock 39,534,156
Suiza Capital Trust II, 5.50% Preferred Stock and
Common Stock 33,746,122
World Color Press, Inc., 6.00%, due 10/1/07 and Common
Stock 33,733,203
Network Associates, Inc., (zero coupon), due 2/13/18
and Common Stock 31,971,448
</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.
14
<PAGE> 102
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE SECURITIES
(78.2%)+
CONVERTIBLE BONDS (45.8%)
AUTO PARTS (4.6%)
Magna International, Inc.
4.875%, due 2/15/05 (d)...... $ 500,000 $ 513,750
Mark IV Industries, Inc.
4.75%, due 11/1/04........... 1,350,000 1,108,687
4.75%, due 11/1/04 (c)....... 4,150,000 3,408,187
MascoTech, Inc.
4.50%, due 12/15/03 (e)...... 33,700,000 27,128,500
------------
32,159,124
------------
BANKS (0.8%)
Mitsubishi Bank Limited
International Finance
(Bermuda) Trust
3.00%, due 11/30/02.......... 5,950,000 5,801,250
------------
BIOTECHNOLOGY (0.2%)
Aviron
5.75%, due 4/1/05............ 1,200,000 1,171,500
------------
COMPUTERS & OFFICE EQUIPMENT
(4.1%)
Applied Magnetics Corp.
7.00%, due 3/15/06........... 6,575,000 3,024,500
Comverse Technology, Inc.
4.50%, due 7/1/05............ 5,500,000 6,737,500
Cymer, Inc.
3.50%, due 8/6/04............ 6,500,000 4,680,000
3.50%, due 8/6/04 (c)........ 3,500,000 2,520,000
Integrated Process Equipment
Corp.
6.25%, due 9/15/04........... 4,000,000 2,925,000
6.25%, due 9/15/04 (c)....... 5,000,000 3,656,250
Western Digital Corp.
(zero coupon), due 2/18/18... 5,900,000 1,806,875
Xerox Credit Corp.
Series E
2.875%, due 7/1/02........... 2,500,000 3,175,000
------------
28,525,125
------------
DOMESTIC OILS (1.3%)
Texaco Capital, Inc.
3.50%, due 8/5/04 (f)........ 9,550,000 9,347,063
------------
DRUGS (0.7%)
Centocor, Inc.
4.75%, due 2/15/05........... 2,000,000 2,212,500
Roche Holdings, Inc.
Series DTC
(zero coupon), due 4/20/10
(g).......................... 4,600,000 2,938,250
------------
5,150,750
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
ELECTRICAL EQUIPMENT (0.7%)
Antec Corp.
4.50%, due 5/15/03 (c)....... $5,000,000 $ 4,962,500
------------
ENERGY (1.2%)
Pennzoil Co.
4.95%, due 08/15/08.......... 8,911,000 8,677,086
------------
FINANCE (0.0%) (B)
Cityscape Financial Corp.
6.00%, due 5/1/06 (h)(q)..... 500,000 3,750
------------
FOOD, BEVERAGES & TOBACCO
(0.2%)
Chock Full O' Nuts Corp.
7.00%, due 4/1/12............ 1,700,000 1,610,750
------------
HEALTH CARE (4.5%)
Chiron Corp.
1.90%, due 11/17/00 (c)...... 2,000,000 2,012,500
Elan Finance Corp. Ltd.
(zero coupon), due 12/14/18
(c)(g)....................... 20,800,000 11,726,000
PhyCor, Inc.
4.50%, due 2/15/03........... 7,800,000 4,787,250
Tenet Healthcare Corp.
6.00%, due 12/1/05........... 6,500,000 5,687,500
Total Renal Care Holdings,
Inc.
7.00%, due 5/15/09 (c)....... 3,000,000 3,285,000
Veterinary Centers of America,
Inc.
5.25%, due 5/1/06............ 4,894,000 4,037,550
------------
31,535,800
------------
INDUSTRIAL (1.2%)
Thermo Instrument Systems,
Inc.
Series RG
4.00%, due 1/15/05........... 10,750,000 8,626,875
------------
LEISURE (0.1%)
Family Golf Centers, Inc.
5.75%, due 10/15/04.......... 1,050,000 972,563
------------
MEDICAL EQUIPMENT (0.4%)
Thermo Cardiosystems, Inc.
4.75%, due 5/15/04 (c)....... 3,000,000 2,520,000
------------
OIL SERVICES (0.6%)
Loews Corp.
3.125%, due 9/15/07.......... 5,000,000 3,981,250
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 103
MainStay Convertible Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONTINUED)
PAPER & FOREST PRODUCTS (0.4%)
Thermo Fibertek, Inc.
4.50%, due 7/15/04 (c)....... $3,000,000 $ 2,550,000
------------
PERSONAL SERVICES (0.7%)
Equity Corporation
International
4.50%, due 12/31/04.......... 4,200,000 5,055,750
------------
PUBLISHING (5.0%)
Jacor Communications, Inc.
(zero coupon), due 2/9/18
(g).......................... 20,000,000 9,425,000
World Color Press, Inc.
6.00%, due 10/1/07........... 25,950,000 25,495,875
------------
34,920,875
------------
REAL ESTATE (1.0%)
Macerich Co. (The)
Series BREG
7.25%, due 12/15/02.......... 2,340,000 2,246,400
7.25%, due 12/15/02 (c)...... 4,591,000 4,407,360
------------
6,653,760
------------
RESTAURANTS & LODGING (1.3%)
Boston Chicken, Inc.
(zero coupon), due 6/1/15
(g)(q)....................... 18,100,000 181,000
Hilton Hotels Corp.
5.00%, due 5/15/06........... 4,000,000 3,625,000
Marriott International, Inc.
(zero coupon), due 3/25/11
(g).......................... 8,100,000 5,184,000
------------
8,990,000
------------
RETAIL (1.8%)
Michaels Stores, Inc.
6.75%, due 1/15/03 (e)....... 4,260,000 3,690,225
Office Depot, Inc.
(zero coupon), due 11/1/08
(g).......................... 6,250,000 5,312,500
Rite Aid Corp.
5.25%, due 9/15/02........... 2,525,000 3,721,219
------------
12,723,944
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
SEMICONDUCTORS (8.7%)
Advanced Micro Devices, Inc.
6.00%, due 5/15/05........... $14,100,000 $ 14,241,000
Amkor Technologies, Inc.
5.75%, due 5/1/03............ 14,750,000 13,699,063
Cirrus Logic, Inc.
6.00%, due 12/15/03.......... 2,700,000 1,971,000
Cypress Semiconductor, Corp.
6.00%, due 10/1/02........... 3,823,000 3,345,125
Micron Technology, Inc.
7.00%, due 7/1/04............ 6,000,000 6,262,500
S3, Incorporated
5.75%, due 10/1/03........... 8,765,000 6,277,931
Xilinx, Inc.
5.25%, due 11/1/02 (c)....... 11,750,000 14,922,500
------------
60,719,119
------------
SERVICES (1.4%)
CUC International, Inc.
3.00%, due 2/15/02........... 3,650,000 3,485,750
Metamor Worldwide, Inc.
2.94%, due 8/15/04........... 7,600,000 5,947,000
------------
9,432,750
------------
SOFTWARE (2.4%)
Network Associates, Inc.
(zero coupon), due 2/13/18... 5,915,000 3,608,150
Safeguard Scientifics, Inc.
6.00%, due 2/1/06 (c)(e)..... 5,775,000 5,775,000
System Software Associates,
Inc.
7.00%, due 9/15/02........... 4,650,000 3,441,000
Vantive Corp. (The)
4.75%, due 9/1/02............ 2,150,000 1,505,000
Wind River Systems, Inc.
5.00%, due 8/1/02............ 2,000,000 2,322,500
------------
16,651,650
------------
STEEL, ALUMINUM & OTHER
METALS (1.2%)
Coeur d'Alene Mines Corp.
7.25%, due 10/31/05.......... 850,000 497,250
7.25%, due 10/31/05 (c)...... 13,800,000 8,073,000
------------
8,570,250
------------
TECHNOLOGY (0.5%)
Adaptec, Inc.
4.75%, due 2/1/04............ 4,100,000 3,177,500
------------
TELECOMMUNICATION EQUIPMENT
(0.3%)
World Access, Inc.
4.50%, due 10/1/02........... 2,500,000 2,087,500
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 104
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES
(0.4%)
France Telecom ADN
2.00%, due 1/1/04 (c)........ $3,090,000 $ 3,076,095
------------
TELEPHONES UTILITIES (0.1%)
Bell Atlantic Financial
Services, Inc.
4.25%, due 9/15/05 (c)....... 900,000 936,000
------------
Total Convertible Bonds
(Cost $330,062,758).......... 320,590,579
------------
Shares
-----------
PREFERRED STOCKS (32.4%)
AUTO PARTS (0.9%)
Tower Auto Capital Trust
6.75% (c).................... 116,000 5,916,000
------------
BIOTECHNOLOGY (0.3%)
Alkermes, Inc.
6.50%........................ 47,500 2,185,000
------------
BUILDING MATERIALS (2.5%)
Owens Corning Capital L.L.C.
6.50% (c).................... 360,000 17,505,000
------------
CABLE (1.5%)
United International Holdings,
Inc.
4.00%, Series A (i).......... 53,641 10,459,995
------------
CHEMICALS (0.4%)
Merrill Lynch & Co., Inc.
6.25%, Series IGL (j1)....... 38,800 921,500
Monsanto Co.
6.50%........................ 41,400 2,028,600
------------
2,950,100
------------
COMPUTERS & OFFICE EQUIPMENT
(3.8%)
Unisys Corp.
$3.75, Series A (e).......... 455,700 26,772,375
------------
CONSUMER STAPLES (0.4%)
Newell Financial Trust I
5.25%........................ 51,000 2,741,250
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
CONTAINERS (0.5%)
Crown Cork & Seal Co., Inc.
4.50%........................ 127,000 $ 3,714,750
------------
DOMESTIC OIL & GAS (0.3%)
Tesoro Petroleum Corp.
7.25% (k).................... 175,000 2,362,500
------------
ENERGY (0.9%)
Chesapeake Energy Corp.
7.00% (c).................... 30,000 382,500
Unocal Corp.
6.25%........................ 123,000 5,873,250
------------
6,255,750
------------
FOOD (0.7%)
Suiza Capital Trust II
5.50%........................ 108,000 4,657,500
------------
FOOD, BEVERAGES & TOBACCO
(0.7%)
Chiquita Brands International,
Inc.
$2.875, Series A............. 98,500 3,459,813
$3.75, Series B.............. 31,900 1,347,775
------------
4,807,588
------------
HEALTH CARE (1.0%)
Owens & Minor Trust I
5.375%, Series A............. 95,000 4,441,250
Sun Financing I
7.00% (c)(l)................. 240,000 2,580,000
------------
7,021,250
------------
HOME BUILDING (0.1%)
Kaufman & Broad Home, Corp.
8.25%........................ 100,000 900,000
------------
HOUSEHOLD PRODUCTS (0.2%)
AJL PEPS
$1.44 (m).................... 240,900 1,595,963
------------
INSURANCE (2.4%)
Merrill Lynch & Co., Inc.
7.25%, Series SAI (e)(j2).... 223,900 16,680,550
------------
MACHINERY (0.1%)
Ingersoll-Rand Co.
6.75%........................ 26,600 631,750
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 105
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS (CONTINUED)
MINING (0.5%)
Cyprus Amax Minerals Co.
$4.00, Series A.............. 99,500 $ 3,407,875
Freeport McMoRan Copper &
Gold, Inc.
7.00% (n1)................... 18,000 267,750
------------
3,675,625
------------
NATURAL GAS PIPELINES (2.4%)
El Paso Energy Capital Trust I
4.75% (e).................... 307,500 14,721,562
MCN Energy Group, Inc.
8.75%........................ 100,000 1,868,750
------------
16,590,312
------------
PAPER & FOREST PRODUCTS (3.7%)
International Paper Co.
5.25% (e).................... 534,600 25,861,275
------------
REAL ESTATE (3.1%)
Archstone Communities Trust
$1.75, Series A.............. 46,700 1,249,225
Equity Office Properties Trust
5.25%, Series B.............. 95,000 3,645,625
General Growth Properties,
Inc.
7.25% (o).................... 507,000 13,055,250
Lodgian Capital Trust I
7.00% (c)(p)................. 228,000 4,018,500
------------
21,968,600
------------
SOFTWARE (1.6%)
Microsoft Corp.
$2.196, Series A (e)......... 100,300 9,804,325
Tribune Co.
6.25%........................ 60,000 1,477,500
------------
11,281,825
------------
STEEL, ALUMINUM & OTHER
METALS (2.1%)
Bethlehem Steel Corp.
$3.50 (c).................... 240,000 9,000,000
Timet Capital Trust I
6.625%....................... 35,000 835,625
WHX Corp.
$3.75, Series B.............. 123,200 4,573,800
------------
14,409,425
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATION EQUIPMENT
(1.4%)
Loral Space & Communications
Ltd.
6.00%, Series C.............. 80,500 $ 4,246,375
QUALCOMM Financial Trust
5.75%........................ 121,000 5,414,750
------------
9,661,125
------------
TELECOMMUNICATION SERVICES
(0.3%)
Metromedia International Group
7.25%........................ 44,000 1,166,000
Nextlink Communications, Inc.
6.50%, (c)................... 15,000 588,750
------------
1,754,750
------------
TRANSPORTATION (0.6%)
Union Pacific Capital Trust
6.25%, (c)................... 95,000 4,298,750
------------
Total Preferred Stocks
(Cost $239,770,562).......... 226,659,008
------------
Total Convertible Securities
(Cost $569,833,320).......... 547,249,587
------------
Principal
Amount
-----------
CORPORATE BONDS (0.8%)
BANKS (0.6%)
Westfed Holdings, Inc.
15.50%, due 9/15/99 (h)...... $4,500,000 3,960,000
------------
COMPUTERS & OFFICE EQUIPMENT
(0.2%)
Businessland, Inc.
5.50%, due 3/1/07............ 1,936,000 1,239,040
------------
FINANCE (0.0%) (b)
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (h)....... 1,000,000 150,000
------------
HOUSING (0.0%) (b)
UDC Homes, Inc.
Series C
(zero coupon) due 11/1/00
(a)(q)(x).................... 18,799 2
------------
Total Corporate Bonds
(Cost $5,263,471)............ 5,349,042
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 106
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (11.8%)
ADVERTISING (0.2%)
Omnicom Group, Inc. .......... 20,000 $ 1,160,000
------------
AEROSPACE (0.4%)
Coltec Industries, Inc. (a)... 127,300 2,482,350
------------
APPLIANCES & FURNITURE (0.1%)
Armstrong World Industries,
Inc. ........................ 10,000 603,125
------------
AUTO PARTS (0.2%)
Mark IV Industries, Inc. ..... 18,900 245,700
Tower Automotive, Inc. (a).... 44,700 1,114,706
------------
1,360,406
------------
BIOTECHNOLOGY (0.0%) (b)
Alkermes, Inc. (a)............ 11,500 255,156
------------
BUILDING MATERIALS (0.4%)
Masco Corp. .................. 91,500 2,630,625
Owens Corning Capital LLC..... 300 10,631
------------
2,641,256
------------
BUSINESS SERVICES (0.0%) (b)
Iron Mountain, Inc. (a)....... 1,475 53,174
------------
CASINOS (0.0%) (b)
Station Casinos, Inc. (a)..... 900 7,369
------------
CHEMICALS (1.1%)
RPM, Inc. of Ohio (e)......... 485,078 7,761,248
------------
COMPUTERS & OFFICE EQUIPMENT
(0.8%)
Cymer, Inc. (a)............... 46,400 678,600
ISS Group, Inc. (a)........... 34,000 1,870,000
Seagate Technology, Inc.
(a).......................... 50,000 1,512,500
BISYS Group, Inc. (The) (a)... 900 46,462
Trikon Technologies, Inc.
(a).......................... 3,387,828 135,513
Xerox Corp. .................. 8,800 1,038,400
------------
5,281,475
------------
CONTAINERS (0.1%)
Crown Cork & Seal Co.,
Inc. ........................ 33,000 1,016,813
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
DOMESTIC OIL & GAS (1.6%)
Apache Corp. ................. 137,233 $ 3,473,710
Enron Oil & Gas Co. .......... 296,600 5,116,350
Snyder Oil Corp. ............. 50,100 666,956
Tesoro Petroleum Corp. ....... 31,500 381,938
Tuboscope, Inc. .............. 62,300 506,188
USX-Marathon Group. .......... 40,000 1,205,000
------------
11,350,142
------------
DOMESTIC OILS (0.6%)
Oryx Energy Co. .............. 85,000 1,142,187
Santa Fe Energy Resources,
Inc. ........................ 384,400 2,834,950
------------
3,977,137
------------
DRUGS (0.0%) (b)
Centocor, Inc. (a)............ 4,600 207,575
------------
ELECTRIC UTILITIES (0.1%)
EL Paso Electric Co. (a)...... 43,500 380,625
------------
ELECTRICAL EQUIPMENT (0.0%) (b)
Alcatel Alsthom S.A. (CGE) ADR
(r).......................... 7,000 171,063
------------
ENERGY (0.5%)
Burlington Resources, Inc.
(a).......................... 20,000 716,250
Chevron Corp. ................ 7,290 604,630
OGE Energy Corp. ............. 37,500 1,085,156
Union Pacific Resources Group,
Inc. ........................ 79,000 715,938
Unocal Corp. ................. 10,400 303,550
------------
3,425,524
------------
FINANCE (0.3%)
Everest Reinsurance Holdings,
Inc. ........................ 49,300 1,867,238
S&P 500 Depositary Receipt.... 2,311 284,253
------------
2,151,491
------------
FOOD (0.1%)
Flowers Industries, Inc. ..... 15,000 359,062
------------
GAS UTILITIES (0.1%)
Keyspan Energy Corp. ......... 18,112 561,472
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 107
MainStay Convertible Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH CARE (0.5%)
American Home Products
Corp. ....................... 10,000 $ 563,125
Beverly Enterprises, Inc.
(a).......................... 15,000 101,250
Elan Corp., PLC ADR (a)(r).... 2,700 187,819
Integrated Health Services,
Inc. ........................ 96,247 1,359,489
Owens & Minor, Inc. .......... 36,200 570,150
PhyCor, Inc. (a).............. 33,600 228,900
Total Renal Care Holdings,
Inc. (a)..................... 400 11,825
Veterinary Centers Of America,
Inc. (a)..................... 9,800 195,387
------------
3,217,945
------------
HOME BUILDING (0.0%) (b)
Kaufman & Broad Home Corp. ... 10,000 287,500
------------
INSURANCE (0.2%)
SunAmerica, Inc. ............. 15,000 1,216,875
------------
MEDICAL EQUIPMENT (0.5%)
Abgenix, Inc. (a)............. 226,000 3,672,500
------------
MINING (0.1%)
Cyprus Amax Minerals Co. ..... 66,000 660,000
------------
NATURAL GAS PIPELINES (0.3%)
Columbia Energy Group......... 17,800 1,027,950
Coastal Corp. (The)........... 14,000 489,125
MCN Energy Group, Inc. ....... 47,600 907,375
------------
2,424,450
------------
OIL SERVICES (0.1%)
Cooper Cameron Corp. (a)...... 23,000 563,500
Diamond Offshore Drilling,
Inc. ........................ 300 7,106
------------
570,606
------------
PAPER & FOREST PRODUCTS (0.2%)
International Paper Co. ...... 29,000 1,299,562
Repap Enterprises, Inc.
(a)(s)....................... 9,294,809 393,335
------------
1,692,897
------------
POLLUTION & RELATED (0.1%)
Browning-Ferris Industries,
Inc. ........................ 13,000 369,688
------------
PUBLISHING (0.0%) (b)
Jacor Communications, Inc.
(a).......................... 1,000 64,375
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
REAL ESTATE (1.3%)
Highwoods Properties, Inc. ... 101,300 $ 2,608,475
Macerich Co. (The)............ 41,200 1,055,750
Meditrust Corp. .............. 13,000 196,625
Simon Property Group, Inc. ... 119,200 3,397,200
Spieker Properties, Inc. ..... 43,000 1,488,875
------------
8,746,925
------------
RECREATION & ENTERTAINMENT (0.1%)
Alliance Gaming Corp. (a)..... 388,144 800,547
------------
RETAIL (0.0%) (B)
Office Depot, Inc. (a)........ 1,300 48,019
------------
SEMICONDUCTORS (0.4%)
Cypress Semiconductor Corp.
(a).......................... 114,900 955,106
Micron Technology, Inc. ...... 17,000 859,562
Xilinx, Inc. (a).............. 17,200 1,120,150
------------
2,934,818
------------
SERVICES (0.4%)
Equity Corporation
International (a)............ 30,000 796,875
Metamor Worldwide, Inc. (a)... 72,800 1,820,000
------------
2,616,875
------------
SOFTWARE (0.1%)
Network Associates, Inc.
(a).......................... 100 6,625
Safeguard Scientifics, Inc.
(a).......................... 25,000 685,938
------------
692,563
------------
SPECIALIZED SERVICES (0.0%) (b)
Cendant Corp. (a)............. 2,500 47,656
------------
STEEL, ALUMINUM & OTHER METALS
(0.2%)
ASARCO, Inc. ................. 25,000 376,563
Coeur d'Alene Mines, Corp. ... 161,700 747,862
Worthington Industries,
Inc. ........................ 6,800 85,000
------------
1,209,425
------------
TECHNOLOGY (0.1%)
Adaptec, Inc. (a)............. 50,000 878,125
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 108
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATION EQUIPMENT
(0.3%)
Comverse Technology, Inc.
(a).......................... 22,600 $ 1,604,600
Loral Space & Communications
Ltd. (a)..................... 16,900 301,031
Premisys Communications, Inc.
(a).......................... 50,000 459,375
QUALCOMM, Inc. (a)............ 700 36,269
------------
2,401,275
------------
TELECOMMUNICATION SERVICES
(0.1%)
Rogers Communications, Inc.
Class B (a)(s)............... 108,000 959,766
------------
TEXTILE & APPAREL (0.0%) (B)
Burlington Industries, Inc.
(a).......................... 28,200 310,200
------------
TOBACCO (0.1%)
Philip Morris Companies,
Inc. ........................ 14,500 775,750
------------
UTILITIES (0.1%)
Energy East Corp. ............ 11,900 672,350
------------
Total Common Stocks
(Cost $89,483,780)........... 82,477,593
------------
PREFERRED STOCK (0.6%)
COMPUTERS & OFFICE EQUIPMENT
(0.0%) (B)
Trikon Technologies, Inc.
8.125%, Series H (t)......... 193,686 338,950
------------
MINING (0.6%)
Freeport-McMoRan Copper &
Gold, Inc.
Series Silver (e)(n2)(u)..... 330,000 3,877,500
------------
Total Preferred Stock
(Cost $6,295,558)............ 4,216,450
------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
PURCHASED PUT OPTIONS (4.1%)
AUTO PARTS (0.3%)
Magna International, Inc.
Expire January 1999
Strike Price $101.00......... 99 $ 386,100
MascoTech, Inc.
Expire February 1999
Strike Price $20.00.......... 3,729 1,072,087
Tower Automotive, Inc.
Expire February 1999
Strike Price $30.00.......... 1,050 531,615
------------
1,989,802
------------
BIOTECHNOLOGY (0.0%) (b)
Aviron
Expire February 1999
Strike Price $29.00.......... 250 78,125
------------
BUILDING MATERIALS (0.3%)
Owens Corning
Expire February 1999
Strike Price $42.00.......... 2,832 1,858,642
------------
CHEMICALS (0.0%) (b)
IMC Global, Inc.
Expire February 1999
Strike Price $25.00.......... 212 76,850
Monsanto Co.
Expire February 1999
Strike Price $59.00.......... 160 184,000
------------
260,850
------------
COMPUTERS & OFFICE EQUIPMENT
(0.2%)
Cymer, Inc.
Expire February 1999
Strike Price $23.00.......... 1,750 1,465,625
Xerox Corp.
Expire January 1999
Strike Price $127.00......... 250 225,000
------------
1,690,625
------------
CONTAINERS (0.1%)
Crown Cork & Seal Co., Inc.
Expire February 1999
Strike Price $36.00.......... 1,350 700,380
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 109
MainStay Convertible Fund
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
PURCHASED PUT OPTIONS
(CONTINUED)
DOMESTIC OILS (0.1%)
Tesoro Petroleum Corp.
Expire February 1999
Strike Price $16.00.......... 1,250 $ 484,375
Texaco, Inc.
Expire February 1999
Strike Price $67.00.......... 60 84,000
------------
568,375
------------
DRUGS (0.1%)
Centocor, Inc.
Expire February 1999
Strike Price $53.00.......... 350 275,625
Chiron Corp.
Expire February 1999
Strike Price $31.00.......... 200 96,260
------------
371,885
------------
ELECTRICAL EQUIPMENT (0.1%)
Antec Corp.
Expire January 1999
Strike Price $25.00.......... 1,250 609,375
Thermo Instrument Systems,
Inc.
Expire February 1999
Strike Price $20.00.......... 310 153,078
------------
762,453
------------
ENERGY (0.0%) (b)
Unocal Corp.
Expire January 1999
Strike Price $43.00.......... 104 143,655
------------
FOOD (0.1%)
Suiza Foods Corp.
Expire February 1999
Strike Price $60.00.......... 670 607,221
------------
HEALTHCARE (0.2%)
Elan Corp. PLC
Expire February 1999
Strike Price $76.00.......... 250 151,575
Owens & Minor, Inc.
Expire February 1999
Strike Price $21.00.......... 1,000 525,000
Expire February 1999
Strike Price $22.00.......... 200 125,000
Sun Healthcare Group, Inc.
Expire February 1999
Strike Price $9.00........... 1,050 255,990
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
HEALTHCARE (CONTINUED)
Total Renal Care Holdings,
Inc.
Expire February 1999
Strike Price $33.00.......... 450 $ 154,710
------------
1,212,275
------------
HOME BUILDING (0.0%) (b)
Kaufman & Broad Home Corp.
Expire February 1999
Strike Price $37.00.......... 250 206,250
------------
INSURANCE (0.1%)
SunAmerica, Inc.
Expire February 1999
Strike Price $98.00.......... 300 480,000
------------
MINING (0.1%)
Cyprus Amax Minerals Co.
Expire January 1999
Strike Price $17.00.......... 179 125,300
Expire February 1999
Strike Price $15.00.......... 1,500 750,000
Titanium Metals Corp.
Expire January 1999
Strike Price $15.00.......... 200 130,000
------------
1,005,300
------------
NATURAL GAS PIPELINES (0.2%)
El Paso Energy Corp.
Expire February 1999
Strike Price $41.00.......... 1,624 1,004,931
MCN Energy Group, Inc.
Expire February 1999
Strike Price $24.00.......... 750 370,350
------------
1,375,281
------------
OIL SERVICES (0.0%) (b)
Diamond Offshore Drilling,
Inc.
Expire February 1999
Strike Price $31.00.......... 200 146,260
------------
PAPER & FOREST PRODUCTS (0.1%)
International Paper Co.
Expire February 1999
Strike Price $53.00.......... 1,201 983,379
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 110
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
PURCHASED PUT OPTIONS
(CONTINUED)
PERSONNEL SERVICES (0.2%)
Equity Corporation
International, Inc.
Expire January 1999
Strike Price $32.00.......... 300 $ 163,140
Metamor Worldwide, Inc.
Expire February 1999
Strike Price $30.00.......... 1,800 900,000
------------
1,063,140
------------
PUBLISHING (0.2%)
Jacor Communications, Inc.
Expire February 1999
Strike Price $78.00.......... 725 987,812
World Color Press, Inc.
Expire February 1999
Strike Price $34.00.......... 2,379 135,039
------------
1,122,851
------------
REAL ESTATE (0.1%)
Equity Office Properties Trust
Expire February 1999
Strike Price $30.00.......... 600 360,000
Macerich Co. (The)
Expire February 1999
Strike Price $33.00.......... 550 405,625
------------
765,625
------------
RESTAURANT & LODGING (0.1%)
Hilton Hotels Corp.
Expire February 1999
Strike Price $25.00.......... 450 264,375
Marriott International, Inc.
Expire February 1999
Strike Price $36.00.......... 700 490,000
Servico Corp. International
Expire February 1999
Strike Price $8.00........... 100 31,250
------------
785,625
------------
RETAIL (0.1%)
Michaels Stores, Inc.
Expire January 1999
Strike Price $24.00.......... 638 376,803
Office Depot, Inc.
Expire January 1999
Strike Price $40.00.......... 900 264,420
------------
641,223
------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
SEMICONDUCTORS (0.5%)
Advanced Micro Devices, Inc.
Expire January 1999
Strike Price $38.00.......... 1,511 $ 1,359,900
Amkor Technologies, Inc.
Expire February 1999
Strike Price $11.00.......... 2,450 46,060
Expire February 1999
Strike Price $12.00.......... 1,850 219,780
Cirrus Logic, Inc.
Expire February 1999
Strike Price $14.00.......... 230 96,324
Micron Technology, Inc.
Expire January 1999
Strike Price $61.00.......... 750 782,850
Xilinx, Inc.
Expire February 1999
Strike Price $75.00.......... 990 977,625
------------
3,482,539
------------
SOFTWARE (0.2%)
Network Associates, Inc.
Expire February 1999
Strike Price $76.00.......... 460 448,500
Safeguard Scientifics, Inc.
Expire February 1999
Strike Price $32.00.......... 1,650 752,895
Systems Software Associates,
Inc.
Expire February 1999
Strike Price $10.00.......... 120 35,628
Vantive Corp. (The)
Expire February 1999
Strike Price $12.00.......... 440 176,000
------------
1,413,023
------------
SPECIALIZED SERVICES (0.1%)
Cendant Corp.
Expire February 1999
Strike Price $25.00.......... 600 341,280
------------
STEEL, ALUMINUM & OTHER METALS
(0.3%)
Bethlehem Steel Corp.
Expire February 1999
Strike Price $12.00.......... 3,000 1,087,500
Coeur d'Alene Mines Corp.
Expire February 1999
Strike Price $8.00........... 1,960 661,500
WHX Corp.
Expire February 1999
Strike Price $15.00.......... 1,381 681,938
------------
2,430,938
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE> 111
MainStay Convertible Fund
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
PURCHASED PUT OPTIONS
(CONTINUED)
TELECOMMUNICATION EQUIPMENT
(0.2%)
Comverse Technology, Inc.
Expire February 1999
Strike Price $77.00.......... 700 $ 420,000
Loral Space & Communications
Ltd.
Expire February 1999
Strike Price $23.00.......... 324 168,091
QUALCOMM, Inc.
Expire February 1999
Strike Price $63.00.......... 550 615,340
World Access, Inc.
Expire February 1999
Strike Price $24.00.......... 400 105,000
------------
1,308,431
------------
TRANSPORTATION (0.1%)
Union Pacific Corp.
Expire February 1999
Strike Price $60.00.......... 463 691,629
------------
Total Purchased Put Options
(Cost $32,993,678)........... 28,487,062
------------
PURCHASED CALL OPTIONS (0.1%)
STOCK INDEX OPTIONS (0.1%)
S&P Call Option
Expire January 1999
Strike Price 1240............ 12,000 230,256
S&P Call Option
Expire January 1999
Strike Price 1245............ 10,000 140,000
S&P Call Option
Expire January 1999
Strike Price 1250............ 22,000 255,750
------------
626,006
------------
Total Purchased Call Options
(Cost $685,196).............. 626,006
------------
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.2%)
COMMERCIAL PAPER (2.2%)
Associates Corp.
5.08%, due 1/4/99............ $15,285,000 $ 15,278,529
------------
Total Short-Term Investment
(Cost $15,278,529)........... 15,278,529
------------
Total Investments
(Cost $719,833,532) (v)...... 97.8% 683,684,269(w)
Cash and Other Assets, Less
Liabilities.................. 2.2 15,522,925
----------- ------------
Net Assets.................... 100.0% $699,207,194
=========== ============
<CAPTION>
Shares
-----------
<S> <C> <C>
SHORT POSITIONS (-0.4%)
COMMON STOCKS (-0.4%)
COMPUTERS & OFFICE EQUIPMENT
(-0.3%)
Applied Magnetics Corp. ...... (317,700) $(1,965,769)
------------
FINANCE (-0.0%) (b)
Cityscape Financial Corp. .... (17,000) (102)
------------
HOUSEHOLD PRODUCTS (-0.1%)
Amway Japan Ltd. (p).......... (73,977) (397,626)
------------
REAL ESTATE (-0.0%) (b)
General Growth Properties,
Inc. ........................ (2,100) (79,538)
------------
TELECOMMUNICATIONS EQUIPMENT
(-0.0%) (b)
Comverse Technology, Inc. .... (800) (56,800)
------------
Total Common Stocks
(Proceeds $9,141,513)........ (2,499,835)
------------
<CAPTION>
Number of
Contracts
-----------
<S> <C> <C>
WRITTEN CALL OPTIONS (-0.0%)
(b)(x)
AUTO PARTS (-0.0%) (b)
MascoTech, Inc.
Expire February 1999
Strike Price $22.00.......... (3,729) (3,729)
Tower Automotive, Inc.
Expire February 1999
Strike Price $30.00.......... (1,050) (1,050)
------------
(4,779)
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE> 112
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
WRITTEN CALL OPTIONS
(CONTINUED)
BIOTECHNOLOGY (-0.0%) (b)
Aviron
Expire February 1999
Strike Price $29.00.......... (250) $ (250)
------------
BUILDING MATERIALS (-0.0%) (b)
Owens Corning
Expire February 1999
Strike Price $42.00.......... (2,832) (2,832)
------------
CHEMICALS (-0.0%) (b)
IMC Global, Inc.
Expire February 1999
Strike Price $25.00.......... (212) (212)
Monsanto Co.
Expire February 1999
Strike Price $59.00.......... (160) (160)
------------
(372)
------------
COMPUTERS & OFFICE EQUIPMENT
(-0.0%) (b)
Cymer, Inc.
Expire February 1999
Strike Price $23.00.......... (1,750) (1,750)
Xerox Corp.
Expire January 1999
Strike Price $127.00......... (250) (250)
------------
(2,000)
------------
CONTAINERS (-0.0%) (b)
Crown Cork & Seal Co., Inc.
Expire February 1999
Strike Price $36.00.......... (1,350) (1,350)
------------
DOMESTIC OILS (-0.0%) (b)
Tesoro Petroleum Corp.
Expire February 1999
Strike Price $16.00.......... (1,250) (1,250)
Texaco, Inc.
Expire February 1999
Strike Price $67.00.......... (60) (60)
------------
(1,310)
------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
DRUGS (-0.0%) (b)
Centocor, Inc.
Expire February 1999
Strike Price $53.00.......... (350) $ (350)
Chiron Corp.
Expire February 1999
Strike Price $31.00.......... (200) (200)
------------
(550)
------------
ELECTRICAL EQUIPMENT
(-0.0%) (b)
Antec Corp.
Expire January 1999
Strike Price $25.00.......... (1,250) (1,250)
Thermo Instrument Systems,
Inc.
Expire February 1999
Strike Price $20.00.......... (310) (310)
------------
(1,560)
------------
ENERGY (-0.0%) (b)
Unocal Corp.
Expire January 1999
Strike Price $43.00.......... (104) (104)
------------
FOOD (-0.0%) (b)
Suiza Foods Corp.
Expire February 1999
Strike Price $60.00.......... (670) (670)
------------
HEALTHCARE (-0.0%) (b)
Elan Corp. PLC
Expire February 1999
Strike Price $76.00.......... (250) (250)
Owens & Minor, Inc.
Expire February 1999
Strike Price $21.00.......... (1,000) (1,000)
Expire February 1999
Strike Price $22.00.......... (200) (200)
Sun Healthcare Group, Inc.
Expire February 1999
Strike Price $9.00........... (1,050) (1,050)
Total Renal Care Holdings,
Inc.
Expire February 1999
Strike Price $53.00.......... (450) (450)
------------
(2,950)
------------
HOME BUILDING (-0.0%) (b)
Kaufman & Broad Home Corp.
Expire February 1999
Strike Price $37.00.......... (250) (250)
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE> 113
MainStay Convertible Fund
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
WRITTEN CALL OPTIONS
(CONTINUED)
INSURANCE (-0.0%) (b)
SunAmerica, Inc.
Expire February 1999
Strike Price $98.00.......... (300) $ (300)
------------
MINING (-0.0%) (b)
Cyprus Amax Minerals Co.
Expire January 1999
Strike Price $17.00.......... (179) (179)
Expire February 1999
Strike Price $15.00.......... (1,500) (1,500)
Titanium Metals Corp.
Expire January 1999
Strike Price $15.00.......... (200) (200)
------------
(1,879)
------------
NATURAL GAS PIPELINES
(-0.0%) (b)
El Paso Energy Corp.
Expire February 1999
Strike Price $41.00.......... (1,624) (1,624)
MCN Energy Group, Inc.
Expire February 1999
Strike Price $24.00.......... (750) (750)
------------
(2,374)
------------
OIL SERVICES (-0.0%) (b)
Diamond Offshore Drilling,
Inc.
Expire February 1999
Strike Price $31.00.......... (200) (200)
------------
PAPER & FOREST PRODUCTS
(-0.0%) (b)
International Paper Co.
Expire February 1999
Strike Price $53.00.......... (1,201) (1,201)
------------
PERSONAL SERVICES (-0.0%) (b)
Equity Corporation
International
Expire January 1999
Strike Price $32.00.......... (300) (300)
------------
PERSONNEL SERVICES (-0.0%) (b)
Metamor Worldwide, Inc.
Expire February 1999
Strike Price $30.00.......... (1,800) (1,800)
------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
PUBLISHING (-0.0%) (b)
Jacor Communications, Inc.
Expire February 1999
Strike Price $78.00.......... (725) $ (725)
World Color Press, Inc.
Expire February 1999
Strike Price $34.00.......... (379) (379)
------------
(1,104)
------------
REAL ESTATE (-0.0%) (b)
Equity Office Properties Trust
Expire February 1999
Strike Price $30.00.......... (600) (600)
Macerich Co. (The)
Expire February 1999
Strike Price $33.00.......... (550) (550)
------------
(1,150)
------------
RESTAURANT & LODGING
(-0.0%) (b)
Boston Chicken, Inc.
Expire January 1999
Strike Price $5.00........... (1,000) (6,250)
Hilton Hotels Corp.
Expire February 1999
Strike Price $25.00.......... (450) (450)
Marriott International Inc.
Expire February 1999
Strike Price $36.00.......... (700) (700)
Servico Corp. International
Expire February 1999
Strike Price $8.00........... (100) (100)
------------
(7,500)
------------
RETAIL (-0.0%) (b)
Michaels Stores, Inc.
Expire January 1999
Strike Price $24.00.......... (638) (638)
Office Depot, Inc.
Expire January 1999
Strike Price $40.00.......... (900) (900)
------------
(1,538)
------------
SEMICONDUCTORS (-0.0%) (b)
Advanced Micro Devices, Inc.
Expire January 1999
Strike Price $38.00.......... (1,511) (1,511)
Amkor Technologies, Inc.
Expire February 1999
Strike Price $11.00.......... (2,450) (2,450)
Expire February 1999
Strike Price $12.00.......... (1,850) (1,850)
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE> 114
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
WRITTEN CALL OPTIONS
(CONTINUED)
SEMICONDUCTORS (CONTINUED)
Cirrus Logic, Inc.
Expire February 1999
Strike Price $14.00.......... (230) $ (230)
Micron Technology, Inc.
Expire January 1999
Strike Price $61.00.......... (750) (750)
Xilinx, Inc.
Expire February 1999
Strike Price $75.00.......... (990) (990)
------------
(7,781)
------------
SOFTWARE (-0.0%) (b)
Network Associates, Inc.
Expire February 1999
Strike Price $76.00.......... (460) (460)
Safeguard Scientifics, Inc.
Expire February 1999
Strike Price $32.00.......... (1,650) (1,650)
Systems Software Associates,
Inc.
Expire February 1999
Strike Price $10.00.......... (120) (120)
Vantive Corp. (The)
Expire February 1999
Strike Price $12.00.......... (440) (440)
------------
(2,670)
------------
SPECIALIZED SERVICES
(-0.0%) (b)
Cendant Corp.
Expire February 1999
Strike Price $25.00.......... (600) (600)
------------
STEEL, ALUMINUM & OTHER METALS
(-0.0%) (b)
Bethlehem Steel Corp.
Expire February 1999
Strike Price $12.00.......... (3,000) (3,000)
Coeur d'Alene Mines Corp.
Expire February 1999
Strike Price $8.00........... (1,960) (1,960)
WHX Corp.
Expire February 1999
Strike Price $15.00.......... (1,381) (1,381)
------------
(6,341)
------------
TELECOMMUNICATION EQUIPMENT
(-0.0%) (b)
Comverse Technology, Inc.
Expire February 1999
Strike Price $77.00.......... (700) (700)
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts Value
- -------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATION EQUIPMENT
(CONTINUED)
Loral Space & Communications
Ltd.
Expire February 1999
Strike Price $23.00.......... (324) $ (324)
QUALCOMM, Inc.
Expire February 1999
Strike Price $63.00.......... (550) (550)
World Access, Inc.
Expire February 1999
Strike Price $24.00.......... (400) (400)
------------
(1,974)
------------
TRANSPORTATION (-0.0%) (b)
Union Pacific Corp.
Expire February 1999
Strike Price $60.00.......... (463) (463)
------------
Total Written Call Options
(Proceeds $111,900).......... (58,152)
------------
Total Short Positions
(Proceeds $9,253,413)........ $ (2,557,987)
============
</TABLE>
- -------
<TABLE>
<S> <C>
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Yankee bond.
(e) Partially segregated as margin against common stock
short and option positions.
(f) Euro-dollar bond.
(g) 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.
(h) Issuer in default.
(i) Restricted security.
(j1) STRYPES--Structured Yield Product Exchangeable for IMC
Global, Inc. common stock.
(j2) STRYPES--Structured Yield Product Exchangeable for
SunAmerica, Inc. common stock.
(k) PIES--Premium Income Equity Securities.
(l) TIPS--Trust Issued Preferred Stock.
(m) PEPS--Premium Exchangeable Participating Shares--each
PEP is exchangeable for 1.25 American Depository Shares
of Amway Japan on 2/15/99.
(n1) Depository Shares--each share represents 0.05 shares of
step-up preferred stock.
(n2) Depository Shares--each share represents 0.025 shares
of a share of silver denominated preferred stock.
(o) PIERS--Preferred Income Equity Redeemable Stock.
(p) CRESTS--Convertible Redeemable Equity Structured Trust
Securities.
(q) Issuer in bankruptcy.
(r) ADR--American Depository Receipt.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
<PAGE> 115
MainStay Convertible Fund
<TABLE>
<S> <C>
(s) Canadian security.
(t) PIK ("Payment in Kind")--interest or dividend payment
is made with additional securities.
(u) Dividend equals U.S. dollar equivalent of 0.04125 oz.
of silver per share.
(v) The cost for Federal income tax purposes is
$726,309,771.
(w) At December 31, 1998 net unrealized depreciation was
$42,625,502, 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 $36,614,922 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $79,240,424.
(x) Fair valued security.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
28
<PAGE> 116
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$719,833,532)............................................. $683,684,269
Cash........................................................ 1,347
Deposit with broker for securities sold short............... 9,293,615
Receivables:
Investment securities sold................................ 26,649,637
Dividends and interest.................................... 7,670,499
Fund shares sold.......................................... 235,273
------------
Total assets........................................ 727,534,640
------------
LIABILITIES:
Securities sold short (proceeds $9,141,513)................. 2,499,835
Options written (premiums received $111,900)................ 58,152
Payables:
Investment securities purchased........................... 21,054,839
Fund shares redeemed...................................... 2,121,677
NYLIFE Distributors....................................... 577,396
MainStay Management....................................... 443,580
Transfer agent............................................ 126,256
Custodian................................................. 69,799
Trustees.................................................. 5,513
Accrued expenses............................................ 192,977
Unrealized depreciation on forward foreign currency
contracts................................................. 1,177,422
------------
Total liabilities................................... 28,327,446
------------
Net assets.................................................. $699,207,194
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 33,929
Class B................................................... 525,807
Additional paid-in capital.................................. 744,412,869
Accumulated undistributed net investment income............. 259,745
Accumulated distribution in excess of net realized gain on
investments............................................... (15,393,897)
Net unrealized depreciation on investments.................. (36,149,263)
Net unrealized appreciation on securities sold short and
options written........................................... 6,695,426
Net unrealized depreciation on forward foreign currency
contracts................................................. (1,177,422)
------------
Net assets.................................................. $699,207,194
============
CLASS A
Net assets applicable to outstanding shares................. $ 42,375,398
============
Shares of beneficial interest outstanding................... 3,392,907
============
Net asset value per share outstanding....................... $ 12.49
Maximum sales charge (5.50% of offering price).............. 0.73
------------
Maximum offering price per share outstanding................ $ 13.22
============
CLASS B
Net assets applicable to outstanding shares................. $656,831,395
============
Shares of beneficial interest outstanding................... 52,580,673
============
Net asset value and offering price per share outstanding.... $ 12.49
============
CLASS C
Net assets applicable to outstanding shares................. $ 401
============
Shares of beneficial interest outstanding................... 32
============
Net asset value and offering price per share outstanding.... $ 12.49
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
29
<PAGE> 117
Statement of Operations
for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 16,439,986
Interest.................................................. 26,657,074
------------
Total income............................................ 43,097,060
------------
Expenses:
Management................................................ 6,025,907
Distribution--Class B..................................... 5,856,240
Distribution--Class C..................................... 1
Service--Class A.......................................... 140,235
Service--Class B.......................................... 1,952,094
Transfer agent............................................ 1,712,819
Dividends on securities sold short........................ 1,023,714
Shareholder communication................................. 287,382
Professional.............................................. 206,026
Custodian................................................. 201,170
Recordkeeping............................................. 110,412
Registration.............................................. 39,396
Trustees.................................................. 23,855
Miscellaneous............................................. 35,296
------------
Total expenses.......................................... 17,614,547
------------
Net investment income....................................... 25,482,513
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... 36,017,831
Securities sold short..................................... (9,323,900)
Option transactions....................................... (7,713,320)
Foreign currency transactions............................. 1,539,153
------------
Net realized gain on investments and foreign currency
transactions.............................................. 20,519,764
------------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions..................................... (42,953,272)
Securities sold short and options written................. 7,606,045
Forward foreign currency contracts........................ (2,226,953)
------------
Net unrealized gain on investments and foreign currency
transactions.............................................. (37,574,180)
------------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... (17,054,416)
------------
Net increase in net assets resulting from operations........ $ 8,428,097
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $11,955.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
30
<PAGE> 118
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 25,482,513 $ 32,411,201
Net realized gain on investments.......................... 36,017,831 75,766,771
Net realized loss on short sale transactions.............. (9,323,900) (6,578,078)
Net realized loss on option transactions.................. (7,713,320) --
Net realized gain on foreign currency transactions........ 1,539,153 1,087,917
Net change in unrealized appreciation on security
transactions............................................ (42,953,272) (20,895,179)
Net change in unrealized depreciation on securities sold
short and options written............................... 7,606,045 12,260,878
Net change in unrealized appreciation on forward foreign
currency contracts...................................... (2,226,953) 637,775
------------- -------------
Net increase in net assets resulting from operations...... 8,428,097 94,691,285
------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (2,145,731) (2,668,900)
Class B................................................. (25,154,338) (30,007,599)
Class C................................................. (7) --
From net realized gain on investments:
Class A................................................. (2,062,425) (5,382,678)
Class B................................................. (32,356,830) (70,065,339)
Class C................................................. (20) --
------------- -------------
Total dividends and distributions to shareholders..... (61,719,351) (108,124,516)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 7,399,467 15,235,444
Class B................................................. 36,028,870 123,016,962
Class C................................................. 1,293 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 3,886,678 7,544,470
Class B................................................. 51,651,324 89,693,078
Class C................................................. 18 --
------------- -------------
98,967,650 235,489,954
Cost of shares redeemed:
Class A................................................. (30,109,058) (14,025,978)
Class B................................................. (222,144,381) (156,109,349)
Class C................................................. (907) --
------------- -------------
Increase (decrease) in net assets derived from capital
share transactions................................... (153,286,696) 65,354,627
------------- -------------
Net increase (decrease) in net assets................. (206,577,950) 51,921,396
NET ASSETS:
Beginning of year........................................... 905,785,144 853,863,748
------------- -------------
End of year................................................. $ 699,207,194 $ 905,785,144
============= =============
Accumulated undistributed net investment income at end of
year...................................................... $ 259,745 $ 538,389
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
31
<PAGE> 119
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
-------------------------------------
Year ended December 31,
-------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 13.53 $ 13.81 $ 13.45 $ 11.67
------- ------- ------- -------
Net investment income....................................... 0.57 0.60 0.57 0.59
Net realized and unrealized gain (loss) on investments...... (0.38) 0.91 1.02 2.14
Net realized and unrealized gain (loss) on foreign currency
transactions.............................................. (0.02) 0.03 0.02 (0.00)(b)
------- ------- ------- -------
Total from investment operations............................ 0.17 1.54 1.61 2.73
------- ------- ------- -------
Less dividends and distributions:
From net investment income................................ (.57) (0.60) (0.62) (0.55)
From net realized gain on investments..................... (.64) (1.22) (0.63) (0.40)
------- ------- ------- -------
Total dividends and distributions........................... (1.21) (1.82) (1.25) (0.95)
------- ------- ------- -------
Net asset value at end of period............................ $ 12.49 $ 13.53 $ 13.81 $ 13.45
======= ======= ======= =======
Total investment return (a)................................. 1.23% 11.36% 12.13% 23.72%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 3.74% 4.10% 4.4% 4.9%
Expenses................................................ 1.40% 1.45% 1.5% 1.5%
Portfolio turnover rate..................................... 347% 273% 296% 243%
Net assets at end of period (in 000's)...................... $42,376 $64,246 $56,621 $26,836
</TABLE>
- -------
<TABLE>
<C> <S>
* The Fund changed its fiscal year end from August 31 to
December 31.
** Class C Shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one cent per share.
(c) Less than one thousand.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
32
<PAGE> 120
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------------------- ------------
September 1, September 1,
Year ended December 31, through Year ended through
----------------------------------------- December 31, August 31, December 31,
1998 1997 1996 1995 1994* 1994 1998**
-------- -------- -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 13.52 $ 13.80 $ 13.45 $ 11.67 $ 12.83 $ 13.92 $ 12.64
-------- -------- -------- -------- -------- -------- -------
0.46 0.51 0.48 0.51 0.19 0.50 0.26
(0.37) 0.91 1.02 2.14 (0.71) 0.70 0.47
(0.02) 0.03 0.02 (0.00)(b) -- (0.01) 0.02
-------- -------- -------- -------- -------- -------- -------
0.07 1.45 1.52 2.65 (0.52) 1.19 0.75
-------- -------- -------- -------- -------- -------- -------
(.46) (0.51) (0.54) (0.47) (0.21) (0.49) (.26)
(.64) (1.22) (0.63) (0.40) (0.43) (1.79) (.64)
-------- -------- -------- -------- -------- -------- -------
(1.10) (1.73) (1.17) (0.87) (0.64) (2.28) (.90)
-------- -------- -------- -------- -------- -------- -------
$ 12.49 $ 13.52 $ 13.80 $ 13.45 $ 11.67 $ 12.83 $ 12.49
======== ======== ======== ======== ======== ======== =======
0.53% 10.67% 11.39% 23.02% (4.09%) 8.95% 6.06%
2.99% 3.47% 3.8% 4.3% 4.8%+ 3.5% 2.99%+
2.15% 2.08% 2.1% 2.1% 1.9%+ 1.9% 2.15%+
347% 273% 296% 243% 77% 269% 347%
$656,831 $841,540 $797,243 $427,461 $180,304 $160,407 $ --(c)
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
33
<PAGE> 121
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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on May 1, 1986 and
September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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 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
34
<PAGE> 122
Notes to Financial Statements
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 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.
35
<PAGE> 123
MainStay Convertible Fund
Forward foreign currency contract open at December 31, 1998:
<TABLE>
<CAPTION>
Contract Contract
Amount Amount Unrealized
Sold Purchased Depreciation
------------ ---------- ------------
<S> <C> <C> <C>
Foreign Currency Sale Contract
Japanese Yen vs. US$, expiring 2/19/99.................... Yen 617,622,000 $4,334,189 $(1,177,422)
===========
</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 securities 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.
36
<PAGE> 124
Notes to Financial Statements (continued)
Purchased option activity for the year ended December 31, 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........................................... (124,963) (99,326,287)
Options--purchased.......................................... 469,029 346,805,379
Options--sold............................................... (295,965) (219,240,864)
-------- ------------
Options outstanding at December 31, 1998.................... 52,001 $ 32,993,678
======== ============
</TABLE>
Written option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
--------- -----------
<S> <C> <C>
Options outstanding at December 31, 1997.................... (100) $ (34,699)
Options--expired............................................ 157,802 420,892
Options--written............................................ (432,763) (905,942)
Options--buybacks........................................... 222,159 407,849
-------- -----------
Options outstanding at December 31, 1998.................... (52,902) $ (111,900)
======== ===========
</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 issuers of the securities will bear the costs involved in registration under
the Securities Act of 1933 and in connection with the disposition of such
securities. The Fund does not have the right to demand that such securities be
registered. The Fund may not invest more than 10% of its net assets in illiquid
securities.
Restricted security held at December 31, 1998:
<TABLE>
<CAPTION>
ACQUISITION 12/31/98 PERCENT 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 $10,459,995 1.5%
========== =========== ====
</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.
37
<PAGE> 125
MainStay Convertible Fund
Permanent book-tax difference of $1,538,919 has been reclassified from
accumulated distribution in excess of net realized gain on investments to
accumulated net investment income due to the tax treatment of foreign currency
gains.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
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
38
<PAGE> 126
Notes to Financial Statements (continued)
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%. For the year ended December 31, 1998 the Manager
earned $6,025,907.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C shares of the Fund.
The Plan provides that the distribution and service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $10,796 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B and Class C shares
of $1,760,525 and $82, respectively, for the period ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $1,712,819.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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.
39
<PAGE> 127
MainStay Convertible Fund
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Like amounted to $22,757 for year the ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$110,412 for the year ended December 31, 1998.
NOTE 4--DEPOSIT WITH BROKER:
Cash deposited with broker in the amount of $9,293,615 is partially restricted
as collateral for securities sold short.
NOTE 5--FEDERAL INCOME TAX:
The Fund intends to elect to treat for Federal income tax purposes approximately
$8,917,658 of qualifying realized capital losses and $122,805 of qualifying
foreign exchange losses that arose during the year as if they arose on January
1, 1999.
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 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 $2,535,694 and
$2,607,293, respectively.
NOTE 7--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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------- --------------------
CLASS A CLASS B CLASS C* CLASS A CLASS B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.................................... 545 2,621 -- 1,070 8,666
Shares issued in reinvestment of dividends and
distributions................................ 301 4,032 -- 551 6,561
------ ------- --- ----- -------
846 6,653 -- 1,621 15,227
Shares redeemed................................ (2,202) (16,303) -- (973) (10,777)
------ ------- --- ----- -------
Net increase (decrease)........................ (1,356) (9,650) --(a) 648 4,450
====== ======= === ===== =======
</TABLE>
- -------
* First offered on September 1, 1998.
(a) Less than one thousand.
40
<PAGE> 128
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Convertible Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 1999
41
<PAGE> 129
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a secondary consideration. Advisors, Inc.(2)
EQUITY INCOME FUND To realize maximum long-term total return from a MacKay Shields Financial
combination of capital appreciation and income. Corporation(2)
RESEARCH VALUE FUND To seek long-term capital appreciation by investing John A. Levin & Co.,
primarily in securities of large-capitalization Inc.
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.
42
<PAGE> 130
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
43
<PAGE> 131
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
44
<PAGE> 132
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN06-02/99
[RECYCLE LOGO]
MAINSTAY CONVERTIBLE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 133
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Equity Income Fund Highlights 3
$10,000 Invested in the MainStay Equity
Income Fund versus Lipper Equity Income
Fund Index and Inflation--Class A, Class
B, & Class C Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 & 12/31/98 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Fund & Lipper Returns 12
Top 10 Holdings 13
10 Largest Common Stock Purchases 13
10 Largest Common Stock Sales 13
Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 20
Report of Independent Accountants 25
The MainStay Funds 26
</TABLE>
<PAGE> 134
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year
that domestic stocks in general returned more than 20%. Getting there, however,
was often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 135
MainStay Equity Income Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - Although the U.S. stock market was highly volatile throughout 1998, it
provided double-digit returns for the fourth year in a row.
- - In general, companies benefited from low inflation throughout 1998 and
declining interest rates in the second half of the year.
- - Financial problems in Asia, Russia, and Latin America led investors, in
general, to seek highly liquid, purely domestic stocks with steady growth and
relatively predictable earnings.
- - While technology and pharmaceutical stocks generally outperformed the market,
they offered few opportunities for income-oriented investors.
- - Among income-producing equities, utilities and cyclicals tended to provide
positive performance, while energy companies and REITs were generally weak.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - From its inception on 6/1/98 through 12/31/98, the MainStay Equity Income Fund
returned 4.01% for Class A shares and 3.56% for Class B and Class C shares,*
excluding all sales charges.
- - Because of its income orientation the Fund was generally positioned among
large, established companies with a history of providing dividends, rather
than the Internet and technology growth stocks that led the market in the
second half of 1998.
- - The Fund benefited from an overweighted position in utilities in the third
quarter and well-timed utility sales in the fourth quarter of 1998.
- - Although REIT stocks initially appeared attractive, the Fund's REIT holdings
tended to underperform during the reporting period.
- - All share classes outperformed the average Lipper* equity income fund, which
returned 2.42% for the same since-inception period.
- -------
* See footnote and table on page 12 for more information on Lipper Inc.
Performance figures for Class C shares include the performance of Class B
shares from inception (6/1/98) through 8/31/98.
3
-
<PAGE> 136
$10,000 Invested in the MainStay Equity
Income Fund versus Lipper Equity
Income Fund Index and Inflation
CLASS A SHARES SEC Returns: since inception -1.71%
<TABLE>
<CAPTION>
MAINSTAY EQUITY INCOME LIPPER EQUITY INCOME FUND
FUND INDEX* INFLATION (CPI)+
---------------------- ------------------------- ---------------
<S> <C> <C> <C>
6/01/98 9450.00 10000.00 10000.00
6/98 9478.00 10081.00 10006.00
9/98 9057.00 9081.00 10043.00
12/31/98 9829.00 10282.00 10098.00
</TABLE>
CLASS B SHARES SEC Returns: since inception -1.44%
<TABLE>
<CAPTION>
MAINSTAY EQUITY INCOME LIPPER EQUITY INCOME FUND
FUND INDEX* INFLATION (CPI)+
---------------------- ------------------------- ---------------
<S> <C> <C> <C>
6/01/98 10000.00 10000.00 10000.00
6/98 10030.00 10081.00 10006.00
9/98 9558.00 9081.00 10043.00
12/31/98 9838.00 10282.00 10098.00
</TABLE>
CLASS C SHARES SEC Returns: since inception 2.56%
<TABLE>
<CAPTION>
MAINSTAY EQUITY INCOME LIPPER EQUITY INCOME FUND
FUND INDEX* INFLATION (CPI)+
---------------------- ------------------------- ---------------
<S> <C> <C> <C>
6/01/98 10000.00 10000.00 10000.00
6/98 10030.00 10081.00 10006.00
9/98 9558.00 9081.00 10043.00
12/31/98 10252.00 10282.00 10098.00
</TABLE>
4
<PAGE> 137
- ----------------
Past performance is no guarantee of future results. The Class A graph assumes an
initial investment of $10,000 made on 6/1/98 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
6/1/98. Returns shown reflect a 5% Contingent Deferred Sales Charge (CDSC),
which would apply for the period shown. The Class C graph assumes an initial
investment of $10,000 made on 6/1/98 and includes the performance of Class B
shares for periods 6/1/98 through 8/31/98. Performance data for the two classes
vary after this date based on differences in their load. Returns shown reflect
the 1% CDSC, 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 Lipper Equity Income Fund Index is an unmanaged equal-weighted index of
the 30 largest funds in the Lipper equity income objective universe. Lipper
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. It is not possible to make
an investment directly into an index.
+ 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.
5
-
<PAGE> 138
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods
traded on a commodities exchange.
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.
Portfolio Management Discussion and Analysis
The second half of 1998 was one of the most volatile periods in recent
investment history. Despite its ups and downs, however, the S&P 500* Index
closed the year with a 28.58% annual gain, making 1998 the fourth year in a row
domestic stocks in general have returned more than 20%.
With financial problems in Asia, Russia, and Latin America, declining oil
prices, and weaknesses in other commodities, investors sought refuge in stocks
they felt were least likely to be affected by these difficulties. The market
focused on large-capitalization growth stocks that appeared to have steady and
predictable earnings prospects and little or no commodity or emerging-market
exposure. The market's move toward more defensive issues during the second half
of the year caused domestic utility stocks to advance, but resulted in weak
performance in the REIT sector. Declining oil prices caused energy stocks to
underperform.
Declining interest rates improved earnings prospects for many companies in the
second half of 1998, and low inflation also helped strengthen the stock market's
advance. Despite international tensions and impeachment action against President
Clinton, the stock market remained relatively strong at the end of the year.
HOW DID THE MAINSTAY EQUITY INCOME FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Equity Income Fund began operations on 6/1/98 and returned 4.01%
for Class A shares and 3.56% for Class B and Class C shares(+) for the
seven-month period ended 12/31/98, excluding all sales charges. All share
classes outperformed the average Lipper(++) equity income fund, which returned
2.42% for the seven-month period.
WHAT WERE THE MAJOR FACTORS THAT AFFECTED THE FUND'S PERFORMANCE?
The Fund takes an opportunistic, earnings-driven approach to equity-income
investing, seeking to capitalize on inefficiencies in pricing and investor
perceptions. This approach led us to overweight the Fund in utilities and REITs
at inception, which was generally positive for the Fund's performance through
October 15, 1998, when the market was in a general downtrend. As money rotated
into more defensive issues, utilities tended to outperform the market as a
whole. The rise in utility prices provided opportunities for the Fund to sell
some of its holdings at a substantial profit as they approached or exceeded
what we believed to be their full valuations.
Given the earlier market downtrend, the Fund sought to reinvest the proceeds
from these sales in more conservative issues just as the market began to recover
in the latter part of October. From that time through the end of the year,
stocks in general tended to advance, and the Fund's more conservative
positioning caused it to underperform. During this period, the Fund also
retained some of its REIT positions, which tended to underperform in the fourth
quarter, as Internet, technology, health care, and consumer stocks attracted
more investor attention.
- -------
* "S&P(R)," "S&P 500(R)," and "500" 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. It is not possible
to make an investment directly into an index.
+ Performance figures for Class C shares include the performance of Class B
shares from inception (6/1/98) through 8/31/98.
++ See footnote and table on page 12 for more information on Lipper Inc.
6
<PAGE> 139
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
<TABLE>
Period end Total Return %
- ---------- --------------
<S> <C>
6/98 0.30 Class A
12/98 4.01 Class A
6/98 0.30 Class B & Class C
12/98 3.56 Class B & Class C
</TABLE>
Class C returns reflect the historical performance of the Class B shares for
periods 6/98 through 8/98.
See footnote * on page 12 for more information on performance.
WHAT WERE SOME OF THE FUND'S MOST SIGNIFICANT PURCHASES?
Since the Fund began operations in June, all the securities it owns were
purchased during the reporting period. We believed that utilities had been
battered in the market prior to the Fund's inception, and given their favorable
prices at the time of purchase, they were among the most profitable of the
Fund's investments. We also believed that Philip Morris Cos. was being overly
penalized for the tobacco litigation risk, with the company's stock selling
below the underlying value of the company's assets. At one point, the stock was
the Fund's largest holding and we have since sold about half of the Fund's
position at a substantial profit. Philip Morris proved to be the Fund's best-
performing asset during the reporting period.
WERE THERE OTHER NOTEWORTHY PURCHASES?
Yes, there were. The Fund purchased a Microsoft convertible preferred issue in
August. It offered excellent downside protection, which is a feature we look for
in all of the Fund's convertible holdings. During the reporting period, it
provided dividends and modest price appreciation as Microsoft led the advance in
large-cap growth stocks.
Starwood Hotels and Resorts is a REIT stock that was one of the Fund's early
top-five holdings. The Fund purchased the stock at a time when we believed it
was selling at a very attractive price, given the company's underlying
potential. But as the second half of the year progressed, our confidence in the
company declined along with the stock price. Eventually, we sold the Fund's
position at a loss, which had a negative impact on performance, but allowed us
to reinvest the Fund's assets more productively.
Another purchase worth noting would be Amoco, which was also one of the Fund's
early top-ten holdings. During the reporting period, it was announced that the
company would be acquired by British
REIT
- --------------------
A Real Estate Investment Trust is a company that purchases and manages real
estate properties for the benefit of its shareholders.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
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.
RECOVERY
- --------------------
A period of rising prices in a securities market after a period of falling
prices.
7
-
<PAGE> 140
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.
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[DIVERSIFICATION BY INDUSTRY PIE CHART]
<TABLE>
<CAPTION>
OIL & GAS-
REAL ESTATE EXPLORATION &
ELECTRIC POWER COMPANIES INVESTMENT/MANAGEMENT FOOD PRODUCTION COMPUTERS ALL OTHER
- ------------------------ --------------------- ---- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
17.0% 11.30% 7.50% 7.20% 6.80% 50.20%
</TABLE>
Actual percentages will vary over time.
Petroleum. As a result, the Fund was able to sell the stock at a substantial
premium, which had a positive impact on the Fund's performance.
IN THE SHORT TIME THE FUND HAS BEEN OPERATING, WERE THERE ANY SIGNIFICANT
SALES?
Starwood and Amoco were the most significant sales. We also sold the Fund's
position in Anheuser-Busch in December when the stock reached our target
valuation. The increase in price had a positive impact on the Fund's
performance. Another acquisition-related sale was Cilcorp, a central-Illinois
utility that was purchased by California Energy, a non-utility power company.
Once again, the Fund was able to sell the stock at a substantial profit, with a
positive impact on performance.
WERE THERE SALES THAT WEREN'T AS POSITIVE FOR THE FUND?
The Fund owned Telebras, the local phone company in Brazil, which we believed
the market had severely undervalued. When Brazil began to face severe economic
setbacks, the country's financial difficulties overshadowed the company's
fundamentals and we decided to sell the Fund's position at a loss. Later, the
stock recovered for many of the reasons the Fund had originally purchased it. As
a result, the sale had a negative impact in terms of cost and lost opportunity.
On the other hand, it reduced the portfolio's downside potential in a highly
unpredictable market.
WHAT WERE THE FUND'S BEST-PERFORMING SECURITIES DURING THE REPORTING PERIOD?
Aside from Philip Morris and Amoco, the Fund also had excellent results from
Energy East. We like this utility because it is very shareholder oriented. In
particular, it is taking dramatic steps to improve the market's perception of
its value. Although the stock pays only a 3% dividend, we believe there is a
good deal of room for that to increase. During the year, the company sold six of
its power
8
<PAGE> 141
PORTFOLIO COMPOSITION AS OF 12/31/98
[PORTFOLIO COMPOSITION PIE CHART]
<TABLE>
<CAPTION>
CASH, EQUIVALENTS & OTHER
COMMON STOCKS CONVERTIBLE BONDS CONVERTIBLE PREFERRED STOCKS ASSETS, LESS LIABILITIES
- ------------- ----------------- ---------------------------- -------------------------
<S> <C> <C> <C>
71.7% 6.0% 12.5% 9.8%
</TABLE>
Actual percentages will vary over time.
plants for about $1.2 billion and plans to redeploy the assets to expand the
company's distribution business and repurchase stock. With the potential for
substantial earnings increases, we think the company has excellent potential,
and its securities have made a substantial positive contribution to the Fund's
performance.
We also bought DQE for the Fund at what we believed was a very attractive price.
We were confident in the company's earnings and it performed just as we
anticipated, which turned a very inexpensive stock into one that we believed was
fully valued. As money began flowing out of defensive stocks in October, we sold
the Fund's position in DQE at an attractive profit, which had a positive impact
on performance.
One other issue worth mentioning is Adaptec, a company that specializes in
technology that helps speed data through computer systems to the end user. In
the third quarter, when there were difficulties in both the stock and
convertibles markets, the Fund purchased an Adaptec convertible security at a
time when the stock price was so low that the convertible feature was all but
valueless. This was a classic "busted convertible," trading at a price we found
very attractive given the company's long-range potential. From the time the Fund
bought the security, the company's stock price has doubled, and the convertible
has returned over 25% for the Fund's portfolio.
WHAT WERE THE FUND'S WORST-PERFORMING SECURITIES?
Telebras and Starwood had the greatest negative impact on the Fund. Next
was Imperial Chemical, which is a U.K. chemical company we purchased based on
its attractive cash flow and restructuring efforts. With the entire U.K. economy
slowing and cyclical stocks underperforming, we decided to cut the Fund's losses
by selling the stock and investing the proceeds elsewhere.
The Fund also suffered a setback from Highwood Properties, a REIT that primarily
owns and operates office properties. Although the company had stable earn-
9
-
<PAGE> 142
AMERICAN
DEPOSITORY
RECEIPT
- --------------------
An ADR is a receipt for shares of a foreign-based corporation that entitles the
shareholder to all dividends and capital gains. The shares themselves are
generally held in the vault of a U.S. bank.
ings and we believe we bought it for the Fund at an attractive price, the REIT
sector as a whole lost ground during the reporting period and Highwood
Properties' stock price declined further. We like the company's management and
continue to hold the stock in the Fund's portfolio, even though it had a
negative impact on performance in the seven-month reporting period.
WITH THE BENEFIT OF HINDSIGHT, IS THERE ANYTHING ELSE YOU MIGHT HAVE DONE
DIFFERENTLY?
The Fund had some investments in energy stocks that didn't perform as well as we
would have liked. Their overall impact was neutral, which suggests that we made
good selections in an industry that suffered major setbacks overall. While it
would have been impossible to anticipate the continuing drop in oil prices or
the extent of the slowdown in demand that resulted from the financial problems
in emerging markets, looking back, we wish we could have invested the assets
more productively.
AS OF YEAR END, DID THE FUND HAVE ANY OVERWEIGHTED OR UNDERWEIGHTED POSITIONS?
Throughout the reporting period, the Fund was overweighted in utilities. As of
year end, we believed this sector offered excellent opportunities for income-
oriented investors. Although we have sold some of the Fund's REIT positions,
since REITs aren't included in the benchmark, the Fund remains overweighted in
REITs.
Since technology stocks typically reinvest their proceeds to fuel future growth,
the Fund is underweighted in this sector, although it owns some convertible
technology issues. The Fund is also underweighted in health care issues, which
we believe are fully valued and would not provide sufficient dividends for the
Fund.
WHAT RISKS DID THE FUND FACE IN 1998, AND HOW DID YOU SEEK TO MANAGE THEM?
The major risks were the general market trends, which included extreme
volatility and difficulties resulting from the emerging-market crisis. Although
American Depository Receipts may pay attractive dividends, we found that the
Fund's positions in Telebras and Imperial Chemical carried risks peculiar to
their economic environments, and both positions were sold. While there was
little we could do to prevent market volatility in the fourth quarter, we took a
more conservative approach, which helped reduce the volatility of the Fund, but
also caused it to lag the market as it rose.
10
- -
<PAGE> 143
WHAT IS YOUR OUTLOOK GOING FORWARD?
We believe that interest rates could move back toward 5% and if they do, it
would be positive for investors. We continue to see opportunities in the utility
and pipeline sectors and believe we may see them acquired by nonutility buyers.
Despite the dismal performance of oil and gas companies in 1998, the low price
of oil may force consolidation within the energy and oil services industries,
which could be positive for investors. Whatever happens, we will continue to
take an opportunistic approach to equity-income investing, seeking 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.
11
-
<PAGE> 144
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A 4.01%
Class B 3.56%
Class C 3.56%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A -1.71%
Class B -1.44%
Class C 2.56%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Average Lipper
equity income fund 2.42%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.25 $0.0716 $0.0738
Class B $10.24 $0.0385 $0.0738
Class C $10.24 $0.0385 $0.0738
</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%.
Class C shares, first offered to the public on 9/1/98, are sold with no
initial sales charge, but are subject to a CDSC of 1% if redeemed within one
year of purchase and an annual 12b-1 fee of 1%. Performance figures for this
class include the historical performance of the Class B shares for periods
from inception (6/1/98) up to 8/31/98. Performance data for the two classes
after this date vary based on differences in their load.
+ Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
average listed above is not class specific. Life of Fund return is for the
period from the initial offering of Class A and Class B shares (on 6/1/98)
through 12/31/98. The Fund's Class C shares were first offered to the public
on 9/1/98.
12
- -
<PAGE> 145
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Energy East Corp. $757,100
Microsoft Corp. $2.196, Series A 586,500
Masco Corp. 575,000
Supervalu Inc. 560,000
Flowers Industries, Inc. 526,625
Coastal Corp. (The) 506,594
Illinova Corp. 442,500
General Growth Properties, Inc., 7.25%, due 7/15/08 412,000
Adaptec, Inc., 4.75%, due 2/1/04 387,500
Apache Corp. 379,687
</TABLE>
10 Largest Common Stock Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
Energy East Corp. $1,461,850
DQE, Inc. 1,279,643
Suiza Foods Corp. 1,080,145
Illinova Corp. 1,039,862
Texas Utilities Co. 730,872
OGE Energy Corp. 673,214
Phelps Dodge Corp. 610,385
Highwoods Properties, Inc. 569,134
Columbia Energy Group 560,875
Masco Corp. 550,878
</TABLE>
10 Largest Common Stock Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
DQE, Inc. $1,399,147
Suiza Foods Corp. 1,117,788
Energy East Corp. 823,980
OGE Energy Corp. 690,447
Phelps Dodge Corp. 600,082
Texas Utilities Co. 594,218
Columbia Energy Group 573,756
Dominion Resources, Inc. 559,903
Anheuser-Busch Cos., Inc. 539,408
Illinova Corp. 524,645
</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.
13
-
<PAGE> 146
MainStay Equity Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
------------------------------
<S> <C> <C>
LONG-TERM BONDS (6.0%)+
CONVERTIBLE BONDS (6.0%)
COMPUTERS (2.7%)
Adaptec, Inc.
4.75%, due 2/1/04.............. $500,000 $ 387,500
-----------
HEALTH CARE--MEDICAL PRODUCTS (1.6%)
Elan Finance Corp.
Zero Coupon, due 12/14/18
(a)(b)......................... 400,000 225,500
-----------
MANUFACTURING (0.5%)
Mascotech, Inc.
4.50%, due 12/15/03............ 100,000 80,500
-----------
SPECIALTY PRINTING (1.2%)
World Color Press, Inc.
6.00%, due 10/1/07............. 175,000 171,937
-----------
Total Convertible Bonds
(Cost $791,422)................ 865,437
-----------
Total Long-Term Bonds
(Cost $791,422)................ 865,437
-----------
Shares
---------
COMMON STOCKS (71.7%)
AUTO PARTS & EQUIPMENT (1.4%)
Genuine Parts Co. .............. 6,000 200,625
-----------
BUILDING MATERIALS (5.8%)
Masco Corp. .................... 20,000 575,000
Sherwin-Williams Co. (The)...... 9,000 264,375
-----------
839,375
-----------
CHEMICALS (1.9%)
Geon Co. (The).................. 12,000 276,000
-----------
- ------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
Shares Value
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
ELECTRIC POWER COMPANIES (17.0%)
Allegheny Energy, Inc. ......... 8,000 $ 276,000
Baltimore Gas and Electric
Co. ........................... 9,000 277,875
Energy East Corp. .............. 13,400 757,100
Illinova Corp. ................. 17,700 442,500
LG&E Energy Corp. .............. 5,000 141,563
Nipsco Industries, Inc. ........ 8,800 267,850
Teco Energy, Inc. .............. 2,800 78,925
Texas Utilities Co. ............ 4,500 210,093
-----------
2,451,906
-----------
FOOD (7.5%)
Flowers Industries, Inc. ....... 22,000 526,625
Supervalu Inc. ................. 20,000 560,000
-----------
1,086,625
-----------
HEALTH CARE (0.8%)
Meditrust Corp. ................ 8,000 121,000
-----------
INSURANCE (2.3%)
Everest Reinsurance Holdings,
Inc. .......................... 9,000 340,875
-----------
LEISURE TIME (1.8%)
Callaway Golf Co. .............. 25,000 256,250
-----------
MANUFACTURING (2.1%)
U.S. Industries, Inc. .......... 16,000 298,000
-----------
NATURAL GAS DISTRIBUTORS & PIPELINES (4.3%)
Coastal Corp. (The)............. 14,500 506,594
Questar Corp.................... 5,700 110,437
-----------
617,031
-----------
OIL & GAS--EQUIPMENT & SERVICES (0.5%)
McDermott International,
Inc. .......................... 3,000 74,062
-----------
OIL & GAS--EXPLORATION & PRODUCTION (7.2%)
Apache Corp. ................... 15,000 379,687
Seagull Energy Corp. (c)........ 25,000 157,812
Snyder Oil Corp. ............... 20,661 275,050
Union Pacific Resources Group
Inc. .......................... 25,000 226,563
-----------
1,039,112
-----------
OIL--INTEGRATED DOMESTIC (1.0%)
USX-Marathon Group.............. 5,000 150,625
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 147
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL--INTEGRATED INTERNATIONAL (3.0%)
Conoco Inc. Class A (c)......... 7,500 $ 156,562
YPF Sociedad Anonima ADR (d).... 10,000 279,375
-----------
435,937
-----------
OIL--REFINING & MARKETING (1.1%)
Valero Energy Corp. ............ 7,200 153,000
-----------
POLLUTION CONTROL (1.4%)
Browning-Ferris Industries,
Inc. .......................... 7,000 199,063
-----------
REAL ESTATE INVESTMENT/MANAGEMENT (8.5%)
Developers Diversified Realty
Corp. ......................... 20,000 355,000
Felcor Lodging Trust Inc. ...... 1,000 23,063
Highwoods Properties, Inc. ..... 13,800 355,350
Simon Property Group, Inc. ..... 10,000 285,000
Spieker Properties, Inc. ....... 6,000 207,750
-----------
1,226,163
-----------
SPECIALTY PRINTING (0.9%)
Deluxe Corp. ................... 3,500 127,969
-----------
STEEL (1.7%)
Worthington Industries, Inc. ... 19,300 241,250
-----------
TOBACCO (1.5%)
Philip Morris Cos. Inc. ........ 4,000 214,000
Universal Corp. ................ 300 10,538
-----------
224,538
-----------
Total Common Stocks
(Cost $10,438,793)............. 10,359,406
-----------
PREFERRED STOCKS (12.5%)
CHEMICALS (1.7%)
Monsanto Co.,
6.50%.......................... 5,000 245,000
-----------
COMPUTERS (4.1%)
Microsoft Corp.
$2.196, Series A............... 6,000 586,500
-----------
METALS--MINING (2.6%)
Cyprus Amax Minerals Co.
$4.00 Series A................. 11,000 376,750
-----------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Shares Value
<S> <C> <C>
OIL--INTEGRATED DOMESTIC (1.3%)
Unocal Capital Trust Corp.,
6.25%.......................... 4,000 $ 191,000
-----------
REAL ESTATE INVESTMENT/MANAGEMENT (2.8%)
General Growth Properties, Inc.,
7.25% 7/15/08 (e).............. 16,000 412,000
-----------
Total Preferred Stocks
(Cost $1,810,671).............. 1,811,250
-----------
Principal
Amount
---------
SHORT-TERM INVESTMENTS (9.0%)
COMMERCIAL PAPER (9.0%)
Wells Fargo & Co.
5.51%, due 1/29/99............ $650,000 647,210
Xerox Credit Corp.
5.10%, due 1/4/99.............. 650,000 649,724
-----------
Total Short-Term Investments
(Cost $1,296,934).............. 1,296,934
-----------
Total Investments
(Cost $14,337,820) (f)......... 99.2% 14,333,027(g)
Cash and Other Assets,
Less Liabilities............... 0.8 123,212
----- ---------
Net Assets...................... 100.0% $14,456,239
===== ===========
</TABLE>
- -------
(a) May be sold to institutional investors only.
(b) 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.
(c) Non-income producing security.
(d) ADR--American Depository Receipt.
(e) PIERS--Preferred Income Equity Redeemable Stock.
(f) The cost for Federal income tax purposes is $14,370,465.
(g) At December 31, 1998, net unrealized depreciation was $37,438 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 $491,629 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $529,067.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 148
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$14,337,820).............................................. $14,333,027
Cash........................................................ 338,328
Receivables:
Investment securities sold................................ 822,779
Dividends and interest.................................... 41,360
Fund shares sold.......................................... 10,668
Unamortized organization expense............................ 59,631
-----------
Total assets........................................ 15,605,793
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,065,015
Custodian................................................. 9,961
Fund shares redeemed...................................... 9,177
MainStay Management....................................... 8,389
NYLIFE Distributors....................................... 5,539
Transfer agent............................................ 4,452
Trustees.................................................. 155
Accrued expenses............................................ 46,866
-----------
Total liabilities................................... 1,149,554
-----------
Net assets.................................................. $14,456,239
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 10,042
Class B................................................... 4,070
Additional paid-in capital.................................. 14,024,218
Accumulated undistributed net investment income............. 3,420
Accumulated undistributed net realized gain on
investments............................................... 419,282
Net unrealized depreciation on investments.................. (4,793)
-----------
Net assets.................................................. $14,456,239
===========
CLASS A
Net assets applicable to outstanding shares................. $10,289,749
===========
Shares of beneficial interest outstanding................... 1,004,199
===========
Net asset value per share outstanding....................... $ 10.25
Maximum sales charge (5.50% of offering price).............. 0.60
-----------
Maximum offering price per share outstanding................ $ 10.85
===========
CLASS B
Net assets applicable to outstanding shares................. $ 4,166,153
===========
Shares of beneficial interest outstanding................... 407,002
===========
Net asset value and offering price per share outstanding.... $ 10.24
===========
CLASS C
Net assets applicable to outstanding shares................. $ 337
===========
Shares of beneficial interest outstanding................... 33
===========
Net asset value and offering price per share outstanding.... $ 10.24
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
<PAGE> 149
Statement of Operations
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends................................................. $ 202,377
Interest.................................................. 100,416
---------
Total income............................................ 302,793
---------
Expenses:
Management................................................ 49,143
Shareholder communication................................. 47,094
Transfer agent............................................ 21,340
Registration.............................................. 21,056
Professional.............................................. 18,613
Service--Class A.......................................... 13,799
Service--Class B.......................................... 3,751
Service--Class C.......................................... 1
Distribution--Class B..................................... 11,254
Distribution--Class C..................................... 1
Custodian................................................. 9,439
Organization.............................................. 7,828
Recordkeeping............................................. 7,133
Trustees.................................................. 328
Miscellaneous............................................. 18,707
---------
Total expenses.......................................... 229,487
---------
Net investment income....................................... 73,306
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................ 526,098
Net unrealized depreciation on investments.................. (4,793)
---------
Net realized and unrealized gain on investments............. 521,305
---------
Net increase in net assets resulting from operations........ $ 594,611
=========
</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.
17
-
<PAGE> 150
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 73,306
Net realized gain on investments.......................... 526,098
Net unrealized depreciation on investments................ (4,793)
-----------
Net increase in net assets resulting from operations...... 594,611
-----------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (70,639)
Class B................................................. (14,420)
Class C................................................. (1)
From net realized gain on investments:
Class A................................................. (73,706)
Class B................................................. (28,837)
Class C................................................. (2)
-----------
Total dividends and distributions to shareholders..... (187,605)
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 9,963,096
Class B................................................. 4,192,218
Class C................................................. 300
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 79,421
Class B................................................. 38,060
Class C................................................. 3
-----------
14,273,098
Cost of shares redeemed:
Class A................................................. (15,950)
Class B................................................. (207,914)
Class C................................................. (1)
-----------
Increase in net assets derived from capital share
transactions......................................... 14,049,233
-----------
Net increase in net assets............................ 14,456,239
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $14,456,239
===========
Accumulated undistributed net investment income at end of
period.................................................... $ 3,420
===========
</TABLE>
- -------
* Commencement of operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 151
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
---------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.00 $ 10.00 $ 9.06
------- ------- -------
Net investment income....................................... 0.07 0.04 0.04
Net realized and unrealized gain on investments............. 0.32 0.31 1.25
------- ------- -------
Total from investment operations............................ 0.39 0.35 1.29
------- ------- -------
Less dividends and distributions:
From net investment income.................................. (0.07) (0.04) (0.04)
From net realized gain on investments....................... (0.07) (0.07) (0.07)
------- ------- -------
Total dividends and distributions........................... (0.14) (0.11) (0.11)
------- ------- -------
Net asset value at end of period............................ $ 10.25 $ 10.24 $ 10.24
======= ======= =======
Total investment return (a)................................. 4.01% 3.56% 14.30%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 1.20%+ 0.45%+ 0.45%+
Expenses................................................ 3.11%+ 3.86%+ 3.86%+
Portfolio turnover rate..................................... 270% 270% 270%
Net assets at end of period (in 000's)...................... $10,290 $ 4,166 $ --(b)
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one thousand.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
<PAGE> 152
MainStay Equity 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
Equity Income Fund (the "Fund").
The Fund currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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-
20
- -
<PAGE> 153
Notes to Financial Statements
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 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 $67,459 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $15,174 have been reclassified from
accumulated net investment loss to accumulated net realized gain on investments
and additional paid-in capital, due primarily to recharacterization of
distributions.
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.
21
-
<PAGE> 154
MainStay Equity Income 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.
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 December 31, 1998, the
Manager earned $49,143.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C shares of the Fund.
22
- -
<PAGE> 155
Notes to Financial Statements (continued)
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $2,531 for the period ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $169 for
the period ended December 31, 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 accrued for the period ended December 31,
1998 amounted to $21,340.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $9,225,000 and $1,024,000, respectively. This
represents 89.7% and 24.6% of the net assets at period end for Class A and B,
respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $387 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$7,133 for the period ended December 31, 1998.
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $41,626 and $29,070, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other
23
-
<PAGE> 156
MainStay Equity Income Fund
factors. Interest on revolving credit loans is charged based upon the Federal
Funds Advances rate. There were no borrowings on the line of credit at December
31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998* through
December 31, 1998
-------------------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold................................................ 998 424 --
Shares issued in reinvestment of dividends and
distributions............................................ 8 4 --
----- --- ---
1,006 428 --
Shares redeemed............................................ (2) (21) --
----- --- ---
Net increase............................................... 1,004 407 --(a)
===== === ===
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
24
- -
<PAGE> 157
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Equity Income Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
25
-
<PAGE> 158
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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> 159
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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> 160
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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> 161
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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 preceeded or
accompanied by an effective MainStay Funds prospectus. This report does not
offer to sell any securities or solicit orders to buy them.
(C)1999. All rights reserved. MSAN20-02/99
[RECYCLE.LOGO]
MAINSTAY EQUITY INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 162
Table of Contents
<TABLE>
<S> <C>
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 Performance 6
Diversification by Industry--Top 5 7
Returns & Lipper Rankings 8
Top 10 Equity Holdings 9
Portfolio of Investments 10
Financial Statements 19
Notes to Financial Statements 23
Report of Independent Accountants 28
The MainStay Funds 29
</TABLE>
<PAGE> 163
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 164
MainStay Equity Index Fund Highlights
1998 MARKET RECAP
- - The U.S. economy continued to expand in a favorable environment of generally
solid corporate earnings growth, low interest rates, and extraordinarily tame
inflation.
- - In the third quarter, however, an economic collapse in Russia, a weakening
economic outlook in Latin America, and ongoing economic woes in Asia combined
with lower corporate profits and expectations of slower growth in the U.S. to
cause U.S. equity markets to tumble.
- - Fears of global recession and financial market instability prompted the
Federal Reserve Board to move to lower interest rates 0.25% three separate
times beginning in late September. This provided an enormous psychological
boost that set the stage for the equity markets' unexpectedly speedy rebound
in the fourth quarter.
1998 FUND RECAP
- - For the one-year period ended 12/31/98, the MainStay Equity Index Fund
returned 27.69% for Class A shares, excluding all sales charges.
- - The Fund closely tracked the 28.58% return of the S&P 500* Index and exceeded
the 14.52% return of the average Lipper(+) general equity fund for the
one-year period ended 12/31/98.
- - Buoyed by positive investor sentiment toward their higher liquidity and
relative safe haven status, the large-capitalization stocks of which the Fund
is composed outperformed their mid- and small-capitalization counterparts
which returned 19.11% and -1.32%, respectively, based on the performance of
the S&P 400 MidCap(++) and S&P 600 SmallCap(sec.) Indexes, respectively.
- - The Fund underperformed the average Lipper S&P 500 Index objective fund, which
returned 28.05% for the one-year period ended 12/31/98.
- - The Fund earned a five-star rating from Morningstar(#) based on its overall
performance as of 12/31/98.
- -------
* See footnote on page 4 for more information on the S&P 500.
(+) See footnote and table on page 8 for more information on Lipper Inc.
(++) 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.
(sec.) S&P 600 SmallCap Index is an unmanaged capitalization-weighted index that
measures the performance of selected stocks with small
market-capitalizations.
(#) Morningstar, Inc. is an independent fund performance monitor. Its ratings
reflect historic risk-adjusted performance, taking into account fees and
other sales charges and may change monthly. Its ratings of 1 (low) to 5
(high) stars are based on a fund's 3-, 5-, and 10-year average annual
returns with fee adjustments in excess of 90-day Treasury bill returns, and
a risk factor that reflects fund performance below 90-day Treasury bill
monthly returns. The top 10% of the funds in a rating group 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. As of 12/31/98,
the individual 3- and 5-year ratings for the Class A shares of the MainStay
Equity Index Fund were 5 stars out of 2,802 and 1,702 domestic equity funds.
3
<PAGE> 165
$10,000 Invested in the Mainstay
Equity Index Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-year 23.86%, 5-year 22.25%, since inception 19.02%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY EQUITY INDEX FUND S&P 500* INFLATION(+)
-------------------------- -------- ----------
<S> <C> <C> <C>
12/90 9710 10000 10000
12/91 12430 13040 10298
12/92 13200 14032 10603
12/93 14391 15441 10893
12/94 14463 15645 11177
12/95 19657 21518 11467
12/96 23988 26454 11847
12/97 31728 35280 12047
12/98 40514 45361 12241
</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 for
use 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. It is not
possible to make an investment directly into an index.
+ 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> 166
Portfolio Management Discussion and Analysis
Overall in 1998, tame inflation and a corresponding drop in interest rates had a
positive impact on stock prices, with the S&P 500* Index returning 28.58% for
the one-year period ended 12/31/98. Against a backdrop of above-average
corporate productivity, falling producer prices (i.e., the cost of raw
materials), and heavy consumer spending, the market for large-capitalization
stocks managed to post its fourth consecutive annual gain in excess of 20%.
Giant mergers among the telecommunications, financial services, and heavy
industry sectors made headlines throughout the year.
During the first six months of the year, the S&P 500 climbed even as volatility
increased, crossing the 1,000 mark for the first time in February 1998. As fears
of a tightening by the Federal Reserve Board mounted during the second quarter,
the markets began a roller-coaster ride of volatility that began in April and
continued through June. Lower corporate profits, expectations of slower U.S.
corporate growth, and the General Motors strike helped cause stocks to tumble in
a July sell-off. Bad news continued in August, as Russia devalued its currency
and defaulted on its debt, weak commodity prices helped to dampen the outlook
for Latin America and ongoing economic instability in Asia generally impacted
markets worldwide. Declining consumption in these regions and their inexpensive
exports to the United States put considerable downward pressure on corporate
profitability. An impending credit crunch, political infighting, and the
collapse of a high-profile hedge fund only added to investor concerns. The
result of all this--the S&P 500's total return in August was one of the ten
worst since the Index's inception.
The S&P 500 Index scored tremendous gains early in September, which helped it to
quickly recover more than half of its August losses before faltering toward the
end of the month. Frustrated by a smaller-than-expected 0.25% interest rate cut
by the Federal Reserve Board at the end of September, the markets tumbled once
again, only to roar back as the Federal Reserve rapidly cut rates 0.25% twice
more in the fourth quarter. We believe this evidence of commitment to
maintaining global financial stability--along with a lack of panic among small
market investors after the summer plunge--was all the markets needed to spark a
powerful rally that fueled the strongest fourth-quarter returns in some twenty
years for most of the major U.S. large-cap equity indices. The quarter was led
by the technology sector in general and Internet-related stocks in particular.
GIVEN THIS CONTEXT, HOW DID THE MAINSTAY EQUITY INDEX FUND PERFORM IN 1998?
For the one-year period ended 12/31/98, the MainStay Equity Index Fund returned
27.69% for Class A shares, excluding all sales charges. The Fund slightly
underperformed the average Lipper(+) S&P 500 Index objective fund, which
returned 28.05% for the year, and significantly outperformed the average Lipper
general equity fund, which returned 14.52%.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
FEDERAL RESERVE BOARD
- --------------------
The seven-member governing board of the Federal Reserve System, which is the
central bank of the United States. The Board sets policies on reserve
requirements, estab- lishes bank regulations, sets the discount rate, tightens
or loosens the availability of credit in the economy, and regulates the purchase
of securities on margin.
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 footnote on page 4 for more information on the S&P 500.
+ See footnote and table on page 8 for more information on Lipper Inc.
5
<PAGE> 167
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.
SPIN-OFF
- --------------------
A form of corporate divestiture that results in a subsidiary or division
becoming an independent company.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[BAR CHART]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<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
12/98 27.69
</TABLE>
- --------
See footnote * on page 8 for more information on performance.
WHAT CAUSED THE FUND TO UNDERPERFORM THE S&P 500 AND ITS PEERS?
The Fund performed precisely as anticipated, closely mirroring the performance
of its benchmark, the S&P 500 Index, but trailing by a slight margin due to
various expenses. The S&P 500 Index itself is a hypothetical investment and does
not face the 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 redemptions. Since the Fund
underperformed its average S&P 500 Index objective fund by 0.36% and still
managed to rank in the top 10% of all funds in its rating universe, according to
Morningstar,(++) we believe the impact of these factors was minor.
DID THE FUND'S PORTFOLIO COMPOSITION CHANGE DURING THE YEAR?
It did. The S&P 500 Index is not static. Mergers, acquisitions, spin-offs, and
the success and failure of some companies can impact which companies are
included in the Index--and their relative weightings. During 1998, an abundance
of giant corporate mergers changed the composition of the S&P 500 Index, and
thus the Fund's portfolio. Specifically, at year end, there were 48 changes to
the S&P 500, over 75% of which were due to mergers and acquisitions.
WHICH WERE THE FUND'S MOST SIGNIFICANT PURCHASES AND SALES DURING THE ANNUAL
PERIOD?
All purchases and sales were executed in an attempt to invest in stocks in the
same proportions as they are represented in the S&P 500. Significant purchases
included America Online, General Electric, Microsoft, Coca-Cola, Exxon, Intel,
AT&T, Merck, Pfizer, and Safeway. Significant sales included Amoco, Chrysler,
General Re, General Electric, MCI WorldCom, Exxon, IBM, Abercrombie & Fitch,
Microsoft, and Intel.
- -------
++ Please see footnote on page 3 for more information on Morningstar, Inc.
6
<PAGE> 168
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
ALL OTHERS 74.2%
COMPUTER SOFTWARE & SERVICES 6.1%
HEALTH CARE - DRUGS 5.4%
COMPUTER SYSTEMS 5.1%
TELEPHONE 4.7%
HEALTHCARE - DIVERSIFIED 4.5%
</TABLE>
Actual percentages will vary over time
WHICH OF THE FUND'S INDIVIDUAL STOCKS SHOWED THE BEST PERFORMANCE DURING 1998?
America Online generated the single highest gain for the year, rising
586%.(sec.) Other strong performers included Dell Computer, up 249%; Apple
Computer, up 212%; EMC Corp., up 210%; Lucent Technology, up 175%; Ascend
Communications, up 168%; Cisco Systems, up 150%; Providian Financial, up 149%;
Unisys Corp., up 148%; and Compuware, which rose 144%.
WHICH INDIVIDUAL STOCKS RECORDED THE WORST PERFORMANCE DURING 1998?
Harnischfeger was the worst-performing stock in the S&P 500, with a decline of
71%. IKON Office Solutions fell 70%; Rowan Companies fell 68%; Case Corp. was
down 64%; and Union Pacific Resources declined 63% for the year.
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
Stocks are inherently risky investments. While they historically have provided
investors with attractive returns and outperformed all other major asset classes
over the long term, investors must be aware that over shorter periods of time,
their prices may fluctuate in value, often dramatically.
The objective of the MainStay Equity Index Fund is to seek to provide investment
results that correspond to the total return performance (reflecting reinvestment
of dividends) of common stocks in the aggregate, as represented by the S&P 500.
As a result, we do not respond to nor evaluate changing market and economic
conditions. Nor do we manage according to a given outlook for the equity markets
or the economy in general.
However, it seems unlikely that stock market returns can continue at the levels
we have seen in recent years. As 1998 has once again proved, equity markets are
unpredictable, particularly in the short term, and no one can know with absolute
certainty whether the markets will rise or fall in 1999. That's why we feel it
is important for investors to keep focused on their long-term goals despite
short-term volatility.
James A. Mehling, CFA
Portfolio Manager
Monitor Capital Advisors, Inc.
- -------
(sec.) Returns reflect performance for the one-year period ended 12/31/98.
Past performance is no guarantee of future results.
7
<PAGE> 169
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS THROUGH 12/31/98
<S> <C> <C> <C>
Class A 27.69% 23.00% 19.47%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS THROUGH 12/31/98
<S> <C> <C> <C>
Class A 23.86% 22.25% 19.02%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS THROUGH 12/31/98
<S> <C> <C> <C>
Equity Index 78 out of 39 out of 13 out of
Fund 95 funds 40 funds 13 funds
Average Lipper
S&P 500 Index
objective fund 28.05% 23.56% 20.27%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $39.47 $0.2100 $0.4262
</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 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 Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Life of
fund return is for the period 12/20/90 through 12/31/98. For the 12-month
period ended 12/31/98, the Lipper general equity average included 3,325
funds and the MainStay Equity Index Fund was ranked 690 out of 3,325; 118
out of 1,222; and 171 out of 621 funds for the 1-year, 5-year, and
since-inception periods.
8
<PAGE> 170
Top 10 Equity Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Microsoft Corp. $27,059,873
General Electric Co. 26,168,213
Intel Corp. 15,462,447
Wal-Mart Stores, Inc. 14,358,164
Exxon Corp. 13,907,571
Merck & Co., Inc. 13,760,192
International Business Machines Corp. 13,493,032
Coca-Cola Co. (The) 12,898,382
Pfizer Inc. 12,732,659
Cisco Systems, Inc. 11,469,490
</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.
9
<PAGE> 171
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.2%)(+)
AEROSPACE/DEFENSE (1.1%)
Boeing Co. (The).................. 78,175 $ 2,550,459
General Dynamics Corp. ........... 9,897 580,212
Lockheed Martin Corp. ............ 15,407 1,305,743
Northrop Grumman Corp. ........... 5,240 383,175
Raytheon Co. Class B.............. 26,411 1,406,386
Rockwell International Corp. ..... 15,003 728,583
United Technologies Corp. ........ 17,715 1,926,506
-----------
8,881,064
-----------
AIRLINES (0.3%)
AMR Corp. (a)..................... 14,407 855,416
Delta Air Lines, Inc. ............ 11,155 580,060
Southwest Airlines Co. ........... 26,330 590,779
US Airways Group, Inc. (a)........ 6,855 356,460
-----------
2,382,715
-----------
ALUMINUM (0.2%)
Alcan Aluminum Ltd. .............. 17,919 484,933
Aluminum Co. of America........... 14,370 1,071,463
Reynolds Metals Co. .............. 5,083 267,811
-----------
1,824,207
-----------
AUTO PARTS & EQUIPMENT (0.2%)
Cooper Tire & Rubber Co. ......... 6,133 125,343
Genuine Parts Co. ................ 14,166 473,676
Goodyear Tire & Rubber Co.
(The)............................ 12,378 624,315
-----------
1,223,334
-----------
AUTOMOBILES (1.2%)
Ford Motor Co. ................... 94,695 5,557,413
General Motors Corp. ............. 51,400 3,678,312
-----------
9,235,725
-----------
BANKS--MAJOR REGIONAL (4.5%)
Bank of New York Co., Inc.
(The)............................ 59,525 2,395,881
Bank One Corp. ................... 91,669 4,680,848
BankBoston Corp. ................. 23,152 901,481
BB&T Corp. ....................... 22,983 926,502
Comerica Inc. .................... 12,144 828,069
Fifth Third Bancorp............... 20,995 1,497,206
Firstar Corp. .................... 13,100 1,221,575
Fleet Financial Group, Inc. ...... 44,696 1,997,353
Huntington Bancshares Inc. ....... 16,600 499,038
KeyCorp........................... 35,587 1,138,784
Mellon Bank Corp. ................ 20,451 1,406,006
Mercantile Bancorp Inc. .......... 12,300 567,338
National City Corp. .............. 25,867 1,875,358
- -------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
BANKS--MAJOR REGIONAL (CONTINUED)
Northern Trust Corp. ............. 8,795 $ 767,913
PNC Bank Corp. ................... 23,673 1,281,301
Regions Financial Corp. .......... 17,290 697,003
Republic New York Corp. .......... 8,510 387,737
State Street Corp. ............... 12,742 886,365
Summit Bancorp.................... 13,636 595,723
SunTrust Banks, Inc. ............. 24,654 1,886,031
Synovus Financial Corp. .......... 20,688 504,270
Union Planters Corp. ............. 10,626 481,491
U.S. Bancorp...................... 56,830 2,017,465
Wachovia Corp. ................... 15,820 1,383,261
Wells Fargo Co. .................. 126,568 5,054,809
-----------
35,878,808
-----------
BANKS--MONEY CENTER (2.4%)
BankAmerica Corp. ................ 135,400 8,140,925
Bankers Trust Corp. .............. 7,424 634,288
Chase Manhattan Corp. (The)....... 66,192 4,505,193
First Union Corp. ................ 77,550 4,716,009
Morgan (J.P.) & Co., Inc. ........ 13,701 1,439,461
-----------
19,435,876
-----------
BANKS--SAVINGS & LOANS (0.3%)
Golden West Financial Corp. ...... 4,563 418,370
Washington Mutual, Inc. .......... 46,601 1,779,576
-----------
2,197,946
-----------
BEVERAGES--ALCOHOLIC (0.5%)
Anheuser-Busch Cos., Inc. ........ 37,417 2,455,491
Brown-Forman Corp.
Class B.......................... 5,349 404,852
Coors (Adolph) Co.
Class B.......................... 2,895 163,387
Seagram Co. Ltd. (The)............ 30,878 1,173,364
-----------
4,197,094
-----------
BEVERAGES--SOFT DRINKS (2.4%)
Coca-Cola Co. (The) (c)........... 192,873 12,898,382
Coca-Cola Enterprises Inc. ....... 30,626 1,094,879
PepsiCo, Inc. .................... 114,804 4,699,789
-----------
18,693,050
-----------
BROADCAST/MEDIA (1.1%)
CBS Corp. ........................ 55,264 1,809,896
Clear Channel Communications, Inc.
(a).............................. 19,493 1,062,369
Comcast Corp. Special Class A..... 29,096 1,707,571
MediaOne Group Inc. (a)........... 47,455 2,230,385
Tele-Communications, Inc. Series A
TCI Group (a).................... 42,127 2,330,150
-----------
9,140,371
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
10
<PAGE> 172
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUILDING MATERIALS (0.2%)
Masco Corp. ...................... 26,703 $ 767,711
Owens Corning..................... 4,070 144,231
Sherwin-Williams Co. (The)........ 13,653 401,057
-----------
1,312,999
-----------
CHEMICALS (1.4%)
Air Products & Chemicals, Inc. ... 18,165 726,600
Dow Chemical Co. (The)............ 17,278 1,571,218
Du Pont (E.I.) De Nemours &
Co. ............................. 88,048 4,672,047
Eastman Chemical Co. ............. 6,210 277,897
Goodrich (B.F.) Co. (The)......... 5,660 203,053
Hercules Inc. .................... 7,623 208,680
Monsanto Co. ..................... 49,003 2,327,642
Praxair, Inc. .................... 12,400 437,100
Rohm & Haas Co. .................. 13,071 393,764
Union Carbide Corp. .............. 10,362 440,385
-----------
11,258,386
-----------
CHEMICALS--DIVERSIFIED (0.2%)
Avery Dennison Corp. ............. 9,250 416,828
Engelhard Corp. .................. 11,281 219,980
FMC Corp. (a)..................... 2,742 153,552
PPG Industries, Inc. ............. 14,068 819,461
-----------
1,609,821
-----------
CHEMICALS--SPECIALTY (0.1%)
Grace (W.R.) & Co. (a)............ 5,968 93,623
Great Lakes Chemical Corp. ....... 4,700 188,000
Morton International, Inc. ....... 9,466 231,917
Nalco Chemical Co. ............... 5,300 164,300
Sigma-Aldrich Corp. .............. 7,917 232,562
-----------
910,402
-----------
COMMUNICATIONS--EQUIPMENT MANUFACTURERS (3.7%)
Andrew Corp. (a).................. 6,774 111,771
Ascend Communications, Inc. (a)... 16,978 1,116,304
Cabletron Systems, Inc. (a)....... 12,911 108,130
Cisco Systems, Inc. (a)........... 123,577 11,469,490
General Instrument Corp. (a)...... 13,103 444,683
Lucent Technologies Inc. ......... 102,937 11,323,070
Northern Telecom Ltd. ............ 50,983 2,555,523
Scientific-Atlanta, Inc. ......... 5,855 133,567
Tellabs, Inc. (a)................. 15,263 1,046,469
3Com Corp. (a).................... 28,048 1,256,901
-----------
29,565,908
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
COMPUTER SOFTWARE & SERVICES (6.1%)
Adobe Systems Inc. ............... 5,250 $ 245,438
America Online Inc. (a)........... 35,600 5,153,100
Autodesk, Inc. ................... 3,658 156,151
Automatic Data Processing,
Inc. ............................ 23,723 1,902,288
BMC Software, Inc. (a)............ 16,874 751,948
Ceridian Corp. (a)................ 5,728 399,886
Computer Associates International,
Inc. ............................ 42,159 1,797,027
Computer Sciences Corp. (a)....... 12,219 787,362
Compuware Corp. (a)............... 10,400 812,500
Electronic Data Systems Corp. .... 38,637 1,941,509
Equifax Inc. ..................... 11,667 398,865
First Data Corp. ................. 34,649 1,097,940
HBO & Co. ........................ 36,364 1,043,192
Microsoft Corp. (a)............... 195,114 27,059,873
Novell, Inc. (a).................. 27,741 502,806
Oracle Corp. (a).................. 76,037 3,279,096
Parametric Technology Corp. (a)... 21,341 349,459
Paychex, Inc. .................... 12,812 659,017
PeopleSoft, Inc. (a).............. 18,129 343,318
Shared Medical Systems Corp. ..... 2,101 104,787
-----------
48,785,562
-----------
COMPUTER SYSTEMS (5.1%)
Apple Computer, Inc. (a).......... 10,413 426,282
Compaq Computer Corp. ............ 133,053 5,579,910
Data General Corp. (a)............ 3,793 62,347
Dell Computer Corp. (a)........... 99,532 7,284,498
EMC Corp. (a)..................... 39,214 3,333,190
Gateway 2000, Inc. (a)............ 12,287 628,941
Hewlett-Packard Co. .............. 81,159 5,544,174
International Business Machines
Corp. ........................... 73,034 13,493,032
Seagate Technology, Inc. (a)...... 19,187 580,407
Silicon Graphics, Inc. (a)........ 14,893 191,747
Sun Microsystems, Inc. (a)........ 29,828 2,554,023
Unisys Corp. (a).................. 19,847 683,481
-----------
40,362,032
-----------
CONGLOMERATES (0.2%)
Tenneco Inc. ..................... 13,483 459,265
Textron Inc. ..................... 12,347 937,600
-----------
1,396,865
-----------
CONSUMER FINANCE (0.4%)
Capital One Financial Corp. ...... 5,213 599,495
Countrywide Credit Industries,
Inc. ............................ 8,771 440,195
Household International, Inc. .... 37,819 1,498,578
Providian Financial Corp. ........ 11,286 846,487
-----------
3,384,755
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
<PAGE> 173
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CONTAINERS--METAL & GLASS (0.1%)
Ball Corp. ....................... 2,406 $ 110,075
Crown Cork & Seal Co., Inc. ...... 9,541 293,982
Owens-Illinois, Inc. (a).......... 12,111 370,899
-----------
774,956
-----------
CONTAINERS--PAPER (0.1%)
Bemis Co., Inc. .................. 4,188 158,882
Temple-Inland Inc. ............... 4,362 258,721
-----------
417,603
-----------
COSMETICS/PERSONAL CARE (0.7%)
Alberto-Culver Co.
Class B.......................... 4,366 116,517
Avon Products, Inc. .............. 20,720 916,860
Gillette Co. (The)................ 86,825 4,194,733
International Flavors &
Fragrances Inc. ................. 8,464 374,003
-----------
5,602,113
-----------
ELECTRIC POWER COMPANIES (2.3%)
Ameren Corp. ..................... 10,673 455,604
American Electric Power Co.,
Inc. ............................ 14,981 705,043
Baltimore Gas & Electric Co. ..... 11,590 357,841
Carolina Power & Light Co. ....... 11,903 560,185
Central & South West Corp. ....... 16,689 457,904
Cinergy Corp. .................... 12,389 425,872
Consolidated Edison, Inc. ........ 18,468 976,496
Dominion Resources, Inc. ......... 15,419 720,838
DTE Energy Co. ................... 11,407 489,075
Duke Energy Corp. ................ 28,392 1,818,863
Edison International.............. 27,794 774,758
Entergy Corp. .................... 19,361 602,611
FirstEnergy Corp. ................ 18,651 607,323
FPL Group, Inc. .................. 14,295 880,929
GPU, Inc. ........................ 10,128 447,531
Houston Industries Inc. .......... 22,291 716,098
New Century Energies Inc. ........ 8,758 426,953
Niagara Mohawk Power Corp. (a).... 14,783 238,376
Northern States Power Co. ........ 11,899 330,197
PacifiCorp........................ 23,445 493,810
PECO Energy Co. .................. 17,487 727,896
PG&E Corp. ....................... 30,033 946,040
PP&L Resources, Inc. ............. 11,904 331,824
Public Service Enterprise Group
Inc. ............................ 17,833 713,320
Southern Co. (The)................ 54,505 1,584,052
Texas Utilities Co. .............. 22,010 1,027,592
Unicom Corp. ..................... 17,126 660,421
-----------
18,477,452
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
ELECTRICAL EQUIPMENT (4.0%)
AMP Inc. ......................... 17,203 $ 895,631
Emerson Electric Co. ............. 34,568 2,162,661
General Electric Co. (c).......... 256,394 26,168,213
Grainger (W.W.), Inc. ............ 7,418 308,774
Honeywell Inc. ................... 10,011 753,953
Raychem Corp. .................... 6,250 201,953
Solectron Corp. (a)............... 9,200 855,025
Thomas & Betts Corp. ............. 4,324 187,283
-----------
31,533,493
-----------
ELECTRONICS--DEFENSE (0.0%) (b)
EG&G, Inc. ....................... 3,652 101,571
-----------
ELECTRONICS--INSTRUMENTATION (0.1%)
Perkin-Elmer Corp. (The).......... 3,893 379,811
Tektronix, Inc. .................. 3,693 111,021
-----------
490,832
-----------
ELECTRONICS--SEMICONDUCTORS (3.0%)
Advanced Micro Devices, Inc.
(a).............................. 11,325 327,717
Applied Materials, Inc. (a)....... 28,881 1,232,858
Intel Corp. ...................... 130,416 15,462,447
KLA-Tencor Corp. (a).............. 6,831 296,295
LSI Logic Corp. (a)............... 11,068 178,471
Micron Technology, Inc. (a)....... 16,773 848,085
Motorola, Inc. ................... 47,090 2,875,433
National Semiconductor Corp.
(a).............................. 12,984 175,284
Texas Instruments Inc. ........... 30,481 2,608,030
-----------
24,004,620
-----------
ENGINEERING & CONSTRUCTION (0.0%) (b)
Fluor Corp. ...................... 6,172 262,696
Foster Wheeler Corp. ............. 3,173 41,844
-----------
304,540
-----------
ENTERTAINMENT (1.6%)
King World Productions, Inc.
(a).............................. 5,770 169,854
Time Warner Inc. ................. 96,023 5,959,428
Viacom Inc. Class B (a)........... 27,245 2,016,130
Walt Disney Co. (The)............. 160,333 4,809,990
-----------
12,955,402
-----------
FINANCIAL--MISCELLANEOUS (4.3%)
American Express Co. ............. 35,343 3,613,822
American General Corp. ........... 19,869 1,549,782
Associates First Capital Corp.
Class A.......................... 56,544 2,396,052
Citigroup Inc. ................... 177,749 8,798,576
Fannie Mae........................ 81,123 6,003,102
Franklin Resources Inc. .......... 19,839 634,848
Freddie Mac....................... 53,306 3,434,905
MBIA Inc. ........................ 7,747 507,913
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE> 174
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL--MISCELLANEOUS (CONTINUED)
MBNA Corp. ....................... 58,805 $ 1,466,450
Morgan Stanley Dean Witter &
Co. ............................. 45,180 3,207,780
SLM Holding Corp. ................ 13,199 633,552
SunAmerica Inc. .................. 16,957 1,375,636
Transamerica Corp. ............... 5,008 578,424
-----------
34,200,842
-----------
FOOD (2.1%)
Bestfoods......................... 22,320 1,188,540
Campbell Soup Co. ................ 35,262 1,939,410
ConAgra, Inc. .................... 38,343 1,207,805
General Mills, Inc. .............. 12,187 947,539
Heinz (H.J.) Co. ................. 28,456 1,611,321
Hershey Foods Corp. .............. 11,240 698,988
Kellogg Co. ...................... 31,929 1,089,577
Quaker Oats Co. (The)............. 10,694 636,293
Ralston-Ralston Purina Group...... 24,570 795,454
Sara Lee Corp. ................... 71,514 2,015,801
Unilever N.V. .................... 50,137 4,158,237
Wrigley (Wm.) Jr. Co. ............ 9,070 812,332
-----------
17,101,297
-----------
FOOD & HEALTH CARE DISTRIBUTORS (0.3%)
Cardinal Health, Inc. ............ 15,808 1,199,432
SUPERVALU Inc. ................... 9,421 263,788
SYSCO Corp. ...................... 26,114 716,503
-----------
2,179,723
-----------
GOLD & PRECIOUS METALS MINING (0.2%)
Barrick Gold Corp. ............... 29,147 568,366
Battle Mountain Gold Co. ......... 18,095 74,642
Homestake Mining Co. ............. 18,783 172,569
Newmont Mining Corp. ............. 13,118 236,944
Placer Dome Inc. ................. 19,706 226,619
-----------
1,279,140
-----------
HARDWARE & TOOLS (0.1%)
Black & Decker Corp. (The)........ 6,834 383,131
Snap-on Inc. ..................... 4,604 160,277
Stanley Works (The)............... 6,958 193,084
-----------
736,492
-----------
HEALTH CARE--DIVERSIFIED (4.5%)
Abbott Laboratories............... 118,751 5,818,799
Allergan, Inc. ................... 5,087 329,383
American Home Products Corp. ..... 103,125 5,807,226
Bristol-Myers Squibb Co. ......... 77,783 10,408,338
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
HEALTH CARE--DIVERSIFIED (CONTINUED)
Johnson & Johnson................. 105,217 $ 8,825,076
Mallinckrodt Inc. ................ 5,772 177,850
Warner-Lambert Co. ............... 64,379 4,840,496
-----------
36,207,168
-----------
HEALTH CARE--DRUGS (5.4%)
Lilly (Eli) & Co. ................ 86,013 7,644,405
Merck & Co., Inc. ................ 93,171 13,760,192
Pfizer Inc. ...................... 101,506 12,732,659
Pharmacia & Upjohn, Inc. ......... 39,948 2,262,056
Schering-Plough Corp. ............ 115,036 6,355,739
-----------
42,755,051
-----------
HEALTH CARE--HMOS (0.2%)
Aetna Inc. ....................... 11,136 875,568
Humana Inc. (a)................... 13,108 233,486
United Healthcare Corp. .......... 14,538 626,043
-----------
1,735,097
-----------
HEALTH CARE--HOSPITAL MANAGEMENT (0.2%)
Columbia/HCA Healthcare Corp. .... 50,467 1,249,058
Tenet Healthcare Corp. (a)........ 24,224 635,880
-----------
1,884,938
-----------
HEALTH CARE--MEDICAL PRODUCTS (1.0%)
Bard (C.R.), Inc. ................ 4,200 207,900
Bausch & Lomb Inc. ............... 4,362 261,720
Baxter International Inc. ........ 22,419 1,441,822
Becton, Dickinson & Co. .......... 19,247 821,606
Biomet, Inc. ..................... 8,800 354,200
Boston Scientific Corp. (a)....... 30,757 824,672
Guidant Corp. .................... 11,849 1,306,352
Medtronic, Inc. .................. 38,416 2,852,388
St. Jude Medical, Inc. (a)........ 6,588 182,405
-----------
8,253,065
-----------
HEALTH CARE--MISCELLANEOUS (0.4%)
ALZA Corp. (a).................... 6,799 355,248
Amgen Inc. (a).................... 20,034 2,094,805
HCR Manor Care, Inc. (a).......... 8,503 249,776
HEALTHSOUTH Corp. (a)............. 33,075 510,595
-----------
3,210,424
-----------
HEAVY DUTY TRUCKS & PARTS (0.2%)
Cummins Engine Co., Inc. ......... 3,121 110,796
Dana Corp. ....................... 12,934 528,677
Eaton Corp. ...................... 5,634 398,253
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE> 175
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEAVY DUTY TRUCKS & PARTS (CONTINUED)
ITT Industries, Inc. ............. 8,129 $ 323,128
Navistar International Corp.
(a).............................. 5,418 154,413
PACCAR Inc. ...................... 6,136 252,343
-----------
1,767,610
-----------
HOMEBUILDING (0.1%)
Centex Corp. ..................... 4,698 211,704
Kaufman & Broad Home Corp. ....... 3,088 88,780
Pulte Corp. ...................... 3,370 93,728
-----------
394,212
-----------
HOTEL/MOTEL (0.4%)
Carnival Corp. ................... 46,600 2,236,800
Harrah's Entertainment, Inc.
(a).............................. 7,902 123,963
Hilton Hotels Corp. .............. 20,458 391,259
Marriott International, Inc.
Class A.......................... 19,638 569,502
-----------
3,321,524
-----------
HOUSEHOLD--FURNISHINGS & APPLIANCES (0.1%)
Armstrong World Industries,
Inc. ............................ 3,041 183,410
Maytag Corp. ..................... 7,169 446,270
Whirlpool Corp. .................. 5,801 321,231
-----------
950,911
-----------
HOUSEHOLD PRODUCTS (1.9%)
Clorox Co. (The).................. 8,181 955,643
Colgate-Palmolive Co. ............ 22,874 2,124,423
Fort James Corp. ................. 17,362 694,480
Kimberly-Clark Corp. ............. 42,445 2,313,252
Procter & Gamble Co. (The)........ 103,789 9,477,233
-----------
15,565,031
-----------
HOUSEWARES (0.2%)
Fortune Brands, Inc. ............. 13,560 428,835
Newell Co. ....................... 12,825 529,031
Rubbermaid Inc. .................. 11,834 372,031
Tupperware Corp. ................. 4,561 74,972
-----------
1,404,869
-----------
INSURANCE BROKERS (0.2%)
Aon Corp. ........................ 13,250 733,719
Marsh & McLennan Cos., Inc. ...... 20,210 1,181,022
-----------
1,914,741
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
INSURANCE--LIFE (0.4%)
Conseco, Inc. .................... 24,459 $ 747,528
Jefferson-Pilot Corp. ............ 8,383 628,725
Lincoln National Corp. ........... 7,984 653,191
Provident Cos., Inc. ............. 10,653 442,100
Torchmark Corp. .................. 11,097 391,863
UNUM Corp. ....................... 10,920 637,455
-----------
3,500,862
-----------
INSURANCE--MULTI-LINE (1.3%)
American International Group,
Inc. ............................ 82,111 7,933,975
CIGNA Corp. ...................... 16,140 1,247,824
Hartford Financial Services
Group,Inc. (The)................. 18,475 1,013,816
-----------
10,195,615
-----------
INSURANCE--PROPERTY & CASUALTY (0.9%)
Allstate Corp. (The).............. 64,177 2,478,837
Chubb Corp. (The)................. 12,993 842,921
Cincinnati Financial Corp. ....... 13,124 480,667
Loews Corp. ...................... 9,022 886,412
MGIC Investment Corp. ............ 8,548 340,317
Progressive Corp. (The)........... 5,612 950,532
SAFECO Corp. ..................... 10,650 457,284
St. Paul Cos., Inc. (The)......... 18,516 643,431
-----------
7,080,401
-----------
INVESTMENT BANK/BROKERAGE (0.6%)
Bear Stearns Cos., Inc. (The)..... 8,983 335,740
Lehman Brothers Holdings Inc. .... 9,039 398,281
Merrill Lynch & Co., Inc. ........ 27,730 1,850,977
Schwab (Charles) Corp. (The)...... 31,578 1,774,289
-----------
4,359,287
-----------
LEISURE TIME (0.1%)
Brunswick Corp. .................. 7,764 192,159
Mirage Resorts, Inc. (a).......... 14,127 211,022
-----------
403,181
-----------
MACHINE TOOLS (0.0%) (b)
Milacron Inc. .................... 3,105 59,771
-----------
MACHINERY--DIVERSIFIED (0.4%)
Briggs & Stratton Corp. .......... 1,815 90,523
Case Corp. ....................... 5,920 129,130
Caterpillar Inc. ................. 28,100 1,292,600
Cooper Industries, Inc. .......... 8,104 386,459
Deere & Co. ...................... 18,646 617,649
Harnischfeger Industries, Inc. ... 3,763 38,336
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE> 176
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MACHINERY--DIVERSIFIED (CONTINUED)
Ingersoll-Rand Co. ............... 13,007 $ 610,516
NACCO Industries, Inc. Class A.... 663 60,996
Thermo Electron Corp. (a)......... 12,435 210,618
Timken Co. (The).................. 4,927 92,997
-----------
3,529,824
-----------
MANUFACTURED HOUSING (0.0%) (b)
Fleetwood Enterprises, Inc. ...... 2,810 97,647
-----------
MANUFACTURING--DIVERSIFIED (1.2%)
Aeroquip-Vickers, Inc. ........... 2,193 65,653
AlliedSignal Inc. ................ 43,837 1,942,527
Crane Co. ........................ 5,448 164,462
Danaher Corp. .................... 10,518 571,259
Dover Corp. ...................... 17,491 640,608
Illinois Tool Works Inc. ......... 19,702 1,243,689
Johnson Controls, Inc. ........... 6,691 394,769
Millipore Corp. .................. 3,416 97,142
Pall Corp. ....................... 9,879 250,062
Parker-Hannifin Corp. ............ 8,772 287,282
Sealed Air Corp. (a).............. 6,478 330,783
Tyco International Ltd. .......... 50,543 3,812,838
-----------
9,801,074
-----------
METALS--MINING (0.1%)
ASARCO Inc. ...................... 3,228 48,622
Cyprus Amax Minerals Co. ......... 7,074 70,740
Freeport-McMoRan Copper & Gold
Inc. Class B..................... 12,972 135,395
Inco Ltd. ........................ 13,111 138,485
Phelps Dodge Corp. ............... 4,735 240,893
-----------
634,135
-----------
MISCELLANEOUS (1.4%)
AES Corp. (The) (a)............... 13,864 656,807
AirTouch Communications, Inc.
(a).............................. 44,760 3,228,315
American Greetings Corp. Class
A................................ 5,549 227,856
Archer-Daniels-Midland Co. ....... 46,464 798,600
Corning Inc. ..................... 18,222 819,990
Harcourt General, Inc. ........... 5,560 295,722
Harris Corp. ..................... 6,245 228,723
Jostens, Inc. .................... 2,896 75,839
Minnesota Mining &
Manufacturing Co. ............... 31,415 2,234,392
Nextel Communications, Inc.
Class A (a)...................... 22,464 530,712
Pioneer Hi-Bred International,
Inc. ............................ 19,021 513,567
Sprint Corp. (PCS Group) (a)...... 32,462 750,684
TRW Inc. ......................... 9,356 525,690
-----------
10,886,897
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
NATURAL GAS DISTRIBUTORS &
PIPELINES (0.6%)
Coastal Corp. (The)............... 16,576 $ 579,124
Columbia Energy Group............. 6,480 374,220
Consolidated Natural Gas Co. ..... 7,460 402,840
Eastern Enterprises............... 1,571 68,731
Enron Corp. ...................... 25,853 1,475,237
NICOR Inc. ....................... 3,787 160,001
ONEOK, Inc. ...................... 2,467 89,120
Peoples Energy Corp. ............. 2,777 110,733
Sempra Energy..................... 18,793 476,872
Sonat, Inc. ...................... 8,634 233,658
Williams Cos., Inc. (The)......... 33,355 1,040,259
-----------
5,010,795
-----------
OFFICE EQUIPMENT & SUPPLIES (0.6%)
Moore Corp. Ltd. ................. 6,921 76,131
Pitney Bowes Inc. ................ 21,304 1,407,395
Xerox Corp. ...................... 25,859 3,051,362
-----------
4,534,888
-----------
OIL & GAS DRILLING (0.0%) (b)
Helmerich & Payne, Inc. .......... 3,833 74,264
Rowan Cos., Inc. (a).............. 6,529 65,290
-----------
139,554
-----------
OIL & GAS--EQUIPMENT & SERVICES (0.4%)
Baker Hughes Inc. ................ 25,601 452,818
Halliburton Co. .................. 34,425 1,019,840
McDermott International Inc. ..... 4,685 115,661
Schlumberger Ltd. ................ 42,792 1,973,781
-----------
3,562,100
-----------
OIL & GAS--EXPLORATION &
PRODUCTION (0.2%)
Anadarko Petroleum Corp. ......... 9,424 290,966
Apache Corp. ..................... 7,749 196,146
Burlington Resources Inc. ........ 13,965 500,122
Oryx Energy Co. (a)............... 8,317 111,760
Union Pacific Resources Group,
Inc. ............................ 19,791 179,356
-----------
1,278,350
-----------
OIL--INTEGRATED DOMESTIC (0.7%)
Amerada Hess Corp. ............... 7,200 358,200
Ashland Inc. ..................... 6,006 290,540
Atlantic Richfield Co. ........... 25,277 1,649,324
Kerr-McGee Corp. ................. 3,739 143,017
Occidental Petroleum Corp. ....... 27,094 457,211
Phillips Petroleum Co. ........... 19,894 847,982
Sunoco Inc. ...................... 7,379 266,105
Unocal Corp. ..................... 19,014 554,971
USX-Marathon Group................ 24,148 727,459
-----------
5,294,809
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 177
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL--INTEGRATED INTERNATIONAL (4.2%)
Chevron Corp. .................... 51,044 $ 4,233,462
Exxon Corp. ...................... 190,189 13,907,571
Mobil Corp. ...................... 61,044 5,318,458
Royal Dutch Petroleum Co. ........ 167,770 8,031,989
Texaco Inc. ...................... 41,823 2,211,391
-----------
33,702,871
-----------
PAPER & FOREST PRODUCTS (0.5%)
Boise Cascade Corp. .............. 4,334 134,354
Champion International Corp. ..... 7,499 303,709
Georgia-Pacific Group............. 6,861 401,797
International Paper Co. .......... 24,193 1,084,149
Louisiana-Pacific Corp. .......... 8,576 157,048
Mead Corp. (The).................. 8,149 238,868
Potlatch Corp. ................... 2,236 82,453
Union Camp Corp. ................. 5,408 365,040
Westvaco Corp. ................... 7,977 213,883
Weyerhaeuser Co. ................. 15,560 790,642
Willamette Industries, Inc. ...... 8,687 291,015
-----------
4,062,958
-----------
PHOTOGRAPHY/IMAGING (0.3%)
Eastman Kodak Co. ................ 25,367 1,826,424
IKON Office Solutions, Inc. ...... 10,693 91,559
Polaroid Corp. ................... 3,564 66,602
-----------
1,984,585
-----------
POLLUTION CONTROL (0.3%)
Browning-Ferris Industries,
Inc. ............................ 13,608 386,977
Waste Management, Inc. ........... 44,963 2,096,400
-----------
2,483,377
-----------
PUBLISHING (0.1%)
McGraw-Hill Cos., Inc. (The)...... 7,836 798,292
Meredith Corp. ................... 4,114 155,818
-----------
954,110
-----------
PUBLISHING--NEWSPAPER (0.5%)
Dow Jones & Co., Inc. ............ 7,240 348,425
Gannett Co., Inc. ................ 22,016 1,457,184
Knight-Ridder, Inc. .............. 6,239 318,969
New York Times Co. (The)
Class A.......................... 14,253 494,401
Times Mirror Co. (The)
Class A.......................... 6,250 350,000
Tribune Co. ...................... 9,541 629,706
-----------
3,598,685
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
RAILROADS (0.5%)
Burlington Northern Santa Fe
Corp. ........................... 36,689 $ 1,238,254
CSX Corp. ........................ 17,249 715,834
Norfolk Southern Corp. ........... 29,829 945,206
Union Pacific Corp. .............. 19,476 877,637
-----------
3,776,931
-----------
RESTAURANTS (0.6%)
Darden Restaurants, Inc. ......... 10,926 196,668
McDonald's Corp. ................. 52,918 4,054,842
Tricon Global Restaurants, Inc.
(a).............................. 11,999 601,450
Wendy's International, Inc. ...... 9,731 212,257
-----------
5,065,217
-----------
RETAIL STORES--APPAREL (0.5%)
Gap, Inc. (The)................... 45,387 2,553,019
Limited, Inc. (The)............... 17,838 519,532
TJX Cos., Inc. (The).............. 25,209 731,061
-----------
3,803,612
-----------
RETAIL STORES--DEPARTMENT (0.5%)
Dillard's, Inc.
Class A.......................... 8,499 241,159
Federated Department Stores, Inc.
(a).............................. 16,072 700,136
Kohl's Corp. (a).................. 12,432 763,791
May Department Stores Co. (The)... 18,296 1,104,621
Nordstrom, Inc. .................. 11,674 404,942
Penney (J.C.) Co., Inc. .......... 19,850 930,469
-----------
4,145,118
-----------
RETAIL STORES--DRUGS (0.4%)
Longs Drug Stores Corp. .......... 3,034 113,775
Rite Aid Corp. ................... 20,265 1,004,384
Walgreen Co. ..................... 39,082 2,288,740
-----------
3,406,899
-----------
RETAIL STORES--FOOD (0.9%)
Albertson's, Inc. ................ 19,303 1,229,360
American Stores Co. .............. 21,412 790,906
Fred Meyer Inc. (a)............... 12,001 723,060
Great Atlantic & Pacific Tea Co.,
Inc. (The)....................... 2,950 87,394
Kroger Co. (The) (a).............. 20,188 1,221,374
Safeway Inc. (a).................. 38,121 2,322,998
Winn-Dixie Stores, Inc. .......... 11,698 524,948
-----------
6,900,040
-----------
RETAIL STORES--GENERAL
MERCHANDISE (2.3%)
Dayton Hudson Corp. .............. 34,386 1,865,441
Kmart Corp. (a)................... 38,638 591,644
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 178
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL STORES--GENERAL MERCHANDISE (CONTINUED)
Sears, Roebuck & Co. ............. 29,959 $ 1,273,258
Wal-Mart Stores, Inc. ............ 176,309 14,358,164
-----------
18,088,507
-----------
RETAIL STORES--SPECIALTY (1.9%)
AutoZone, Inc. (a)................ 12,014 395,711
Circuit City Stores-Circuit City
Group............................ 7,745 386,766
Consolidated Stores Corp. (a)..... 8,424 170,059
Costco Cos., Inc. (a)............. 16,942 1,223,001
CVS Corp. ........................ 30,567 1,681,185
Dollar General Corp. ............. 14,489 342,303
Home Depot, Inc. (The)............ 122,322 7,484,577
Lowe's Cos., Inc. ................ 27,621 1,413,850
Pep Boys-Manny, Moe & Jack
(The)............................ 4,935 77,418
Staples Inc. (a).................. 24,475 1,069,251
Tandy Corp. ...................... 7,915 325,999
Toys "R" Us, Inc. (a)............. 20,548 346,748
-----------
14,916,868
-----------
SHOES (0.1%)
NIKE, Inc. Class B................ 22,383 907,910
Reebok International Ltd. (a)..... 4,372 65,034
-----------
972,944
-----------
SPECIALIZED SERVICES (0.8%)
Block (H&R), Inc. ................ 7,903 355,635
Cendant Corp. (a)................. 66,778 1,272,956
Dun & Bradstreet Corp. (The)...... 13,049 411,859
Ecolab Inc. ...................... 10,079 364,734
IMS Health Inc. .................. 12,529 945,156
Interpublic Group of Cos., Inc.
(The)............................ 10,783 859,944
Laidlaw Inc. ..................... 25,935 260,971
National Service Industries,
Inc. ............................ 3,353 127,414
Omnicom Group Inc. ............... 13,151 762,758
Service Corp. International....... 20,168 767,645
-----------
6,129,072
-----------
SPECIALTY PRINTING (0.1%)
Deluxe Corp. ..................... 6,434 235,243
Donnelley (R.R.) & Sons Co. ...... 10,642 466,253
-----------
701,496
-----------
STEEL (0.1%)
Allegheny Teledyne Inc. .......... 15,485 316,475
Bethlehem Steel Corp. (a)......... 10,020 83,918
Nucor Corp. ...................... 6,894 298,165
USX-U.S. Steel Group.............. 6,737 154,951
Worthington Industries, Inc. ..... 7,268 90,850
-----------
944,359
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
TELECOMMUNICATIONS--LONG
DISTANCE (3.0%)
AT&T Corp. ....................... 141,343 $10,636,061
MCI WorldCom, Inc. (a)............ 143,406 10,289,380
Sprint Corp. (FON Group).......... 33,873 2,849,566
-----------
23,775,007
-----------
TELEPHONE (4.7%)
ALLTEL Corp. ..................... 21,599 1,291,890
Ameritech Corp. .................. 86,458 5,479,276
Bell Atlantic Corp. .............. 121,439 6,899,253
BellSouth Corp. .................. 153,032 7,632,471
Frontier Corp. ................... 13,513 459,442
GTE Corp. ........................ 75,654 5,101,917
SBC Communications Inc. .......... 153,055 8,207,574
US West Inc. ..................... 39,552 2,556,048
-----------
37,627,871
-----------
TEXTILES--APPAREL MANUFACTURERS (0.1%)
Fruit of the Loom, Inc.
Class A (a)...................... 5,739 79,270
Liz Claiborne, Inc. .............. 5,065 159,864
Russell Corp. .................... 2,805 56,977
Springs Industries, Inc.
Class A.......................... 1,520 62,985
V.F. Corp. ....................... 9,535 446,953
-----------
806,049
-----------
TOBACCO (1.4%)
Philip Morris Cos. Inc. .......... 190,479 10,190,627
RJR Nabisco Holdings Corp. ....... 25,531 757,951
UST Inc. ......................... 14,542 507,152
-----------
11,455,730
-----------
TOYS (0.1%)
Hasbro, Inc. ..................... 10,379 374,942
Mattel, Inc. ..................... 22,548 514,376
-----------
889,318
-----------
TRANSPORTATION--MISCELLANEOUS (0.1%)
FDX Corp. (a)..................... 11,456 1,019,584
Ryder System, Inc. ............... 5,563 144,638
-----------
1,164,222
-----------
Total Common Stocks
(Cost $521,130,567).............. 782,926,673(d)
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 179
MainStay Equity Index Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (1.2%)
COMMERCIAL PAPER (0.9%)
B.A.T. Capital Corp.
6.00%, due 1/8/99 (c)......... $2,700,000 $ 2,696,850
Consolidation Coal Co.
6.00%, due 1/22/99 (c)........ 4,200,000 4,185,300
------------
Total Commercial Paper
(Cost $6,882,150)............. 6,882,150
------------
U.S. GOVERNMENT (0.3%)
United States Treasury Bills
4.43%, due 4/8/99 (c)......... 1,000,000 988,459
4.50%, due 4/1/99 (c)......... 1,600,000 1,583,141
------------
Total U.S. Government
(Cost $2,571,033)............. 2,571,600
------------
Total Short-Term Investments
(Cost $9,453,183)............. 9,453,750
------------
Total Investments
(Cost $530,583,750) (e)....... 99.4% 792,380,423(f)
Cash and Other Assets,
Less Liabilities.............. 0.6 4,739,590
----- ----------
Net Assets..................... 100.0% $797,120,013
===== ==========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Contracts Appreciation/
Long (Depreciation)(g)
- ---------------------------------------------------------
<S> <C> <C>
FUTURES CONTRACTS (0.1%)
Standard & Poor's 500
March 1999............ 26 $ 467,293
Mini March 1999....... 1 (107)
------------
Total Futures Contracts
(Settlement Value
$8,158,025) (d)....... $ 467,186
============
</TABLE>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) Segregated or partially segregated as collateral for futures contracts.
(d) The combined market value of common stocks and settlement value of Standard
& Poor's 500 Index futures contracts represents 99.2% of net assets.
(e) The cost for Federal income tax purposes is $530,729,962.
(f) At December 31, 1998, net unrealized appreciation was $261,650,461, 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 $273,213,504 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $11,563,043.
(g) Represents the difference between the value of the contracts at the time
they were opened and the value at December 31, 1998.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 180
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$530,583,750)............................................. $792,380,423
Receivables:
Fund shares sold.......................................... 6,763,865
Dividends and interest.................................... 712,425
Investment securities sold................................ 171,027
Variation margin receivable on futures contracts............ 33,994
Unamortized organization expense............................ 24,552
Other assets................................................ 9,627
------------
Total assets........................................ 800,095,913
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,240,465
Fund shares redeemed...................................... 750,624
MainStay Management....................................... 323,831
Custodian................................................. 185,499
NYLIFE Distributors....................................... 161,916
Transfer agent............................................ 78,664
NYLIFE Inc................................................ 33,000
Trustees.................................................. 6,021
Accrued expenses............................................ 195,880
------------
Total liabilities................................... 2,975,900
------------
Net assets.................................................. $797,120,013
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized.......... $ 201,955
Additional paid-in capital.................................. 528,716,116
Accumulated undistributed net realized gain on
investments............................................... 5,938,083
Net unrealized appreciation on investments.................. 262,263,859
------------
Net assets applicable to outstanding shares................. $797,120,013
============
Shares of beneficial interest outstanding................... 20,195,467
============
Net asset value per share outstanding....................... $ 39.47
Maximum sales charge (3.00% of offering price).............. 1.22
------------
Maximum offering price per share outstanding................ $ 40.69
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 181
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 8,533,317
Interest.................................................. 1,438,050
------------
Total income............................................ 9,971,367
------------
Expenses:
Management................................................ 3,038,607
Distribution.............................................. 1,519,304
Transfer agent............................................ 814,689
Shareholder communication................................. 192,755
Registration.............................................. 133,691
Custodian................................................. 110,007
Recordkeeping............................................. 61,548
Professional.............................................. 55,710
Trustees.................................................. 20,070
Amortization of organization expense...................... 12,479
Miscellaneous............................................. 38,832
------------
Total expenses before reimbursement..................... 5,997,692
Expense reimbursement from Manager.......................... (172,008)
------------
Net expenses............................................ 5,825,684
------------
Net investment income....................................... 4,145,683
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from:
Security transactions..................................... 9,910,055
Futures transactions...................................... 547,374
------------
Net realized gain on investments............................ 10,457,429
------------
Net change in unrealized appreciation on investments:
Security transactions..................................... 134,666,663
Futures transactions...................................... 424,241
------------
Net unrealized gain on investments.......................... 135,090,904
------------
Net realized and unrealized gain on investments............. 145,548,333
------------
Net increase in net assets resulting from operations........ $149,694,016
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $52,403.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 182
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------- ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 4,145,683 $ 4,148,994
Net realized gain on investments.......................... 10,457,429 8,632,619
Net change in unrealized appreciation on investments...... 135,090,904 73,820,854
------------- ------------
Net increase in net assets resulting from operations...... 149,694,016 86,602,467
------------- ------------
Dividends and distributions to shareholders:
From net investment income................................ (4,229,242) (4,133,923)
From net realized gain on investments..................... (8,583,224) (5,707,208)
------------- ------------
Total dividends and distributions to shareholders....... (12,812,466) (9,841,131)
------------- ------------
Capital share transactions:
Net proceeds from sale of shares.......................... 469,003,594 180,823,270
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions............. 12,268,427 9,532,058
------------- ------------
481,272,021 190,355,328
Cost of shares redeemed................................... (256,722,364) (57,177,469)
------------- ------------
Increase in net assets derived from capital share
transactions........................................... 224,549,657 133,177,859
------------- ------------
Net increase in net assets.............................. 361,431,207 209,939,195
NET ASSETS:
Beginning of year........................................... 435,688,806 225,749,611
------------- ------------
End of year................................................. $ 797,120,013 $435,688,806
============= ============
Accumulated undistributed net investment income at end of
year...................................................... $ -- $ 15,071
============= ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 183
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
September 1
Year ended December 31, through Year ended
----------------------------------------- December 31, August 31,
1998 1997 1996 1995 1994* 1994
-------- -------- -------- -------- ------------ ----------
<S> <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
-------- -------- -------- -------- -------- --------
Net investment income........................... 0.21 0.30 0.30 0.24 0.09 0.27
Net realized and unrealized gain (loss) on
investments................................... 8.35 7.24 3.92 4.82 (0.48) 0.37
-------- -------- -------- -------- -------- --------
Total from investment operations................ 8.56 7.54 4.22 5.06 (0.39) 0.64
-------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income...................... (0.21) (0.30) (0.54) (0.27) -- (0.25)
From net realized gain on investments........... (0.43) (0.41) (0.82) (0.27) -- (0.18)
-------- -------- -------- -------- -------- --------
Total dividends and distributions............... (0.64) (0.71) (1.36) (0.54) -- (0.43)
-------- -------- -------- -------- -------- --------
Reverse share split............................. 0.64 0.71 1.36 0.54 -- 0.43
-------- -------- -------- -------- -------- --------
Net asset value at end of period................ $ 39.47 $ 30.91 $ 23.37 $ 19.15 $ 14.09 $ 14.48
======== ======== ======== ======== ======== ========
Total investment return (a)..................... 27.69% 32.26% 22.04% 35.91% (2.68%) 4.59%
Ratios (to average net assets)/
Supplemental Data:
Net investment income....................... 0.68% 1.25% 1.8% 1.7% 2.0%(+) 1.9%
Net expenses................................ 0.96% 0.80% 0.8% 1.1% 0.9%(+) 0.9%
Expenses (before reimbursement)............. 0.99% 0.99% 1.0% 1.1% 0.9%(+) 0.9%
Portfolio turnover rate......................... 4% 3% 3% 4% 2% 12%
Net assets at end of period (in 000's).......... $797,120 $435,689 $225,750 $109,308 $ 61,561 $ 62,828
</TABLE>
- -------
<TABLE>
<C> <S>
* 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.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 184
Notes to Financial Statements
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 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 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 or loss equal to
the difference between the proceeds from (or cost of) the closing
23
<PAGE> 185
MainStay Equity Index Fund
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. A
permanent book-tax difference of $68,488 has been reclassified from accumulated
undistributed net investment income to accumulated undistributed net realized
gain on investments due to recharacterization of distributions.
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.
24
<PAGE> 186
Notes to Financial Statements (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 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%. 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 year ended December 31, 1998, the Manager
earned $3,038,607 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGE. The Fund was advised that the amount of sales charge retained by
the Distributor was $547,315 for the year ended December 31, 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
25
<PAGE> 187
MainStay Equity Index Fund
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 accrued for the
year ended December 31, 1998 amounted to $814,689.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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 $14,520 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$61,548 for the year ended December 31, 1998.
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $236,710 and $22,544, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Year ended
December 31
-------------------
1998 1997
------ ------
<S> <C> <C>
Shares sold................................................. 13,478 6,514
Shares issued in reinvestment of dividends and
distributions............................................. 323 324
------ ------
13,801 6,838
Shares redeemed............................................. (7,362) (2,069)
Reduction of shares due to reverse shares split............. (338) (334)
------ ------
Net increase................................................ 6,101 4,435
====== ======
</TABLE>
26
<PAGE> 188
Notes to Financial Statements (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.
27
<PAGE> 189
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Equity Index Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
28
<PAGE> 190
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
29
<PAGE> 191
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
30
<PAGE> 192
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
31
<PAGE> 193
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN07-02/99
[RECYCLE LOGO]
MAINSTAY EQUITY INDEX FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 194
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Global High Yield Fund
Highlights 3
$10,000 Invested in the MainStay Global
High Yield Fund versus J.P. Morgan
Emerging Markets Bond Index--Class A,
Class B, & Class C Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 & 12/31/98 8
Diversification by Country--Top 5 9
Quality Breakdown 10
Fund & Lipper Returns 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Financial Statements 15
Notes to Financial Statements 19
Report of Independent Accountants 25
The MainStay Funds 26
</TABLE>
<PAGE> 195
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year
that domestic stocks in general returned more than 20%. Getting there,
however, was often like riding a roller-coaster. Just as the stock market
climbed to new highs in mid-July, preliminary corrections in various portions of
the market warned of an imminent decline. By the end of August, the U.S. stock
market had plummeted nearly 20%, turning earlier exhilaration into serious
investor concern. Remarkably, however, the market continued to charge ahead,
again reaching record levels in November, then dropping back slightly and ending
the year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
January 1999
2
<PAGE> 196
MainStay Global High Yield Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - Global bond markets experienced unusually high levels of volatility in 1998,
as problems in Asia, Russia, and Latin America caused a flight to quality and
severe setbacks for most emerging markets.
- - Following the Asian financial crisis, decreasing demand for oil and other
commodities caused most commodity prices to decline, with a negative impact on
emerging markets that depend on commodity exports to service their debt.
- - Despite major setbacks in Asia, by the end of the year, Korean debt was rated
BB(*) with a positive outlook by major rating agencies.
- - A bailout package from the International Monetary Fund helped soften the
impact of Brazil's financial difficulties on other Latin American economies
and by year end, Colombian debt was rated BBB(+) by major rating agencies.
- - The Japanese yen's weakness reversed in midyear, as the U.S. dollar lost its
strength against most major currencies.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - From its inception on 6/1/98 through 12/31/98, the MainStay Global High Yield
Fund returned -16.38% for Class A shares and -16.82% for Class B and Class C
shares,(++ )excluding all sales charges.
- - The Fund's generally underweighted position in Latin America helped
performance amid Brazilian financial difficulties, although the Fund benefited
from strengthening credit quality in Columbia.
- - The Fund's overweighted positions in Korea and the Philippines also helped
performance as Asian markets began to stabilize.
- - Although a small position in Russian debt hurt performance, it was sold
quickly when the country's financial problems began to emerge.
- - All share classes outperformed the average Lipper(++) emerging-market debt
fund, which returned -22.21% for the since-inception period.
- -------
(*) Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
(+) 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.
(++) See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance
of Class B shares from inception (6/1/98) through 8/31/98.
3
<PAGE> 197
$10,000 Invested in the MainStay Global High Yield Fund versus J.P. Morgan
Emerging Markets Bond Index
CLASS A SHARES SEC Returns: since inception -20.14%
<TABLE>
<CAPTION>
MAINSTAY GLOBAL J.P.MORGAN EMERGING MARKETS BOND
HIGH YIELD FUND INDEX*
--------------- --------------------------------
<S> <C> <C>
6/01/98 9450.00 10000.00
6/98 9273.00 9711.00
9/98 7066.00 7649.00
12/98 7986.00 8408.00
</TABLE>
CLASS B SHARES SEC Returns: since inception -20.98%
<TABLE>
<CAPTION>
MAINSTAY GLOBAL J.P.MORGAN EMERGING MARKETS BOND
HIGH YIELD FUND INDEX*
--------------- --------------------------------
<S> <C> <C>
6/01/98 10000 10000
6/98 9700 9711
9/98 7369 7649
12/98 7902 8408
</TABLE>
CLASS C SHARES SEC Returns: since inception -17.65%
<TABLE>
<CAPTION>
MAINSTAY GLOBAL J.P.MORGAN EMERGING MARKETS BOND
HIGH YIELD FUND INDEX*
--------------- --------------------------------
<S> <C> <C>
6/01/98 10000 10000
6/98 9700 9711
9/98 7369 7649
12/98 8235 8408
</TABLE>
4
<PAGE> 198
- -------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/1/98 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 6/1/98. Returns shown reflect a 5% Contingent
Deferred Sales Charge (CDSC), which would apply for the period shown. The
Class C graph assumes an initial investment of $10,000 made on 6/1/98 and
includes the performance of Class B shares for periods 6/1/98 through
8/31/98. Performance data for the two classes vary after this date based on
differences in their load. Returns shown reflect the 1% CDSC, 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 J.P. Morgan Emerging Markets Bond Index (EMBI) is an unmanaged, market
capitalization weighted, total return index tracking the traded market for
U.S. dollar-denominated Brady bonds. As of 12/31/97, the EMBI included 29
issues, with a total face value of $118.4 billion and a market
capitalization of $96.1 billion. It is not possible to make an investment
directly into an index.
5
<PAGE> 199
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
Portfolio Management Discussion and Analysis
Overall, the second half of 1998 was a period of extreme volatility for
emerging-market debt securities. Financial difficulties in Asian markets were
compounded by a recession in Japan and difficulties in Russia and Brazil. The
result was a general flight to quality, with investors seeking refuge in the
highest-quality securities of established market economies. Most emerging
markets, even those with little or no ties to troubled markets, suffered severe
setbacks.
During the reporting period, difficulties in a few emerging markets caused
investors to indiscriminately avoid all of them. In many markets, the declines
showed little, if any, justification in terms of debt quality or company
performance. Even so, with investors concerned about safety and liquidity, the
development of a European high-yield market provided an alternative for
investors seeking relief from troubled Asian and Latin American markets.
In the second half of 1998, the news in emerging markets was not all bad.
Following an election in Venezuela, the country's bond market strengthened.
Despite problems in neighboring Brazil, the market reacted positively to a
November election in Colombia and S&P and Moody's both affirmed Colombian debt's
BBB(*) rating.
While the market focused on Latin American problems, Asia and Japan appeared to
be stabilizing. The yen strengthened against the U.S. dollar and European
currencies and South Korea's debt rating of BB(+) with a positive outlook was
confirmed by major rating agencies.
HOW DID THE MAINSTAY GLOBAL HIGH YIELD FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Global High Yield Fund began operations on 6/1/98 and returned
- -16.38% for Class A shares and -16.82% for Class B and Class C shares(++) for
the seven-month period ended 12/31/98, excluding all sales charges. All share
classes outperformed the average Lipper(sec.) emerging-market debt fund, which
returned -22.21% for the since-inception period.
WHAT CAUSED THE FUND TO OUTPERFORM ITS PEERS?
The Fund uses a "country first" investment approach, seeking to identify markets
with the strongest overall potential and then invest in a broad mix of
securities within the most promising markets. We believe this approach
contributed to the Fund's outperformance in an admittedly difficult period for
emerging-market debt.
During the reporting period, the Fund generally underweighted Latin American
debt, which contributed positively to performance. Brazil, which makes up about
30% of the J.P. Morgan Emerging Markets Bond Index,(/) represented only about
18% of the Fund's portfolio. While Brazilian bonds performed poorly throughout
the second half of the year, our underweighted position had a positive effect on
the Fund's relative performance.
The Fund also benefited from having a relatively small commitment to Russian
debt and selling it quickly when the country's financial difficulties became
apparent. The Fund never held more than
- -------
(*) 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 is less vulnerable to non- payment than other speculative
issues. However, it faces major ongoing uncer- tainties 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.
(++) Performance figures for Class C shares include the historical performance
of Class B shares from inception (6/1/98) through 8/31/98.
(sec.) See footnote and table on page 11 for more information on Lipper Inc.
(/) See footnote on page 5 for more information on the J.P. Morgan Emerging
Markets Bond Index.
6
<PAGE> 200
3% of its assets in Russian bonds, which resulted in strong performance relative
to other funds with a higher commitment to Russian debt.
At the Fund's inception, we believed that Korea represented a strong credit,
despite the problems most Asian emerging markets were experiencing. Our
assessment proved beneficial for the Fund as Moody's and Standard & Poor's rated
Korea's debt BB with a positive outlook. Overall, Korea was the best-performing
market for the portfolio.
WHAT TYPE OF BONDS DID YOU CHOOSE IN KOREA?
Two issues are worth noting. The Fund held Korean Electric Power 6 3/8% bonds
due 2003, which rose about 7% since we purchased them for the Fund. It also
owned Korean Development Bank, which is a large, well-capitalized financial
institution. Although the Fund invests primarily in government issues, both
companies are majority-owned by the state, so we consider these utility and bank
bonds as quasi-sovereign issues, although there is no government guarantee. Both
contributed positively to the Fund's performance during the second half of 1998.
WERE THERE OTHER FACTORS THAT CONTRIBUTED POSITIVELY TO THE FUND'S RELATIVE
PERFORMANCE?
Yes. In December, we decided that Venezuela had strong potential and that its
bonds were severely underpriced, so we added to the Fund's position in
Venezuelan bonds. The country had undergone an election, and President Chavez
indicated that he intended to return Venezuela to economic equilibrium without
devaluing its currency or imposing exchange controls. The market responded
favorably, and Venezuelan bonds rose 11.81% in U.S. dollar terms in December
alone, which had a positive impact on the Fund's performance.
WITH PROBLEMS IN ASIA AND LATIN AMERICA, WHERE COULD THE FUND SEEK STRONGER
INVESTMENT OPPORTUNITIES?
One place was Europe. During 1998, the development of a high-yield bond market
in Europe offered an attractive way to diversify holdings and participate in
more stable markets. We purchased several high-yield corporate issues in the
U.K. for the Fund. While these bonds returned 1.0% for the second half of 1998,
that was much higher than the -10% return of the Emerging Market Bond Index over
the same period.
In the third quarter, we also added Polish government and corporate bonds to the
Fund's investment portfolio. While most emerging markets declined for the year,
the Fund's Polish bonds have returned about 2.0% since it purchased them, which
had a positive impact on performance.
WHY DID YOU SELECT POLAND?
We believed that Poland will try to join the European Community in the near
future. It has a relatively strong economy and its bonds are rated BBB. That
makes it one of the highest-quality issuers in the emerging-market bond
universe. In a period when investors perceived Latin American assets to carry
unreasonable levels of risk regardless of their relative quality, Eastern
European bonds were perceived as a potentially stronger alternative. Since the
Fund's Polish bonds provided a positive return, they were the second
best-performing asset for the port-
RECESSION
- --------------------
A downturn in economic activity, typically defined by at least two consecutive
quarters of decline in a country's gross domestic product.
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.
EMERGING MARKETS
- --------------------
Countries with smaller or more recently established capital markets.
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.
7
<PAGE> 201
WEIGHTING
- --------------------
The proportion of a portfolio allocated to a specific security, sector, or
country, i.e., a fund is said to be over- weighted in a sector when that portion
of the portfolio is greater than the sector's general relationship to the market
as a whole.
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.
COLLATERAL
- --------------------
Assets pledged to a lender until a loan is repaid. If the borrower defaults, the
lender has the legal right to seize the collateral and sell it to pay off the
loan.
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
[PERFORMANCE CHART]
<TABLE>
<CAPTION>
CLASS A CLASS B & CLASS C
------- -----------------
<S> <C> <C>
6/98 -2.9 -3
12/98 -16.38 -16.82
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 6/98 through 8/98.
See footnote * on page 11 for more information on performance.
folio during the seven-month reporting period.
WHAT WAS THE OVERALL QUALITY OF THE SECURITIES IN THE FUND'S INVESTMENT
PORTFOLIO?
Although the Fund has assets at various quality levels, the overall quality of
the Fund's investments was BB. Although the Fund may invest around the world, it
did not assume any foreign currency exposure, because most of its securities
were denominated in U.S. dollars and the rest were hedged into U.S. dollars.
This gives investors one less thing to consider. From time to time, we also take
other specific steps to manage the other risks that the Fund may take.
CAN YOU PROVIDE AN EXAMPLE?
Sure. The Fund's original investments in Venezuela and Ecuador were not
collateralized, which added to the level of risk the Fund assumed. During the
third quarter, we switched those securities into collateralized debt. The credit
quality of the securities the Fund purchased improved since the principal was
now backed by U.S. Treasuries. We believe this may help manage risk, since the
price of the bonds is unlikely to decline below the value of the underlying
collateral.
WERE THERE OTHER IMPROVEMENTS IN THE QUALITY OF THE FUND?
Yes, as of year end, the Fund held about 3.5% of its assets in Colombian
government bonds. Late in the year, both Moody's and Standard & Poor's affirmed
Colombia's BBB rating, which had a positive effect on performance and may help
the bonds provide strong results in the coming months.
WHICH MARKETS WERE THE WORST PERFORMERS FOR THE FUND?
Although Brazil was underweighted in the Fund, the market itself was down 14.77%
for the second half of 1998. Despite its strong improvement in December,
Venezuela was down 13.83% for the last six months of the year, and Russia was
down 73.86% over the same period. Fortunately, the Fund's Russian holdings
didn't decline nearly as much and were then sold early in the third quarter.
Nevertheless, these bond markets
8
<PAGE> 202
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
Mexico 19.2%
Brazil 16.3%
Argentina 14.5%
Venezuela 6.6%
Poland 6.4%
Other 37.0%
</TABLE>
Actual percentages will vary over time.
had a negative overall impact on the Fund's performance.
The worst-performing individual issues included Euronet zero-coupon bonds, which
declined 50% during the reporting period. The bonds were issued by a
Hungarian-based operator of ATMs throughout Europe. Corporate high-yield bonds
tended to underperform sovereign issues during the reporting period, and since
the company was new, it was particularly hard hit during the flight to quality.
Fortunately, the bonds appear to be showing more strength as we move into 1999.
Innova S de R.L. is a Mexican satellite TV company that is majority owned by the
major broadcasters, Grupo Televisa and Newscorp. Despite its market potential,
the company suffered from rising interest rates and the general weakness of
Mexican bonds. The Fund's position lost 23% over the second half of 1998.
Another poor performer was ESCELSA 10.00% bonds of 2007. The company is a
Brazilian electric utility, and the bonds' poor performance was directly related
to the Brazilian financial crisis. While Brazil still has a great deal of work
to do to get its fiscal house in order, we believe the company is strong, has
solid management, and is providing a necessary service. In general, we like
Latin American utilities and believe they are likely to weather any setbacks
better than other corporate bonds.
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
There's no question that volatility is likely to continue. While emerging
markets have had poor performance in recent months, improvements in Korean and
Colombian debt suggest that, at least in some cases, the worst may be over. We
will carefully monitor the progress of Brazil and other major emerging markets,
which will undoubtedly have spillover effects into nearby nations. If the price
of oil begins to rise, Latin American bonds may improve. We believe if Japan
begins to show positive signs of recovery, we could see a rapid return to Asian
emerging markets. Regardless of what develops, however, the Fund will continue
to use
9
<PAGE> 203
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.
QUALITY BREAKDOWN AS OF 12/31/98
<TABLE>
<S> <C> <C> <C>
BBB Cash, Equivalents & other Assets, less Liabilities Not Rated
55.1 26.5 1.4
<CAPTION>
<S> <C> <C>
B BB
6.4 10.6
</TABLE>
disciplined research and careful security selection seeking to provide maximum
current income by investing primarily in high-yield debt securities of non-U.S.
issuers.
Joseph Portera
Portfolio Manager
MacKay Shields Financial Corporation
10
<PAGE> 204
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND THROUGH 12/31/98
<S> <C>
Class A -16.38%
Class B -16.82%
Class C -16.82%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND THROUGH 12/31/98
<S> <C>
Class A -20.14%
Class B -20.98%
Class C -17.65%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND THROUGH 12/31/98
<S> <C>
Average Lipper
emerging market debt fund -22.21%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $8.00 $0.3425 $0.0000
Class B $7.98 $0.3210 $0.0000
Class C $7.98 $0.2672 $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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (6/1/98) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
(+) Lipper() 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 Class A and Class B shares on
6/1/98 through 12/31/98. The Fund's Class C shares were first offered to
the public on 9/1/98.
11
<PAGE> 205
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
<S> <C> <C>
United Mexican States, 11.375%, due 9/15/16 Mexico $828,000
Republic of Venezuela, Series W-A, 6.75%, due
3/31/20 Venezuela 525,892
Conproca S.A., 12.00%, due 6/16/10 Mexico 470,000
Republic of Brazil, 9.375%, due 4/7/08 Brazil 462,797
Republic of Bulgaria, Series A, 6.6875%, due
7/28/24 Bulgaria 424,125
TPSA Finance BV, 7.75%, due 12/10/08 Poland 415,800
National Power Corp., 9.625%, due 5/15/28 Philippines 415,000
Republic of Brazil, 10.125%, due 5/15/27 Brazil 403,500
Republic of Argentina, Series BGL5, 11.375%, due
1/30/17 Argentina 398,750
Petroleos Mexicanos, 9.375%, due 12/2/08 Mexico 395,000
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF PURCHASE
<S> <C> <C>
Republic of Brazil, due
4/7/08-5/15/27 Brazil $2,336,382
Republic of Venezuela,
due 12/18/07-9/15/27 Venezuela 1,978,064
Republic of Argentina,
due 3/31/05-1/30/17 Argentina 1,370,746
United Mexican States,
due 9/15/16-12/31/19 Mexico 1,273,250
Ministry Finance Russia,
due 11/27/01-6/24/28 Russia 707,950
Petroleos Mexicanos, due
6/1/07-12/2/08 Mexico 697,750
Republic of Ecuador,
due 2/27/15-2/28/25 Ecuador 612,576
Banco Nacional De Desenvolvi,
due 2/2/04-6/16/08 Mexico 534,225
Republic of Bulgaria, due 7/28/24 Bulgaria 529,563
Conproca S.A., due 6/16/10 Mexico 503,750
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF SALE
<S> <C> <C>
Republic of Venezuela, due
12/18/07-9/15/27 Venezuela $1,190,054
Republic of Argentina, due
3/31/05-1/30/17 Argentina 806,888
Republic of Brazil, due 4/7/08-5/15/27 Brazil 684,350
Banco Nacional De Desenvolvi,
due 2/2/04-6/16/08 Mexico 568,500
Ministry Finance Russia, due
11/27/01-6/24/28 Russia 439,125
Ford Brasil Ltda., due 1/22/07 Brazil 392,500
United Mexican States, due
9/15/16-12/31/19 Mexico 381,875
Republic of Turkey, due 2/23/05 Turkey 368,000
Grupo Televisa S.A., due
5/15/06-5/15/08 Mexico 354,500
Comtel Brasileira Ltda., due 9/26/04 Brazil 296,250
</TABLE>
12
- -------
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.
<PAGE> 206
Portfolio of Investments* December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount** Value
- ------------------------------------------------------------
<S> <C> <C>
LONG-TERM BONDS (93.6%)+
BRADY BONDS (22.2%)
BRAZIL (2.1%)
Republic of Brazil
Series 20 year
8.00%, due 4/15/14 (b)(g)...... $353,286 $ 211,972
-----------
BULGARIA (4.2%)
Republic of Bulgaria
Series A
6.6875%, due 7/28/24 (b)....... 600,000 424,125
-----------
ECUADOR (3.4%)
Republic of Ecuador
Series 20 year
6.625%, due 2/27/15 (b)(g)..... 282,529 113,895
Series DISC
6.625%, due 2/28/25 (b)........ 450,000 229,500
-----------
343,395
-----------
PERU (3.6%)
Republic of Peru
Series 20 year
3.25%, due 3/7/17 (b)(h)....... 650,000 367,656
-----------
POLAND (2.3%)
Republic of Poland
Series PDIB
5.00%, due 10/27/14 (b)........ 250,000 232,969
-----------
VENEZUELA (6.6%)
Republic of Venezuela
Series DL
5.9375%, due 12/18/07 (b)...... 214,286 136,205
Series W-A
6.75%, due 3/31/20............. 756,000 525,892
-----------
662,097
-----------
Total Brady Bonds
(Cost $2,335,894).............. 2,242,214
-----------
CORPORATE BONDS (29.8%)
ARGENTINA (3.7%)
Banco Hipotecario S.A.
13.00%, due 12/3/08 (c)........ 200,000 202,000
CIA Transporte Energia
Series REGS
9.25%, due 4/1/08.............. 200,000 170,000
-----------
372,000
-----------
- ------------------------------------------------------------
+ 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 in which investments are denominated.
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount** Value
- ------------------------------------------------------------
<S> <C> <C>
BRAZIL (3.0%)
CIA Saneamento Basico
Series REGS
10.00%, due 7/28/05............ $200,000 $ 138,000
Espirito Santo Centrais
Series REGS
10.00%, due 7/15/07............ 250,000 160,000
-----------
298,000
-----------
GERMANY (0.4%)
Euronet Services Inc.
Series DBCU
(zero coupon), due 7/1/06
12.375%, beginning 7/1/02
(d)............................ DM 209 37,644
-----------
MEXICO (8.6%)
Conproca S.A.
12.00%, due 6/16/10 (c)........ $500,000 470,000
Petroleos Mexicanos
9.375%, due 12/2/08 (c)........ 400,000 395,000
-----------
865,000
-----------
POLAND (4.1%)
TPSA Finance BV
7.75%, due 12/10/08 (c)........ 420,000 415,800
-----------
SOUTH KOREA (5.3%)
Korea Development Bank
7.125%, due 9/17/01............ 250,000 235,625
Korea Electric Power
6.375%, due 12/1/03............ 350,000 298,375
-----------
534,000
-----------
UNITED KINGDOM (3.0%)
IPC Magazines Group PLC
9.625%, due 3/15/08............ L 100,000 144,751
TM Group Holdings
12.25%, due 5/15/08 (c)........ 100,000 158,062
-----------
302,813
-----------
UNITED STATES (1.7%)
Poland Communication Inc.
Series B
9.875%, due 11/1/03............ $200,000 175,000
-----------
Total Corporate Bonds
(Cost $3,213,806).............. 3,000,257
-----------
GOVERNMENTS & FEDERAL AGENCIES (28.3%)
ARGENTINA (6.6%)
Province of Tucuman
Series REGS
9.45%, due 8/1/04.............. 205,357 166,340
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE> 207
MainStay Global High Yield Fund
<TABLE>
<CAPTION>
Principal
Amount** Value
- ------------------------------------------------------------
<S> <C> <C>
GOVERNMENT & FEDERAL AGENCIES (CONTINUED)
ARGENTINA (CONTINUED)
Republic of Argentina
Series XW
11.00%, due 12/4/05............ $100,000 $ 99,438
Series BGL5
11.375%, due 1/30/17........... 400,000 398,750
-----------
664,528
-----------
BRAZIL (8.6%)
Republic of Brazil
9.375%, due 4/7/08............. 675,000 462,797
10.125%, due 5/15/27........... 600,000 403,500
-----------
866,297
-----------
COLOMBIA (2.5%)
Republic of Colombia
7.625%, due 2/15/07............ 300,000 246,000
-----------
MEXICO (8.2%)
United Mexican States
11.375%, due 9/15/16........... 800,000 828,000
-----------
PANAMA (2.4%)
Republic of Panama
8.875%, due 9/30/27............ 260,000 244,400
-----------
Total Governments & Federal
Agencies
(Cost $3,146,291).............. 2,849,225
-----------
YANKEE BONDS (13.3%)
ARGENTINA (4.2%)
CTI Holdings S.A.
(zero coupon), due 4/15/08
11.50%, beginning 4/15/03...... 400,000 180,000
Mastellone Hermanos S.A.
11.75%, due 4/1/08............. 300,000 243,000
-----------
423,000
-----------
BRAZIL (2.6%)
Multicanal Participacoes
Series B
12.625%, due 6/18/04........... 300,000 261,000
-----------
MEXICO (2.4%)
Grupo Televisa S.A.
Series B
11.875%, due 5/15/06........... 100,000 100,000
Innova S de R.L.
12.875%, due 4/1/07............ 200,000 138,000
-----------
238,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount** Value
- ------------------------------------------------------------
<S> <C> <C>
PHILIPPINES (4.1%)
National Power Corp.
9.625%, due 5/15/28............ $500,000 $ 415,000
-----------
Total Yankee Bonds
(Cost $1,644,965).............. 1,337,000
-----------
Total Long-Term Bonds
(Cost $10,340,956)............. 9,428,696
-----------
Shares
---------
WARRANTS (0.0%) (A)
ARGENTINA (0.0%) (A)
Republic of Argentina
Expire 12/3/99................. 100 4,100
-----------
Total Warrants
(Cost $3,647).................. 4,100
-----------
<CAPTION>
Principal
Amount**
---------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.0%)
COMMERCIAL PAPER (2.0%)
UNITED STATES (2.0%)
Associates Corp. of North
America
5.08%, due 1/4/99.............. $200,000 199,915
-----------
Total Short-Term Investment
(Cost $199,915)................ 199,915
-----------
Total Investments
(Cost $10,544,518) (e)......... 95.6% 9,632,711(f)
Cash and Other Assets,
Less Liabilities............... 4.4 447,558
----- -----------
Net Assets...................... 100.0% $10,080,269
===== ===========
</TABLE>
- -------
(a) Less than one tenth percent.
(b) Floating rate. Rate shown is the rate in effect at December 31, 1998.
(c) May be sold to institutional investors only.
(d) 209 Units--each unit reflects $1,000 principal amount of 12.375% Senior
Discounted Notes plus 3 warrants to acquire 1.05 shares of common stock at
$2.00 per share at a future date.
(e) The cost for Federal income tax purposes is $10,649,287.
(f) At December 31, 1998 net unrealized depreciation for securities was
$1,016,576, 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 $49,501 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $1,066,077.
(g) CIK (cash in kind) interest payment is made with cash or additional
securities.
(h) FLIRB (Float Loaded Interest Rate Bond) carries a fixed, below market
interest rate which rises incrementally over the initial 5 to 7 years of
the life of the bond, and is then replaced by a floating rate coupon for
the remaining life of the bond.
(i) The following abbreviations are used in the above portfolio:
DM--Deutsche Mark
Pound Sterling --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.
14
<PAGE> 208
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$10,544,518).............................................. $ 9,632,711
Cash........................................................ 353,120
Receivables:
Interest.................................................. 225,072
Investment securities sold................................ 77,861
Fund shares sold.......................................... 12,396
Unrealized appreciation on forward foreign currency
contracts................................................. 3,702
Unamortized organization expense............................ 59,631
-----------
Total assets.............................................. 10,364,493
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 203,117
MainStay Management....................................... 5,264
Fund shares redeemed...................................... 4,816
Custodian................................................. 4,370
Transfer agent............................................ 3,752
NYLIFE Distributors....................................... 3,698
Trustees.................................................. 187
Accrued expenses............................................ 58,885
Unrealized depreciation on forward foreign currency
contracts................................................. 135
-----------
Total liabilities......................................... 284,224
-----------
Net assets.................................................. $10,080,269
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 9,440
Class B................................................... 3,173
Class C................................................... 1
Additional paid-in capital.................................. 12,247,143
Accumulated undistributed net investment income............. 1,284
Accumulated net realized loss on investments................ (1,272,491)
Net unrealized depreciation on investments.................. (911,807)
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies and forward foreign
currency contracts........................................ 3,526
-----------
Net assets.................................................. $10,080,269
===========
CLASS A
Net assets applicable to outstanding shares................. $ 7,548,076
===========
Shares of beneficial interest outstanding................... 944,020
===========
Net asset value per share outstanding....................... $ 8.00
Maximum sales charge (4.50% of offering price).............. 0.38
-----------
Maximum offering price per share outstanding................ $ 8.38
===========
CLASS B
Net assets applicable to outstanding shares................. $ 2,531,787
===========
Shares of beneficial interest outstanding................... 317,320
===========
Net asset value and offering price per share outstanding.... $ 7.98
===========
CLASS C
Net assets applicable to outstanding shares................. $ 406
===========
Shares of beneficial interest outstanding................... 51
===========
Net asset value and offering price per share outstanding.... $ 7.98
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 209
Statement of Operations
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.................................................. $ 614,448
-----------
Expenses:
Shareholder communication................................. 44,969
Management................................................ 39,854
Transfer agent............................................ 21,620
Professional.............................................. 21,500
Registration.............................................. 21,089
Service--Class A.......................................... 11,488
Service--Class B.......................................... 2,743
Service--Class C.......................................... 3
Distribution--Class B..................................... 8,180
Distribution--Class C..................................... 9
Amortization of organization expense...................... 7,829
Recordkeeping............................................. 7,000
Custodian................................................. 6,939
Trustees.................................................. 328
Miscellaneous............................................. 19,231
-----------
Total expenses before waiver............................ 212,782
Fees waived by Manager...................................... (11,387)
-----------
Net expenses............................................ 201,395
-----------
Net investment income....................................... 413,053
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized loss from:
Security transactions..................................... (1,272,491)
Foreign currency transactions............................. (11,682)
-----------
Net realized loss on investments and foreign currency
transactions.............................................. (1,284,173)
-----------
Net unrealized appreciation (depreciation) on investments:
Security transactions..................................... (911,807)
Translation of other assets and liabilities in foreign
currencies and forward foreign currency contracts....... 3,526
-----------
Net unrealized loss on investments and foreign currency
transactions.............................................. (908,281)
-----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (2,192,454)
-----------
Net decrease in net assets resulting from operations........ $(1,779,401)
===========
</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.
16
<PAGE> 210
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 413,053
Net realized loss on investments.......................... (1,272,491)
Net realized loss on foreign currency transactions........ (11,682)
Net unrealized depreciation on investments................ (911,807)
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies and forward
foreign currency contracts.............................. 3,526
-----------
Net decrease in net assets resulting from operations...... (1,779,401)
-----------
Dividends to shareholders:
From net investment income:
Class A................................................. (321,589)
Class B................................................. (89,012)
Class C................................................. (142)
-----------
Total dividends to shareholders....................... (410,743)
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 9,504,312
Class B................................................. 2,974,159
Class C................................................. 19,635
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 11,928
Class B................................................. 32,959
Class C................................................. 11
-----------
12,543,004
Cost of shares redeemed:
Class A................................................. (116,560)
Class B................................................. (136,060)
Class C................................................. (19,971)
-----------
Increase in net assets derived from capital share
transactions......................................... 12,270,413
-----------
Net increase in net assets............................ 10,080,269
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $10,080,269
===========
Accumulated undistributed net investment income at end of
period.................................................... $ 1,284
===========
</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.
17
<PAGE> 211
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
---------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.00 $ 10.00 $ 7.18
------- ------- -------
Net investment income (a)................................... 0.34 0.32 0.27
Net realized and unrealized gain (loss) on investments...... (1.99) (2.01) 0.81
Net realized and unrealized loss on foreign currency
transactions.............................................. (0.01) (0.01) (0.01)
------- ------- -------
Total from investment operations............................ (1.66) (1.70) 1.07
------- ------- -------
Less dividends:
From net investment income.................................. (0.34) (0.32) (0.27)
------- ------- -------
Total dividends............................................. (0.34) (0.32) (0.27)
------- ------- -------
Net asset value at end of period............................ $ 8.00 $ 7.98 $ 7.98
======= ======= =======
Total investment return (b)................................. (16.38)% (16.82)% 14.99%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 7.40%+ 6.65%+ 6.65%+
Net expenses............................................ 3.39%+ 4.14%+ 4.14%+
Expenses (before waiver)................................ 3.59%+ 4.34%+ 4.34%+
Portfolio turnover rate..................................... 96% 96% 96%
Net assets at end of period (in 000's)...................... $ 7,548 $ 2,532 $ --(c)
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
Per share data based on average shares outstanding during
(a) the period.
Total return is calculated exclusive of sales charges and is
(b) not annualized.
(c) Less than one thousand dollars.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 212
Notes to Financial Statements
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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
19
<PAGE> 213
MainStay Global High Yield Fund
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.
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 December 31, 1998:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
--------- --------- --------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts
Deutsche Mark vs. U.S. Dollar, expiring 3/31/99............. DM 63,000 $ 37,858 $ (135)
Pound Sterling vs. U.S. Dollar, expiring 3/31/99............ Pound
Sterling 190,400 $319,682 3,702
--------
Net unrealized appreciation on forward foreign currency
contracts: $ 3,567
========
</TABLE>
20
<PAGE> 214
Notes to Financial Statements (continued)
ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $67,460 and are being
amortized over 60 months from the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $10,656 and $11,682 have been reclassified
from undistributed net investment income and accumulated undistributed net
realized loss on foreign currency transactions to additional paid-in capital and
undistributed net investment income, respectively, due to certain expenses being
nondeductible for tax purposes and the tax treatment of foreign currency losses,
respectively.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Discounts on securities
purchased for the Fund are accreted on the constant yield method over the life
of the respective securities, or, if applicable, over the period to the first
call date. Premiums on securities purchased are not amortized for this Fund.
EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when direct allocations of expenses can be made. The investment
income and expenses (other than expenses incurred under the Distribution Plan)
and realized and unrealized gains and losses on investments of the Fund are
allocated to separate classes of shares based upon their relative net asset
value on the date the income is earned or expenses and realized and unrealized
gains and losses are incurred.
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.
21
<PAGE> 215
MainStay Global High Yield Fund
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, 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. 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.
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 December 31, 1998, the Manager earned $39,854 and waived
$11,387 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
22
<PAGE> 216
Notes to Financial Statements (continued)
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 and Class C Plans, the Fund pays the
Distributor a monthly fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Distribution Plan provides that the Class
B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $766 for the period ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B and Class C shares
of $1,244 and $20, respectively, for the period ended December 31, 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 accrued amounted to $21,620 for the period
ended December 31, 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 $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $7,200,000 and $798,000, respectively. This represents
95.4% and 31.5% of the net assets at period end for Class A and B, respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $349 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$21,089 for the period ended December 31, 1998.
23
<PAGE> 217
MainStay Global High Yield Fund
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, capital loss
carryforwards of $954,715 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 2006. 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.
The Fund intends to elect to treat for Federal income tax purposes approximately
$213,007 of qualifying realized capital losses that arose during the period as
if they arose on January 1, 1999.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $20,302 and $8,712, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There was no outstanding balance on
this line of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold................................................. 957 331 3
Shares issued in reinvestment of dividends.................. 2 4 --
--- --- --
959 335 3
Shares redeemed............................................. (15) (18) (3)
--- --- --
Net increase................................................ 944 317 --(a)
=== === ==
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
24
<PAGE> 218
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Global High Yield Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, and the results of its operations, the changes
in its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 24, 1999
25
<PAGE> 219
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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> 220
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
4 "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
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> 221
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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> 222
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN21-02/99
[RECYCLE LOGO]
MAINSTAY GLOBAL HIGH YIELD FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 223
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Portfolio Composition 7
Returns & Lipper Rankings 9
Portfolio of Investments 11
Financial Statements 13
Notes to Financial Statements 18
Report of Independent Accountants 24
The MainStay Funds 25
</TABLE>
<PAGE> 224
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 225
MainStay Government Fund Highlights
1998 MARKET RECAP
- - During the first half of 1998, domestic bond markets experienced the lowest
volatility in 15 years, but in the second half of the year, volatility
approached its 15-year high.
- - Throughout 1998, the bond markets were influenced by financial crises in many
parts of the world, modest inflation, low unemployment, falling commodity
prices, and a budget surplus that reduced Treasury issuance.
- - In the last four months of the year, the Federal Reserve Board moved to reduce
interest rates three times.
- - In the second half of 1998, difficulties in Asia, Russia, and Brazil, along
with the near failure of a leading hedge fund, resulted in a flight to quality
that raised prices among high-quality, highly liquid securities and reduced
the yield on 30-year Treasury bonds to record lows.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Government Fund returned 8.32%
for Class A shares and 7.52% for Class B and Class C shares,* excluding all
sales charges.
- - The Fund benefited from a duration strategy that was long to neutral
throughout the year.
- - The Fund's overweighted position in 30-year Treasuries helped the Fund benefit
as the yield curve flattened in the second quarter and again in the second
half of 1998.
- - The Fund enhanced its returns by shifting the Fund's weighting in
mortgage-backed securities throughout the year.
- - Class A shares outperformed and Class B and Class C shares underperformed the
average Lipper* general U.S. government fund, which returned 8.07% for the
year ended 12/31/98.
- -------
* See footnote and table on page 9 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 226
$10,000 Invested in the MainStay Government Fund versus Lehman Brothers
Government Bond Index and Inflation
CLASS A SHARES SEC Returns: 1-Year 3.44%, 5-Year 5.41%, 10-Year 6.88%
[LINE GRAPH]
<TABLE>
<CAPTION>
LEHMAN BROTHERS
MAINSTAY GOVERNMENT FUND GOVERNMENT BOND INDEX* INFLATION(+)
------------------------ ---------------------- ------------
<S> <C> <C> <C>
12/88 9550 10000 10000
12/89 10713 11423 10464
12/90 11454 12419 11118
12/91 12989 14322 11449
12/92 13485 15357 11788
12/93 14278 16994 12111
12/94 13871 16420 12426
12/95 16143 19431 12749
12/96 16460 19969 13171
12/97 17962 21885 13395
12/98 19456 24040 13611
</TABLE>
CLASS B & CLASS C SHARES Class B SEC Returns: 1-Year 2.52%, 5-Year 5.52%,
10-Year
7.10%
Class C SEC Returns: 1-Year 6.52%, 5-Year 5.84%,
10-Year
7.10%
[LINE GRAPH]
<TABLE>
<CAPTION>
LEHMAN BROTHERS INFLATION(+)
MAINSTAY GOVERNMENT GOVERNMENT BOND ------------
FUND INDEX*
------------------- ---------------
<S> <C> <C> <C>
12/88 10000.00 10000.00 10000.00
12/89 11217.00 11423.00 10464.00
12/90 11994.00 12419.00 11118.00
12/91 13601.00 14322.00 11449.00
12/92 14120.00 15357.00 11788.00
12/93 14950.00 16994.00 12111.00
12/94 14525.00 16420.00 12426.00
12/95 16804.00 19431.00 12749.00
12/96 17015.00 19969.00 13171.00
12/97 18467.00 21885.00 13395.00
12/98 19856.00 24040.00 13611.00
</TABLE>
- -------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 12/31/88 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 12/31/88 through 12/31/94. Performance
data for the two classes vary after this date based on differences in their
load and expense structures. The Class B graph assumes an initial
investment of $10,000 made on 12/31/88. Returns shown do not reflect the
Contingent Deferred Sales Charge (CDSC), as it would not apply to the
period shown. The Class C graph assumes an initial investment of $10,000
made on 12/31/88 and includes the historical performance of Class B shares
for periods 12/31/88 through 8/31/98. Performance data for the two classes
vary after this date based on differences in their load. Returns shown do
not reflect the 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. It is not possible to make an investment directly into an
index.
(+) 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> 227
Portfolio Management Discussion and Analysis
Overall, 1998 was a year of extremes in the bond market, causing investors to
reevaluate risk at several levels. The first half of the year saw the lowest
level of volatility in 15 years, while the second half of the year approached
the highest volatility in a decade and a half.
A variety of forces fueled the progress of the bond markets, including a budget
surplus that reduced Treasury issuance and tightened supply, and a flight to
quality in the third quarter of 1998 that dramatically increased demand for
government bonds. With financial problems in Asia, Russia, and Latin America,
and the near collapse of one of the world's largest hedge funds, the rush to
high-quality, highly liquid issues drove government bond prices higher and
reduced 30-year Treasury yields to record lows.
Meanwhile, modest inflation, low unemployment, and a strong U.S. dollar provided
a positive economic backdrop, but a worldwide financial crisis, along with
earnings disappointments at leading corporations caused wide swings in the stock
market, eroding investor confidence during the third quarter of 1998. In
response, the Federal Reserve Board moved to reduce interest rates three times
in the third and fourth quarters, helping calm investors and bring liquidity
back to the marketplace.
Mortgage-backed securities had variable performance amid shifting interest rates
and prepayment concerns, but recovered strongly at the end of the fourth
quarter. Asset-backed securities generally showed positive performance,
particularly among highly rated, short-term issues, where the likelihood of
prepayment was low.
By year end, market prices reflected most of the variables that had a major
effect in 1998, including inflation expectations, Asian and emerging market
concerns, and anticipated action by the Federal Reserve Board.
HOW DID THE MAINSTAY GOVERNMENT FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Government Fund returned 8.32% for Class A shares and 7.52% for
Class B and Class C shares* for the year ended 12/31/98, excluding all sales
charges. Class A shares outperformed and Class B and Class C shares
underperformed the average Lipper(+) general U.S. government fund, which
returned 8.07% for the year.
WHAT STRATEGIES DID THE FUND USE TO ACHIEVE THIS PERFORMANCE?
We believe that duration was an important factor in determining the Fund's
performance. The Fund's strategy throughout the year was to remain long to
neutral. In the first half of the year, the Fund remained long as rates headed
lower and reduced duration as rates rallied, which had a positive impact on
performance. In the second half of the year, the Fund's duration moved with the
ebb and flow of the market, but we shortened the Fund's duration in the fourth
quarter, which had a marginally negative impact on performance late in
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.
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.
- -------
* Performance for Class C shares includes the historical performance of Class B
shares from 1/1/98 through 8/31/98.
(+) See footnote and table on page 9 for more information on Lipper Inc.
5
<PAGE> 228
HEDGE FUND
- --------------------
A private investment partnership or off-shore investment corporation that may
take both long and short positions, use leverage and derivative securities, and
invest across many markets. Hedge funds may use high-risk or speculative
investment strategies.
YIELD
- --------------------
The income paid to investors over a specified period of time.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[BAR CHART]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<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
12/98 8.32
</TABLE>
Returns reflect the historical performance of the Class B shares for the
periods 12/86 through 12/94.
See footnote * on page 9 for more information on performance.
CLASS B & CLASS C SHARES
[BAR CHART]
<TABLE>
<CAPTION>
CLASS B & C SHARES
------------------
<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 15.59
12/96 1.25
12/97 8.54
12/98 7.52
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 12/86 through 8/98.
See footnote * on page 9 for more information on performance.
the quarter. Overall, however, the Fund's duration strategy was positive for the
portfolio.
The Fund's yield-curve strategy was also a positive contributor to performance.
The Fund remained overweighted in 30-year Treasuries, which helped the portfolio
throughout the year, but particularly in the second and fourth quarters, when
yield spreads between 2-year and 30-year Treasury bonds narrowed, flattening the
yield curve.
WHAT IS THE OVERALL QUALITY OF THE SECURITIES IN THE FUND'S INVESTMENT
PORTFOLIO?
As of 12/31/98, the overall credit quality of the securities in the Fund's
investment portfolio was Agency,(++) which is better than AAA.(sec.) The Fund's
emphasis on
- -------
(++) Agency rating is above AAA. This rating is based solely on the
creditworthiness of the bonds in the portfolio and is not meant to
represent the stability or safety of the Fund.
(sec.) 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.
6
<PAGE> 229
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
U.S. TREASURY NOTES 14.30%
U.S. TREASURY BONDS 19.70%
FEDERAL NATIONAL MORTGAGE ASSOCIATION 28.60%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 17.00%
ASSETS-BACKED SECURITIES 12.30%
MORTGAGE-BACKED SECURITIES 7.40%
CASH, EQUIVALENTS, AND OTHER ASSETS 0.70%
</TABLE>
Actual percentages will vary over time.
high quality proved beneficial when investors rushed to government bonds seeking
a haven of relative security when the stock market dropped nearly 20% in August.
The uncertainty surrounding emerging markets and hedge funds helped fuel the
interest in high-grade bonds, and the Fund was well positioned to take advantage
of investor preferences during this period.
HOW DID THE FUND'S MORTGAGE-BACKED SECURITIES PERFORM?
Anticipating prepayments, the Fund entered the year underweighted in high-
coupon mortgage-backed securities, which was positive for performance. In the
second quarter, the Fund added bonds we believed would not be interest-rate
sensitive and managed to take some profits as the market rallied. Unfortunately,
a second wave of prepayments hurt the Fund's holdings and an overweighted
position detracted from performance in the second quarter.
In the third quarter, we reduced the Fund to an underweighted position in
mortgage-backed securities, which proved beneficial as interest rates fell and
prepayments continued. During the fourth quarter, the Fund had an opportunity to
purchase mortgage-backed bonds at distressed prices from hedge funds that were
forced to liquidate their holdings. This contributed positively to performance
as the Federal Reserve Board moved to lower interest rates, which helped restore
investor confidence, bring order to the markets, and increase demand for
mortgage-backed securities.
WERE THERE OTHER STRATEGIES THAT CONTRIBUTED POSITIVELY TO PERFORMANCE?
In the first half of the year, interest rates remained in a relatively narrow
range, so we used a variety of technical indicators to guide the Fund between
newer and older issues, which provided incremental gains.
Finding few opportunities elsewhere, the Fund was heavily weighted in Treasury
securities, which had a positive impact on performance throughout the year, but
particularly in the second half of 1998, when a drop in the stock market,
concerns over Asia, Russia, and Brazil, and
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.
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> 230
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.
YIELD SPREAD
- --------------------
The difference in yield between securities in different market sectors, such as
government and mortgage-backed securities--or between different securities in a
single sector, such as 2-year and 30-year Treasuries.
problems with major hedge funds caused investors to seek a "safe haven" in
Treasury securities. The gains during this period were exaggerated by the budget
surplus, which decreased Treasury issuance and limited supply at a time when
demand for highly liquid, high-quality securities was extremely high.
WHAT OTHER INVESTMENTS DID THE FUND HAVE?
The Fund also had relatively small allocations in agency securities,
asset-backed securities, unleveraged CMOs, and variable floating-rate notes. All
of these positions contributed positively to the Fund's performance over the
course of the year. Among asset-backed securities, the Fund's concentration on
high-quality, shorter-term issues provided a measure of prepayment protection,
which was a positive factor. The Fund's asset-backed securities increased the
portfolio's yield and provided the securities in the Fund's investment portfolio
with a rating of AAA.
DID THE FUND MAKE ANY MATERIAL SHIFTS IN ITS SECTOR ALLOCATIONS DURING THE YEAR?
Over the course of the year, the largest shift was a decrease in Treasury
holdings and an increase in mortgage-backed securities. That change accelerated
in the fourth quarter, when hedge-fund liquidations made it possible to buy
mortgage-backed securities at what we believed to be very attractive prices. The
Fund took profits in Treasuries to purchase these securities, and both the
purchases and sales had a positive impact on performance.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We believe that unless a major market shift occurs, the Federal Reserve is
likely to remain on hold temporarily, though it may move to ease interest rates
further as the year unfolds. We continue to believe that diversification will be
important for an investor's overall allocation as was exhibited by the inverse
relationship between stocks and bonds in the second half of 1998, when bonds
outperformed stocks for a period of time. Within the income securities market we
believe value can be added along the yield curve as reduced Treasury issuance
and ongoing volatility continue to create opportunities. We also anticipate
reduced supply and higher demand for mortgage-backed securities and believe the
Fund is well positioned to take advantage of any move in that direction.
Whatever happens, the Fund will continue to emphasize high-quality investments
as it seeks a high level of current income, consistent with safety of principal.
Ravi Akhoury
Edward Munshower
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
8
<PAGE> 231
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 8.32% 6.39% 7.38% 7.07%
Class B 7.52% 5.84% 7.10% 6.85%
Class C 7.52% 5.84% 7.10% 6.85%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 3.44% 5.41% 6.88% 6.68%
Class B 2.52% 5.52% 7.10% 6.85%
Class C 6.52% 5.84% 7.10% 6.85%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 65 out of n/a n/a 65 out of
184 funds 125 funds
Class B 118 out of 63 out of 47 out of 25 out of
184 funds 97 funds 50 funds 31 funds
Class C n/a n/a n/a n/a
Average Lipper
general U.S.
government fund 8.07% 6.15% 8.19% 7.57%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $8.46 $0.4802 $0.0000
Class B $8.44 $0.4167 $0.0000
Class C $8.44 $0.1372 $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 load and 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
9
<PAGE> 232
purchase and an annual 12b-1 fee of 1%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of 1%. Performance figures for this class include the
historical performance of the Class B shares for periods from inception
(5/1/86) up to 8/31/98. Performance data for the two classes after this
date vary based on differences in their load.
(+) Lipper 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
12/31/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class C shares on 9/1/98.
10
<PAGE> 233
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM INVESTMENTS (109.2%)+
ASSET-BACKED SECURITIES (12.3%)
AIRPLANE LEASES (4.0%)
AerCo Ltd.
Series 1A Class A1
5.7255%, due 7/15/23
(a)(d)...................... $ 4,185,000 $ 4,155,412
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19 (c)...... 11,893,514 12,559,550
Morgan Stanley Aircraft
Finance
Series 1A Class A1
5.7455%, due 3/15/23
(a)(d)...................... 8,133,080 8,087,534
------------
24,802,496
------------
CONSUMER LOANS (2.4%)
Green Tree Recreational,
Equipment & Consumer Trust
Series 1996-C Class A1
5.7755%, due 10/15/17
(c)(d)...................... 1,501,619 1,495,988
Series 1997-C Class A1
6.49%, due 2/15/18 (c)...... 13,446,087 13,576,514
------------
15,072,502
------------
EQUIPMENT LOANS (0.4%)
Newcourt Equipment Trust
Securities
Series 1998-1 Class A3
5.24%, due 12/20/02 (c)..... 2,245,000 2,229,622
------------
HOME EQUITY LOANS (3.2%)
Household Finance Corp. Home
Equity Loan
Asset-Backed Certificates
Series 1992-2 Class A2
5.985%, due 10/20/07
(c)(d)...................... 6,351,713 6,341,550
Money Store Home Equity Trust
(The)
Series 1997-A Class A10
5.6655%, due 5/15/25
(c)(d)...................... 2,349,670 2,343,796
Saxon Asset Securities Trust
Series 1997-3 Class AF1
5.784%, due 10/25/20
(c)(d)...................... 1,557,610 1,555,117
Southern Pacific Secured
Asset Corp.
Series 1997-1 Class A1
5.8244%, due 4/25/27
(c)(d)...................... 9,313,158 9,208,385
------------
19,448,848
------------
STUDENT LOANS (0.6%)
Nellie Mae, Inc.
Series 1996-1 Class A1
5.7055%, due 12/15/04
(c)(d)...................... 3,601,679 3,593,755
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
UTILITY LOANS (1.7%)
Comed Transitional Funding
Trust Series 1998-1 Class A7
5.74%, due 12/25/10 (c)..... $ 10,545,000 $ 10,541,731
------------
Total Asset-Backed Securities
(Cost $75,784,473).......... 75,688,954
------------
MORTGAGE-BACKED SECURITIES
(7.4%)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE
OBLIGATIONS) (5.5%)
DLJ Commercial Mortgage Corp.
Series 1998-CF2 Class A1B
6.24%, due 11/12/31 (c)..... 5,630,000 5,739,109
LB Commercial Conduit
Mortgage Trust
Series 1998-C4 Class A1B
6.21%, due 10/15/08 (c)..... 12,395,000 12,600,261
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C2 Class A1
7.2778%, due 6/15/21
(c)(d)...................... 5,229,814 5,323,846
Morgan Stanley Capital I
Series 1998-HF2 Class A1
6.01%, due 11/15/30 (c)..... 2,883,674 2,911,156
Mortgage Capital Funding,
Inc.
Series 1998-MC3 Class A2
6.337%, due 11/18/31 (c).... 4,585,000 4,671,703
Nationslink Funding Corp.
Series 1998-2 Class A1
6.001%, due 11/20/07 (c).... 2,188,516 2,204,930
------------
33,451,005
------------
RESIDENTIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE
OBLIGATIONS) (1.9%)
SASCO Floating Rate
Commercial Mortgage
Series 1998-C3A Class A1A
6.1744%, due 6/25/15
(a)(d)...................... 9,616,149 9,616,149
Structured Asset Securities
Corp.
Series 1996-2 Class A1
7.00%, due 8/25/26 (c)...... 2,125,614 2,128,505
------------
11,744,654
------------
Total Mortgage-Backed
Securities
(Cost $45,004,296).......... 45,195,659
------------
</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> 234
MainStay Government Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & FEDERAL
AGENCIES (89.5%)
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (7.5%)
5.25%, due 1/15/03.......... $ 31,665,000 $ 31,881,272
5.75%, due 4/15/03 (e)...... 13,865,000 14,232,838
------------
46,114,110
------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE
PASS-THROUGH SECURITIES)
(24.4%)
6.45%, due 1/1/05........... 5,302,679 5,503,120
6.50%, due 5/1/13-11/1/28... 106,710,651 107,561,426
6.50%, due 2/11/29 TBA
(b)....................... 25,425,000 25,568,143
6.54%, due 1/1/05........... 4,952,219 5,168,135
7.00%, due 11/1/12.......... 5,479,752 5,597,895
------------
149,398,719
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I (MORTGAGE
PASS-THROUGH SECURITIES)
(17.0%)
7.00%, due
7/15/25-9/15/28........... 90,024,387 92,106,651
8.00%, due 11/15/28......... 11,657,539 12,105,654
------------
104,212,305
------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II (MORTGAGE
PASS-THROUGH SECURITY) (6.6%)
7.50%, due 1/21/29 TBA
(b)....................... 39,535,000 40,745,957
------------
UNITED STATES TREASURY BONDS
(19.7%)
6.125%, due 11/15/27 (e).... 15,045,000 16,840,922
6.375%, due 8/15/27......... 14,450,000 16,608,397
7.625%, due 2/15/25 (e)..... 36,845,000 48,439,753
8.875%, due 8/15/17 (e)..... 27,457,000 38,675,656
------------
120,564,728
------------
UNITED STATES TREASURY NOTES
(14.3%)
5.625%, due 11/30/00 (e).... 16,080,000 16,366,385
6.50%, due 5/15/05 (e)...... 16,115,000 17,661,073
6.625%, due 5/15/07 (e)..... 18,190,000 20,455,201
6.875%, due 5/15/06 (e)..... 29,345,000 33,178,044
------------
87,660,703
------------
Total U.S. Government &
Federal Agencies
(Cost $546,508,483)......... 548,696,522
------------
Total Long-Term Investments
(Cost $667,297,252)......... 669,581,135
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (0.9%)
FEDERAL AGENCY (0.9%)
Federal Mortgage Corp.
Discount Note
4.50%, due 1/4/99........... $ 5,300,000 $ 5,298,012
------------
Total Short-Term Investment
(Cost $5,298,012)........... 5,298,012
------------
Total Investments
(Cost $672,595,264) (f)..... 110.1% 674,879,147(g)
Liabilities in Excess of
Cash and Other Assets....... (10.1) (62,002,936)
---- ----------
Net Assets................... 100.0% $612,876,211
===== ============
</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 December 31, 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 $673,305,217.
(g) At December 31, 1998 net unrealized appreciation was $1,573,930 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 $4,092,733 and aggregate gross unrealized
depreciation of all investments on which there was an excess of cost over
market value of $2,518,803.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
<PAGE> 235
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$672,595,264)............................................. $ 674,879,147
Collateral held for securities loaned, at value (Note 5).... 163,379,437
Receivables:
Interest.................................................. 5,622,365
Fund shares sold.......................................... 867,071
Investment securities sold................................ 206,668
-------------
Total assets........................................ 844,954,688
-------------
LIABILITIES:
Securities lending collateral, at value (Note 5)............ 163,379,437
Payables:
Investment securities purchased........................... 66,170,234
Fund shares redeemed...................................... 1,334,090
NYLIFE Distributors....................................... 508,917
MainStay Management....................................... 321,352
Custodian................................................. 166,150
Transfer agent............................................ 96,648
Trustees.................................................. 4,688
Accrued expenses............................................ 96,961
-------------
Total liabilities................................... 232,078,477
-------------
Net assets.................................................. $ 612,876,211
=============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 26,236
Class B................................................... 699,856
Class C................................................... 112
Additional paid-in capital.................................. 717,146,648
Accumulated net realized loss on investments................ (107,280,524)
Net unrealized appreciation on investments.................. 2,283,883
-------------
Net assets.................................................. $ 612,876,211
=============
CLASS A
Net assets applicable to outstanding shares................. $ 22,189,393
=============
Shares of beneficial interest outstanding................... 2,623,604
=============
Net asset value per share outstanding....................... $ 8.46
Maximum sales charge (4.50% of offering price).............. 0.40
-------------
Maximum offering price per share outstanding................ $ 8.86
=============
CLASS B
Net assets applicable to outstanding shares................. $ 590,592,343
=============
Shares of beneficial interest outstanding................... 69,985,649
=============
Net asset value and offering price per share outstanding.... $ 8.44
=============
CLASS C
Net assets applicable to outstanding shares................. $ 94,475
=============
Shares of beneficial interest outstanding................... 11,194
=============
Net asset value and offering price per share outstanding.... $ 8.44
=============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE> 236
Statement of Operations
for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.................................................. $ 39,425,549
------------
Expenses:
Distribution--Class B..................................... 4,535,189
Distribution--Class C..................................... 134
Management................................................ 3,741,658
Service--Class A.......................................... 47,334
Service--Class B.......................................... 1,511,644
Service--Class C.......................................... 46
Transfer agent............................................ 1,213,615
Shareholder communication................................. 151,800
Recordkeeping............................................. 88,839
Custodian................................................. 87,436
Registration.............................................. 65,947
Professional.............................................. 64,390
Trustees.................................................. 18,639
Miscellaneous............................................. 19,684
------------
Total expenses.......................................... 11,546,355
------------
Net investment income....................................... 27,879,194
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments............................ 30,978,483
Net change in unrealized appreciation on investments........ (13,940,211)
------------
Net realized and unrealized gain on investments............. 17,038,272
------------
Net increase in net assets resulting from operations........ $ 44,917,466
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE> 237
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 27,879,194 $ 40,092,680
Net realized gain on investments.......................... 30,978,483 2,612,844
Net change in unrealized appreciation on investments...... (13,940,211) 13,181,818
------------- -------------
Net increase in net assets resulting from operations...... 44,917,466 55,887,342
------------- -------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (961,126) (1,019,757)
Class B................................................. (26,599,772) (38,267,749)
Class C................................................. (904) --
Return of capital:
Class A................................................. (121,741) --
Class B................................................. (3,369,262) --
Class C................................................. (115) --
------------- -------------
Total dividends and distributions to shareholders..... (31,052,920) (39,287,506)
------------- -------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 20,636,346 10,873,435
Class B................................................. 107,139,254 47,345,675
Class C................................................. 95,045 --
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 973,289 738,859
Class B................................................. 22,960,831 28,767,769
Class C................................................. 462 --
------------- -------------
151,805,227 87,725,738
Cost of shares redeemed:
Class A................................................. (16,901,003) (11,379,777)
Class B................................................. (189,497,366) (238,724,333)
------------- -------------
Decrease in net assets derived from capital share
transactions......................................... (54,593,142) (162,378,372)
------------- -------------
Net decrease in net assets............................ (40,728,596) (145,778,536)
NET ASSETS:
Beginning of year........................................... 653,604,807 799,383,343
------------- -------------
End of year................................................. $ 612,876,211 $ 653,604,807
============= =============
Accumulated undistributed net investment income at end of
year...................................................... $ -- $ 4,118
============= =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 238
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year ended December 31,
----------------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 8.27 $ 8.06 $ 8.41 $ 7.76
------- ------- ------- -------
Net investment income....................................... 0.43 0.50 0.50 0.58
Net realized and unrealized gain (loss) on investments...... 0.24 0.21 (0.35) 0.65
------- ------- ------- -------
Total from investment operations............................ 0.67 0.71 0.15 1.23
------- ------- ------- -------
Less dividends and distributions:
From net investment income................................ (0.43) (0.50) (0.50) (0.58)
In excess of net investment income........................ -- -- -- (0.00)(b)
Return of capital........................................... (0.05) -- -- --
------- ------- ------- -------
Total dividends and distributions........................... (0.48) (0.50) (0.50) (0.58)
------- ------- ------- -------
Net asset value at end of period............................ $ 8.46 $ 8.27 $ 8.06 $ 8.41
======= ======= ======= =======
Total investment return (a)................................. 8.32% 9.12% 1.97% 16.38%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 5.20% 6.23% 6.3% 7.3%
Expenses................................................ 1.12% 1.09% 1.0% 1.0%
Portfolio turnover rate..................................... 371% 338% 307% 540%
Net assets at end of period (in 000's)...................... $22,189 $17,114 $16,413 $12,784
</TABLE>
- -------
<TABLE>
<S> <C>
The Fund changed its fiscal year end from August 31 to
* December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one cent per share.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 239
<TABLE>
<CAPTION>
Class B Class C
- ---------------------------------------------------------------------- --------------
September 1, September 1,**
Year ended December 31, through Year ended through
- ----------------------------------------- December 31, August 31, December 31,
1998 1997 1996 1995 1994* 1994 1998
- -------- -------- -------- -------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.25 $ 8.04 $ 8.41 $ 7.76 $ 8.04 $ 8.77 $ 8.43
- -------- -------- -------- -------- ---------- ---------- --------
0.37 0.45 0.46 0.54 0.19 0.57 0.12
0.24 0.21 (0.37) 0.65 (0.29) (0.71) 0.03
- -------- -------- -------- -------- ---------- ---------- --------
0.61 0.66 0.09 1.19 (0.10) (0.14) 0.15
- -------- -------- -------- -------- ---------- ---------- --------
(0.37) (0.45) (0.46) (0.54) (0.18) (0.57) (0.12)
-- -- -- (0.00)(b) -- (0.01) --
(0.05) -- -- -- -- (0.01) (0.02)
- -------- -------- -------- -------- ---------- ---------- --------
(0.42) (0.45) (0.46) (0.54) (0.18) (0.59) (0.14)
- -------- -------- -------- -------- ---------- ---------- --------
$ 8.44 $ 8.25 $ 8.04 $ 8.41 $ 7.76 $ 8.04 $ 8.44
======== ======== ======== ======== ========== ========== ========
7.52% 8.54% 1.25% 15.69% (1.24%) (1.63%) 1.75%
4.45% 5.67% 5.7% 6.7% 7.1%+ 7.1% 4.45%+
1.87% 1.65% 1.6% 1.7% 1.7%+ 1.7% 1.87%+
371% 338% 307% 540% 143% 491% 371%
$590,592 $636,491 $782,970 $990,184 $1,024,492 $1,119,586 $ 94
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 240
MainStay Government 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
Government Fund (the "Fund").
The Fund currently offers three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on May 1, 1986 and
September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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
18
<PAGE> 241
Notes to Financial Statements
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 Fund's calculation of net
asset value unless the sub-adviser believes that the particular event would
materially affect net asset value, in which case an adjustment would be made.
MORTGAGE DOLLAR ROLLS. The Fund enters into mortgage dollar roll transactions
("MDRs") in which it sells mortgage-backed securities ("MBS") from its portfolio
to a counterparty from whom it simultaneously agrees to buy a similar security
on a delayed delivery basis. The MDR transactions of the Fund are classified as
purchase and sale transactions. The securities sold in connection with the MDRs
are removed from the portfolio and a realized gain or loss is recognized. The
securities the Fund has agreed to acquire are included at market value in the
portfolio of investments and liabilities for such purchase commitments are
included as payables for investments purchased. The Fund maintains a segregated
account with its custodian containing securities from its portfolio having a
value not less than the repurchase price, including accrued interest. MDR
transactions involve certain risks, including the risk that the MBS returned to
the Fund at the end of the roll, while substantially similar, could be inferior
to what was initially sold to the counterparty.
SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are secured by collateral (cash or securities)
at least equal at all times to the market value of the securities loaned. The
Fund may bear the risk of delay in recovery of, or loss of rights in, the
securities loaned should the borrower of the securities fail financially. The
Fund receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $3,491,118 and $321,510 have been reclassified
from accumulated distribution in excess of net investment income and accumulated
net realized gain on investments, respectively, to additional paid-in-capital
due to a return of capital distribution and the tax treatment of gains (losses)
on paydowns.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
19
<PAGE> 242
MainStay Government Fund
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method and include gains
and losses from repayments of principal on mortgage backed securities. 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 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 are 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 year ended December 31, 1998 the Manager earned
$3,741,658. 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
20
<PAGE> 243
Notes to Financial Statements (continued)
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 and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plan provides
that the Class B and Class C 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 or
Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $16,947 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges for redemption of Class B shares of $535,272
for the period ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $1,213,615.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $16,865 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$88,839 for the year ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, capital loss
carryforwards of $106,440,455 were available, as shown in the table below, to
the extent provided by regulations to offset future realized gains
21
<PAGE> 244
MainStay Government Fund
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>
2002...................................................... $ 91,253
2004...................................................... 13,291
2005...................................................... 1,896
--------
$106,440
========
</TABLE>
The Fund intends to treat for Federal income tax purposes approximately $130,116
of qualifying capital losses that arose during the year as if they arose on
January 1, 1999. The Fund utilized $31,197,492 of capital loss carryforwards
during the current year.
NOTE 5--PORTFOLIO SECURITIES LOANED:
At December 31, 1998, the Fund had securities on loan with a market value of
$159,445,724 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.
Investments made with cash collateral at December 31, 1998:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------
<S> <C> <C>
SHORT-TERM COMMERCIAL PAPER
American Express Bank Ltd.
5.320%, due 3/19/99..................... $ 6,980,000 $ 6,982,506
Associates First Capital
5.622%, due 4/5/99...................... 15,000,000 15,000,000
Bankers Trust
5.15%, due 2/3/99....................... 25,000,000 24,980,450
Broadway Capital
5.158%, due 1/11/99..................... 21,239,000 21,205,578
Clipper Receivables
5.524%, due 1/8/99...................... 25,000,000 24,889,236
Deutsche Floorplan Master Trust
5.735%, due 2/16/99..................... 25,000,000 25,000,000
</TABLE>
22
<PAGE> 245
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------
<S> <C> <C>
First Tennessee Bank
5.20%, due 1/26/99...................... $ 4,400,000 $ 4,400,000
Greenwich Funding
5.677%, due 1/20/99..................... 16,000,000 15,924,667
NationsBank
5.02%, due 4/21/99...................... 25,000,000 24,997,000
------------
$163,379,437
============
</TABLE>
Net income earned by the Fund for securities lending transactions amounted to
$446,424, net of broker fees and rebates, for the year ended December 31, 1998,
which is included as interest income on the Statement of Operations.
NOTE 6--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of U.S. Government
securities were $2,458,678 and $2,492,900, respectively. Purchases and sales of
securities other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $137,538 and $131,534,
respectively.
NOTE 7--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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 8--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, 1998 1997
---------------------------- -----------------
CLASS A CLASS B CLASS C* CLASS A CLASS B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.................................. 2,439 12,725 11 1,341 5,865
Shares issued in reinvestment of dividends... 116 2,741 -- 91 3,568
------ ------- -- ------ -------
2,555 15,466 11 1,432 9,433
Shares redeemed.............................. (2,001) (22,634) -- (1,400) (29,669)
------ ------- -- ------ -------
Net increase (decrease)...................... 554 (7,168) 11 32 (20,236)
====== ======= == ====== =======
</TABLE>
- -------
* First offered on September 1, 1998.
23
<PAGE> 246
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Government Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 24, 1999
24
<PAGE> 247
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
25
<PAGE> 248
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
26
<PAGE> 249
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment of $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
27
<PAGE> 250
OFFICERS & TRUSTEES*
<TABLE>
<C> <C>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN08-02/99
[RECYCLE LOGO]
MAINSTAY GOVERNMENT FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 251
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Growth Opportunities Fund
Highlights 3
$10,000 Invested in the MainStay Growth
Opportunities Fund versus Lipper Growth
and Income Funds Index and
Inflation--Class A, Class B, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 & 12/31/98 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Returns & Lipper Rankings 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Financial Statements 16
Notes to Financial Statements 20
Report of Independent Accountants 24
The MainStay Funds 25
</TABLE>
<PAGE> 252
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year
that domestic stocks in general returned more than 20%. Getting there,
however, was often like riding a roller-coaster. Just as the stock market
climbed to new highs in mid-July, preliminary corrections in various portions of
the market warned of an imminent decline. By the end of August, the U.S. stock
market had plummeted nearly 20%, turning earlier exhilaration into serious
investor concern. Remarkably, however, the market continued to charge ahead,
again reaching record levels in November, then dropping back slightly and ending
the year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 253
MainStay Growth Opportunities Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - International economic weakness caused U.S. corporate profit growth to slow.
- - Global recession fears prompted three successive 0.25% interest-rate cuts by
the Federal Reserve Board.
- - The market saw strong inflows into mutual funds and increased demand for U.S.
equities by foreign investors.
- - Record levels of merger and acquisition activity helped boost equity
valuations.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - The MainStay Growth Opportunities Fund commenced operations on June 1, 1998.
- - The Fund returned 18.60% for Class A and 18.00% for Class B and Class C
shares,* respectively, for the since-inception period from 6/1/98 through
12/31/98.
- - The Fund benefited from its holdings in technology stocks, which generated
extremely strong returns in the second half of 1998.
- - All share classes outperformed the average Lipper* growth & income fund, which
returned 4.88% over the same since-inception period.
- -------
* See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the performance of Class B
shares from inception (6/1/98) through 8/31/98.
3
-
<PAGE> 254
$10,000 Invested in the MainStay Growth
Opportunities Fund versus Lipper Growth &
Income Funds Index and Inflation
CLASS A SHARES SEC Returns: since inception 12.08%
<TABLE>
<CAPTION>
MAINSTAY GROWTH LIPPER GROWTH & INCOME
OPPORTUNITIES FUND FUNDS INDEX* INFLATION (CPI)+
------------------ ---------------------- ----------------
<S> <C> <C> <C>
6/1/98 9450.00 10000.00 10000.00
6/98 10055.00 10120.00 10006.00
9/98 9308.00 8858.00 10043.00
12/98 11208.00 10298.00 10098.00
</TABLE>
CLASS B SHARES SEC Returns: since inception 13.00%
<TABLE>
<CAPTION>
MAINSTAY GROWTH LIPPER GROWTH & INCOME
OPPORTUNITIES FUND FUNDS INDEX* INFLATION (CPI)+
------------------ ---------------------- ----------------
<S> <C> <C> <C>
6/1/98 10000.00 10000.00 10000.00
6/98 10630.00 10120.00 10006.00
9/98 9820.00 8858.00 10043.00
12/98 11300.00 10298.00 10098.00
</TABLE>
CLASS C SHARES SEC Returns: since inception 17.00%
<TABLE>
<CAPTION>
MAINSTAY GROWTH LIPPER GROWTH & INCOME
OPPORTUNITIES FUND FUNDS INDEX* INFLATION (CPI)+
------------------ ---------------------- ----------------
<S> <C> <C> <C>
6/1/98 10000.00 10000.00 10000.00
6/98 10630.00 10120.00 10006.00
9/98 9820.00 8858.00 10043.00
12/98 11700.00 10298.00 10098.00
</TABLE>
4
<PAGE> 255
- --------
(*) Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 6/1/98 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 6/1/98. Returns shown reflect a 5%
Contingent Deferred Sales Charge (CDSC), which would apply for the period
shown. The Class C graph assumes an initial investment of $10,000 made on
6/1/98 and includes the performance of Class B shares for periods 6/1/98
through 8/31/98. Performance data for the two classes vary after this
date based on differences in their load. Returns shown reflect the CDSC,
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 Lipper Growth & Income Funds Index is an index comprised of 30
equally-weighted performance indices, adjusted for capital gain
distributions and income dividends of the largest qualifying funds in
this investment objective. It is not possible to make an investment
directly into an index.
(+) 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.
5
-
<PAGE> 256
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.
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.
The second half of 1998 ended with the equity markets basking in the glow
of low interest rates, seemingly nonexistent inflation, and continued
strength in the domestic economy. But fourth-quarter returns, the strongest in
approximately 20 years for most major U.S. large-capitalization equity indices,
differed sharply from the preceding quarter.
Concerns over the impact of financial troubles in emerging markets on the U.S.
economy weighed heavily on the U.S. equity market from mid-July through early
October. Russia's default on its domestic debt, weak commodity prices dampening
the outlook in Latin America, and ongoing economic instability in Asia
culminated in a significant market correction in August. The market had
recovered more than half of August's losses toward the end of September, when it
tumbled again, having anticipated a 0.50% cut in interest rates by the Federal
Reserve Board. The cut turned out to be 0.25% instead.
Better-than-expected U.S. corporate earnings reports and a long-awaited series
of interest-rate reductions by the Federal Reserve Board were the catalysts that
helped the market bounce back quickly and strongly in the fourth quarter. The
easing of the money supply also provided liquidity for the financial markets. As
investor confidence returned, the market gained momentum, particularly in the
technology sector.
GIVEN THIS CONTEXT, HOW DID THE MAINSTAY GROWTH OPPORTUNITIES FUND PERFORM IN
1998?
The MainStay Growth Opportunities Fund commenced operations on 6/1/98. For the
seven months ended 12/31/98, the MainStay Growth Opportunities Fund returned
18.60% for Class A shares and 18.00% for both Class B and Class C shares,(*)
excluding all sales charges. All share classes also outperformed the average
Lipper(+) growth & income fund, which returned 4.88% for the same seven-month
period.
WHAT STRATEGIES ACCOUNTED FOR THE FUND'S OUTPERFORMANCE?
Although the Fund balances a growth- and value-style approach, it was launched
with a strong growth stock orientation. This decision was based on our forecast
for overall economic growth. It proved most beneficial to the Fund, particularly
since growth stocks outperformed value stocks by a wide margin during the period
since the Fund's inception.
We also positioned the Fund to take into account the potential impact of
overseas economic problems on U.S. corporate profit growth. We avoided investing
the Fund in those industries we believed were most likely to be impacted by
emerging-market problems. This strategy helped the Fund's performance when the
equity markets were rocked by extreme volatility during the third quarter and
many of these stocks lagged the market by a wide margin.
- -------
* Performance figures for Class C shares include the performance of Class B
shares from inception (6/1/98) through 8/31/98.
+ See footnote and table on page 11 for more information on Lipper Inc.
6
<PAGE> 257
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
[FUND PERFORMANCE BAR CHART]
<TABLE>
<CAPTION>
6/98 12/98 6/98 12/98
---- ----- ---- -----
<S> <C> <C> <C>
6.40% Class A 18.60% Class A 6.30% Class B & Class C 18.00% Class B & Class C
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 6/98 through 8/98.
See footnote* on page 11 for more information on performance.
DID THE FUND REMAIN FULLY INVESTED?
No. As emerging-market woes dominated the U.S. equity market from mid-July
through October, we allowed the Fund's cash position to build. Rather than
investing cash inflows into an equity market that was in the process of
spiraling downward, we waited. When the Federal Reserve Board began to lower
interest rates on September 29, helping to restore investor confidence, we
quickly moved the Fund back into the market--a decision that definitely boosted
performance. We still kept the Fund in a higher-than-normal cash position, given
our concerns about the tenacity of the market rally.
WHICH SECTORS CONTRIBUTED MOST SIGNIFICANTLY TO THE FUND'S PERFORMANCE?
Technology was by far the best performing industry in 1998. In particular,
Internet stocks or any company remotely related to the Internet performed
extremely well in the second half of the year. The MainStay Growth Opportunities
Fund was moderately overweighted in technology issues, with an emphasis on the
software and computer services areas. In November, we increased our exposure
further, as these stocks appeared to have the best relative growth prospects in
the market. This proved to be a timely call when the technology sector surged in
the month of December. The Fund also focused on certain companies such as US
Filter and SPX Corp., which saw their stock prices inordinately hurt by the
third-quarter correction.
CAN YOU PROVIDE SOME EXAMPLES OF TECHNOLOGY STOCKS THAT PERFORMED WELL?
America Online, which benefited from its acquisition of Netscape, was by far the
Fund's best-performing stock in the second half of the year, with a staggering
six-month return of 146%. EMC Corp., the dominant provider of computer memory
storage, and Cisco Systems, the preeminent provider of networking and
communications equipment, also were strong performers, with a six-month return
as of 12/31/98 of 89% and 51%, respectively.
7
-
<PAGE> 258
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
COMMUNICATIONS- HEALTH CARE-
COMPUTERS EQUIPMENT RETAIL DRUGS TELECOMMUNICATIONS ALL OTHERS
--------- -------------- ------ ------------ ------------------ ----------
<S> <C> <C> <C> <C> <C>
11.9% 5.8% 5.5% 5.5% 4.7% 66.6%
</TABLE>
Actual percentages will vary over time.
Three other new Fund holdings in the technology sector--Sun Microsystems, Texas
Instruments, and Hewlett-Packard, also contributed positively to year-end
results.
WAS THE FUND IMPACTED BY THE DRAMATIC DECLINE IN OIL PRICES?
The severe downturn in energy prices did have a negative impact on the
performance of the MainStay Growth Opportunities Fund. However, the Fund's
underweighting in this sector actually helped to enhance its overall performance
relative to the market.
The Fund's worst performing stocks were two energy-related companies,
Halliburton, which returned -33%, and Schlumberger, which returned -32% for the
second half of 1998. The Fund continues to maintain its positions in these
stocks, viewing them as value holdings while we await a turnaround in the energy
sector.
Amoco, which recently merged with British Petroleum, and Exxon, were purchased
for the Fund as value positions after oil prices had hit historically low
levels. These two stocks have trailed the market, but again will remain in the
portfolio for the foreseeable future given their relatively high dividend yields
and the likelihood of potential stock appreciation as energy prices begin to
stabilize.
DID THE FUND MAKE OTHER SIGNIFICANT PURCHASES DURING THE REPORTING PERIOD?
Yes. We added Ameritech, ALLTEL, Global Crossing, and Qwest Communications to
the Fund's portfolio in the second half of the year. These companies represent
some of the fastest-growing enterprises in the communications sector, and we
feel confident in each company's long-term strategic outlook.
The Fund also added McGraw-Hill, Anheuser-Busch, Safeway, and Time Warner as
significant holdings. Although all of these firms are in different industries,
the rationale behind each purchase was based on our belief that these companies'
dominant franchises give them the ability to consistently grow earnings.
8
<PAGE> 259
PORTFOLIO COMPOSITION AS OF 12/31/98
[PORTFOLIO COMPOSITION AS OF 12/31/98 PIE CHART]
<TABLE>
<CAPTION>
CASH, EQUIVALENTS & OTHER ASSETS,
COMMON STOCKS LESS LIABILITIES
- ------------- ---------------------------------
<S> <C>
88.0% 12.0%
</TABLE>
Actual percentages will vary over time.
We also increased the Fund's exposure to the health care sector by purchasing
companies such as Genzyme, Pfizer, Schering-Plough, and Biomet. Our decision to
overweight this sector in the Fund was based on the strong demographic trend of
an aging population and its dependence on health care products. In fact, all of
these companies were positive contributors to Fund returns.
WERE THERE ANY SIGNIFICANT SALES DURING THE REPORTING PERIOD?
American Stores is a retail food chain, and the Fund sold its holdings in the
company upon the announcement of its merger with Albertson's. We believe the
merger has a high potential for future earnings disappointments. We also
disposed of the Fund's holdings in drug distributor McKesson, as a result of its
merger with HBO & Co., a health care information provider. This sale was
prompted by the departure of several senior HBO executives despite compensation
incentives to remain. We also sold Monsanto, an agricultural and chemical
conglomerate, when its planned merger with pharmaceutical giant American Home
Products fell through.
Finally, we were early sellers of the Fund's financial stocks--including Chase
Manhattan, Travelers Group, and BankBoston--which were particularly hurt by
earnings disappointments due to emerging-market developments. Since the third
quarter, the Fund has maintained a slightly underweighted position in this
sector, a decision that proved to be a good one given that the U.S. bank sector
underperformed the market in 1998.
HOW WAS THE FUND WEIGHTED AT YEAR END?
Generally speaking, the Fund is managed as a relatively sector-balanced
portfolio, with sector weightings between 0.5 times and 1.5 times the
appropriate S&P 500(++) sector weightings. As mentioned earlier, however, the
Fund was moderately overweighted in technology and health care stocks and
underweighted in the energy sector. This positioning helped the Fund's
performance.
- -------
++ "S&P 500(R)" is a trademark of The McGraw-Hill Companies. The S&P 500 is an
unmanaged index and is considered to be generally representative of the U.S.
stock market. Results assume the reinvestment of all income and capital gain
distributions. The MainStay Funds are neither sponsored by nor affiliated with
Standard & Poor's. It is not possible to make an investment directly into an
index.
9
-
<PAGE> 260
Investments in foreign securities may be subject to greater risks than domestic
investments. These risks include currency fluctu ations, changes in U.S. or
foreign tax or cur rency laws, and changes in monetary policies and economic
and political condi tions in foreign countries.
Past performance is no guarantee of future results.
The Fund was also slightly underweighted in basic materials and consumer
cyclicals, because based upon our global economic outlook, we do not believe
that sufficient catalysts exist for a sustained turnaround in earnings growth in
these sectors. These Fund weightings also played an important role in the
outperformance of the Fund.
WHAT DO YOU FORESEE FOR 1999?
We remain guardedly optimistic about the equity markets, based on our positive
outlook for low inflation and interest rates. We expect corporate earnings
growth to remain in the 5-7% range, which means that traditional growth stocks
may continue to lead the market. On the other hand, this positive outlook for
both the equity markets and the economy could be seriously tested if Y2K or
millenium bug remediations are not completed by year end. As of the end of 1998,
the market does not appear to have concerns over a lack of compliance. However,
we will continue to closely monitor the progress of government and business
community Y2K efforts.
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.
10
- -
<PAGE> 261
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS(*)
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A 18.60%
Class B 18.00%
Class C 18.00%
</TABLE>
FUND SEC RETURNS(*)
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A 12.08%
Class B 13.00%
Class C 17.00%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Average Lipper
growth & income fund 4.88%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $11.86 $0.0000 $0.0000
Class B $11.80 $0.0000 $0.0000
Class C $11.80 $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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (6/1/98) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
+ Lipper 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 Class A and Class B shares (on 6/1/98)
through 12/31/98. The Fund's Class C shares were first offered to the public
on 9/1/98.
11
-
<PAGE> 262
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
General Electric Co. $510,313
America Online, Inc. 506,625
Network Associates, Inc. 397,500
Cisco Systems, Inc. 361,969
MCI WorldCom, Inc. 358,750
Qwest Communications International Inc. 350,000
Tyco International Ltd. 339,469
McGraw-Hill Cos., Inc. (The) 336,188
SPX Corp. 335,000
Ascend Communications, Inc. 328,750
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
General Electric Co. $408,300
Cardinal Health, Inc. 303,960
Equifax Inc. 299,380
Raytheon Co. Class A 291,486
Biomet, Inc. 289,093
Tellabs, Inc. 288,393
Hershey Foods Corp. 266,446
Northern Telecom Ltd. 264,373
McGraw-Hill Cos., Inc. (The) 263,985
Emerson Electric Co. 258,115
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Raytheon Co. Class A $307,809
Beyond.Com Corp. 237,242
Viacom Inc. Class B 218,337
Sylvan Learning Systems Inc. 217,106
McKesson HBOC, Inc. 215,748
Lucent Technologies Inc. 207,092
Lockheed Martin Corp. 202,123
Bestfoods 166,928
American Stores Co. 160,703
Newell Co. 156,784
</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> 263
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (88.0%)+
AUTO PARTS & EQUIPMENT (1.3%)
SPX Corp. (a)................... 5,000 $ 335,000
-----------
BANKS (3.7%)
BankAmerica Corp................ 4,000 240,500
Bank of New York Co., Inc.
(The).......................... 6,000 241,500
First Union Corp................ 4,300 261,494
Fleet Financial Group, Inc...... 4,600 205,562
-----------
949,056
-----------
BEVERAGES (1.0%)
Anheuser-Busch Cos., Inc........ 4,000 262,500
-----------
BIOTECHNOLOGY (1.8%)
Centocor, Inc. (a).............. 5,000 225,625
Genzyme Corp. (General Division)
(a)............................ 5,000 248,750
-----------
474,375
-----------
BROADCAST/MEDIA (4.6%)
Capstar Broadcasting Corp. Class
A.............................. 11,000 251,625
Clear Channel
Communications, Inc. (a)....... 4,000 218,000
Comcast Corp. Special Class A... 5,200 305,175
MediaOne Group, Inc. (a)........ 5,000 235,000
USA Networks, Inc. (a).......... 5,000 165,625
-----------
1,175,425
-----------
CHEMICALS (0.6%)
IMC Global Inc.................. 7,600 162,450
-----------
COMMUNICATIONS--EQUIPMENT (5.8%)
ADC Telecommunications, Inc.
(a)............................ 8,000 278,000
Ascend Communications, Inc.
(a)............................ 5,000 328,750
Cisco Systems, Inc. (a)......... 3,900 361,969
Northern Telecom Ltd. .......... 5,000 250,625
Tellabs, Inc. (a)............... 4,000 274,250
-----------
1,493,594
-----------
COMPUTERS (11.9%)
America Online, Inc. (a)........ 3,500 506,625
Ceridian Corp. (a).............. 4,200 293,212
- ------------------------------------------------------------
</TABLE>
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMPUTERS (CONTINUED)
Comdisco Inc.................... 15,000 $ 253,125
EMC Corp. (a)................... 3,000 255,000
Equifax Inc. ................... 8,000 273,500
Hewlett-Packard Co. ............ 4,000 273,250
Microsoft Corp. (a)............. 2,000 277,375
Network Associates, Inc. (a).... 6,000 397,500
Sun Microsystems, Inc. (a)...... 3,000 256,875
SunGard(R) Data Systems Inc.
(a)............................ 6,800 269,875
-----------
3,056,337
-----------
ELECTRIC POWER COMPANIES (1.0%)
CMS Energy Corp. ............... 5,400 261,563
-----------
ELECTRICAL EQUIPMENT (3.0%)
Emerson Electric Co. ........... 4,000 250,250
General Electric Co. ........... 5,000 510,313
-----------
760,563
-----------
ELECTRONICS (2.0%)
Motorola, Inc. ................. 4,000 244,250
Texas Instruments Inc. ......... 3,000 256,688
-----------
500,938
-----------
ENTERTAINMENT (1.2%)
Time Warner Inc. ............... 5,000 310,313
-----------
FINANCE (4.3%)
American General Corp. ......... 3,500 273,000
Associates First Capital Corp.
Class A........................ 7,200 305,100
Fannie Mae...................... 3,000 222,000
Freddie Mac..................... 4,500 289,969
-----------
1,090,069
-----------
FOOD & HEALTH CARE DISTRIBUTORS (3.1%)
Cardinal Health, Inc. .......... 4,000 303,500
Hershey Foods Corp. ............ 4,000 248,750
Sysco Corp. .................... 9,000 246,936
-----------
799,186
-----------
HEALTH CARE (4.5%)
Abbott Laboratories............. 5,000 245,000
American Home Products Corp. ... 4,000 225,250
Bristol-Myers Squibb Co. ....... 1,600 214,100
Johnson & Johnson............... 2,400 201,300
Warner-Lambert Co. ............. 3,500 263,156
-----------
1,148,806
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
<PAGE> 264
MainStay Growth Opportunities Fund
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH CARE--DRUGS (5.5%)
Glaxo Wellcome PLC ADR (b)...... 3,000 $ 208,500
Lilly (Eli) & Co. .............. 3,500 311,062
Pfizer Inc. .................... 2,000 250,875
Pharmacia & UpJohn, Inc. ....... 3,600 203,850
Schering-Plough Corp. .......... 4,000 221,000
SmithKline Beecham PLC ADR
(b)............................ 3,000 208,500
-----------
1,403,787
-----------
HEALTH CARE--MEDICAL PRODUCTS (2.2%)
Biomet, Inc. ................... 8,000 322,000
Medtronic, Inc. ................ 3,100 230,175
-----------
552,175
-----------
HEAVY DUTY TRUCKS & PARTS (0.4%)
Dana Corp. ..................... 2,700 110,363
-----------
INSURANCE (2.7%)
Allstate Corp. (The)............ 5,000 193,125
EXEL Ltd. Class A............... 3,500 262,500
Provident Cos., Inc. ........... 6,000 249,000
-----------
704,625
-----------
MANUFACTURING (2.2%)
Tyco International Ltd. ........ 4,500 339,469
United States Filter Corp.
(a)............................ 10,000 228,750
-----------
568,219
-----------
NATURAL GAS DISTRIBUTORS &
PIPELINES (0.9%)
Enron Corp. .................... 4,000 228,250
-----------
OIL & GAS--EQUIPMENT & SERVICES (1.0%)
Halliburton Co. ................ 2,400 71,100
Schlumberger N.V. .............. 4,000 184,500
-----------
255,600
-----------
OIL--INTEGRATED INTERNATIONAL (3.3%)
Amoco Corp. .................... 4,000 241,500
Exxon Corp. .................... 2,900 212,063
Mobil Corp. .................... 2,600 226,525
Texaco Inc. .................... 3,100 163,912
-----------
844,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS (0.7%)
Boise Cascade Corp. ............ 5,500 $ 170,500
-----------
PUBLISHING (1.3%)
McGraw-Hill Cos., Inc. (The).... 3,300 336,188
-----------
REAL ESTATE INVESTMENT/MANAGEMENT (1.5%)
Chelsea GCA Realty, Inc. ....... 6,800 242,250
Glenborough Realty Trust
Inc. .......................... 7,000 142,625
-----------
384,875
-----------
RETAIL (5.5%)
Costco Cos., Inc. (a)........... 4,000 288,750
Kroger Co. (The) (a)............ 5,200 314,600
Rite Aid Corp. ................. 5,000 247,813
Safeway Inc. (a)................ 4,600 280,312
Wal-Mart Stores, Inc. .......... 3,600 293,175
-----------
1,424,650
-----------
SPECIALIZED SERVICES (2.6%)
Fiserv, Inc. (a)................ 3,900 200,606
Service Corp. International..... 6,500 247,406
ServiceMaster Co. (The)......... 9,450 208,491
-----------
656,503
-----------
TELECOMMUNICATIONS (4.7%)
Global Crossing Ltd. (a)........ 4,800 216,600
MCI WorldCom, Inc. (a).......... 5,000 358,750
Qwest Communications
International Inc. (a)......... 7,000 350,000
Sprint Corp. (FON Group)........ 3,000 252,375
Sprint Corp. (PCS Group) (a).... 1,250 28,906
-----------
1,206,631
-----------
TELEPHONE (2.8%)
ALLTEL Corp. ................... 4,000 239,250
Ameritech Corp. ................ 3,700 234,487
Bell Atlantic Corp. ............ 4,400 249,975
-----------
723,712
-----------
WASTE DISPOSAL (0.9%)
Republic Services, Inc. Class A
(a)............................ 12,000 221,250
-----------
Total Common Stocks
(Cost $18,833,176)............. 22,571,503
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 265
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS (13.1%)
COMMERCIAL PAPER (13.1%)
Banco Nacional De Comercio
Exterior, S.N.C. (Bancomext)
5.55%, due 1/20/99............. $150,000 $ 149,560
Banco Nacional De Comercio
Exterior, S.N.C. (Bancomext)
5.80%, due 1/20/99............. 780,000 777,609
Bayshore Fuel Co.
5.55%, due 1/19/99............. 373,000 371,964
Baystate Health Systems
5.35%, due 2/5/99.............. 254,000 252,677
Citic Pacific Finance
5.40%, due 1/29/99............. 315,000 313,674
Delmarva Power & Light Co.
4.90%, due 1/4/99.............. 575,000 574,765
Fluor Corp.
5.69%, due 1/7/99.............. 286,000 285,728
MetLife Funding Inc.
5.55%, due 1/13/99............. 300,000 299,444
South Carolina Electric & Gas
Co.
5.40%, due 2/11/99............. 130,000 129,200
West Penn Power Co.
4.90%, due 1/4/99.............. 215,000 214,912
-----------
Total Short Term Investments
(Cost $3,369,533).............. 3,369,533
-----------
</TABLE>
<TABLE>
<CAPTION>
Value
- ------------------------------------------------------------
<S> <C> <C>
Total Investments
(Cost $22,202,709) (c)......... 101.1% $25,941,036(d)
Liabilities In Excess of Cash,
and Other Assets............... (1.1) (296,920)
----- -----------
Net Assets...................... 100.0% $25,644,116
===== ===========
</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 December 31, 1998, net unrealized appreciation was $3,738,327 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 $4,103,931 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $365,604.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 266
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$22,202,709).............................................. $25,941,036
Cash........................................................ 712
Receivables:
Fund shares sold.......................................... 228,892
Dividends and interest.................................... 11,753
Unamortized organization expense............................ 59,632
-----------
Total assets............................................ 26,242,025
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 503,105
MainStay Management....................................... 13,415
NYLIFE Distributors....................................... 11,530
Custodian................................................. 10,539
Transfer agent............................................ 6,383
Fund shares redeemed...................................... 6,374
Trustees.................................................. 172
Accrued expenses............................................ 46,391
-----------
Total liabilities....................................... 597,909
-----------
Net assets.................................................. $25,644,116
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 11,206
Class B................................................... 10,463
Additional paid-in capital.................................. 22,158,433
Accumulated net realized loss on investments................ (274,313)
Net unrealized appreciation on investments.................. 3,738,327
-----------
Net assets.................................................. $25,644,116
===========
CLASS A
Net assets applicable to outstanding shares................. $13,292,555
===========
Shares of beneficial interest outstanding................... 1,120,585
===========
Net asset value per share outstanding....................... $ 11.86
Maximum sales charge (5.50% of offering price).............. 0.69
-----------
Maximum offering price per share outstanding................ $ 12.55
===========
CLASS B
Net assets applicable to outstanding shares................. $12,351,178
===========
Shares of beneficial interest outstanding................... 1,046,275
===========
Net asset value and offering price per share outstanding.... $ 11.80
===========
CLASS C
Net assets applicable to outstanding shares................. $ 383
===========
Shares of beneficial interest outstanding................... 32
===========
Net asset value and offering price per share outstanding.... $ 11.80
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
<PAGE> 267
Statement of Operations
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 92,779
Interest.................................................. 80,548
-----------
Total income............................................ 173,327
-----------
Expenses:
Management................................................ 70,044
Shareholder communication................................. 41,397
Transfer agent............................................ 29,521
Distribution--Class B..................................... 28,996
Distribution--Class C..................................... 1
Service--Class A.......................................... 15,350
Service--Class B.......................................... 9,666
Registration.............................................. 21,103
Professional.............................................. 18,886
Custodian................................................. 10,539
Organization.............................................. 7,828
Recordkeeping............................................. 7,133
Trustees.................................................. 406
Miscellaneous............................................. 21,156
-----------
Total expenses.......................................... 282,026
-----------
Net investment loss......................................... (108,699)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (276,582)
Net unrealized appreciation on investments.................. 3,738,327
-----------
Net realized and unrealized gain on investments............. 3,461,745
-----------
Net increase in net assets resulting from operations........ $ 3,353,046
===========
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
(a) Dividends recorded net of foreign withholding taxes of $178.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<PAGE> 268
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (108,699)
Net realized loss on investments.......................... (276,582)
Net unrealized appreciation on investments................ 3,738,327
-----------
Net increase in net assets resulting from operations...... 3,353,046
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 11,499,713
Class B................................................. 12,537,474
Class C................................................. 310
Cost of shares redeemed:
Class A................................................. (106,967)
Class B................................................. (1,639,458)
Class C................................................. (2)
-----------
Increase in net assets derived from capital share
transactions......................................... 22,291,070
-----------
Net increase in net assets............................ 25,644,116
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $25,644,116
===========
</TABLE>
- -------
* Commencement of operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 269
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
-------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $10.00 $10.00 $ 9.22
------ ------ ------
Net investment loss (a)..................................... (0.05) (0.08) (0.06)
Net realized and unrealized gain on investments............. 1.91 1.88 2.64
------ ------ ------
Total from investment operations............................ 1.86 1.80 2.58
------ ------ ------
Net asset value at end of period............................ $11.86 $11.80 $11.80
====== ====== ======
Total investment return (b)................................. 18.60% 18.00% 27.98%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss..................................... (1.09%)+ (1.84%)+ (1.84%)+
Expenses................................................ 2.53%+ 3.28%+ 3.28%+
Portfolio turnover rate..................................... 32% 32% 32%
Net assets at end of period (in 000's)...................... $13,293 $12,351 $ --(c)
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ 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 thousand.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
<PAGE> 270
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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were first
offered on September 1, 1998. Class A shares are offered at net asset value per
share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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 was 60 days or less, or by
amortizing the difference between market
20
- -
<PAGE> 271
Notes to Financial Statements
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 $67,460 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $108,699 and $2,269 have been reclassified
from accumulated net investment loss and accumulated net realized loss on
investments to additional paid-in capital, primarily due to a net investment
loss incurred by the Fund in 1998.
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.
21
-
<PAGE> 272
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 December 31, 1998, the
Manager earned $70,044.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $3,564 for the period ended
December 31, 1998. The Fund was also advised that NYLIFE Distributors retained
contingent deferred sales charges on redemptions of Class B shares of $1,935 for
the period ended December 31, 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 accrued for the period ended December 31,
1998, amounted to $29,521.
22
- -
<PAGE> 273
Notes to Financial Statements (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 $45,000, $2,000 for each Board meeting and $1,000 for each
Committee meeting attended plus reimbursement for travel and out-of-pocket
expenses. The Trust allocates this expense in proportion to the net assets of
the respective Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $10,674,000 and $1,180,000, respectively. This
represents 80.3% and 9.6% of the net assets at period end for Class A and Class
B, respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $476 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$7,133 for the period ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, a capital loss
carryforward of $227,903 is available, to the extent provided by regulatons, to
offset future realized gains of the Fund through 2006. In addition, the Fund
intends to elect, to the extent provided by the regulations, to treat $48,487 of
qualifying capital losses that arose during the year as if they arose on January
1, 1999.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $23,898 and $4,788, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998* through
December 31, 1998
-----------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold................................................. 1,131 1,202 --
Shares redeemed............................................. (10) (156) --
----- ----- --
Net increase................................................ 1,121 1,046 --(a)
===== ===== ==
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
23
-
<PAGE> 274
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Growth Opportunities Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, and the results of its operations, the changes
in its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
24
- -
<PAGE> 275
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
25
-
<PAGE> 276
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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.
26
- -
<PAGE> 277
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
27
-
<PAGE> 278
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY FUNDS LOGO]
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.
(C)1999. All rights reserved. MSAN22-02/99
[RECYCLE LOGO]
MAINSTAY GROWTH OPPORTUNITIES FUND
ANNUAL REPORT
DECEMBER 31, 1998
[MAINSTAY FUNDS LOGO]
<PAGE> 279
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 11
Top Ten Holdings 12
10 Largest Purchases 12
10 Largest Sales 13
Portfolio of Investments 14
Financial Statements 26
Notes to Financial Statements 32
Report of Independent Accountants 41
The MainStay Funds 42
</TABLE>
<PAGE> 280
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ STEPHEN C. ROUSSIN
Stephen C. Roussin
January 1999
2
<PAGE> 281
MainStay High Yield Corporate Bond Fund Highlights
1998 MARKET RECAP
- - The development of the high-yield bond market in Europe added new
diversification opportunities for high-yield investors.
- - The potential for deflation became a global theme that made it increasingly
difficult for many high-yield issuers to meet earnings expectations.
- - Successive financial problems in Asia, Russia, and Latin America resulted in a
flight to quality that greatly increased the premium investors required to
assume additional risk.
- - As liquidity all but evaporated in the third quarter of 1998, lower-rated
bonds traded at more attractive levels.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay High Yield Corporate Bond Fund
returned 2.07% for Class A shares and 1.31% for Class B and Class C shares,(*)
excluding all sales charges.
- - The Fund began the year defensively positioned and underweighted in
economically sensitive sectors.
- - In midyear, the Fund found opportunities among lower-rated issues as reduced
liquidity lowered prices, but by year end, higher-rated issues offered more
appealing default-adjusted spreads.
- - The Fund benefited from several bonds that were tendered away and from careful
selection of securities with strong asset coverage.
- - All share classes outperformed the average Lipper(*) high current yield fund,
which returned -0.44% for the year.
- -------
* See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 282
$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 -2.52%, 5-Year 9.21%, 10-Year 10.28%
<TABLE>
<CAPTION>
MAINSTAY HIGH YIELD FIRST BOSTON HIGH YIELD
CORPORATE BOND FUND INDEX* INFLATION(+)
------------------- ----------------------- ------------
<S> <C> <C> <C>
Year End
12/88 10000 9550 10000
12/89 10040 9068 10464
12/90 9400 8357 11118
12/91 13513 11054 11449
12/92 15766 13447 11788
12/93 18746 16358 12111
12/94 18566 16603 12426
12/95 21796 19970 12749
12/96 24501 23231 13171
12/97 27595 26067 13395
12/98 27755 26606 13611
</TABLE>
CLASS B & CLASS C SHARES
Class B SEC Returns: 1-Year -3.69%, 5-Year 9.40%, 10-Year 10.52%
Class C SEC Returns: 1-Year 0.31%, 5-Year 9.68%, 10-Year 10.52%
<TABLE>
<CAPTION>
MAINSTAY HIGH YIELD FIRST BOSTON HIGH YIELD
CORPORATE BOND FUND INDEX* INFLATION(+)
------------------- ----------------------- ------------
<S> <C> <C> <C>
Year End
12/88 10000 10000 10000
12/89 10040 9496 10464
12/90 9400 8751 11118
12/91 13513 11154 11449
12/92 15766 14080 11788
12/93 18746 17129 12111
12/94 18566 17385 12426
12/95 21796 20812 12749
12/96 24501 24054 13171
12/97 27595 26833 13395
12/98 27755 27183 13611
</TABLE>
- -------------
Past performance is no guarantee of future results. The Class A graph assumes an
initial investment of $10,000 made on 12/31/88 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 12/31/88 through 12/31/94. Performance data for the two classes vary after
this date based on differences in their load and expense structures. The Class B
graph assumes an initial investment of $10,000 made on 12/31/88. Returns shown
do not reflect the Contingent Deferred Sales Charge (CDSC), as it would not
apply to the period shown. The Class C graph assumes an initial investment of
$10,000 made on 12/31/88 and includes the historical performance of Class B
shares for periods 12/31/88 through 8/31/98. Performance data for the two
classes vary after this date based on differences in their load. Returns shown
do not reflect the 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. It is not possible to make an investment directly
into an index.
(+) 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> 283
Portfolio Management Discussion and Analysis
As years go, 1998 was one of the most volatile in recent memory. Both the stock
and bond markets were affected by a number of forces that impacted high-yield
securities. While the stock market was dominated by large-cap growth stocks
that soared to new highs, many smaller companies that make up the high-yield
bond market suffered corrections.
A major theme that pervaded the markets in 1998 was the potential for global
deflation. With low inflation, prices remained relatively stable and in some
cases had to be reduced to promote sales. As a result, many corporations found
it increasingly difficult to meet earnings expectations. Since corporate
earnings are a primary factor influencing the high-yield market, any earnings
disappointments were met with quick, negative responses from investors,
underscoring the importance of careful research and credit analysis.
In the third quarter of 1998, financial problems in Asia, Russia, and Latin
America, declining commodity prices, and problems at a leading hedge fund,
caused a general flight to quality. The resulting decrease in prices provided
attractive opportunities among lower-rated bonds. In the fourth quarter, the
high-yield market experienced a substantial recovery as the Federal Reserve
Board made successive moves to lower interest rates, which improved investor
confidence.
During the year, a high-yield bond market emerged in developed European
economies, expanding the diversification opportunities for high-yield investors.
HOW DID THE MAINSTAY HIGH YIELD CORPORATE BOND FUND PERFORM IN THIS MARKET
ENVIRONMENT?
The MainStay High Yield Corporate Bond Fund returned 2.07% for Class A shares
and 1.31% for Class B and Class C shares(*) for the year ended 12/31/98,
excluding all sales charges. All share classes outperformed the average Lipper
high current yield fund, which returned -0.44% for the year.
WHY DID THE FUND OUTPERFORM ITS PEERS?
A variety of positive developments contributed to the Fund's outperformance. At
the beginning of 1998, we had positioned the Fund defensively, in light of the
difficulties in Asia, which had taken a severe toll on securities with foreign
exposure in late 1997. We decided to underweight economically sensitive sectors,
including paper, steel, and oil and gas. Since these sectors performed poorly,
the decision had a positive impact on performance.
Throughout the year, telecommunications, which makes up a large portion of the
high-yield market, simply did not fit our investment disciplines. We believed
that many telecommunications issues were overpriced for the amount of risk they
involved. Our decision to underweight telecommunications in the Fund proved
beneficial, as the sector tended to underperform.
Of course, more important than where the Fund didn't invest was where it did.
Using our careful bottom-up security selection process, we individually selected
securities that we believed would
5
INFLATION/DEFLATION
- --------------------
Inflation is an increase in the cost of goods and services over time. As prices
rise, the purchasing power of the dollar declines. Deflation is a reduction in
the cost of goods over time. When deflation occurs, the purchasing power of the
dollar increases.
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods
traded on a commodities exchange.
HEDGE FUND
- --------------------
A private investment partnership or off-shore investment corporation that may
take both long and short positions, use leverage and derivative securities, and
invest across many markets. Hedge funds may use high-risk or speculative
investment strategies and move large amounts of money in and out of the markets
quickly.
- ----
* Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
5
<PAGE> 284
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
<TABLE>
<CAPTION>
Total
Year End Return %
<S> <C>
12/86 5.01
12/87 0.19
12/88 16.89
12/89 -5.04
12/90 -7.85
12/91 32.27
12/92 21.65
12/93 21.65
12/94 1.50
12/95 20.28
12/96 16.33
12/97 12.20
12/98 2.07
</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 & CLASS C SHARES
<TABLE>
<CAPTION>
Total
Year End Return %
<S> <C>
12/86 5.01
12/87 0.19
12/88 16.89
12/89 -5.04
12/90 -7.85
12/91 32.27
12/92 21.65
12/93 21.65
12/94 1.50
12/95 19.71
12/96 15.58
12/97 11.55
12/98 1.31
</TABLE>
Class C share returns reflect the historical performance
of the Class B shares for periods 12/86 through 8/98.
See footnote * on page 11 for more information on performance.
overcompensate the Fund for the risks it would have to assume. Using this
process, we were drawn throughout the year to recession-resistant industries,
such as media, health care, utilities, and office properties, which had a
positive impact on performance.
WHAT WERE SOME OF THE FUND'S SIGNIFICANT PURCHASES DURING 1998?
One was United International Holdings, an international cable company, which we
purchased for the Fund in the third quarter. The Fund already owned UIH bonds
and had done a considerable amount of research on the company. The company
tendered for the bonds we
WEIGHTING
- --------------------
The proportion of a portfolio allocated to a specific security or sec- tor,
i.e., a fund is said to be overweighted in a sector when that por- tion of the
portfolio is greater than the sec- tor's general relation- ship to the market as
a whole.
BOTTOM-UP INVESTING
- --------------------
Security selection based on the specific funda- mental merits of indi- vidual
issues. The opposite of "top-down" investing, which starts with general economic
trends, compares mar- ket sectors, and uses relative security values to narrow
the range of issues to examine.
TENDER
- --------------------
To offer money or goods in settlement of a prior debt or claim.
6
<PAGE> 285
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
<TABLE>
Cable Health Care Cellular Telephone Real Estate Publishing All Other
<S> <C> <C> <C> <C> <C>
11.5% 6.3% 5.9% 4.9% 4.8% 66.6%
</TABLE>
Actual percentages will vary over time.
owned, but we felt the new issue was overpriced when it originally came to
market. During the market setback in the third-quarter, however, the price of
the new bonds dropped to about seventy-five cents on the dollar, which we
thought was attractive. Accordingly, the Fund made a substantial purchase, and
the bonds were among the Fund's top-performing securities in 1998.
Although the Fund did not emphasize telecommunications during the year, another
top-performing name was Centennial Cellular. During 1998, the company was
acquired and the bonds were tendered away, with a positive impact on
performance.
In the fourth quarter, the Fund also purchased Centaur Funding, a preferred
equity obligation of AirTouch Communications, a cellular phone company. The
bonds, which were rated BBB,(+) reflected the superior value of higher-rated
bonds as the high-yield market recovered. They were trading at about a 50 basis
point advantage to bonds rated BB.(++) From the day we purchased the bonds for
the Fund, they have been positive performers. As rumors began to circulate that
AirTouch might be acquired by Bell Atlantic, they contributed positively to
performance.
Another bond the Fund purchased in the second half of the year was issued by
Highwoods Properties, a diversified commercial property REIT. The bonds were
relatively high quality and the Fund was able to purchase them at what we
believe was a very attractive price--well below where the bonds were trading
earlier in the year. Although they haven't yet had any noticeable impact on
performance, we believe they will perform well in 1999.
WERE THERE OTHER SIGNIFICANT PURCHASES IN THE PORTFOLIO?
We also purchased Medaphis bonds for the Fund. Medaphis provides billing
services to doctors and develops software for patient scheduling and hospital
applications. Unfortunately, just after we purchased the bonds for the Fund, the
company missed its third-quarter earnings projections, which took a toll on
performance.
REIT
- --------------------
A Real Estate Investment Trust is a company that purchases and manages real
estate properties for the benefit of its shareholders.
- -------
(+) Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
(++) Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to
the obligor's inadequate capacity to meet its financial commitment on the
obligation.
7
<PAGE> 286
YIELD SPREAD
- --------------------
The difference in yield between securities in different market sectors, such as
high-yield securities and Treasury issues--or between different securities in a
single sector, such as intermediate-term and short-term Treasury issues.
QUALITY BREAKDOWN AS OF 12/31/98
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government A BBB BB B CCC CC D
1.8 0.3 9.5 16.9 48.6 10.8 0.4 0.6
<CAPTION>
<S> <C>
Cash, Equivalents & Other Assets, Less Liabilities All Other
6.6 4.5
</TABLE>
We took another careful look at the company to determine if it still fit our
process, and we believed there was very good asset value at Medaphis. The
company told us they planned an asset sale, and we added to the Fund's position
at much lower prices. They did make the sale, so by year end, they were flush
with cash, had great liquidity, and their operating momentum appeared to be
improving. Although the bonds had a negative impact on the Fund's performance in
1998, we believe they will do well going forward.
WHAT WERE SOME OF THE FUND'S MORE SIGNIFICANT SALES?
One of the Fund's casino holdings also received a tender. We bought Grand Casino
bonds for the Fund in the fourth quarter, and it was tendered away from the Fund
before the end of the year. Despite a short holding period, the impact on
performance was positive.
Other significant sales included Viacom, Loewen Group, Inc., and Vencor. The
Fund's Viacom holdings reached the Fund's price target as yield spreads
tightened in the first half of the year, so we sold the Fund's position at a
profit.
Loewen Group is the world's second largest publicly held funeral service and
cemetery corporation in terms of revenues and assets. Through our research
process, we identified potential problems at the company and spoke to management
sev-eral times about them. The more we spoke with the company, the less secure
we became about their understanding of the underlying economics of their
business. Perceiving a risk that they would continue to miss earnings
projections, we sold the Fund's position. Although the sale price was lower than
the original purchase, subsequent performance proved that it was a positive
decision for the Fund.
We also purchased a new issue of Vencor, a nursing home operator, but decided
that a change in Medicare payment systems was likely to negatively impact the
company's business. As a result, in July, we sold the Fund's position, which,
like Loewen, was positive for the portfolio
8
<PAGE> 287
since the Fund was able to reinvest the assets in more productive securities.
WHICH OF THE FUND'S SECURITIES PROVIDED THE BEST PERFORMANCE IN 1998?
CD Radio is a company that plans to do for radio what satellite TV did for
television. We bought their bonds for the Fund in late 1997, but during 1998 two
large investors, the Bass Family and Apollo Group, infused equity into the
company, lending credibility to their business plan. That strengthened the
performance of the bonds, which were the best-performing assets in the Fund for
the year.
WERE THERE OTHER STRONG PERFORMERS IN THE FUND'S PORTFOLIO?
Yes. The Fund had excellent success with Hutchison Whampoa, a Hong Kong
conglomerate with diversified holdings in property development and investment,
ports and related services, retailing and manufacturing, telecommunications and
media, and infrastructure and energy. The company has excellent asset coverage,
high-quality bonds, and performed well for the portfolio.
Quest Diagnostics is a health care company whose bonds showed positive
performance in 1998, as the company continued to generate strong free cash flow,
improving credit statistics.
WHICH OF THE FUND'S SECURITIES WERE POOR PERFORMERS IN 1998?
Northern Offshore is an oil services company whose bonds were purchased by the
Fund. Within just a few months of the purchase, declining oil prices caused the
company to not put a couple of their new rigs into service, which had a negative
impact on bond performance. We have cut back on the Fund's position, but lost
money on the sales.
Another loser was Entex, a company that distributes computers and software and
provides technology consulting to corporate clients. Unfortunately, the company
missed its earnings projections within two quarters of issuing its bonds, which
had a negative impact on the Fund's performance. We believe the value of the
consulting business alone would cover the Fund's bond investments, and
management has assured us that their operating momentum is now moving in a more
positive direction, so the Fund continues to hold their securities.
We already mentioned Medaphis, which also detracted from the Fund's performance
in 1998.
WERE THERE ANY MAJOR SURPRISES DURING THE YEAR?
Perhaps the biggest surprise was how quickly the market reacted to potential
problems. Investors used to have a buffer period to discover negatives before
bond prices declined. But now, the market is becoming much more efficient at
pricing negative news. We purchased Extendicare bonds for the Fund in late 1997,
and early in 1998, we found that our research didn't resemble what the company
had told us to expect. Fortunately, the Fund was able to sell those bonds at a
profit. However, these windows of opportunity are becoming shorter as
demonstrated by Medaphis, whose bonds dropped sharply immediately following
their earnings warning, demonstrating that the time for processing negatives has
shortened considerably.
9
<PAGE> 288
High-yield securities run greater risks of price fluctuations, loses of
principal and interest, default or bankruptcy by the issuer, and other risks,
which is why these securities are considered speculative.
IN WHICH SECTORS WAS THE FUND UNDERWEIGHTED AND OVERWEIGHTED IN 1998?
The Fund was overweighted in media, particularly publishing, with names like
Affiliated News. The Fund was also overweighted in health care, including
Medaphis, Columbia HCA, Magellan Health Services, Quest Diagnostics, and ICN.
Electric utilities were also overweighted in the Fund, with positive results
from several of its holdings.
During the year, the Fund also overweighted office property REITs, including
Highwoods Properties and Crescent Real Estate. With the exception of Medaphis,
all of these holdings had a positive impact on performance.
The Fund underweighted chemicals, paper, steel, and oil and gas throughout the
year, which was positive for performance, since these sectors generally
underperformed. Although some of the Fund's biggest winners were
telecommunications names, the Fund benefited from its generally underweighted
position in telecommunications relative to the high-yield market as a whole.
WHAT IS THE OVERALL QUALITY OF THE SECURITIES IN THE FUND'S INVESTMENT
PORTFOLIO?
As of year end, the overall credit quality of the securities in the Fund's
investment portfolio was B,(sec.) but during the third quarter, we found a
number of opportunities among lower-rated credits, which brought the quality of
securities in the Fund's investment portfolio down to B-. In the fourth quarter,
we found that default-adjusted spreads were greater in higher-rated bonds, so we
made several purchases for the Fund that improved overall portfolio quality back
to B.
WHAT IS A DEFAULT-ADJUSTED SPREAD?
The Fund seeks the greatest possible compensation for the level of risk it
assumes. At each quality-rating level, there is a historical rate of default.
When we subtract the default rate from the spread over comparable Treasury
securities, we obtain what we call the default-adjusted spread. We try to
emphasize securities with the widest spreads, after adjusting for the risk of
default. Of course, before we invest for the Fund, we also carefully research
the company, its asset coverage, free cash flow, and whether there is a
compelling reason to buy the bonds.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We continue to believe that we are in the late stages of the credit cycle and
will remain alert to potential risks that may arise as a result. At year end, we
found higher-rated bonds were offering higher compensation for their relative
risk than other securities, but we realize that as yield spreads shift, this
relationship is subject to change. We believe that any factors that influence
corporate earnings will continue to influence the high-yield bond market.
Whatever happens, we will continue to seek a diversified array of high-yield
securities with the potential to maximize current income for the Fund's
shareholders.
Denis Laplaige
Steven Tananbaum
Portfolio Managers
MacKay Shields Financial Corporation
- -------
(sec.) Debt rated B by Standard & Poor's is more vulnerable to nonpayment that
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. Ratings may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Past performance is no guarantee of future results.
10
<PAGE> 289
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 2.07% 10.22% 10.79% 10.20%
Class B 1.31% 9.68% 10.52% 9.99%
Class C 1.31% 9.68% 10.52% 9.99%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A -2.52% 9.21% 10.28% 9.80%
Class B -3.69% 9.40% 10.52% 9.99%
Class C 0.31% 9.68% 10.52% 9.99%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 75 out of n/a n/a n/a
246 funds
Class B 96 out of 6 out of 8 out of 9 out of
246 funds 87 funds 53 funds 34 funds
Class C n/a n/a n/a n/a
Average Lipper high
current yield fund -0.44% 7.37% 9.34% 8.94%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $7.54 $0.7481 $0.0406
Class B $7.53 $0.6874 $0.0406
Class C $7.53 $0.2682 $0.0406
</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 load and 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%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of 1%. Performance figures for this class include the
historical performance of the Class B shares for periods from inception
(5/1/86) up to 8/31/98. Performance data for the two classes after this
date vary based on differences in their load.
(+) Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
averages listed above are not class specific. Life of fund return is from
the period of the Class B shares' initial offering through 12/31/98. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86; Class C shares on 9/1/98.
11
<PAGE> 290
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
UIH Australia/Pacific, Inc., Series D, (zero coupon), due
5/15/06, 14.00%, beginning 5/15/01 $80,722,200
Marcus Cable Operating Co., L.P., (zero coupon), due 8/1/04,
13.50%, beginning 8/1/99 70,597,540
CD Radio, Inc., (zero coupon), due 12/1/07, 15.00%,
beginning 12/1/02 65,902,900
First Pacific Capital Ltd., 2.00%, due 3/27/02 59,252,830
Tokai Preferred Capital Co. L.L.C., 9.98%, due 12/29/49,
11.0914%, beginning 6/30/08 56,420,300
Crescent Real Estate Equities Co., 7.50%, due 9/15/07 56,390,550
Quest Diagnostics, Inc., 10.75%, due 12/15/06 51,484,010
FRI-MRD Corp., (zero coupon), due 1/24/02, 15.00%, beginning
6/30/99 51,020,550
Advantica Restaurant Group, Inc., 11.25%, due 1/15/08 44,105,914
Centaur Funding Corp., 9.08%, Series B 42,494,400
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
United International Holdings, Inc., Series B,
(zero coupon) due 2/15/08, 10.75%, beginning
2/15/03 and Class A Common Stock $103,443,082
Cendant Corp., 7.50%, due 12/1/00, 7.75%, due
12/1/03 Common Stock, and 7.50% Preferred Stock 89,090,011
Tokai Preferred Capital Co. L.L.C., 9.98%, due
12/29/49 11.0914%, beginning 6/30/08 84,449,075
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 82,163,850
Columbia/HCA Healthcare Corp., 7.19%, due 11/15/15,
7.50% due 12/15/23, 7.50%, due 11/15/95, 7.58%,
due 9/15/25, 8.85%, due 1/1/07, and Common Stock 78,821,890
UCAR Global Enterprises, Inc., Series B, 12.00%,
due 1/15/05 75,229,920
Highwoods Realty L.P., 8.00%, due 12/1/03, 8.125%,
due 1/15/09, and Common Stock 68,743,339
Globalstar L.P. Capital Corp., 11.50%, due 6/1/05 67,861,706
IPC Magazines Group, PLC, (zero coupon), due
3/15/08 10.75%, beginning 3/15/03, and 9.625%,
due 3/15/08 61,574,821
Crescent Real Estate Equities Co., 7.50%, due
9/15/07 55,136,743
</TABLE>
- -------
This breakdown is pro- vided for informational purposes only. The Fund's
holdings may change daily. A share- holder owns shares of the Fund but does not
own a direct interest in any of the specific secu- rities listed. Short-term
securities and U.S. government and federal agency issues are exclud- ed. See
Portfolio of Investments for specific type of security held.
12
<PAGE> 291
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Viacom, Inc., 6.75%, due 1/15/03, 8.00%, due 7/7/06
and Class B Common Stock $158,308,045
United International Holdings, Inc., (zero coupon),
due 11/15/99, Series B, (zero coupon), due
2/15/08, 10.75% beginning 2/15/03 and Class A
Common Stock 86,458,596
Loewen Group, Inc. (The), 6.70%, due 10/1/99 and
Common Stock 81,705,729
UCAR Global Enterprises, Inc., Series B, 12.00%,
due 1/15/05 70,353,769
CD Radio, Inc., (zero coupon), due 12/1/07, 15.00%
beginning 12/1/02, Common Stock and 10.50% Series
C Preferred Stock 67,219,058
USN Communications, Inc., (zero coupon), due
8/15/04 14.625%, beginning 8/15/00, Common Stock
and Warrants 51,473,901
Level 3 Communications, Inc., 9.125%, due 5/1/08 47,820,125
SB Treasury Co. L.L.C., 9.40%, due 12/29/49,
10.925% beginning 6/30/08 46,132,844
Columbia/HCA Healthcare Corp., 7.19%, due 11/15/15,
7.50% due 12/15/23, 7.58%, due 9/15/25, 8.85%,
due 1/1/07, and Common Stock 45,054,300
Abbey Healthcare Group, Inc., 9.50%, due 11/1/02 43,713,221
</TABLE>
13
<PAGE> 292
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
LONG-TERM BONDS (84.4%)(+)
ASSET-BACKED
SECURITIES (1.0%)
ELECTRIC UTILITIES (0.7%)
CMS Energy X-Tras
Pass-Through Trust I
7.00%, due 1/15/05......... $ 9,510,000 $ 9,272,250
Midland Funding Corp. I
Series C-91
10.33%, due 7/23/02........ 13,171,859 14,159,749
Series C-94
10.33%, due 7/23/02........ 2,732,284 2,937,205
--------------
26,369,204
--------------
EQUIPMENT FINANCING (0.3%)
S-C Aircraft
Series 1997-C
11.00%, due 7/1/04 (c)(d).. 10,755,299 10,755,299
--------------
Total Asset-Backed
Securities
(Cost $37,023,228)......... 37,124,503
--------------
CONVERTIBLE BONDS (5.4%)
CELLULAR TELEPHONE (0.7%)
Metro Pacific Capital Ltd.
2.50%, due 4/11/03 (c)(e).. 4,600,000 4,111,250
2.50%, due 4/11/03 (e)..... 22,314,000 19,943,137
--------------
24,054,387
--------------
CONGLOMERATES (2.0%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (e)..... 65,113,000 59,252,830
Hutchison Delta Finance Ltd.
7.00%, due 11/8/02 (e)..... 9,270,000 10,011,600
JG Summit (Cayman) Ltd.
3.50%, due 12/23/03 (e).... 6,074,000 3,879,768
--------------
73,144,198
--------------
CONSTRUCTION &
ENGINEERING (0.4%)
New World Infrastructure
Ltd.
1.00%, due 4/15/03 (e)..... 15,835,000 13,459,750
--------------
HEALTH CARE (0.1%)
Sun Healthcare Group, Inc.
6.00%, due 3/1/04 (c)...... 5,895,000 3,772,800
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
MINING (0.1%)
TVX Gold, Inc.
5.00%, due 3/28/02......... $ 3,750,000 $ 2,679,375
--------------
PAPER & FOREST
PRODUCTS (0.2%)
Sappi BVI Finance Ltd.
7.50%, due 8/1/02 (e)...... 6,070,000 5,447,825
--------------
REAL ESTATE (0.0%) (b)
Paliburg International
Finance Co.
3.50%, due 2/6/01 (e)...... 500,000 296,875
--------------
RESTAURANTS &
LODGING (0.0%) (b)
MeriStar Hospitality Corp.
4.75%, due 10/15/04........ 1,000,000 721,250
--------------
RETAIL (0.6%)
Nine West Group, Inc.
5.50%, due 7/15/03......... 28,189,000 22,269,310
--------------
TECHNOLOGY (1.1%)
Cirrus Logic, Inc.
6.00%, due 12/15/03........ 50,580,000 36,923,400
6.00%, due 12/15/03 (c).... 5,000,000 3,650,000
--------------
40,573,400
--------------
TELECOMMUNICATION
SERVICES (0.2%)
Technology Resources
Industries Berhad
(zero coupon), due
10/31/04................... 5,690,000 3,584,700
2.75%, due 11/28/04 (e).... 4,200,000 2,688,000
--------------
6,272,700
--------------
Total Convertible Bonds
(Cost $193,090,123)........ 192,691,870
--------------
CORPORATE BONDS (62.9%)
AEROSPACE (1.5%)
DeCrane Aircraft Holdings,
Inc.
12.00%, due 9/30/08 (f).... 1,655 1,655,000
Newport News Shipbuilding,
Inc.
8.625%, due 12/1/06........ 17,175,000 18,141,094
9.25%, due 12/1/06......... 6,300,000 6,662,250
</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.
14
<PAGE> 293
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C>
CORPORATE BONDS (CONTINUED)
AEROSPACE (CONTINUED)
Pacific Aerospace &
Electronics, Inc.
11.25%, due 8/1/05 (c)..... $ 16,730,000 $ 13,049,400
Sequa Corp.
8.75%, due 12/15/01........ 1,742,000 1,759,420
9.375%, due 12/15/03....... 12,100,000 12,417,625
9.625%, due 10/15/99....... 1,000,000 1,015,300
--------------
54,700,089
--------------
AIRLINES (0.1%)
Valujet, Inc.
10.25%, due 4/15/01........ 5,750,000 3,450,000
--------------
AUTO MANUFACTURING (0.2%)
Titan Tire Corp.
7.00%, due 2/11/00 (d)..... 6,542,838 6,411,981
--------------
BANKS (3.0%)
B.F. Saul Real Estate
Investment Trust, Series B
9.75%, due 4/1/08.......... 29,365,000 27,309,450
Fuji JGB Inv. L.L.C. Pfd.
Series A
9.87%, due 12/31/49
10.8073%, beginning
6/30/08 (c)................ 5,000,000 3,700,000
Local Financial Corp.
11.00%, due 9/8/04......... 19,985,000 20,584,550
RB Asset, Inc.
Series A
8.00%, due 1/15/06
7.1429%, beginning
1/15/02 (g)................ 778,200 750,008
Tokai Preferred Capital Co.
L.L.C.
9.98%, due 12/29/49
11.0914%, beginning 6/30/08
(c)(e)..................... 65,605,000 56,420,300
--------------
108,764,308
--------------
BROADCAST/MEDIA (0.3%)
Paxson Communications Corp.
11.625%, due 10/1/02....... 8,110,000 8,312,750
Spanish Broadcasting
System, Inc.
Series B
11.00%, due 3/15/04........ 3,000,000 3,180,000
--------------
11,492,750
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C>
CABLE (7.9%)
@Entertainment, Inc.
Series B
(zero coupon), due 7/15/08
14.50%, beginning
7/15/03.................. $ 74,475,000 $ 32,769,000
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning
6/15/99.................... 24,049,589 2,885,951
Series B
(zero coupon), due 8/15/05
14.50%, beginning
8/15/00.................. 18,038,226 1,803,823
Continental Cablevision,
Inc.
11.00%, due 6/1/07......... 4,070,000 4,376,654
CS Wireless Systems, Inc.
Series B
(zero coupon), due 3/1/06
11.375%, beginning
3/1/01................... 25,135,000 4,524,300
Heartland Wireless
Communications, Inc.
13.00%, due 4/15/03 (h).... 2,100,000 525,000
Series D
13.00%, due 4/15/03 (h).... 2,700,000 675,000
Series B
14.00%, due 10/15/04 (h)... 20,985,000 5,246,250
Marcus Cable Operating Co.
L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99... 70,072,000 70,597,540
NTL, Inc.
(zero coupon), due 10/1/08
12.375%, beginning
10/1/03 (c)................ 13,500,000 8,454,375
People's Choice TV Corp.
(zero coupon), due 6/1/04
13.125%, beginning
6/1/00................... 3,500,000 630,000
Poland Communications, Inc.
Series B
9.875%, due 11/1/03........ 6,238,000 5,458,250
Primestar, Inc.
12.3788%, due 4/1/99
(d)(i)..................... 11,580,000 4,632,000
Supercanal Holding, S.A.
11.50%, due 5/15/05 (c).... 19,905,000 11,943,000
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning
5/15/01.................. 13,800,000 7,176,000
Series D
(zero coupon), due 5/15/06
14.00%, beginning
5/15/01.................. 155,235,000 80,722,200
United International
Holdings, Inc.
Series B
(zero coupon), due 2/15/08
10.75%, beginning
2/15/03.................. 73,505,000 39,692,700
--------------
282,112,043
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 294
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CASINOS (4.0%)
Argosy Gaming Co.
13.25%, due 6/1/04......... $ 3,295,000 $ 3,690,400
Circus Circus Enterprises,
Inc.
6.70%, due 11/15/96........ 3,225,000 3,053,556
El Comandante Capital Corp.
11.75%, due 12/15/03....... 15,130,000 13,617,000
Harrah's Operating Company,
Inc.
7.875%, due 12/15/05....... 25,315,000 25,595,490
Harvey Casinos Resorts
10.625%, due 6/1/06........ 13,375,000 14,445,000
Horseshoe Gaming L.L.C.
Series B
12.75%, due 9/30/00........ 29,735,000 31,742,112
Isle of Capri Casinos, Inc.
12.50%, due 8/1/03......... 10,745,000 11,900,088
Penn National Gaming, Inc.
10.625%, due 12/15/04...... 10,910,000 11,455,500
President Riverboat Casinos,
Inc.
12.00%, due 9/15/01
(c)(d)................... 10,097,000 10,097,000
13.00%, due 9/15/01........ 20,097,000 17,283,420
Treasure Bay Gaming &
Resorts
10.00%, due 11/1/03........ 1,909,552 1,718,596
Trump Castle Funding, Inc.
13.875%, due 11/15/05
(j)...................... 280 231
--------------
144,598,393
--------------
CELLULAR TELEPHONE (1.7%)
CCPR Services, Inc.
10.00%, due 2/1/07......... 14,250,000 14,250,000
Cellco Finance N.V.
15.00%, due 8/1/05 (c)..... 3,000,000 2,580,000
Centennial Cellular Corp.
8.875%, due 11/1/01........ 17,118,000 18,145,080
10.125%, due 5/15/05....... 15,085,000 18,856,250
10.75%, due 12/15/08 (c)... 4,520,000 4,497,400
International Wireless
Communications Holdings,
Inc.
(zero coupon), due
8/15/01 (d)(k)............. 10,000,000 1,000,000
Mobile Telecommunication
Technologies Corp.
13.50%, due 12/15/02....... 2,500,000 2,831,250
--------------
62,159,980
--------------
CHEMICALS (0.4%)
Agriculture Minerals &
Chemicals, Inc.
10.75%, due 9/30/03........ 15,250,000 15,478,750
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
COMPUTERS & OFFICE
EQUIPMENT (0.2%)
American Business
Information, Inc.
9.50%, due 6/15/08 (c)..... $ 9,595,000 $ 7,867,900
--------------
CONGLOMERATES (0.8%)
Figgie International, Inc.
9.875%, due 10/1/99........ 11,750,000 12,043,750
JG Summit Holdings
8.375%, due 3/17/04........ 21,480,000 16,969,200
--------------
29,012,950
--------------
CONSTRUCTION &
ENGINEERING (0.6%)
Cathay International
Holdings, Inc.
13.00%, due 4/15/08
(c)(e)................... 43,405,000 16,493,900
Traffic Stream (BVI)
Infrastructure Ltd.
14.25%, due 5/1/06 (c)..... 13,438,000 6,181,480
--------------
22,675,380
--------------
CONSUMER DURABLES (0.7%)
Selmer Co., Inc.
11.00%, due 5/15/05........ 22,680,000 24,267,600
11.00%, due 5/15/05 (c).... 1,500,000 1,605,000
--------------
25,872,600
--------------
CONSUMER NON-DURABLES
(0.0%) (b)
Icon Health & Fitness
Holdings, Inc.
Series B
(zero coupon), due 11/15/04
15.00%, beginning
11/15/99................. 13,000,000 650,000
--------------
COSMETICS (0.8%)
Jafra Cosmetics
International, Inc.
11.75%, due 5/1/08 (c)..... 30,400,000 27,664,000
--------------
DOMESTIC OIL & GAS (2.0%)
Belco Oil & Gas Corp.
Series B
8.875%, due 9/15/07........ 6,590,000 6,029,850
Denbury Management, Inc.
9.00%, due 3/1/08.......... 15,795,000 14,215,500
Houston Exploration Co.
(The) Series B
8.625%, due 1/1/08......... 6,525,000 6,329,250
Husky Oil Ltd.
8.90%, due 8/15/28
11.1875%, beginning
8/15/08.................. 12,800,000 12,288,000
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 295
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
DOMESTIC OIL &
GAS (CONTINUED)
KCS Energy, Inc.
8.875%, due 1/15/08........ $ 1,625,000 $ 942,500
Queens Sand Resources, Inc.
12.50%, due 7/1/08......... 24,105,000 17,355,600
Stone Energy Corp.
8.75%, due 9/15/07......... 4,835,000 4,689,950
Vintage Petroleum, Inc.
8.625%, due 2/1/09......... 6,930,000 6,514,200
9.00%, due 12/15/05........ 4,590,000 4,452,300
--------------
72,817,150
--------------
DRUGS (0.8%)
ICN Pharmaceuticals, Inc.
8.75%, due 11/15/08 (c).... 28,955,000 29,244,550
--------------
ELECTRIC UTILITIES (0.4%)
ESI Tractebel Acquisition
Corp.
7.99%, due 12/30/11........ 15,800,000 15,721,000
--------------
ENERGY (1.0%)
Conproca, S.A.
12.00%, due 6/16/10
(c)(e)................... 38,720,000 36,396,800
--------------
FINANCE (0.9%)
CB Richard Ellis Services,
Inc.
8.875%, due 6/1/06......... 18,405,000 18,036,900
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (h)..... 57,665,000 8,649,750
ContiFinancial Corp.
7.50%, due 3/15/02......... 800,000 544,000
8.375%, due 8/15/03........ 6,000,000 4,020,000
--------------
31,250,650
--------------
FINANCIAL SERVICES (0.4%)
Primark Corp.
9.25%, due 12/15/08 (c).... 13,500,000 13,567,500
--------------
FOOD, BEVERAGES &
TOBACCO (0.8%)
Colorado Prime Corp.
12.50%, due 5/1/04......... 22,980,000 9,192,000
Standard Commercial Corp.
8.875%, due 8/1/05......... 17,195,000 16,507,200
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
FOOD, BEVERAGES & TOBACCO
(CONTINUED)
Tingyi (Cayman Islands)
Holdings Corp.
6.613%, due
11/29/99 (e)(i)............ $ 5,000,000 $ 4,200,000
--------------
29,899,200
--------------
HEALTH CARE (5.9%)
Abbey Healthcare Group, Inc.
9.50%, due 11/1/02......... 590,000 581,150
Columbia/HCA Healthcare
Corp.
7.50%, due 11/15/95........ 46,020,000 40,058,155
Fountain View, Inc.
Series B
11.25%, due 4/15/08........ 9,830,000 8,552,100
Global Health Sciences, Inc.
11.00%, due 5/1/08......... 14,050,000 9,273,000
Magellan Health Services,
Inc.
9.00%, due 2/15/08......... 26,905,000 23,945,450
Medaphis Corp.
9.50%, due 2/15/05......... 52,236,000 40,744,080
MedPartners, Inc.
7.375%, due 10/1/06........ 34,946,000 28,568,355
Quest Diagnostics, Inc.
10.75%, due 12/15/06....... 46,174,000 51,484,010
Sun Healthcare Group, Inc.
9.375%, due 5/1/08 (c)..... 5,045,000 4,036,000
Series B
9.50%, due 7/1/07.......... 3,865,000 3,130,650
--------------
210,372,950
--------------
HOUSING (1.2%)
Greystone Homes, Inc.
10.75%, due 3/1/04......... 39,914,000 42,109,270
UDC Homes, Inc.
Series C
(zero coupon)
due 11/1/00 (a)(k)(w)...... 108,500 11
--------------
42,109,281
--------------
INDUSTRIAL (0.2%)
Generac Portable Products
L.L.C.
11.25%, due 7/1/06
(c)(e)................... 2,105,000 2,126,050
Interlake Corp.
12.00%, due 11/15/01....... 2,930,000 3,091,150
Thermadyne Holdings Corp.
9.875%, due 6/1/08......... 1,745,000 1,587,950
--------------
6,805,150
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 296
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
INSURANCE (0.1%)
Superior National Capital
Trust I
10.75%, due 12/1/17 (l).... $ 4,600,000 $ 4,554,000
--------------
LEISURE (0.5%)
Bally Total Fitness Holding
Corp.
Series B
9.875%, due 10/15/07....... 11,883,000 11,645,340
9.875%, due 10/15/07 (c)... 6,035,000 5,914,300
--------------
17,559,640
--------------
MEDIA (2.4%)
CD Radio, Inc.
(zero coupon), due 12/1/07
15.00%, beginning
12/1/02.................... 106,295,000 65,902,900
Fox/Liberty Networks L.L.C.
(zero coupon), due 8/15/07
9.75%, beginning 8/15/02... 13,225,000 8,993,000
Maxwell Communications
Corp., PLC
Facility A (a)(h)(k)(m).... 9,973,584 797,887
Pratama Datakom Asia B.V.
12.75%, due 7/15/05 (c).... 5,800,000 1,421,000
Tri-State Outdoor Media
11.00%, due 5/15/08........ 3,000,000 2,985,000
Young America Corp.
Series B
11.625%, due 2/15/06....... 12,150,000 5,710,500
--------------
85,810,287
--------------
MEDICAL EQUIPMENT (0.2%)
ALARIS Medical, Inc.
(zero coupon), due 8/1/08
11.125%, beginning
8/1/03 (c)................. 9,800,000 5,341,000
--------------
MINING (0.9%)
Great Central Mines Ltd.
8.875%, due 4/1/08......... 30,897,000 30,897,000
--------------
OIL SERVICES (0.8%)
Grey Wolf, Inc.
8.875%, due 7/1/07......... 3,795,000 2,808,300
Northern Offshore ASA
10.00%, due 5/15/05 (c).... 26,810,000 13,941,200
Pool Energy Services Co.
Series B
8.625%, due 4/1/08......... 3,000,000 2,835,000
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
OIL SERVICES (CONTINUED)
R&B Falcon Corp.
9.50%, due 12/15/08 (c).... $ 9,260,000 $ 9,260,000
--------------
28,844,500
--------------
PAPER & FOREST
PRODUCTS (0.5%)
Gaylord Container Corp.
Series B
9.375%, due 6/15/07........ 5,900,000 5,074,000
SD Warren Co.
Series B
12.00%, due 12/15/04....... 12,095,000 13,168,431
--------------
18,242,431
--------------
PUBLISHING (2.0%)
Affiliated Newspapers
Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99... 23,872,000 24,588,160
Garden State Newspapers,
Inc.
12.00%, due 7/1/04......... 8,515,000 9,323,925
General Media, Inc.
10.625%, due 12/31/00...... 41,695,000 36,691,600
--------------
70,603,685
--------------
REAL ESTATE (4.2%)
Crescent Real Estate
Equities Co.
7.50%, due 9/15/07......... 60,635,000 56,390,550
EOP Operating L.P.
6.763%, due 6/15/07........ 7,150,000 7,047,255
7.25%, due 2/15/18......... 4,785,000 4,450,050
Glenborough Properties L.P.
7.625%, due 3/15/05........ 9,045,000 8,669,614
Highwoods Realty L.P.
8.00%, due 12/1/03......... 27,375,000 27,580,312
8.125%, due 1/15/09........ 21,210,000 20,997,900
LNR Property Corp.
9.375%, due 3/15/08........ 19,830,000 19,036,800
Meditrust Co. (The)
Series MTN
7.77%, due 8/16/02......... 7,515,000 7,022,151
Olympia & York Maiden
Lane Finance Corp.
10.375%, due 12/31/49
(a)(e)(h)(k)............... 4,000 2,800
--------------
151,197,432
--------------
RECREATION &
ENTERTAINMENT (0.6%)
Affinity Group Holding, Inc.
11.00%, due 4/1/07......... 2,935,000 3,037,725
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 297
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
RECREATION & ENTERTAINMENT
(CONTINUED)
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05
(h)(k)................... $ 42,087,000 $ 420,870
Hollywood Entertainment
Corp.
Series B
10.625%, due 8/15/04....... 16,920,000 17,258,400
--------------
20,716,995
--------------
RESTAURANTS & LODGING (3.2%)
Advantica Restaurant Group,
Inc.
11.25%, due 1/15/08........ 43,777,582 44,105,914
Extended StayAmerica, Inc.
9.15%, due 3/15/08......... 3,700,000 3,478,000
FRI-MRD Corp.
(zero coupon), due 1/24/02
14.00%, beginning 7/31/99
(c)(d)..................... 19,000,000 17,385,000
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99
(c)(d)..................... 53,990,000 51,020,550
--------------
115,989,464
--------------
RETAIL (0.1%)
K Mart Corp.
8.375%, due 7/1/22......... 3,779,000 3,887,340
--------------
SPECIALIZED SERVICES (1.7%)
Cendant Corp.
7.50%, due 12/1/00......... 18,560,000 18,714,178
7.75%, due 12/1/03......... 41,495,000 42,214,523
--------------
60,928,701
--------------
STEEL, ALUMINUM & OTHER
METALS (2.6%)
Easco Corp.
Series B
10.00%, due 3/15/01........ 20,150,000 20,351,500
GS Technologies Operating
Co.
12.00%, due 9/1/04......... 14,860,000 10,067,650
12.25%, due 10/1/05........ 19,240,000 12,890,800
LTV Corp. (The)
8.20%, due 9/15/07......... 2,573,000 2,328,565
Republic Engineered Steels,
Inc.
9.875%, due 12/15/01....... 19,530,000 19,969,425
Schuff Steel Co.
10.50%, due 6/1/08......... 3,145,000 2,736,150
UCAR Global Enterprises,
Inc.
Series B
12.00%, due 1/15/05........ 18,667,000 19,600,350
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
STEEL, ALUMINUM & OTHER
METALS (CONTINUED)
WCI Steel, Inc.
Series B
10.00%, due 12/1/04........ $ 4,075,000 $ 4,044,438
--------------
91,988,878
--------------
TECHNOLOGY (1.2%)
Electronic Retailing Systems
International, Inc.
(zero coupon), due 2/1/04
13.25%, beginning 2/1/00... 10,000,000 3,600,000
Entex Information Services,
Inc.
12.50%, due 8/1/06 (c)..... 17,355,000 11,974,950
Metawave Communications
Corp.
13.75%, due 4/28/00
(d)(g)(i).................. 9,479,813 9,479,813
Samsung Electronics America,
Inc.
9.75%, due 5/1/03 (c)...... 13,400,000 12,864,000
Unisys Corp.
11.75%, due 10/15/04....... 5,500,000 6,380,000
--------------
44,298,763
--------------
TELECOMMUNICATION
SERVICES (3.9%)
Globalstar L.P. Capital
Corp.
11.50%, due 6/1/05......... 48,405,000 36,545,775
HighwayMaster
Communications, Inc.
Series B
13.75%, due 9/15/05........ 27,095,000 8,670,400
ICO Global Communications
Holdings Ltd.
15.00%, due 8/1/05 (n)..... 20,340 15,153,300
Impsat Corp.
12.375%, due 6/15/08....... 10,000,000 8,200,000
Orion Network System, Inc.
(zero coupon), due 1/15/07
12.50%, beginning
1/15/02.................... 27,860,000 17,412,500
11.25%, due 1/15/07........ 12,010,000 11,769,800
Protection One Alarm
Monitoring, Inc.
13.625%, due 6/30/05....... 8,000,000 9,120,000
T/SF Communications Corp.
Series B
10.375%, due 11/1/07....... 12,820,000 12,916,150
Telehub Communication Corp.
(zero coupon), due 7/31/05
13.875%, beginning 7/31/01
(c)(o)..................... 33,715 20,229,000
--------------
140,016,925
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 298
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TEXTILE & APPAREL (0.4%)
Norton McNaughton, Inc.
12.50%, due 6/1/05......... $ 16,975,000 $ 14,428,750
TPE International Finance
Co. B.V.
8.21%, due 5/15/02
(e)(i)................... 4,800,000 1,488,000
--------------
15,916,750
--------------
TRANSPORTATION (1.8%)
Cenargo International, PLC
9.75%, due 6/15/08 (c)..... 17,065,000 16,403,731
Equimar Shipholdings Ltd.
9.875%, due 7/1/07......... 1,000,000 790,000
Pacific & Atlantic
(Holdings) Inc.
11.50%, due 5/30/08........ 26,840,000 18,788,000
Pegasus Shipping (Hellas)
Ltd.
11.875%, due 11/15/04...... 31,390,000 27,623,200
--------------
63,604,931
--------------
Total Corporate Bonds
(Cost $2,471,733,265)...... 2,261,494,077
--------------
FOREIGN BONDS (3.0%)
CELLULAR TELEPHONE (0.2%)
Dolphin Telecom, PLC
(zero coupon), due 6/1/08
11.625%, beginning 6/1/03
(c)........................ ECU 25,040,000 8,821,354
--------------
MEDIA (0.0%) (B)
Maxwell Communications
Corp., PLC
Facility B (a)(h)(k)(m).... Pound Sterling 1,131,066 150,550
--------------
MINING (0.1%)
Greenstone Resources Ltd.
9.00%, due 2/28/02......... C$ 6,000,000 2,558,691
--------------
PUBLISHING (2.7%)
IPC Magazines Group, PLC
(zero coupon), due 3/15/08
10.75%, beginning
3/15/03.................. Pound Sterling 44,235,000 38,639,295
9.625%, due 3/15/08........ 13,970,000 20,338,003
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
PUBLISHING (CONTINUED)
Regional Independent Media
Group
(zero coupon), due 7/1/08
12.875%, beginning
7/1/03 (c)................. Pound Sterling 43,075,000 $ 39,417,749
--------------
98,395,047
--------------
Total Foreign Bonds
(Cost $116,364,773)........ 109,925,642
--------------
LOAN ASSIGNMENTS &
PARTICIPATIONS (2.1%)
AUTO PARTS (0.1%)
Global Motorsport Group,
Inc.
Bank debt
Term B
8.991%, due 12/15/05
(d)(i)................... $ 5,000,000 5,000,000
--------------
CHEMICALS (0.4%)
Kronos International, Inc.
Bank debt
6.0905%, due 9/15/99
(d)(i)(m).................. DM 14,413,598 8,588,794
Bank debt
6.0905%, due 9/15/00
(d)(i)(m).................. 10,761,088 6,412,332
--------------
15,001,126
--------------
CONGLOMERATES (0.3%)
First Pacific Capital Ltd.
Bank debt
7.625%, due 1/23/00
(d)(i)................... $ 10,160,000 9,347,200
--------------
CONSUMER SERVICES (0.3%)
Norwood Promotional
Products, Inc.
Bank debt
Tranche B
8.48%, due 10/30/04
(d)(i)(m).................. 8,700,000 8,700,000
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 299
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
LOAN ASSIGNMENTS &
PARTICIPATIONS (CONTINUED)
FOOD, BEVERAGES & TOBACCO (0.2%)
Domino's Pizza, Inc.
Bank debt
Tranche B
8.75%, due 12/31/06
(d)(i)(m).................. $ 4,925,000 $ 4,925,000
Bank debt
Tranche C
9.00%, due 12/31/07
(d)(i)(m).................. 4,925,000 4,925,000
--------------
9,850,000
--------------
PAPER & FOREST PRODUCTS (0.1%)
Stone Container Corp.
Bank debt
Term E
8.8125%, due 10/1/03
(d)(i)................... 4,136,769 4,095,401
--------------
RECREATION & ENTERTAINMENT (0.3%)
Affinity Group, Inc.
Bank debt
Tranche B
9.025%, due 6/30/06
(d)(i)(m).................. 8,700,000 8,700,000
--------------
TRANSPORTATION (0.4%)
Eurotunnel
Bank debt
Tier One
5.28%, due 4/9/04
(d)(i)(m).................. FF 36,000,000 5,477,785
Bank debt
Tranche H2
6.2625%, due 2/1/06
(d)(i)(m).................. 15,122,553 2,710,511
Bank debt
Tranche G2
9.0625%, due 2/1/06
(d)(i)(m).................. Pound Sterling 2,120,438 3,532,417
Bank debt
Tranche G2
9.125%, due 2/1/06
(d)(i)(m).................. 1,734,904 2,890,159
--------------
14,610,872
--------------
Total Loan Assignments &
Participations
(Cost $72,655,914)......... 75,304,599
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
U.S. GOVERNMENT (1.8%)
UNITED STATES TREASURY
NOTE (1.8%)
5.50%, due 8/15/28 (z)..... $ 61,000,000 $ 63,849,920
--------------
Total U.S. Government
(Cost $65,250,469)......... 63,849,920
--------------
YANKEE BONDS (8.2%)
AIRLINES (0.1%)
Canadian Airlines Corp.
12.25%, due 8/1/06......... 5,000,000 3,400,000
--------------
BROADCAST/MEDIA (0.3%)
TV Azteca, S.A. de C.V.
Series B
10.50%, due 2/15/07........ 13,910,000 11,440,975
--------------
CABLE (2.7%)
Australis Holdings Pty Ltd.
(zero coupon), due 11/1/02
15.00%, beginning
11/1/00.................... 10,074,000 478,515
CF Cable TV, Inc.
11.625%, due 2/15/05....... 6,750,000 7,492,500
Comcast UK Cable Partners
Ltd.
(zero coupon), due 11/15/07
11.20%, beginning
11/15/00................... 23,175,000 19,235,250
Kabelmedia Holding GmbH
(zero coupon), due 8/1/06
13.625%, beginning
8/1/01..................... 26,504,000 22,263,360
Le Groupe Videotron Ltee
10.625%, due 2/15/05....... 30,280,000 32,740,250
NTL, Inc.
Series B
(zero coupon), due 4/1/08
9.75%, beginning 4/1/03.... 10,000,000 6,075,000
Rogers Cablesystems Ltd.
10.125%, due 9/1/12........ 7,715,000 8,486,500
--------------
96,771,375
--------------
CELLULAR TELEPHONE (2.0%)
Millicom International
Cellular S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01... 41,160,000 29,120,700
Occidente y Caribe Celular,
S.A.
Series B
(zero coupon), due 3/15/04
14.00%, beginning
3/15/01.................... 19,365,000 14,330,100
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 300
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
YANKEE BONDS (CONTINUED)
CELLULAR TELEPHONE
(CONTINUED)
Rogers Cantel, Inc.
8.30%, due 10/1/07......... $ 17,000,000 $ 17,085,000
9.375%, due 6/1/08......... 10,000,000 10,550,000
--------------
71,085,800
--------------
CHEMICALS (0.7%)
Marsulex, Inc.
9.625%, due 7/1/08......... 6,355,000 6,513,875
Octel Developments, PLC
10.00%, due 5/1/06......... 19,060,000 20,013,000
--------------
26,526,875
--------------
MEDIA (0.4%)
Rogers Communications, Inc.
8.875%, due 7/15/07........ 12,185,000 12,550,550
--------------
MINING (0.2%)
Echo Bay Mines Ltd.
12.00%, due 4/1/27......... 14,915,000 8,054,100
--------------
PAPER & FOREST
PRODUCTS (0.4%)
Stone Container Finance
Company of Canada
11.50%, due 8/15/06 (c).... 13,625,000 14,084,844
--------------
STEEL, ALUMINUM & OTHER
METALS (1.0%)
Ivaco, Inc.
11.50%, due 9/15/05........ 37,636,000 37,636,000
--------------
TESTING SERVICES (0.1%)
Intertek Testing Services
Ltd.
12.00%
due 11/1/07 (c)(d)(j)...... 5,071,990 4,780,350
--------------
TRANSPORTATION (0.3%)
Ermis Maritime Holdings Ltd.
12.50%, due 3/15/06........ 32,256,000 9,999,360
--------------
Total Yankee Bonds
(Cost $327,410,481)........ 296,330,229
--------------
Total Long-Term Bonds
(Cost $3,283,528,253)...... 3,036,720,840
--------------
<CAPTION>
Shares Value
---------------------------------
<S> <C> <C>
COMMON STOCKS (3.6%)
APPLIANCES &
FURNITURE (0.0%) (b)
Central Rents, Inc.
(a)(c)..................... 10,500 $ 420,000
--------------
BANKS (0.1%)
Kookmin Bank GDR (p)........ 351,174 2,844,509
--------------
BUSINESS SERVICES (0.0%) (b)
Iron Mountain, Inc. (a)..... 4,869 175,588
--------------
CABLE (0.8%)
CS Wireless Systems, Inc.
(a)(c)..................... 5,180 52
United International
Holdings, Inc.
Class A (a)................ 1,441,800 27,754,650
--------------
27,754,702
--------------
CASINOS (0.4%)
Equus Gaming Co. L.P. Class
A.......................... 114,320 100,030
Grand Casinos, Inc. (a)..... 358,900 2,893,631
Harrah's Entertainment, Inc.
(a)........................ 591,400 9,277,589
Isle of Capri Casinos, Inc.
(a)........................ 207,925 825,202
Louisiana Casino Cruises,
Inc. (a)................... 12,000 324,000
--------------
13,420,452
--------------
CELLULAR TELEPHONE (0.1%)
Celcaribe, S.A. (a)(c)...... 751,212 1,502,424
Tele Sudeste Celular
Participacoes S.A. ADR
(a)(q)..................... 15,597 322,663
Telesp Celular Participacoes
S.A. ADR (a)(q)............ 31,194 545,895
--------------
2,370,982
--------------
DOMESTIC OIL & GAS (0.2%)
Union Pacific Resources
Group, Inc................. 704,775 6,387,023
--------------
FOOD, BEVERAGES &
TOBACCO (0.2%)
Dr. Pepper Bottling
Holdings, Inc.
Class A (a)................ 200,000 6,000,000
TLC Beatrice International
Holdings Inc. (a).......... 25,000 1,250,000
--------------
7,250,000
--------------
GAS UTILITIES (0.3%)
KeySpan Energy.............. 282,800 8,766,800
UGI Corp.................... 140,100 3,327,375
--------------
12,094,175
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 301
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares Value
---------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HEALTH CARE (0.3%)
Beverly Enterprises, Inc.
(a)(y)..................... 312,000 $ 2,106,000
General Healthcare Group
Ltd. (a)(r)................ 821 40,980
Quest Diagnostics, Inc.
(a)........................ 573,900 10,222,594
--------------
12,369,574
--------------
MEDIA (0.0%) (b)
Rogers Communications, Inc.
Class B (a)(s)............. 243,675 2,165,471
--------------
OIL SERVICES (0.0%) (b)
R&B Falcon Corp. (a)........ 127,305 962,744
--------------
PAPER & FOREST
PRODUCTS (0.2%)
Sappi Ltd................... 999,100 3,766,607
TimberWest Forest Corp.
(s)(x)..................... 423,000 2,464,746
--------------
6,231,353
--------------
PUBLISHING (0.1%)
Affiliated Newspapers
Investments, Inc. (a)...... 28,000 3,080,000
--------------
REAL ESTATE (0.3%)
Highwoods Properties,
Inc........................ 435,700 11,219,275
--------------
RECREATION &
ENTERTAINMENT (0.3%)
Alliance Entertainment Corp.
(a)........................ 596,747 2,983,735
Loews Cineplex Entertainment
Corp. (a).................. 640,000 6,480,000
--------------
9,463,735
--------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
Series B (a)............... 43,750 43,750
--------------
STEEL, ALUMINUM & OTHER
METALS (0.2%)
Placer Dome, Inc............ 560,000 6,440,000
--------------
TELECOMMUNICATION
SERVICES (0.1%)
Embratel Participacoes S.A.
ADR (a)(q)................. 77,985 1,086,916
Rocky Mountain Internet,
Inc. (a)................... 21,000 265,125
Tele Centro Sul
Participacoes S.A. ADR
(a)(q)..................... 15,597 651,175
Tele Norte Leste
Participacoes S.A. ADR
(a)(q)..................... 77,985 969,938
</TABLE>
<TABLE>
<CAPTION>
Shares Value
---------------------------------
<S> <C> <C>
TELECOMMUNICATION SERVICES
(CONTINUED)
Telesp Participacoes S.A.
ADR (a)(q)................. 77,985 $ 1,725,418
--------------
4,698,572
--------------
TEXTILE & APPAREL (0.0%) (b)
Hosiery Corp. of America,
Inc. (a)................... 17,400 696,000
--------------
Total Common Stocks
(Cost $124,473,537)........ 130,087,905
--------------
PREFERRED STOCKS (4.5%)
BANKS (0.2%)
California Federal Preferred
Capital Corp.
9.125%, Series A........... 210,000 5,315,625
--------------
BROADCAST/MEDIA (2.0%)
Paxson Communications Corp.
12.50% (j)................. 42,958 39,091,780
Spanish Broadcasting System,
Inc.
14.25% (c)(j).............. 31,249 32,186,470
14.25% (j)................. 1,836 1,891,080
--------------
73,169,330
--------------
CELLULAR TELEPHONE (1.2%)
Centaur Funding Corp.
9.08%, Series B (c)........ 40,860 42,494,400
--------------
EQUIPMENT FINANCING (0.6%)
GPA Group, PLC (a)(d)....... 41,600,000 21,632,000
--------------
PAPER & FOREST
PRODUCTS (0.1%)
Paperboard Industries
International, Inc.
5.00%, Class A (c)(d)(s)... 219,308 3,444,535
--------------
REAL ESTATE (0.4%)
Crown American Realty Trust
11.00%, Series A........... 294,930 14,414,704
--------------
RETAIL (0.0%) (b)
Loehmann's Holdings, Inc.
$0.056, Series A (j)....... 2,297 1,148
--------------
Total Preferred Stocks
(Cost $153,998,096)........ 160,471,742
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE> 302
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Shares Value
---------------------------------
<S> <C> <C>
WARRANTS (0.9%)
BROADCAST/MEDIA (0.7%)
Spanish Broadcasting System,
Inc.
expire 6/30/99 (a)(c)(t)... 19,780 $ 4,153,800
expire 6/30/99 (a)(u)...... 44,150 21,633,500
--------------
25,787,300
--------------
CABLE (0.1%)
@Entertainment, Inc.
expire 7/15/08 (a)(c)...... 297,900 744,750
People's Choice TV Corp.
expire 6/1/00 (a).......... 300 3
Supercanal Holding, S.A.
Series A
expire 11/14/99
(a)(c)(d).................. 6,822,324 955,125
UIH Australia/Pacific, Inc.
expire 5/15/06 (a)......... 24,315 24,315
United International
Holdings, Inc.
expire 11/15/99 (a)........ 20,834 312,510
--------------
2,036,703
--------------
CASINOS (0.0%) (b)
Belle Casino, Inc. (a)(c)... 5,500 55
Isle of Capri Casinos, Inc.
expire 5/3/01 (a).......... 36,808 36,808
--------------
36,863
--------------
CELLULAR
TELEPHONE (0.0%) (b)
Nextel Communications, Inc.
Series C
expire 4/25/99 (a)......... 3,500 35
Occidente y Caribe Celular,
S.A.
expire 3/15/04 (a)(c)...... 105,840 793,800
--------------
793,835
--------------
CONGLOMERATES (0.0%) (b)
IFA Capital, Inc.
Series H expire 11/14/99
(a)(c)..................... 8,000 80
--------------
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
--------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
---------------------------------
<S> <C> <C>
POLLUTION &
RELATED (0.0%) (b)
ICF Kaiser International,
Inc.
expire 12/31/99 (a)........ 28,000 $ 280
--------------
PUBLISHING (0.0%) (b)
General Media, Inc.
expire 12/21/03 (a)........ 34,486 345
--------------
TECHNOLOGY (0.1%)
Metawave Communications
Corp.
expire 4/28/00 (a)(d)...... 164,401 1,150,807
--------------
TELECOMMUNICATION
SERVICES (0.0%) (b)
HighwayMaster
Communications, Inc.
expire 9/15/05 (a)(c)...... 27,095 271
--------------
TESTING SERVICES (0.0%) (b)
Intertek Testing Services
Ltd.
expire 12/31/99 (a)(d)..... 691 221,120
--------------
TRANSPORTATION (0.0%) (b)
Ermis Maritime Holdings Ltd.
expire 3/15/03 (a)......... 25,910 77,730
--------------
Total Warrants
(Cost $10,176,267)......... 30,825,584
--------------
<CAPTION>
Principal
Amount
-------------
<S> <C> <C>
SHORT-TERM
INVESTMENTS (5.0%)
COMMERCIAL PAPER (4.6%)
American Express Credit
Corp.
5.85%, due 1/5/99.......... $ 15,000,000 14,990,250
Associates Corp. Of North
America
5.08%, due 1/4/99.......... 15,265,000 15,258,538
Ford Motor Credit Co.
5.62%, due 1/7/99.......... 30,000,000 29,971,900
Halifax, PLC
5.61%, due 1/5/99.......... 30,000,000 29,981,300
5.65%, due 1/5/99.......... 30,000,000 29,981,167
Norwest Financial Inc.
5.51%, due 1/29/99......... 33,035,000 32,893,427
Wells Fargo & Co.
5.40%, due 1/19/99......... 14,505,000 14,465,836
--------------
Total Commercial Paper
(Cost $167,542,418)........ 167,542,418
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE> 303
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS
(CONTINUED)
REPURCHASE AGREEMENT (0.2%)
State Street Corp.
4.25%, due 1/4/99 with a
maturity value of
$6,002,833 (Collateralized
by $5,530,000 U.S. Treasury
Note 7.875%, due 8/15/01
market value --
$6,124,475)................ $ 6,000,000 $ 6,000,000
--------------
Total Repurchase Agreement
(Cost $6,000,000).......... 6,000,000
--------------
SHORT-TERM BONDS (0.0%) (b)
TEXTILE & APPAREL (0.0%) (b)
Alpargatas S.A.I.C.
11.75%, due 8/18/98
(c)(h)(v).................. 800,000 144,000
--------------
Total Short-Term Bonds
(Cost $656,350)............ 144,000
--------------
SHORT-TERM
LOAN ASSIGNMENT (0.2%)
FOOD, BEVERAGES &
TOBACCO (0.2%)
Buenos Aires Embotelladora
Sociedad Anonima
Bank debt
9.479%, due 8/1/98
(d)(h)(v).................. 15,750,000 6,457,500
--------------
Total Short-Term Loan
Assignment
(Cost $13,013,125)......... 6,457,500
--------------
Total Short-Term Investments
(Cost $187,211,893)........ 180,143,918
--------------
Total Investments
(Cost $3,759,388,046)
(aa)....................... 98.4% 3,538,249,989(bb)
Cash and Other Assets,
Less Liabilities........... 1.6 59,344,415
---- --------------
Net Assets.................. 100.0% $3,597,594,404
===== ==============
</TABLE>
- -------
<TABLE>
<S> <C>
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Restricted security.
(e) Euro-Dollar bond.
(f) 1,655 Units -- each unit reflects $1,000 principal
amount of 12.00% Senior Subordinated Notes plus 1
warrant to acquire 1.55 shares of common stock at
$35.65 per share at a future date.
(g) CIK ("Cash in Kind")-interest or dividend payment is
made with cash or additional securities.
(h) Issue in default.
(i) Floating rate. Rate shown is the rate in effect at
December 31, 1998.
(j) PIK ("Payment in Kind")-interest or dividend payment
is made with additional securities.
(k) Issuer in bankruptcy.
(l) 10.75% Trust Preferred Securities. The Trust exists
solely for the purpose of issuing the Trust Securities
and investing the proceeds there-of in an equivalent
amount of 10.75% Senior Subordinated Notes due 2017 of
the Superior National Insurance Group, Inc.
(m) Multiple tranche facilities.
(n) 20,340 Units -- each unit reflects $1,000 principal
amount of 15.00% Senior Notes plus 1 warrant to
acquire 19.85 shares of common stock at $13.20 per
share at a future date.
(o) 33,715 Units -- each unit reflects $1,000 principal
amount of 0%/13.875% Senior Discounted Notes plus
warrants to acquire 8% of the company 's common stock
at a future date.
(p) GDR -- Global Depository Receipt.
(q) ADR -- American Depository Receipt.
(r) British security.
(s) Canadian security.
(t) 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.
(u) Each warrant entitles the holder thereof to purchase 1
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.
(v) The company defaulted on the payment of principal to
its creditors on maturity date.
(w) Fair valued security.
(x) Stapled Unit -- each unit consists of 1 common share,
100 preferred shares and 1 Subordinated Note receipt.
(y) Segregated as collateral for forward foreign currency
contracts.
(z) Partially segregated as collateral for loan
participations.
(aa) The cost for Federal income tax purposes is
$3,764,483,183.
(bb) At December 31, 1998, net unrealized depreciation was
$226,233,194 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 $122,666,417 and
aggregate gross unrealized depreciation for all
investments on which there was an excess of cost over
market value of $348,899,611.
(L) Security denominated in British Pound Sterling.
(C$) Security denominated in Canadian Dollar.
(ECU) Security denominated in European Currency Unit.
(FF) Security denominated in French Franc.
(DM) Security denominated in German Deutsche Mark.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE> 304
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$3,759,388,046)........................................... $3,538,249,989
Cash........................................................ 534,505
Deposit with broker......................................... 3,067,702
Receivables:
Dividends and interest.................................... 59,305,170
Investment securities sold................................ 10,835,471
Fund shares sold.......................................... 7,397,649
Unrealized appreciation on forward foreign currency
contracts................................................. 1,815,097
--------------
Total assets........................................ 3,621,205,583
--------------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 8,887,799
Investment securities purchased........................... 6,012,500
NYLIFE Distributors....................................... 2,893,413
MainStay Management....................................... 1,745,901
Transfer agent............................................ 372,778
Custodian................................................. 34,620
Trustees.................................................. 27,783
Accrued expenses............................................ 654,626
Unrealized depreciation on forward foreign currency
contracts................................................. 2,981,759
--------------
Total liabilities................................... 23,611,179
--------------
Net assets.................................................. $3,597,594,404
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 368,739
Class B................................................... 4,393,893
Class C................................................... 13,310
Additional paid-in capital.................................. 3,852,664,387
Accumulated distribution in excess of net investment
income.................................................... (3,671,347)
Accumulated distribution in excess of net realized gain on
investments............................................... (33,785,597)
Net unrealized depreciation on investments.................. (221,138,057)
Net unrealized depreciation on foreign currency and forward
foreign currency contracts................................ (1,250,924)
--------------
Net assets.................................................. $3,597,594,404
==============
CLASS A
Net assets applicable to outstanding shares................. $ 278,180,638
==============
Shares of beneficial interest outstanding................... 36,873,889
==============
Net asset value per share outstanding....................... $ 7.54
Maximum sales charge (4.50% of offering price).............. 0.36
--------------
Maximum offering price per share outstanding................ $ 7.90
==============
CLASS B
Net assets applicable to outstanding shares................. $3,309,388,909
==============
Shares of beneficial interest outstanding................... 439,389,326
==============
Net asset value and offering price per share outstanding.... $ 7.53
==============
CLASS C
Net assets applicable to outstanding shares................. $ 10,024,857
==============
Shares of beneficial interest outstanding................... 1,330,953
==============
Net asset value and offering price per share outstanding.... $ 7.53
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE> 305
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 13,532,549
Interest (b).............................................. 371,100,885
-------------
Total income............................................ 384,633,434
-------------
Expenses:
Distribution--Class B..................................... 25,681,731
Distribution--Class C..................................... 8,921
Management................................................ 22,177,189
Service--Class A.......................................... 678,256
Service--Class B.......................................... 8,559,244
Service--Class C.......................................... 2,995
Transfer agent............................................ 4,515,537
Shareholder communication................................. 824,481
Professional.............................................. 678,533
Custodian................................................. 413,008
Recordkeeping............................................. 395,788
Registration.............................................. 192,896
Trustees.................................................. 111,316
Miscellaneous............................................. 59,366
-------------
Total expenses before waiver............................ 64,299,261
Fees waived by Manager...................................... (1,598,099)
-------------
Net expenses............................................ 62,701,162
-------------
Net investment income....................................... $ 321,932,272
-------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized loss from:
Security transactions..................................... (31,587,296)
Securities sold short..................................... (466,913)
Foreign currency transactions............................. (2,190,133)
-------------
Net realized loss on investments and foreign currency
transactions.............................................. (34,244,342)
-------------
Net change in unrealized appreciation on investments:
Security transactions..................................... (239,041,166)
Foreign currency and forward currency contracts........... (1,911,179)
-------------
Net unrealized loss on investments and foreign currency
transactions.............................................. (240,952,345)
-------------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (275,196,687)
-------------
Net increase in net assets resulting from operations........ $ 46,735,585
=============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $189,287.
(b) Interest recorded net of foreign withholding taxes of $13,855.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
<PAGE> 306
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 321,932,272 $ 256,747,395
Net realized gain (loss) on investments................... (31,587,296) 147,564,306
Net realized loss on securities sold short................ (466,913) --
Net realized gain (loss) on foreign currency
transactions............................................ (2,190,133) 978,376
Net change in unrealized appreciation on securities
transactions............................................ (239,041,166) (64,858,129)
Net change in unrealized appreciation (depreciation) on
foreign currency and forward foreign currency
contracts............................................... (1,911,179) 806,336
-------------- --------------
Net increase in net assets resulting from operations...... 46,735,585 341,238,284
-------------- --------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (25,394,563) (15,875,053)
Class B................................................. (291,897,896) (243,546,134)
Class C................................................. (193,731) --
From net realized gain on investments and foreign currency
transactions:
Class A................................................. (1,191,922) (9,477,663)
Class B................................................. (13,960,446) (134,845,754)
Class C................................................. (38,713) --
In excess of net investment income:
Class A................................................. (223,928) --
Class B................................................. (2,573,493) --
Class C................................................. (1,679) --
In excess of net realized gain on investments:
Class A................................................. (313,008) --
Class B................................................. (3,664,390) --
Class C................................................. (9,968) --
-------------- --------------
Total dividends and distributions to shareholders..... (339,463,737) (403,744,604)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 187,918,095 184,071,711
Class B................................................. 778,004,123 1,197,246,355
Class C................................................. 9,786,436 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 19,432,795 19,615,677
Class B................................................. 209,916,586 273,550,920
Class C................................................. 169,443 --
-------------- --------------
1,205,227,478 1,674,484,663
Cost of shares redeemed:
Class A................................................. (150,819,881) (76,496,410)
Class B................................................. (783,310,124) (474,186,948)
Class C................................................. (55,072) --
-------------- --------------
Increase in net assets derived from capital share
transactions......................................... 271,042,401 1,123,801,305
-------------- --------------
Net increase (decrease) in net assets................. (21,685,751) 1,061,294,985
NET ASSETS:
Beginning of year........................................... 3,619,280,155 2,557,985,170
-------------- --------------
End of year................................................. $3,597,594,404 $3,619,280,155
============== ==============
Accumulated distribution in excess of net investment income
at end of year............................................ $ (3,671,347) $ (872,247)
============== ==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
28
<PAGE> 307
This page intentionally left blank
29
<PAGE> 308
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Year ended December 31,
-------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 8.16 $ 8.27 $ 7.92 $ 7.44
-------- -------- -------- -------
Net investment income....................................... 0.75 0.74 0.72 0.84
Net realized and unrealized gain (loss) on investments...... (0.57) 0.23 0.52 0.61
Net realized and unrealized loss on foreign currency
transactions.............................................. (0.01) (0.00)(b) (0.00)(b) (0.00)(b)
-------- -------- -------- -------
Total from investment operations............................ 0.17 0.97 1.24 1.45
-------- -------- -------- -------
Less dividends and distributions:
From net investment income................................ (0.74) (0.74) (0.71) (0.84)
In excess of net investment income........................ (0.01) -- -- (0.01)
From net realized gain on investments..................... (0.03) (0.34) (0.18) (0.10)
In excess of net realized gain on investments............. (0.01) -- -- (0.02)
-------- -------- -------- -------
Total dividends and distributions........................... (0.79) (1.08) (0.89) (0.97)
-------- -------- -------- -------
Net asset value at end of period............................ $ 7.54 $ 8.16 $ 8.27 $ 7.92
======== ======== ======== =======
Total investment return (a)................................. 2.07% 12.20% 16.33% 20.28%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 9.40% 8.79% 9.0% 10.2%
Net expenses............................................ 1.00% 1.01% 1.0% 1.0%
Expenses (before waiver)................................ 1.04% 1.01% 1.0% 1.0%
Portfolio turnover rate..................................... 128% 128% 118% 137%
Net assets at end of period (in 000's)...................... $278,181 $238,841 $116,805 $42,850
</TABLE>
- -------
<TABLE>
<C> <S>
The Fund changed its fiscal year end from August 31 to
* December 31.
** Class C shares were first offered on September 1, 1998.
(+) Annualized.
Total return is calculated exclusive of sales charges and is
(a) not annualized.
(b) Less than one cent per share.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
30
<PAGE> 309
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------------------------------------- -------------
September 1 September 1**
through Year ended through
December 31 August 31 December 31
1998 1997 1996 1995 1994* 1994 1998
---------- ---------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 8.15 $ 8.26 $ 7.92 $ 7.44 $ 7.70 $ 7.93 $ 7.43
---------- ---------- ---------- ---------- ---------- ---------- -------
0.69 0.69 0.67 0.81 0.23 0.69 0.27
(0.57) 0.23 0.52 0.61 (0.27) (0.08) 0.15
(0.01) (0.00)(b) (0.00)(b) (0.00)(b) -- -- (0.01)
---------- ---------- ---------- ---------- ---------- ---------- -------
0.11 0.92 1.19 1.42 (0.04) 0.61 0.41
---------- ---------- ---------- ---------- ---------- ---------- -------
(0.68) (0.69) (0.67) (0.81) (0.22) (0.67) (0.27)
(0.01) -- -- (0.01) -- -- --(b)
(0.03) (0.34) (0.18) (0.10) -- (0.17) (0.03)
(0.01) -- -- (0.02) -- -- (0.01)
---------- ---------- ---------- ---------- ---------- ---------- -------
(0.73) (1.03) (0.85) (0.94) (0.22) (0.84) (0.31)
---------- ---------- ---------- ---------- ---------- ---------- -------
$ 7.53 $ 8.15 $ 8.26 $ 7.92 $ 7.44 $ 7.70 $ 7.53
========== ========== ========== ========== ========== ========== =======
1.31% 11.55% 15.58% 19.71% (0.48%) 7.95% 5.58%
8.65% 8.18% 8.4% 9.5% 9.1%+ 8.7% 8.65%+
1.75% 1.62% 1.6% 1.6% 1.6%+ 1.6% 1.75%+
1.79% 1.62% 1.6% 1.6% 1.6%+ 1.6% 1.79%+
128% 128% 118% 137% 45% 190% 128%
$3,309,389 $3,380,439 $2,441,180 $1,601,238 $1,128,913 $1,090,261 $10,025
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
31
<PAGE> 310
MainStay High Yield Corporate Bond Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on May 1, 1986 and
September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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 bonds securities. Capital appreciation is a
secondary objective. High yield bonds may involve special risks not commonly
associated with investment in higher rated debt securities. These 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
32
<PAGE> 311
Notes to Financial Statements
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 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.
REPURCHASE AGREEMENT. The Fund's custodian and other banks acting in a
sub-custodian capacity take possession of the collateral pledged for investments
in repurchase agreements. The underlying collateral is valued daily on a
mark-to-market basis to determine that the value, including accrued interest,
exceeds the repurchase price. In the event of the seller's default of the
obligation to repurchase, the Funds have the right to liquidate the collateral
and apply the proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
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
33
<PAGE> 312
MainStay High Yield Corporate Bond Fund
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.
Forward foreign currency contracts open at December 31, 1998:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
---------------- ---------------- --------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts
German Deutsche Mark vs. US$, expiring
1/4/99-3/3/99.................................... DM 50,330,000 $ 30,005,196 $ (263,892)
Hong Kong Dollar vs. US$, expiring
1/29/99-2/8/99................................... HKD 911,871,000 $115,000,000 (2,681,737)
Pound Sterling vs. US$, expiring 4/6/99............ Pound Sterling 4,618,082 $ 7,769,000 105,490
Pound Sterling vs. US$, expiring 9/8/99............ Pound Sterling 45,345,000 $ 75,135,758 (35,011)
</TABLE>
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Purchased Sold (Depreciation)
--------------- --------------- --------------
<S> <C> <C> <C>
Foreign Currency Buy Contracts
German Deutsche Mark vs. US$, expiring 1/4/99....... DM 14,377,000 $ 8,611,932 $ 21,506
German Deutsche Mark vs. US$, expiring 1/4/99....... DM 9,143,000 $ 5,491,522 (1,119)
Hong Kong Dollar vs. US$, expiring 1/29/99-2/8/99... HKD911,871,000 $115,993,636 1,688,101
-----------
Net unrealized depreciation on forward foreign
currency contracts................................ $(1,166,662)
===========
</TABLE>
SECURITIES SOLD SHORT. The Fund may engage in short sales as a method of
hedging declines in the value of securities owned. When the Fund enters into a
short sale, it must segregate the security sold short, or securities equivalent
in kind and amount to the securities sold, as collateral for its obligation to
deliver the security upon conclusion of the sale. A gain, limited to the price
at which the Fund sold the security short, or a loss, unlimited as to dollar
amount, will be recognized upon termination of a short sale if the market price
on the date the short position is closed out is less or greater, respectively,
than the proceeds originally received. Any such gain or loss may be offset,
completely or in part, by the change in the value of the hedged investments.
At December 31, 1998 there were no open short sales.
34
<PAGE> 313
Notes to Financial Statements (continued)
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.
<TABLE>
<CAPTION>
Principal Percent
Date(s) of Amount/ 12/31/98 of
Security Acquisition Shares Cost Value Net Assets
- ------------------------------------------ ---------------- ---------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Affinity Group, Inc.
Bank debt, Tranche B
9.025%, due 6/30/06..................... 12/17/98 $ 8,700,000 $ 8,700,000 $ 8,700,000 0.3%
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 6,457,500 0.2
Domino's Pizza, Inc.
Bank debt, Tranche B
8.75%, due 12/31/06..................... 12/24/98 4,925,000 4,925,000 4,925,000 0.1
Bank debt, Tranche C
9.00%, due 12/31/07..................... 12/24/98 4,925,000 4,925,000 4,925,000 0.1
Eurotunnel
Bank debt, Tier One
5.28%, due 4/9/04....................... 10/28/98-11/27/98 FF 36,000,000 5,206,241 5,477,785 0.1
Bank debt, Tranche H2
6.2625%, due 2/1/06..................... 3/6/98 15,122,553 2,485,466 2,710,511 0.1
Bank debt, Tranche G2
9.0625%, due 2/1/06..................... 3/6/98 Pound Sterling 2,120,438 3,498,425 3,532,417 0.1
Bank debt, Tranche G2
9.125%, due 2/1/06...................... 3/6/98 1,734,904 2,862,348 2,890,159 0.1
First Pacific Capital Ltd.
Bank debt
7.625%, due 1/23/00..................... 8/13/98 $ 10,160,000 8,820,567 9,347,200 0.3
FRI-MRD Corp.
(zero coupon), due 1/24/02
14.00%, beginning 7/31/99............... 10/30/98 19,000,000 17,259,277 17,385,000 0.5
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99............... 8/12/97-1/14/98 53,990,000 45,550,993 51,020,550 1.4
Global Motorsport Group, Inc.
Bank debt, Term B
8.991%, due 12/15/05.................... 12/15/98 5,000,000 5,000,000 5,000,000 0.1
GPA Group, PLC
Preferred Stock......................... 3/7/96-12/23/97 41,600,000 16,177,800 21,632,000 0.6
International Wireless Communications
Holdings, Inc.
(zero coupon), due 8/15/01.............. 6/17/98 10,000,000 2,552,168 1,000,000 0.0(c)
Intertek Testing Services Ltd.
12.00%, due 11/1/07 (a)................. 11/8/96-11/1/98 5,071,990 4,871,796 4,780,350 0.1
Warrants, expire 12/31/99............... 11/8/96 691 223,440 221,120 0.0(c)
</TABLE>
35
<PAGE> 314
MainStay High Yield Corporate Bond Fund
<TABLE>
<CAPTION>
Principal Percent
Date(s) of Amount/ 12/31/98 of
Security Acquisition Shares Cost Value Net Assets
- ------------------------------------------ ---------------- ---------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Kronos International, Inc.
Bank debt
6.0905%, due 9/15/99.................... 2/25/97-7/31/97 DM 14,413,598 $ 7,721,679 $ 8,588,794 0.2%
Bank debt
6.0905%, due 9/15/00.................... 2/25/97-7/31/97 10,761,088 5,674,422 6,412,332 0.2
Metawave Communications Corp.
13.75%, due 4/28/00 (b)................. 4/28/98-10/28/98 $ 9,479,813 9,479,813 9,479,813 0.3
Warrants, expire 4/28/00................ 4/28/98 164,401 0(d) 1,150,807 0.0(c)
Norwood Promotional Products, Inc.
Bank debt, Tranche B
8.48%, due 10/30/04..................... 10/30/98 8,700,000 8,700,000 8,700,000 0.3
Paperboard Industries International, Inc.
Preferred Stock
5.00%, Class A.......................... 5/5/98 219,308 3,643,057 3,444,535 0.1
President Riverboat Casinos, Inc.
12.00%, due 9/15/01..................... 12/3/98 10,097,000 10,097,000 10,097,000 0.3
Primestar, Inc.
12.3788%, due 4/1/99.................... 4/1/98-4/14/98 11,580,000 11,580,000 4,632,000 0.1
S-C Aircraft
Series 1997-C
11.00%, due 7/1/04...................... 3/20/97 10,755,299 10,755,299 10,755,299 0.3
Stone Container Corp.
Bank debt, Term E
8.8125%, due 10/1/03.................... 7/16/97 4,136,769 4,136,767 4,095,401 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 6,402,499 6,411,981 0.2
------------ ------------ ---
$224,807,968 $224,727,679 6.2%
============ ============ ===
</TABLE>
- -------
<TABLE>
<C> <S>
PIK ("Payment in Kind")--interest payment is made with
(a) additional securities.
CIK ("Cash in Kind")--interest payment is made with cash or
(b) additional securities.
(c) Less than one tenth of a percent.
(d) These warrants have no cost.
DM Deutsche Mark
FF French Franc
L Pound Sterling
</TABLE>
COMMITMENTS AND CONTINGENCIES. As of December 31, 1998, the Fund had unfunded
loan commitments pursuant to the following loan agreements:
<TABLE>
<CAPTION>
Unfunded
Borrower Commitment
- -------- -----------
<S> <C>
Kronos International, Inc................................... $12,097,267
</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
36
<PAGE> 315
Notes to Financial Statements (continued)
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.
Permanent book-tax difference of $4,446,082 has been reclassified from
accumulated distribution in excess of net realized gain on investments to
accumulated distribution in excess of net investment income due to the tax
treatment of foreign currency losses.
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 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.
37
<PAGE> 316
MainStay High Yield Corporate Bond Fund
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
NOTE 3--FEES AND RELATED PARTY POLICIES:
MANAGER AND SUB-ADVISER. MainStay Management, Inc. (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 $500 million. For the year ended December 31, 1998 the Manager earned
$22,177,189 and waived $1,598,099 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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
38
<PAGE> 317
Notes to Financial Statements (continued)
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $335,190 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges for redemption of Class B shares of $4,333,277
for the year ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $4,515,537.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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 $97,532 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$395,788 for the year ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, capital loss
carryforwards of $11,538,824 were available to the extent provided by
regulations to offset future realized gains of the Fund through 2006. 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.
The Fund intends to elect, to the extent provided by the regulations, to treat
$17,487,479 of qualifying capital losses that arose during the current year as
if they arose on January 1, 1999.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of U.S. Government
securities, other than short-term securities, were $393,501 and $694,137,
respectively. Purchases and sales of securities, other than U.S. Government
securities, securities subject to repurchase transactions and short-term
securities, were $4,160,455 and $3,643,516, 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.
39
<PAGE> 318
MainStay High Yield Corporate Bond Fund
The funds pay a commitment fee, at an annual rate of 0.065% of the average
commitment amount, regardless of usage. Such commitment fees are allocated
amongst the funds based upon net assets and other factors. Interest on revolving
credit loans is charged based upon the Federal Funds Advances rate. There were
no borrowings on the line of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
---------------------------- -----------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.................................. 24,201 96,382 1,316 21,799 142,143
Shares issued in reinvestment of dividends
and distributions.......................... 2,470 26,712 22 2,366 33,033
------- ------- ----- ------ -------
26,671 123,094 1,338 24,165 175,176
Shares redeemed.............................. (19,049) (98,329) (7) (9,042) (56,201)
------- ------- ----- ------ -------
Net increase................................. 7,622 24,765 1,331 15,123 118,975
======= ======= ===== ====== =======
</TABLE>
- -------
* First offered on September 1, 1998.
40
<PAGE> 319
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay High Yield Corporate Bond
Fund (one of the portfolios constituting The MainStay Funds, hereafter referred
to as the "Fund") at December 31, 1998, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 1999
41
<PAGE> 320
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a secondary consideration. Advisors, Inc.(2)
EQUITY INCOME FUND To realize maximum long-term total return from a MacKay Shields Financial
combination of capital appreciation and income. Corporation(2)
RESEARCH VALUE FUND To seek long-term capital appreciation by investing John A. Levin & Co.,
primarily in securities of large-capitalization Inc.
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.
42
<PAGE> 321
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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.
43
<PAGE> 322
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
44
<PAGE> 323
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN09-02/99
[RECYCLE LOGO]
MAINSTAY HIGH YIELD CORPORATE BOND FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 324
Table of Contents
<TABLE>
<S> <C>
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,
& Class C Shares 4
Portfolio Management Discussion and
Analysis 6
Year-by-Year Performance 7
Diversification by Country--Top 5 8
Quality Composition 9
Returns & Lipper Rankings 12
Top 10 Holdings 13
10 Largest Purchases 13
10 Largest Sales 13
Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 22
Report of Independent Accountants 30
The MainStay Funds 31
</TABLE>
<PAGE> 325
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 326
MainStay International Bond Fund Highlights
1998 MARKET RECAP
- - International bond markets experienced unusual levels of volatility in 1998,
as problems in Asia, Russia, and Latin America caused a flight to quality by
most investors and severe setbacks for most emerging markets.
- - The approach of European Monetary Union created opportunities to take
advantage of converging bond prices and yields in core European markets, which
generally showed strong performance as most European central banks moved to
lower interest rates.
- - European nations that will not participate in European Monetary Union provided
diversification opportunities and generally strong returns.
- - The Japanese yen's weakness reversed in midyear, as the U.S. dollar lost its
strength against most major currencies.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay International Bond Fund
returned 11.61% for Class A shares and 10.79% for Class B and Class C shares,*
excluding all sales charges.
- - The Fund overweighted European bonds, including bonds of nations that will
participate in European Monetary Union and nations that will not. Both had a
positive impact on performance.
- - The Fund avoided Japanese bonds throughout the year, which caused it to miss
opportunities created by a stronger yen in the second half of 1998.
- - Small positions in emerging markets detracted from the Fund's performance and
have been reduced or eliminated.
- - All share classes underperformed the average Lipper* international income
fund, which returned 11.91% for the year ended 12/31/98.
- -------
* See footnote and table on page 12 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 327
$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 6.59%, since inception 9.36%
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON BROTHERS NON-U.S. DOLLAR
Year end MAINSTAY INTERNATIONAL BOND FUND WORLD GOVERNMENT BOND INDEX*
- --------- -------------------------------- ---------------------------------
<S> <C> <C>
9/13/94 $ 9550 $10000
12/94 9569 10256
12/95 11356 12261
12/96 12935 12761
12/97 13171 12218
12/98 14700 14392
</TABLE>
CLASS B SHARES SEC Returns: 1-year 5.79%, since inception 9.51%
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON BROTHERS NON-U.S. DOLLAR
Year end MAINSTAY INTERNATIONAL BOND FUND WORLD GOVERNMENT BOND INDEX*
- --------- -------------------------------- ---------------------------------
<S> <C> <C>
9/13/94 $10000 $10000
12/94 10020 10256
12/95 11819 12261
12/96 13371 12761
12/97 13525 12218
12/98 14785 14392
</TABLE>
CLASS C SHARES SEC Returns: 1-year 9.79%, since inception 9.85%
[LINE GRAPH]
<TABLE>
<CAPTION>
SALOMON BROTHERS NON-U.S. DOLLAR
Year end MAINSTAY INTERNATIONAL BOND FUND WORLD GOVERNMENT BOND INDEX*
- --------- -------------------------------- ---------------------------------
<S> <C> <C>
9/13/94 $10000 $10000
12/94 10020 10256
12/95 11819 12261
12/96 13371 12761
12/97 13525 12218
12/98 14985 14392
</TABLE>
4
<PAGE> 328
- -------
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. Performance data for the two classes vary after this date based
on differences in their load and expense structures. 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 Class C graph assumes an initial investment of
$10,000 made on 9/13/94 and includes the historical performance of Class B
shares for periods 9/13/94 through 8/31/98. Performance data for the two
classes vary after this date based on differences in their load. Returns
shown do not reflect the CDSC, as it would not 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. It is not possible to make an investment directly into an index.
5
<PAGE> 329
Portfolio Management Discussion and Analysis
Overall, 1998 was a year of extreme volatility in the international bond
markets. Financial difficulties in emerging Asian markets were compounded by a
recession in Japan and difficulties in Russia and Brazil. The result was a
general flight to quality, with most investors seeking refuge in the
highest-quality securities of established market economies. Most emerging
markets, even those with little or no ties to troubled markets, suffered severe
setbacks.
Among nations planning to participate in European Monetary Union, a general
convergence of bond yields provided early investment opportunities that
decreased as the year progressed. Bonds of nations that did not plan to
participate in European Monetary Union also showed strong performance as
investors sought ways to diversify their European holdings. In an effort to
stabilize volatile markets, many European central banks lowered interest rates
in the second half of the year, which contributed to strong bond performance
throughout Europe.
Japanese bonds continued to provide extremely low yields, but in the middle of
1998, the yen began to strengthen against the U.S. dollar and European
currencies, creating opportunities for investors with yen exposure. Commodity-
linked currencies, including Canadian, Australian, and New Zealand dollars,
tended to focus on the pervading weakness of commodity markets and each declined
relative to the U.S. dollar.
HOW DID THE MAINSTAY INTERNATIONAL BOND
FUND PERFORM IN THIS MARKET
ENVIRONMENT?
The MainStay International Bond Fund returned 11.61% for Class A shares and
10.79% for Class B and Class C shares(*) for the year ended 12/31/98, excluding
all sales charges. All share classes underperformed the average Lipper(+)
international income fund, which returned 11.91% for the year.
WHAT CAUSED THE FUND TO UNDERPERFORM
ITS PEERS?
Although we were generally pleased with the Fund's double-digit returns in 1998,
a few factors contributed to the Fund's underperforming its peers. First, the
Fund had a small exposure to emerging mar-kets, which seemed appropriate at the
beginning of the year, but became increasingly problematic for the Fund as
difficulties in Asia were followed by weaknesses in Russia and Latin America.
Although the emerging-market debt the Fund held was not debt of particularly
troubled markets, with the general flight to quality, virtually all emerging
markets declined, and some of the Fund's holdings suffered substantial
reversals. We have sold the Fund's Argentine debt and have reduced its exposure
in Mexico and Panama, which we believe were positive decisions for the Fund.
Throughout 1998, the Fund also avoided Japanese debt entirely. While Japanese
bonds have provided unsatisfactory yields, as the Japanese yen strengthened in
the second half of the year, the Fund's
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
RECESSION
- --------------------
A downturn in economic activity, typically defined by at least two consecutive
quarters of decline in a country's gross domestic product.
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.
EMERGING MARKETS
- --------------------
Countries with smaller or more recently established capital markets.
- -------
* Performance for Class C shares include the historical performance of Class B
shares from 1/1/98 through 8/31/98.
+ See footnote and table on page 12 for more information on Lipper Inc.
6
<PAGE> 330
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[BAR GRAPH]
<TABLE>
<CAPTION>
Year End Total Return %
- -------- --------------
<S> <C>
12/94 0.20
12/95 18.68
12/96 13.90
12/97 1.83
12/98 11.61
Returns reflect the historical performance of the Class B
shares for periods 12/86 through 12/94.
See footnote * on page 12 for more information on performance.
</TABLE>
CLASS B & CLASS C SHARES
[BAR GRAPH]
<TABLE>
<CAPTION>
Year End Total Return %
- -------- --------------
<S> <C>
12/94 0.2
12/95 17.96
12/96 13.13
12/97 1.15
12/98 10.79
Returns reflect the historical performance of the Class B
shares for periods 12/86 through 12/94.
See footnote * on page 12 for more information on performance.
</TABLE>
absence from that market had a negative impact on performance.
In addition, the Fund had investments in New Zealand bonds that were up 13% for
the year in local currency terms, but the Fund's exposure to the New Zealand
dollar reduced the return to about 4% in U.S. dollar terms. The Fund's Norwegian
investments, made in the second half of the year, had a slightly positive impact
during the time the Fund owned them. While the returns on Norwegian bonds were
positive, they were a drag on performance when other European bonds were
providing double-digit returns.
EUROPEAN MONETARY
UNION (EMU)
- --------------------
A system that allows participating European countries to operate with a common
currency or monetary unit.
YIELD
- --------------------
The income paid to investors over a specified period of time. Mutual fund yields
are expressed as a percentage of the fund's current price per share.
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
LOCAL CURRENCY
TERMS
- --------------------
Returns expressed in local currency terms show what investors using that
currency would have earned, without an adjustment for differences in currency
values.
WEIGHTING
- --------------------
The proportion of a portfolio allocated to a specific security, sector, or
country, 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.
7
<PAGE> 331
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C> <C> <C> <C> <C>
Germany United Kingdom Italy Denmark Canada
18.6% 18.3% 10.9% 9.4% 5.5%
Actual percentages will vary
over time.
<CAPTION>
<S> <C>
Other
37.3%
Actual percentages will vary
over time.
</TABLE>
WHAT WERE SOME OF THE BETTER DECISIONS
YOU MADE FOR THE FUND IN 1998?
Undoubtedly, the best decision we made was to take an overweighted position in
the U.K. Since Britain has opted out of European Monetary Union, it provides one
of the few European investment diversification opportunities in a major world
currency. The U.K. was suffering from an economic slowdown, and by the end of
the year, its manufacturing sector was in recession. Fortunately, the U.K.
government has made the Bank of England an independent central bank, which had a
positive impact on bonds in the first half of the year. In fact, bond prices
climbed even as official interest rates were rising, simply on the belief by
most investors that having a strong, independent central bank could help the
country avert a major recession. Later in the year, the Bank of England moved to
lower interest rates, as did several other European central banks.
Anticipating that the British yield curve would become steeper, the Fund
concentrated on shorter-term U.K. bonds, generally under 10 years. As rates
declined and the yield curve moved as we predicted, the Fund benefited with
returns of almost 20% on U.K. bonds in local currency terms.
The Fund also had strong success with Irish gilt bonds, which we purchased for
the Fund anticipating the strong convergence in interest rates with the approach
of European Monetary Union. The results were positive for the Fund, with returns
of about 14% for the bonds, which were sold in the fourth quarter to take
profits.
WHAT OTHER DECISIONS HAD A POSITIVE
IMPACT ON THE FUND'S PERFORMANCE?
Most of the Fund's investment decisions were positive, with a heavy
overweighting in Europe, where virtually every major market provided
double-digit returns. In addition to the U.K., another non-EMU nation that
provided superior results was Sweden, which benefited from lower-than-expected
inflation. This allowed the Swedish central bank to lower interest rates and
helped the market as a whole return 12.5% in local terms.
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.
GILTS
- --------------------
Bonds issued by the British government. Gilts are the equivalent of Treasury
securities in the United States in that they are perceived to have no risk of
default. Income earned from investing in gilts is therefore guaranteed, though
mutual fund shares that own them are not.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
8
<PAGE> 332
QUALITY COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
AAA AA A BBB BB B Government Agencies
54.5% 20.1% 4.0% 1.2% 1.7% 0.4% 6.9%
Actual percentages
will vary over time.
<CAPTION>
<S> <C>
Cash, Equivalents & Other Assets, Less Liabilities
11.2%
Actual percentages
will vary over time.
</TABLE>
One decision that wasn't country specific was the decision to extend the Fund's
duration in the second half of the year. Since most of the countries where the
Fund was invested lowered interest rates, the Fund's longer duration strategy
worked in its favor. Of course, that didn't mean the Fund simply purchased long
bonds across the board. As the Fund's overweighted position in short- and
intermediate-term U.K. bonds illustrates, we try to invest in the maturities we
believe will be most advantageous for the Fund in each country. So while the
Fund added 30-year Danish bonds that extended the Fund's duration and
contributed positively to performance, we also purchased 10-year Italian
government bonds that also provided strong performance for the Fund. We chose
Italy to take advantage of the convergence of interest rates and selected
10-year bonds because we felt they were the best value for that portion of the
yield curve when we were purchasing these securities for the Fund.
HOW DID FOREIGN CURRENCIES AFFECT THE FUND?
Generally speaking, the Fund had positive results from its currency exposure.
European currencies strengthened about 7.6% against the U.S. dollar over the
course of the year, which had a positive effect on the Fund's total return.
In the second half of 1998, European currencies weakened against the yen and the
Fund participated in the yen's advance through the forwards market, with a proxy
hedge of European currency exposure. The trade was a contrarian move that
reflected our belief that the general negative sentiment about the yen--as well
as euphoria over the new European currency, the euro--were both excessive. As
the yen strengthened, the proxy hedge contributed positively to the Fund's
performance.
Commodity-linked currencies, particularly Canadian, Australian, and New Zealand
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.
PROXY HEDGE
- --------------------
A transaction in the forwards market that seeks to offset investment risk by
substituting exposure to one foreign currency with exposure to another.
9
<PAGE> 333
dollars, all suffered from the general weakness of commodity prices in 1998.
Each of these currencies declined about 7% relative to the U.S. dollar, which
had a negative impact on the Fund's performance.
DID THE FUND OWN OTHER COMMODITY-
LINKED INVESTMENTS?
After the substantial declines of prices in the commodity markets, in the third
and fourth quarters, we decided to increase the Fund's exposure to certain
commodity-linked economies. The Fund took a 3% position in Norwegian bonds,
which were flat for the year, but we believe the bonds are well positioned going
forward. If Norway decides to cut interest rates--as we believe they will--or if
oil prices rise, the bonds could be strong performers in 1999.
WHAT DO YOU THINK WERE INVESTORS'
BIGGEST CONCERNS IN 1998?
From the beginning of the year, most investors were concerned about risk. The
fallout in Asia in late 1997 underscored the need for caution, and when Russia
and Brazil faced substantial problems in the third quarter of 1998, the result
was a sudden and pronounced flight to quality by most investors. Generally
speaking, that had a positive impact on the Fund, since we were not invested in
Asia, Russia, or Brazil, and the Fund's emerging-market exposure was minimal.
Also, the Fund invests primarily in government bonds, which were the primary
beneficiaries of the flight to quality.
WERE THERE INVESTMENTS THAT DIDN'T
BENEFIT AS MUCH?
Given the Fund's primary emphasis on bonds positioned for markets with lower
interest rates, we believed it would be prudent to hedge that positioning in the
event rates should rise. We took that hedge in the form of Danish
mortgage-backed securities, which underperformed the rest of the portfolio,
gaining only about 8% during the year.
Mortgage-backed bonds tend to underperform when rates decline because
prepayments of the underlying mortgages by borrowers are likely to increase. The
general flight to quality also had an impact on the bonds, as all products
offering higher yields than government bonds tended to underperform in the
risk-averse environment. We have continued to hold the Danish mortgage-backed
bonds believing that eventually interest rates will go back up. In the meantime,
the bonds are providing a measure of diversification for the Fund and added
exposure to non-EMU countries.
ARE THERE OTHER NON-EMU EUROPEAN
COUNTRIES WHERE THE FUND HAS INVESTED?
Yes, there are. Late in the year, we added Greek bonds to the Fund's portfolio.
While Greece is a member of the European Community, it did not qualify for
participation in European Monetary Union. Since we anticipate that the nation
will qualify in the next couple of years, we see the same kind of opportunities
there that the Fund capitalized on in Ireland during 1998. Sweden, Denmark, and
Norway are other economically strong non-EMU countries that provided the Fund
with opportunities to diversify its currency exposure.
LOOKING BACK OVER 1998, IS THERE
ANYTHING YOU WOULD HAVE DONE
DIFFERENTLY?
Sure. We would have sold all of the Fund's emerging-market debt in May. At the
time, we had no way of knowing the
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).
10
<PAGE> 334
extent of the problems Russia and Brazil would face or how widespread the
effects would be.
Even with hindsight, we would have found it difficult to invest the Fund's
assets in Japanese bonds. With yields of only about 0.50%, we simply did not
believe they were consistent with the Fund's pursuit of competitive overall
return commensurate with an acceptable level of risk. Given the strengthening of
the yen in the second half of 1998, however, we may begin to consider Japanese
securities going forward.
WHAT ELSE DO YOU ANTICIPATE FOR 1999?
While the markets are inherently unpredictable, in light of recent events we
have good reason to anticipate continued volatility. We believe that the initial
enthusiasm over the introduction of the euro in January 1999 will probably cool
down, and eventually the idea of subjecting national interests to the "greater
good of Europe" may begin to wear on some EMU participants. If so, Europe may
face internal conflicts that could impact the market. We are also looking at
nations that may seek membership in the European Community such as the Czech
Republic, Poland, and Hungary.
As the global economic crisis runs its course, we will continue to seek to
provide competitive total return by investing primarily in a portfolio of non-
U.S. (primarily government) debt securities. For the immediate future, we will
remain cautious about emerging markets and other potential trouble spots around
the globe.
Joseph Portera
Portfolio Manager
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.
Past performance is no guarantee of future results.
11
<PAGE> 335
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND THROUGH 12/31/98
<S> <C> <C>
Class A 11.61% 10.54%
Class B 10.79% 9.85%
Class C 10.79% 9.85%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND THROUGH 12/31/98
<S> <C> <C>
Class A 6.59% 9.36%
Class B 5.79% 9.51%
Class C 9.79% 9.85%
</TABLE>
FUND LIPPER+ RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND THROUGH 12/31/98
<S> <C> <C>
Class A 28 out of 51 funds 9 out of 31 funds
Class B 33 out of 51 funds 7 out of 26 funds
Class C n/a n/a
Average Lipper
international
income fund 11.91% 8.90%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.57 $0.5761 $0.0887
Class B $10.59 $0.5025 $0.0887
Class C $10.59 $0.1625 $0.0887
</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 load and 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%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of 1%. Performance figures for this class include the
historical performance of the Class B shares for periods from inception
(9/13/94) up to 8/31/98. Performance data for the two classes after this
date vary based on differences in their load.
+ Lipper 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
12/31/98. The Fund's Class A shares were first offered to the public on
1/3/95; Class C shares on 9/1/98.
12
<PAGE> 336
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
<S> <C> <C>
Federal National Mortgage Association, Series
EMTN, 6.875%, due 6/7/02 United Kingdom $2,376,833
Buoni Poliennali del Tesoro, 8.25%, due 7/1/01 Italy 2,146,756
United Kingdom Treasury Bond, 8.00%, due
12/7/15 United Kingdom 1,715,792
Norddeutsche Landesbank, 4.75%, due 7/7/08 Germany 1,700,047
Canadian Government, Series VR22, 7.50%, due
3/1/01 Canada 1,544,916
Kingdom of Denmark, 7.00%, due 11/10/24 Denmark 1,421,717
European Investment Bank, 6.25%, due 12/7/08 United Kingdom 1,298,785
Finnish Government, 9.50%, due 3/15/04 Finland 1,260,854
Bundesobligation, Series 98, 5.625%, due
1/4/28 Germany 1,146,946
Nykredit, Series ANN1, 6.00%, due 10/1/29 Denmark 1,132,887
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
AMOUNT
SECURITY COUNTRY OF PURCHASE
<S> <C> <C>
United Kingdom Treasury Bonds, due
8/10/99 - 12/7/15 United Kingdom $9,601,456
Federal National Mortgage Association, due
9/26/00 - 5/15/08 United Kingdom 6,694,157
Canadian Government, due 3/1/01 - 6/1/27 Canada 6,106,077
Australian Government, due 3/15/02 - 8/15/08 Australia 5,406,479
Buoni Poliennali del Tesoro, due
2/1/01 - 11/1/27 Italy 5,081,930
Bundesobligation, due 11/21/00 - 1/4/28 Germany 4,995,835
New Zealand Government, due 4/15/04 - 7/15/09 New Zealand 4,966,624
Kingdom of Denmark, due 11/15/00 - 11/10/24 Denmark 4,483,839
Nykredit, due 10/1/26 - 10/1/29 Denmark 3,905,517
Irish Government, due 10/18/00 - 8/18/08 Ireland 3,408,862
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
AMOUNT
SECURITY COUNTRY OF SALE
<S> <C> <C>
United Kingdom Treasury Bonds, due 8/10/99 - 9/27/13
United Kingdom $10,994,951 Bundesobligation, due 11/21/00 - 1/4/24
Germany 6,109,802 Buoni Poliennali del Tesoro, due 7/15/00 - 11/1/23
Italy 5,473,429 Canadian Government, due 9/1/00 - 6/1/27
Canada 4,897,785 Federal National Mortgage Association, due 9/26/00
- - 5/15/08 United Kingdom 4,665,646
Australian Government, due 3/15/02 - 8/15/08 Australia 4,585,921
France Obligations Assimilables du Tresor, due 3/28/00 - 12/26/12
France 4,534,497 Irish Government, due 4/1/99 - 8/18/08
Ireland 4,319,761 Kingdom of Denmark, due 11/15/00 - 11/15/07
Denmark 4,008,136 Nykredit, due 10/1/26 - 10/1/29
Denmark 3,772,370
</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.
13
<PAGE> 337
MainStay International Bond Fund*
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM BONDS (88.3%)+
CORPORATE BONDS (24.1%)
DENMARK (3.3%)
Nykredit
Series ANN1
6.00%, due 10/1/29...... DK 7,346,000 $ 1,132,887
-----------
GERMANY (12.0%)
Bayerische VBK New York
4.50%, due 6/24/02...... DM 895,000 553,803
Deutsche Pfandbriefe
Hypobank
Series G3
5.00%, due 2/3/05....... 1,395,000 886,356
Discover Card Offerings
Series DM
5.25%, due 6/20/08...... 1,400,000 880,463
Euronet Services Inc.
Series DTCU
(zero coupon), due
7/1/06
12.375%, beginning
7/1/02 (c).............. 480 86,455
Norddeutsche Landesbank
Series 5
4.75%, due 7/7/08....... 2,735,000 1,700,047
-----------
4,107,124
-----------
SWEDEN (1.1%)
Banque Nationale de Paris
Medium-Term Notes
Series E
11.00%, due 11/4/99..... SK 3,050,000 396,030
-----------
UNITED KINGDOM (5.8%)
European Investment Bank
6.25%, due 12/7/08...... L 714,000 1,298,785
Halifax PLC
9.375%, due 5/15/21..... 290,000 700,392
-----------
1,999,177
-----------
UNITED STATES (1.9%)
Conproca S.A.
12.00%, due 6/16/10
(b)..................... $ 313,000 294,220
Petroleos Mexicanos
6.218%, due 3/8/99
(a)..................... 150,000 150,000
TPSA Finance BV
7.75%, due 12/10/08
(b)..................... 200,000 198,000
-----------
642,220
-----------
Total Corporate Bonds
(Cost $8,242,845)....... 8,277,438
-----------
- -------------
+ Percentages indicated are based on Fund net assets.
* Investments are grouped by currency denomination.
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (64.1%)
AUSTRALIA (3.0%)
Australian Government
Series 808
8.75%, due 8/15/08...... A$ 401,000 $ 315,394
Series 904
9.00%, due 9/15/04...... 968,000 715,828
-----------
1,031,222
-----------
CANADA (5.5%)
Canadian Government
Series WH31
6.00%, due 6/1/08....... C$ 466,000 329,186
Series VR22
7.50%, due 3/1/01....... 2,246,000 1,544,916
-----------
1,874,102
-----------
DENMARK (6.1%)
Kingdom of Denmark
7.00%, due 11/10/24..... DK 7,069,000 1,421,717
8.00%, due 5/15/03...... 3,793,000 691,391
-----------
2,113,108
-----------
FINLAND (3.7%)
Finnish Government
Series RG
9.50%, due 3/15/04...... FM 5,000,000 1,260,854
-----------
GERMANY (6.6%)
Bundesobligation
Series 123
4.50%, due 5/17/02...... DM 1,805,000 1,124,982
Republic of Deutschland
Series 98
5.625%, due 1/4/28...... 1,695,000 1,146,946
-----------
2,271,928
-----------
GREECE (2.8%)
Hellenic Republic
8.90%, due 4/1/03....... GRD 82,200,000 307,620
8.90%, due 3/21/04...... 174,800,000 667,699
-----------
975,319
-----------
ITALY (10.9%)
Buoni Poliennali del
Tesoro
5.00%, due 5/1/08....... IL 1,540,000,000 1,002,463
6.50%, due 11/1/27...... 795,000,000 601,449
8.25%, due 7/1/01....... 3,170,000,000 2,146,756
-----------
3,750,668
-----------
NETHERLANDS (1.9%)
Netherlands Government
6.50%, due 4/15/03...... NLG 1,073,000 639,226
-----------
NEW ZEALAND (3.9%)
New Zealand Government
Series 709
7.00%, due 7/15/09...... N$ 562,000 332,415
Series 1106
8.00%, due 11/15/06..... 1,648,000 1,011,507
-----------
1,343,922
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE> 338
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
GOVERNMENTS & FEDERAL AGENCIES (CONTINUED)
NORWAY (2.8%)
Norwegian Government
5.50%, due 5/15/09...... NK 2,423,000 $ 321,752
7.00%, due 5/31/01...... 4,750,000 638,674
-----------
960,426
-----------
SPAIN (1.9%)
Spanish Government
6.00%, due 1/31/08...... SP 82,290,000 665,164
-----------
SWEDEN (1.9%)
Swedish Government
Series 1040
6.50%, due 5/5/08....... SK 4,500,000 650,769
-----------
UNITED KINGDOM (12.5%)
Federal National Mortgage
Association
Series EMTN
6.875%, due 6/7/02...... L 1,358,000 2,376,833
United Kingdom Treasury
Bonds
8.00%, due 12/7/00...... 110,000 193,175
8.00%, due 12/7/15...... 727,000 1,715,792
-----------
4,285,800
-----------
UNITED STATES (0.6%)
Republic of Columbia
7.625%, due 2/15/07..... $ 250,000 205,000
-----------
Total Governments &
Federal Agencies
(Cost $21,524,302)...... 22,027,508
-----------
YANKEE BONDS (0.1%)
UNITED STATES (0.1%)
Innova S de R.L.
12.875%, due 4/1/07..... $ 55,000 37,950
-----------
Total Yankee Bonds
(Cost $56,650).......... 37,950
-----------
Total Long-Term Bonds
(Cost $29,823,797)...... 30,342,896
-----------
SHORT-TERM INVESTMENTS (6.5%)
COMMERCIAL PAPER (6.1%)
UNITED STATES (6.1%)
Associates Corp. of North
America
5.08%, due 1/4/99....... $ 1,100,000 1,099,534
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Xerox Credit Corp.
5.20%, due 1/4/99....... $ 1,000,000 $ 999,567
-----------
2,099,101
-----------
Total Commercial Paper
(Cost $2,099,101)....... 2,099,101
-----------
CORPORATE BONDS (0.4%)
UNITED STATES (0.4%)
Nacional Financiera
S.N.C.
6.219%, due 3/15/99
(a)..................... 125,000 125,000
-----------
Total Corporate Bonds
(Cost $125,100)......... 125,000
-----------
Total Short-Term
Investments
(Cost $2,224,201)....... 2,224,101
-----------
Total Investments
(Cost $32,047,998)
(d)..................... 94.8% 32,566,997(e)
Cash and Other Assets,
Less Liabilities........ 5.2 1,772,521
---- ---------
Net Assets............... 100.0% $34,339,518
---- ---------
---- ---------
</TABLE>
- -------
(a) Floating rate. Rate shown is the rate in effect at December 31, 1998.
(b) May be sold to institutional investors only.
(c) 480 Units--each unit reflects $1,000 principal amount of 12.375% Senior
Discounted Notes plus 3 warrants to acquire 1.05 shares of common stock at
$2.00 per share at a future date.
(d) The cost for Federal income tax purposes is $32,059,666.
(e) At December 31, 1998 net unrealized appreciation for securities was
$507,331, 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 $852,480 and aggregate gross
unrealized depreciation for all investments on which there was an excess of
cost over market value of $345,149.
(f) The following abbreviations are used in the above portfolio:
A$--Australian Dollar
C$--Canadian Dollar
DK--Danish Krone
DM--Deutsche Mark
NLG--Dutch Guilder
FM--Finnish Markka
GRD--Greek Drachma
IL--Italian Lira
N$--New Zealand Dollar
NK--Norwegian Krone
L --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.
15
<PAGE> 339
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$32,047,998).............................................. $32,566,997
Cash denominated in foreign currencies (identified cost
$789,133)................................................. 791,991
Cash........................................................ 259,837
Receivables:
Interest.................................................. 744,158
Fund shares sold.......................................... 23,260
Unrealized appreciation on forward foreign currency
contracts................................................. 134,896
Unamortized organization expense............................ 6,966
-----------
Total assets........................................ 34,528,105
-----------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 23,165
NYLIFE Distributors....................................... 19,233
MainStay Management....................................... 12,983
Custodian................................................. 10,400
Transfer agent............................................ 9,480
Trustees.................................................. 273
Accrued expenses............................................ 68,212
Unrealized depreciation on forward foreign currency
contracts................................................. 44,841
-----------
Total liabilities................................... 188,587
-----------
Net assets.................................................. $34,339,518
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 14,705
Class B................................................... 17,754
Class C................................................... 1
Additional paid-in capital.................................. 33,515,491
Accumulated distribution in excess of net investment
income.................................................... (78,132)
Accumulated undistributed net realized gain on
investments............................................... 256,981
Net unrealized appreciation on investments.................. 518,999
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies and forward foreign
currency contracts........................................ 93,719
-----------
Net assets.................................................. $34,339,518
===========
CLASS A
Net assets applicable to outstanding shares................. $15,541,877
===========
Shares of beneficial interest outstanding................... 1,470,505
===========
Net asset value per share outstanding....................... $ 10.57
Maximum sales charge (4.50% of offering price).............. 0.50
-----------
Maximum offering price per share outstanding................ $ 11.07
===========
CLASS B
Net assets applicable to outstanding shares................. $18,797,327
===========
Shares of beneficial interest outstanding................... 1,775,426
===========
Net asset value and offering price per share outstanding.... $ 10.59
===========
CLASS C
Net assets applicable to outstanding shares................. $ 314
===========
Shares of beneficial interest outstanding................... 30
===========
Net asset value and offering price per share outstanding.... $ 10.59
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 340
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest (a).............................................. $2,263,581
----------
Expenses:
Management................................................ 234,543
Distribution--Class B..................................... 143,690
Distribution--Class C..................................... 1
Transfer agent............................................ 106,858
Shareholder communication................................. 59,068
Registration.............................................. 40,900
Professional.............................................. 38,790
Service--Class A.......................................... 35,903
Service--Class B.......................................... 47,862
Custodian................................................. 30,197
Recordkeeping............................................. 14,829
Amortization of organization expense...................... 9,972
Trustees.................................................. 995
Miscellaneous............................................. 12,321
----------
Total expenses before waiver............................ 775,929
Fees waived by Manager...................................... (100,518)
----------
Net expenses............................................ 675,411
----------
Net investment income....................................... 1,588,170
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... 573,596
Option transactions....................................... (32,695)
Foreign currency transactions............................. (20,109)
----------
Net realized gain on investments and foreign currency
transactions.............................................. 520,792
----------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions..................................... 1,304,076
Translation of other assets and liabilities in foreign
currencies and forward foreign currency contracts....... 99,738
----------
Net unrealized gain on investments and foreign currency
transactions.............................................. 1,403,814
----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 1,924,606
----------
Net increase in net assets resulting from operations........ $3,512,776
==========
</TABLE>
- -------
<TABLE>
<C> <S>
(a) Interest recorded net of foreign withholding taxes of $183.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 341
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 1,588,170 $ 1,591,078
Net realized gain on investments.......................... 573,596 871,829
Net realized loss on option transactions.................. (32,695) --
Net realized gain (loss) on foreign currency
transactions............................................ (20,109) 736,097
Net change in unrealized appreciation (depreciation) on
investments............................................. 1,304,076 (2,552,852)
Net change in unrealized appreciation (depreciation) on
translation of other assets and liabilities in foreign
currencies and forward foreign currency contracts....... 99,738 (143,251)
----------- -----------
Net increase in net assets resulting from operations...... 3,512,776 502,901
----------- -----------
Dividends and distributions to shareholders:
From net investment income and net realized gain on
foreign currency transactions:
Class A................................................. (804,108) (844,072)
Class B................................................. (926,482) (1,366,130)
Class C................................................. (5) --
From net realized gain on investments:
Class A................................................. (129,031) (327,237)
Class B................................................. (156,223) (559,408)
Class C................................................. (3) --
----------- -----------
Total dividends and distributions to shareholders..... (2,015,852) (3,096,847)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 3,679,261 2,078,813
Class B................................................. 3,454,744 7,769,493
Class C................................................. 300 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 362,472 519,949
Class B................................................. 919,787 1,648,318
Class C................................................. 6 --
----------- -----------
8,416,570 12,016,573
Cost of shares redeemed:
Class A................................................. (1,411,366) (1,345,653)
Class B................................................. (7,295,962) (5,928,756)
----------- -----------
Increase (decrease) in net assets derived from capital
share transactions................................... (290,758) 4,742,164
----------- -----------
Net increase in net assets............................ 1,206,166 2,148,218
NET ASSETS:
Beginning of year........................................... 33,133,352 30,985,134
----------- -----------
End of year................................................. $34,339,518 $33,133,352
=========== ===========
Accumulated undistributed net investment income (excess
distribution) at end of year.............................. $ (78,132) $ 80,293
=========== ===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 342
This page intentionally left blank
19
<PAGE> 343
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year ended December 31,
----------------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.10 $ 10.95 $ 10.43 $ 9.90
------- ------- ------- -------
Net investment income....................................... 0.54 0.80 0.72 1.15
Net realized and unrealized gain (loss) on investments...... 0.58 (0.94) 0.27 0.59
Net realized and unrealized gain (loss) on foreign currency
transactions.............................................. 0.02 0.33 0.41 0.07
------- ------- ------- -------
Total from investment operations............................ 1.14 0.19 1.40 1.81
------- ------- ------- -------
Less dividends and distributions:
From net investment income and net realized gain on
foreign currency transactions........................... (0.58) (0.76) (0.73) (0.61)
From net realized gain on investments..................... (0.09) (0.28) (0.15) (0.28)
In excess of net realized gain on investments and foreign
currency transactions................................... -- -- -- (0.39)
------- ------- ------- -------
Total dividends and distributions........................... (0.67) (1.04) (0.88) (1.28)
------- ------- ------- -------
Net asset value at end of period............................ $ 10.57 $ 10.10 $ 10.95 $ 10.43
======= ======= ======= =======
Total investment return (a)................................. 11.61% 1.83% 13.90% 18.68%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 5.17% 5.35% 5.4% 5.6%
Net expenses............................................ 1.59% 1.56% 1.5% 1.5%
Expenses (before waiver)................................ 1.89% 1.86% 1.8% 1.8%
Portfolio turnover rate..................................... 287% 179% 59% 103%
Net assets at end of period (in 000's)...................... $15,542 $12,263 $11,965 $11,494
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one thousand.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 344
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------------------------------------- -------------
September 13,* September 1**
Year ended December 31, through through
- ---------------------------------------------- December 31, December 31,
1998 1997 1996 1995 1994 1998
- ------- ------- ------- ------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$ 10.12 $ 10.98 $ 10.45 $ 9.90 $ 10.00 $ 10.13
- ------- ------- ------- ------- ------- -------
0.46 0.74 0.64 1.06 0.12 0.16
0.58 (0.96) 0.27 0.61 (0.08) 0.53
0.02 0.34 0.42 0.07 (0.02) 0.02
- ------- ------- ------- ------- ------- -------
1.06 0.12 1.33 1.74 0.02 0.71
- ------- ------- ------- ------- ------- -------
(0.50) (0.70) (0.65) (0.56) (0.12) (0.16)
(0.09) (0.28) (0.15) (0.28) -- (0.09)
-- -- -- (0.35) -- --
- ------- ------- ------- ------- ------- -------
(0.59) (0.98) (0.80) (1.19) (0.12) (0.25)
- ------- ------- ------- ------- ------- -------
$ 10.59 $ 10.12 $ 10.98 $ 10.45 $ 9.90 $ 10.59
======= ======= ======= ======= ======= =======
10.79% 1.15% 13.13% 17.96% 0.20% 7.05%
4.42% 4.69% 4.8% 4.9% 4.8%+ 4.42%+
2.34% 2.22% 2.1% 2.2% 2.8%+ 2.34%+
2.64% 2.52% 2.4% 2.5% 3.1%+ 2.64%+
287% 179% 59% 103% 4% 287%
$18,797 $20,870 $19,020 $13,212 $17,155 $ --(b)
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 345
MainStay International Bond Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on September 13,
1994 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C 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 and Class C 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
22
<PAGE> 346
Notes to Financial Statements
to be representative of market values at the regular close of business of the
Exchange, and (b) by appraising all other securities and other assets, including
debt securities for which prices are supplied by a pricing agent but are not
deemed by the sub-adviser to be representative of market values, but excluding
money market instruments with a remaining maturity of sixty days or less and
including restricted securities and securities for which no market quotations
are available, at fair value in accordance with procedures approved by the
Trustees. Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost if their term to maturity at purchase was 60 days
or less, or by amortizing the difference between market value on the 61st day
prior to maturity and value on maturity date if their original term to maturity
at purchase exceeded 60 days.
Events affecting the values of certain portfolio securities that occur between
the close of trading on the principal market for such securities (foreign
exchanges and over-the-counter markets) and the regular close of the Exchange
will not be reflected in the Fund's calculation of net asset value unless the
sub-adviser believes that the particular event would materially affect net asset
value, in which case an adjustment would be made.
FORWARD FOREIGN CURRENCY CONTRACTS. A forward foreign currency contract is an
agreement to buy or sell currencies of different countries on a specified future
date at a specified rate. During the period the forward contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" such contract on a daily basis to reflect the
market value of the contract at the end of each day's trading. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into forward foreign currency
contracts in order to hedge its foreign currency denominated investments and
receivables and payables against adverse movements in future foreign exchange
rates.
The use of forward contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The contract amount reflects the extent of the Fund's involvement
in these financial instruments. Risks arise from the possible movements in the
foreign exchange rates underlying these instruments. The unrealized appreciation
(depreciation) on forward contracts reflects the Fund's exposure at year end to
credit loss in the event of a counterparty's failure to perform its obligations.
23
<PAGE> 347
MainStay International Bond Fund
Forward foreign currency contracts open at December 31, 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 1/13/99... A$ 1,354,000 $ 847,468 $ 16,808
Danish Krone vs. Deutsche Mark, expiring 3/22/99...... DK 15,660,000 DM 4,107,541 10,229
Deutsche Mark vs. Irish Punt, expiring 1/4/99......... DM 6,629,351 IP 2,665,150 (6,372)
Deutsche Mark vs. Norwegian Krone, expiring 3/15/99... DM 545,203 NK 2,525,000 787
Deutsche Mark vs. U.S. Dollar, expiring 3/31/99....... DM 9,814,000 $ 5,897,305 (21,234)
Irish Punt vs. Deutsche Mark, expiring 1/4/99......... IP 2,665,150 DM 6,638,870 12,088
New Zealand Dollar vs. U.S. Dollar, expiring
1/15/99............................................. N$ 2,614,000 $ 1,406,445 25,116
Norwegian Krone vs. Deutsche Mark, expiring 3/15/99... NK 10,160,000 DM 2,170,476 (17,202)
Pound Sterling vs. Deutsche Mark, expiring 3/30/99.... L 2,035,000 DM 5,678,057 46,849
Swedish Krona vs. Deutsche Mark, expiring 3/29/99..... SK 3,076,000 DM 643,111 6,808
Contract Contract
Amount Amount
Purchased Sold
-------------- -------------
Foreign Currency Buy Contracts
Australian Dollar vs. U.S. Dollar, expiring 1/13/99... A$ 244,000 $ 149,723 (33)
Canadian Dollar vs. U.S. Dollar, expiring 1/25/99..... C$ 2,432,000 $ 1,567,225 16,211
--------
Net unrealized appreciation on forward foreign
currency contracts.................................. $ 90,055
========
</TABLE>
PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put options
on its portfolio securities or foreign currencies. 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 or
foreign currency 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 or foreign currency below the exercise price.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value of the security or foreign
currency or to close out covered written put
24
<PAGE> 348
Notes to Financial Statements (continued)
positions. Risks may arise from an imperfect correlation between the change in
market value of the securities or foreign currencies held by the Fund and the
prices of options relating to the securities or foreign currencies 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.
Purchased option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
---------- --------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- $ --
Options--assigned........................................... (3,413,000) (41,579)
Options--purchased.......................................... 8,870,000 99,067
Options--sold............................................... (1,131,000) (11,412)
Options--expired............................................ (4,326,000) (46,076)
---------- --------
Options outstanding at December 31, 1998.................... -- $ --
========== ========
</TABLE>
Short sale option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
---------- --------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- $ --
Options--short sale......................................... 3,413,000 20,478
Options--buyback............................................ (3,413,000) (20,478)
---------- --------
Options outstanding at December 31, 1998.................... -- $ --
========== ========
</TABLE>
ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $54,000 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $4,109 and $20,109 have been reclassified from
accumulated undistributed net realized gain on investments and accumulated net
realized loss on foreign currency transactions to accumulated distribution in
excess of net investment income due to the tax treatment of short-term capital
gains and foreign currency losses.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
25
<PAGE> 349
MainStay International Bond 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. 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 year. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, 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. Gains and losses from certain foreign currency transactions are
treated as ordinary income for Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds,
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing foreign currency denominated assets
and liabilities other than investments at year end exchange rates are reflected
in unrealized foreign exchange gains.
26
<PAGE> 350
Notes to Financial Statements (continued)
Foreign currency held at December 31, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- ---------------------------------- -------- --------
<S> <C> <C> <C> <C>
Australian Dollar A$ 120 $ 76 $ 74
Canadian Dollar C$ 13,726 8,954 8,937
Danish Krone DK 434 68 68
Deutsche Mark DM 904,129 540,689 542,825
French Franc FF 69 12 12
Mexican Peso MP 3 1 --
New Zealand Dollar N$ 66,034 35,551 34,886
Pound Sterling L 123,325 203,782 205,189
-------- --------
$789,133 $791,991
======== ========
</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 0.70%. 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 year ended December 31, 1998, the
Manager earned $234,543 and waived $100,518 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
27
<PAGE> 351
MainStay International Bond 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 and Class C Plans, the Fund pays the
Distributor a monthly fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Distribution Plan provides that the Class
B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $2,626 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B and Class C shares
of $36,901 and $1,170, respectively, for the period ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $106,858.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, NYLIFE Distributors beneficially held Class A
shares of the Fund with a net asset value of $8,217,398 which represents 52.9%
of the net assets of Class A shares at year end.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $887 for the year ended December
31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$14,829 for the year ended December 31, 1998.
28
<PAGE> 352
Notes to Financial Statements (continued)
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $87,608 and $87,721, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There was no outstanding balance on
this line of credit at December 31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
------------------------------------ ---------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.............................. 359 333 -- 196 726
Shares issued in reinvestment of
dividends and distributions............ 35 89 -- 50 158
---- ---- --- ---- ----
394 422 -- 246 884
Shares redeemed.......................... (137) (709) -- (125) (555)
---- ---- --- ---- ----
Net increase (decrease).................. 257 (287) --(a) 121 329
==== ==== === ==== ====
</TABLE>
- -------
<TABLE>
<C> <S>
* First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
29
<PAGE> 353
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay International Bond Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 24, 1999
30
<PAGE> 354
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
31
<PAGE> 355
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
32
<PAGE> 356
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
33
<PAGE> 357
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN10-02/99
[RECYCLE LOGO]
MAINSTAY INTERNATIONAL BOND FUND
ANNUAL REPORT
DECEMBER 31, 1998
[MAINSTAY LOGO]
<PAGE> 358
Table of Contents
<TABLE>
<S> <C>
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, &
Class C Shares 4
Portfolio Management Discussion and
Analysis 6
Year-by-Year Performance 7
Diversification by Country--Top 5 8
Portfolio Composition 11
Returns & Lipper Rankings 13
Top 10 Equity Holdings 15
10 Largest Purchases 15
10 Largest Sales 15
Portfolio of Investments 16
Financial Statements 21
Notes to Financial Statements 26
Report of Independent Accountants 34
The MainStay Funds 35
</TABLE>
<PAGE> 359
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 360
MainStay International Equity Fund Highlights
1998 MARKET RECAP
- - Led by the U.S. stock market, liquidity in most major markets around the world
contributed to positive results in stock markets throughout most of Europe.
- - As European Monetary Union approached, European stocks benefited from
increased merger and acquisition activity, moves by most European central
banks to lower interest rates, and strong consumer spending.
- - Deregulation in the telecommunications and banking sectors helped them show
strong performance, especially in European markets.
- - Financial problems in Asia, Russia, and Latin America caused a flight to
quality, with many equity investors seeking highly liquid securities and
issues of companies with consistent track records of earnings growth.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay International Equity Fund
returned 20.17% for Class A shares and 19.34% for Class B and Class C shares,*
excluding all sales charges.
- - The Fund benefited from an overweighted position in European equity securities
and from its underweighted position in Japanese stocks.
- - A focus on telecommunications, banking, and health-related stocks helped the
Fund benefit from consumer, economic, and demographic trends.
- - All share classes outperformed the average Lipper* international fund, which
returned 13.02% for the year, and ranked in the top 20% of their peer funds.
- -------
* See footnote and table on page 13 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 361
$10,000 Invested in the MainStay
International Equity Fund versus
Morgan Stanley Capital International
EAFE Index
CLASS A SHARES SEC Returns: 1-year 13.56%, since inception 7.04%
[LINE GRAPH]
<TABLE>
<CAPTION>
MORGAN STANLEY CAPITAL
Year End INTERNATIONAL EAFE* MAINSTAY INTERNATIONAL EQUITY FUND
- -------- ---------------------- ----------------------------------
<S> <C> <C>
9/13/94 $10000.00 $9450.00
12/94 9586.00 9233.00
12/95 10661.00 9718.00
12/96 11306.00 10669.00
12/97 11507.00 11151.00
12/98 13808.00 13400.00
</TABLE>
CLASS B SHARES Class B SEC Returns: 1-year 14.34%, since inception 7.33%
[LINE GRAPH]
<TABLE>
<CAPTION>
MORGAN STANLEY CAPITAL
Year End INTERNATIONAL EAFE* MAINSTAY INTERNATIONAL EQUITY FUND
- -------- ---------------------- ----------------------------------
<S> <C> <C>
9/13/94 $10000.00 $10000.00
12/94 9586.00 9770.00
12/95 10661.00 10187.00
12/96 11306.00 11109.00
12/97 11507.00 11529.00
12/98 13808.00 13559.00
</TABLE>
CLASS C SHARES Class C SEC Returns: 1-year 18.34%, since inception 7.70%
[LINE GRAPH]
<TABLE>
<CAPTION>
MORGAN STANLEY CAPITAL
Year End INTERNATIONAL EAFE* MAINSTAY INTERNATIONAL EQUITY FUND
- -------- ---------------------- ----------------------------------
<S> <C> <C>
9/13/94 $10000.00 $10000.00
12/94 9586.00 9770.00
12/95 10661.00 10187.00
12/96 11306.00 11109.00
12/97 11507.00 11529.00
12/98 13808.00 13759.00
</TABLE>
4
<PAGE> 362
- -------
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. Performance data for the two classes vary after this date based
on differences in their load and expense structures. 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 Class C graph assumes an initial investment of
$10,000 made on 9/13/94 and includes the historical performance of Class B
shares for periods 9/13/94 through 8/31/98. Performance data for the two
classes vary after this date based on differences in their load. Returns
shown do not reflect the 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 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. It is not possible to make an investment directly into an
index.
5
<PAGE> 363
Portfolio Management Discussion and Analysis
As years go, 1998 was one of the most volatile in recent memory. International
equity markets started the year with investors focused on the Asian financial
crisis, which grew progressively worse as Japan slipped into a recession. Over
the course of the year, problems in Russia and Latin America caused a general
flight to quality, with most investors focusing on highly liquid securities,
well-known names, and consistent earnings generators.
The flight to quality was positive for the European market, which showed strong
performance as European Monetary Union approached. Most European countries
continued to benefit from low inflation, strong merger and acquisition activity,
and moves by central banks to lower interest rates. The U.K. faced a recession
in its manufacturing sector and was forced to lower interest rates, which had a
positive effect on stock prices.
Japanese stocks benefited from a strengthening yen in the second half of the
year, but generally tended to underperform other international markets.
Australia and New Zealand suffered somewhat as commodity prices continued to
decline, and declining oil prices had a generally negative impact on energy
stocks around the world.
Among the best-performing sectors worldwide were telecommunications, which
benefited from technological advances and wide consumer appeal; banking, which
benefited from low inflation and lower interest rates; and health-related
stocks, which advanced with new products to assist an aging population.
HOW DID THE MAINSTAY INTERNATIONAL EQUITY FUND PERFORM IN THIS MARKET
ENVIRONMENT?
Quite well. The MainStay International Equity Fund returned 20.17% for Class A
shares and 19.34% for Class B and Class C shares(*) for the year ended 12/31/98,
excluding all sales charges. All share classes outperformed the average
Lipper(+) international fund, which returned 13.02%, and ranked in the top 20%
of all peer funds.
HOW DID THE FUND MANAGE TO DO SO WELL?
The Fund uses a "country first" approach, seeking to identify the most promising
geographic markets and then to invest in a wide array of companies in each
target market. This approach proved beneficial in 1998, as difficulties in Asia
led the Fund to maintain an underweighted position in Japanese equities.
Overall, Japanese stocks underperformed other global markets, despite currency
gains in the second half of the year. At the same time, the promise of European
Monetary Union led the Fund to take an overweighted position in Europe, which
proved highly beneficial for the Fund's performance. Finland was up 106.10% for
the year, Belgium 55.50%, Italy 42.20%, Spain 39.40%, France 31.40%, and Ireland
29.40%, all in local currency terms.
The Fund did not restrict its investments to countries that would participate in
European Monetary Union (EMU). Fund investments in non-EMU countries, such as
Sweden and the U.K., also had a positive impact on the Fund's performance.
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
RECESSION
- --------------------
A downturn in economic activity, typically defined by at least two consecutive
quarters of decline in a country's gross domestic product.
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.
- -------
* Performance for Class C shares include the historical performance of Class B
shares from 1/1/98 through 8/31/98.
+ See footnote and table on page 13 for more information on Lipper Inc.
6
<PAGE> 364
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[LINE GRAPH]
<TABLE>
<CAPTION>
Year end Total return %
- --------- --------------
<S> <C>
12/94 -2.30
12/95 5.25
12/96 9.78
12/97 4.52
12/98 20.17
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
ended 12/31/94. See footnote * on page 13 for more information on performance.
CLASS B & CLASS C SHARES
[LINE GRAPH]
<TABLE>
<CAPTION>
Year end Total Return %
- -------- --------------
<S> <C>
12/94 -2.30
12/95 4.27
12/96 9.05
12/97 3.78
12/98 19.34
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 9/94 through 8/98. See footnote * on page 13 for more information
on performance.
Although it generally seeks to invest across a broad range of industries and
sectors, the Fund recognized the strong potential in telecommunications,
banking, and health-related stocks, and emphasized them in its 1998 investments.
This strategy contributed to the Fund outperforming its peers.
WHAT WAS SO GOOD ABOUT TELECOMMUNICATIONS STOCKS?
Telecommunications stocks have benefited from strong growth and increasing
consumer demand. At the same time, many companies are taking advantage of new
technological advances to improve per-
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.
EUROPEAN MONETARY UNION (EMU)
- --------------------
A system that allows participating European countries to operate with a common
currency or monetary unit.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the local currency declines.
7
<PAGE> 365
DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
United Kingdom 21.0%
Japan 10.9%
Germany 10.7%
France 8.6%
Switzerland 8.1%
Other 40.7%
</TABLE>
Actual percentages will vary over time.
formance and deliver better service to their customers. The Fund's largest
holding and best-performing issue in 1998 was Nokia Oyj, a Finnish stock that we
purchased for the Fund in the third quarter. The company has surpassed Motorola
and Ericsson as the leading provider of mobile phones and sold a record one
million handsets in a single month in 1998.
Another company that benefited from its telecommunications interests was
Mannesmann AG, which designs and manufactures a wide range of industrial
products, production machinery, and assembly systems. The company also makes
telecommunication gears and equipment, which contributed significantly to
profits and earnings. The stock returned 110.10% in local terms for the year.
Deutsche Telekom AG was another of the Fund's strong performers. The company
owns and leases public telecommunications networks and has introduced new
telecommunications technology, known as ASDL, which promises faster transmission
than existing data transmission lines. Although telecommunications is growing
more slowly in Germany than in the rest of Europe, the stock contributed
significantly to the Fund's positive performance.
In July and August, the Fund began to take profits in European and Japanese
issues that had reached the target values we had established for them. The Fund
invested some of the proceeds of these sales in telecommunications stocks in
Australia and New Zealand. One was an initial public offering in Cable and
Wireless Optus. The stock went public at 2.15 Australian dollars and by year end
was trading at close to 4.00 Australian dollars, which had a positive impact on
the Fund's performance.
WHY DID THE FUND ALSO FOCUS ON THE BANKING AND FINANCIAL INDUSTRIES?
Financial stocks tend to perform well when interest rates decline. With the
severe market setbacks caused by problems in Asia, Russia, and Latin America, we
believed that central banks would be likely to lower interest rates to help
corporations cope with pressures to
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.
COMMODITIES
- ------------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
WEIGHTING
- ------------------------
The proportion of a portfolio allocated to a specific security, sector, or
country, 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.
8
<PAGE> 366
increase earnings in a low-inflation environment. In the third and fourth
quarters, the Federal Reserve Board lowered U.S. interest rates three times, and
several European banks lowered rates throughout the year, which helped stimulate
corporate growth and make borrowing more affordable. Since banks profit when
borrowing increases, the results were positive for the banking industry.
One of the Fund's successful investments was Allied Irish Banks PLC, which was
up 76.90% in local currency terms for the year. The company provides a full
range of banking services through over 319 offices in Ireland, 82 branches in
Northern Ireland, and 37 offices in the U.K. It also operates over 200 branches
in the United States through its wholly owned subsidiary, First Maryland
Bancorp. With the inception of the single currency throughout EMU countries, we
believe financial institutions will look to establish themselves as a European
force, and we believe Allied Irish Banks has the experience and potential to do
so.
Another financial services stock that showed positive performance during the
year was ING Groep N.V. The company is headquartered in the Netherlands and has
global offices that provide commercial, savings, and investment banking
services, and property and commercial insurance. The company was hurt in the
third quarter by losses from its emerging-market trading, but still returned
44.80% in local currency terms for the 12 months ended 12/31/98.
HOW DID THE FUND BENEFIT FROM HEALTH-RELATED STOCKS?
Health-related sectors were stimulated by advances at several pharmaceutical
companies that capitalized on the aging population. Some of the biggest and best
pharmaceutical names are located in Europe, and the Fund sought to take
advantage of the positive trends in this sector. Other companies benefited from
the move toward natural foods, herbal remedies, and other health and
fitness-related trends.
The Fund owned Novartis AG, a large pharmaceutical company that emerged from the
combination of Sandoz and Ciba Geigy. As the price of the stock rose, we decided
to take profits from the Fund's Novartis shares by selling a portion of the
Fund's position and investing the assets in the stock of Schering AG, a German
pharmaceutical company specializing in diagnostics, fertility control, hormone
therapy, and dermatology. We believed that Schering AG represented better value.
Although neither stock was a stellar performer, both Novartis and Schering AG
provided positive returns for the Fund's portfolio in 1998.
While the Fund tended to underweight Japanese stocks, it did own names that had
broad exposure to world markets. One of these was Yamanouchi Pharmaceutical Co.
Ltd., which was up 30.00% in local terms for the year. While few people have
ever heard the name Yamanouchi, almost everyone is familiar with one of their
leading products, Pepcid AC. The company also has a number of drugs that may
provide substantial earnings growth over time, including medications for high
cholesterol, hepatitis C, and diabetes. The stock reflected the Fund's
concentration in the health-related sector and provided strong relative value in
a Japanese stock market that declined 8.90% in local currency terms in 1998.
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.
9
<PAGE> 367
WHICH OTHER MARKETS WERE WEAK PERFORMERS FOR THE FUND IN 1998?
New Zealand was the worst market, declining 14.90% in local currency terms for
the year. While Australian stocks advanced an otherwise respectable 12.70%, that
figure was substantially below the returns available in the Fund's
best-performing European markets.
DID THE FUND OWN STOCKS IN OTHER SECTORS THAT SHOWED STRONG PERFORMANCE IN 1998?
Yes. The Fund owned CRH PLC, an Irish company that manufactures cement, concrete
products, and building materials. With operations in 12 countries, including
Ireland, Spain, Germany, and the Netherlands, the company is well positioned to
take advantage of government spending throughout Europe to improve
infrastructure. Although cement may seem like a dull industry, the expansion and
improvement of Europe's infrastructure is presenting growth opportunities for
the company, and the investment was a positive contributor to the Fund's
performance in 1998.
Another positive contributor to the Fund's performance was Volkswagen AG, the
car and truck manufacturer. The company expects double-digit growth in its North
American car sales in 1999, based on the introduction of its new Beetle, which
was named North American Car of the Year. The stock was up 34.20%++ in local
currency terms for the year.
WHICH STOCKS DIDN'T DO WELL IN 1998?
The Fund owned a number of stocks that underperformed. One was Royal Dutch
Petroleum, which suffered from the substantial drop in the price of oil and
declined 16.00% in local currency terms for the year. As of year end, we
believed the company represented good value and may perform well if and when oil
prices turn around. In fact, we're hoping to add to the Fund's position in this
stock to take advantage of its broad-based energy exposure--from exploration and
drilling to final processing, delivery, and marketing.
Another stock that underperformed was Volvo. We added the stock to the portfolio
in September because we felt Sweden was a desirable market, autos were a solid
industry, and Volvo had strong fundamentals and international breadth, with 80%
of its sales outside of Sweden. Given the merger of Daimler Benz and Chrysler,
we believed that Volvo would be the next acquisition target in the auto
industry. But the stock did not perform well in the few months the Fund owned it
in 1998.
Finally, Nestle, the Swiss cocoa and consumer products company was a substantial
underperformer in the Fund's portfolio. Although the company has solid
fundamentals, a good growth plan, and is involved in the growing market for
nutritious foods, the stock was too defensive to gain investor attention with
the boom in telecommunications and technology stocks.
WERE THERE ANY SIGNIFICANT SALES YOU MADE FOR THE FUND IN 1998?
In Japan, we recognized the difficulties the financial industry was facing and
decided to sell several of the Fund's financial holdings, including Bank of
Tokyo-Mitsubishi and Sumitomo Bank. The sales were positive for the Fund, since
we were able to invest the assets elsewhere for more productive returns.
- -------
++ Returns reflect performance
for the one-year period
ended 12/31/98.
10
<PAGE> 368
We also sold some of the Fund's holdings in Foster's Brewing, an Australian
company, to take profits and reduce the Fund's overweighted position in the
industry and area. The sale had a positive impact on performance.
Most of the Fund's sales were designed to narrow its focus from 300 securities
to about 215 at the end of the year--and improve the Fund's positioning in
industries we felt had the strongest potential in individual countries. Many of
the sales that were part of this repositioning had only a modest impact on
performance, though in most cases, the impact was positive.
WERE THERE OTHER SHIFTS IN THE MAKEUP OF THE PORTFOLIO?
Yes. While we retained about the same weighting in Europe, in the third quarter
of 1998, we shifted the Fund's focus from central European countries to take in
more peripheral European nations, such as Ireland, Finland, and Sweden. With
names like Allied Irish Banks, Nokia, and Ericsson, each of these additions had
a positive impact on performance.
WHAT WAS THE EFFECT OF CURRENCY MOVEMENTS ON THE FUND IN 1998?
Generally speaking, the Fund had positive results from its currency exposure.
European currencies strengthened about 7.6% against the U.S. dollar over the
course of the year, which had a positive effect on the Fund's total return.
In the second half of 1998, European currencies weakened against the yen, and
the Fund participated in the yen's advance through the forwards market, with a
proxy hedge of European currency exposure. The trade was a contrarian move that
reflected our belief that negative sentiment about the yen--as well as euphoria
over the new European currency, the euro--were both excessive. As the yen
strengthened, the hedge contributed positively to the Fund's performance. The
Fund also had direct exposure to the yen through its weighting in Japanese
equities, which strengthened the otherwise weak returns from Japanese stocks in
the second half of the year.
PORTFOLIO COMPOSITION AS OF 12/31/98
[PORTFOLIO COMPOSITION PIE CHART]
<TABLE>
<S> <C>
Cash & Equivalents 4.4%
Common Stock 95.6%
</TABLE>
Actual percentages will vary over time.
PROXY HEDGE
- --------------------
A transaction in the forward market that seeks to offset currency risk by
substituting exposure of one foreign currency which is expected to fall with
exposure to another currency which is expected to rise.
11
<PAGE> 369
Commodity-linked currencies, particularly the Canadian, Australian, and New
Zealand dollar, all suffered from the general weakness in commodity prices in
1998. Each of these currencies declined about 7% relative to the U.S. dollar,
which had a negative impact on the Fund's performance.
IF YOU COULD RELIVE 1998, WHAT WOULD YOU HAVE DONE DIFFERENTLY?
In hindsight, the Fund would have benefited by having more yen-based securities
during the second half of the year. The Fund also might have benefited by being
invested in Hong Kong and Singapore in the second half of the year, since they
were both very strong. While the Fund might have missed some opportunities
there, we feel that the decisions we made for the portfolio were positive ones,
and they were reflected in the Fund's performance relative to its peers.
AS OF YEAR END, WHERE WAS THE FUND OVERWEIGHTED AND UNDERWEIGHTED?
At year end, the Fund was overweighted in Finland, Belgium, Spain, Ireland,
Portugal, Sweden, New Zealand, and Australia. It was neutral in Germany and
underweighted in France and Switzerland. As we noted earlier, the Fund is
heavily underweighted in Japan.
WHAT RISKS DO YOU SEE AHEAD FOR INVESTORS?
The problems we saw this year represent real risks going forward. Emerging
markets, by their very nature, are relatively fragile and subject to forces that
can make them highly volatile. Brazil's economic difficulties are not happening
in a vacuum. They could have implications for other countries, such as Spain and
Portugal, which have economic, cultural, and language ties with Brazil. While we
believe that Europe should remain strong, the effects of European Monetary Union
are as yet untested. So we will continue to monitor developments in both
participating and nonparticipating European countries.
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
We believe that Europe is likely to benefit from additional mergers and
acquisitions as monetary union gets underway. As long as interest rates and
inflation remain low, economic growth should continue to expand throughout
European nations. In light of recent economic setbacks in many parts of the
world, however, we may position the Fund more defensively in the months ahead.
Generally speaking, we like the industries in which the Fund is concentrated.
Telecommunications should continue to benefit from advancing technology and high
consumer demand. Health-related companies should continue to find opportunities
as the population ages. While favorable forces have helped banks and financial
services, we recognize that this could change at any time. Whatever happens, we
will seek to identify countries and companies that we believe may provide
long-term growth of capital by investing in a portfolio consisting of non-U.S.
equity securities with current income as a secondary objective.
Joseph Portera
Portfolio Manager
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.
Past performance is no guarantee of future results.
12
<PAGE> 370
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR THROUGH 12/31/98
<S> <C> <C>
Class A 20.17% 8.45%
Class B 19.34% 7.70%
Class C 19.34% 7.70%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR THROUGH 12/31/98
<S> <C> <C>
Class A 13.56% 7.04%
Class B 14.34% 7.33%
Class C 18.34% 7.70%
</TABLE>
FUND LIPPER+ RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR THROUGH 12/31/98
<S> <C> <C>
Class A 82 out of 126 out of
527 funds 238 funds
Class B 96 out of 106 out of
527 funds 209 funds
Class C n/a n/a
Average Lipper
international fund 13.02% 7.58%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $12.21 $0.1996 $0.0000
Class B $12.08 $0.1148 $0.0000
Class C $12.08 $0.1148 $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 load and 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%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of 1%. Performance figures for this class include the
historical performance of the Class B shares for periods
13
<PAGE> 371
from inception (9/13/94) up to 8/31/98. Performance data for the two
classes after this date vary based on differences in their load.
+ Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
averages listed above are not class specific. Life of fund return is from
the period of the Class B shares' initial offering through 12/31/98. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 9/13/94; Class C shares on 9/1/98.
14
<PAGE> 372
Top 10 Equity Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
<S> <C> <C>
Nokia Oyj Class A, 2.49% Finland $ 2,485,123
Nestle S.A. Registered, 1.86% Switzerland 1,850,408
Novartis S.A. Registered, 1.65% Switzerland 1,645,381
Royal Dutch Petroleum Co., 1.57% Netherlands 1,559,441
Allied Irish Banks Plc, 1.55% Ireland 1,548,240
Deutsche Telekom AG, 1.51% Germany 1,502,003
British Telecommunications PLC, 1.49% United Kingdom 1,485,343
Glaxo Wellcome PLC, 1.47% United Kingdom 1,468,268
Telefonaktiebolaget LM Ericsson
Series B, 1.39% Sweden 1,383,407
SmithKline Beecham PLC, 1.34% United Kingdom 1,336,237
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF PURCHASE
<S> <C> <C>
Nokia Oyj Class A Finland $1,675,491
Royal Dutch Petroleum Co. Netherlands 1,441,424
Allied Irish Banks PLC Ireland 1,220,575
SmithKline Beecham PLC United Kingdom 1,111,547
Telefonaktiebolaget LM
Ericsson Series B Sweden 1,111,382
France Telecom, S.A. France 1,108,754
Hutchinson Whampoa, Ltd. Hong Kong 981,501
China Light & Power Co., Ltd. Hong Kong 945,114
NTT Mobile Communication
Network, Inc. Japan 889,549
Telstra Corp., Ltd. Australia 845,374
</TABLE>
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF SALE
<S> <C> <C>
Siemens AG Germany $1,358,345
Telestra Corp., Ltd. Australia 1,288,716
Hutchinson Whampoa, Ltd. Hong Kong 1,086,947
Toyota Motor Corp. Japan 1,070,098
L'Air Liquide, S.A. France 1,044,763
China Light & Power Co., Ltd. Hong Kong 1,002,175
Allianz AG Registered Germany 892,487
Norsk Hydro ASA Norway 885,898
BASF AG Germany 879,458
Royal Dutch Petroleum Co. Netherlands 763,801
</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.
15
<PAGE> 373
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (95.6%)+
AUSTRALIA (4.1%)
Broken Hill Proprietary Co.,
Ltd. (energy sources).......... 67,510 $ 497,682
Cable & Wireless Optus Ltd.
(telecommunications) (a)....... 353,785 744,302
Commonwealth Bank of Australia
(banking)...................... 41,400 588,180
Foster's Brewing Group, Ltd.
(beverages & tobacco).......... 73,080 198,124
Lend Lease Corp., Ltd. (real
estate)........................ 35,200 474,986
News Corp., Ltd. (The)
(broadcasting & publishing).... 82,812 547,555
Telstra Corp., Ltd.
(telecommunications)........... 182,100 852,216
WMC, Ltd. (metals-nonferrous)... 54,900 165,673
-----------
4,068,718
-----------
BELGIUM (4.0%)
Delhaize-Le Lion, S.A.
(merchandising)................ 3,440 304,421
Electrabel, S.A.
(utilities-electrical & gas)... 1,780 782,419
Fortis AG (insurance)........... 2,480 898,800
KBC Bancassurance Holding N.V.
(banking)...................... 8,830 699,152
PetroFina, S.A. (energy
sources)....................... 840 385,125
Solvay, S.A. Class A
(chemicals).................... 4,770 359,634
Tractebel, S.A.
(utilities-electrical & gas)... 2,890 561,133
-----------
3,990,684
-----------
FINLAND (3.7%)
Merita Oyj (banking)............ 51,490 327,450
Nokia Oyj Class A (electrical &
electronics)................... 20,295 2,485,123
Outokumpu Oyj
(metals-nonferrous)............ 33,440 309,086
Sampo Insurance Co. PLC Class A
(insurance).................... 5,310 202,928
UPM-Kymmene Oyj (forest products
& paper)....................... 14,220 398,800
-----------
3,723,387
-----------
FRANCE (8.6%)
AXA, S.A. (insurance)........... 4,408 639,184
Carrefour, S.A.
(merchandising)................ 1,065 804,374
Elf Aquitaine, S.A. (energy
sources)....................... 4,873 563,544
- -------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
FRANCE (CONTINUED)
Eridania Beghin-Say, S.A. (food
& household products).......... 1,290 $ 223,314
France Telecom, S.A.
(telecommunications)........... 10,070 800,408
Groupe Danone, S.A. (food &
household products)............ 2,093 599,499
Lafarge, S.A. (building
materials & components)........ 2,770 263,314
L'Air Liquide, S.A.
(chemicals).................... 2,202 404,055
L'Oreal, S.A. (health & personal
care).......................... 1,527 1,104,382
Pernod-Ricard, S.A. (beverages &
tobacco)....................... 3,500 227,444
Pinault-Printemps-Redoute, S.A.
(merchandising)................ 1,560 298,260
Sanofi, S.A. (health & personal
care).......................... 2,790 459,506
Schneider, S.A. (electrical &
electronics)................... 3,977 241,354
Societe Generale, S.A. Class A
(banking)...................... 1,420 230,057
Thomson CSF, S.A. (aerospace &
military technology)........... 7,061 303,373
Total, S.A. Class B (energy
sources)....................... 2,934 297,287
Vivendi, S.A. (business & public
services)...................... 4,145 1,075,949
-----------
8,535,304
-----------
GERMANY (10.7%)
Allianz AG Registered
(insurance).................... 2,450 898,787
Bayer AG (chemicals)............ 21,550 899,899
DaimlerChrysler AG
(automobiles).................. 10,854 1,072,025
Deutsche Bank AG (banking)...... 7,400 435,641
Deutsche Telekom AG
(telecommunications)........... 45,650 1,502,003
Dresdner Bank AG (banking)...... 11,700 491,737
Karstadt AG (merchandising)..... 950 496,240
Mannesmann AG
(telecommunications)........... 6,900 791,283
Metro AG (merchandising)........ 6,850 547,005
Muenchener Rueckversicherungs-
Gesellschaft AG Registered
(insurance).................... 940 455,461
RWE AG (utilities-electrical &
gas)........................... 16,550 906,735
Schering AG (health & personal
care).......................... 4,940 620,643
VEBA AG (utilities-electrical &
gas)........................... 9,900 592,625
Viag AG (utilities-electrical &
gas)........................... 750 439,952
Volkswagen AG (automobiles)..... 6,500 519,056
-----------
10,669,092
-----------
IRELAND (3.8%)
Allied Irish Banks PLC
(banking)...................... 86,317 1,548,240
CRH PLC (building materials &
components).................... 52,901 914,951
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 374
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
IRELAND (CONTINUED)
Irish Life PLC (insurance)...... 34,799 $ 327,914
Kerry Group PLC Class A (food &
household products)............ 28,369 387,027
Ryanair Holdings PLC
(transportation-airlines)
(a)............................ 19,585 140,166
Smurfit (Jefferson) Group PLC
(forest products & paper)...... 243,674 439,613
-----------
3,757,911
-----------
ITALY (5.1%)
Assicurazioni Generali S.p.A.
(insurance).................... 16,515 690,558
Banca Commerciale Italiana
S.p.A. (banking)............... 27,000 186,527
Benetton Group S.p.A. (textile &
apparel)....................... 98,800 199,377
Edison S.p.A.
(utilities-electrical & gas)... 2,000 23,592
ENI S.p.A. (energy sources)..... 109,000 713,383
Fiat S.p.A. (automobiles)....... 65,800 228,881
Fiat S.p.A. di Risp
(automobiles).................. 28,600 57,194
Istituto Nazionale delle
Assicurazioni S.p.A.
(insurance).................... 60,000 158,711
Italgas S.p.A.
(utilities-electrical & gas)... 19,000 102,993
Mediobanca S.p.A. (banking)..... 5,500 76,492
Montedison S.p.A.
(multi-industry)............... 57,080 75,926
Olivetti S.p.A.
(telecommunications) (a)....... 11,800 41,117
Parmalat Finanziaria S.p.A.
(food & household products).... 40,000 76,598
Pirelli S.p.A. (industrial
components).................... 25,000 80,219
Riunione Adriatica di Sicurta
S.p.A. (insurance)............. 5,325 77,286
San Paolo IMI S.p.A.
(banking)...................... 15,500 274,276
Sirti S.p.A. (construction &
housing)....................... 11,500 69,481
Telecom Italia S.p.A.
(telecommunications)........... 65,666 561,090
Telecom Italia S.p.A. di Risp
(telecommunications)........... 25,000 157,560
Telecom Italia Mobile S.p.A.
(telecommunications)........... 82,000 606,242
Telecom Italia Mobile S.p.A. di
Risp (telecommunications)...... 63,000 297,025
Unicredito Italiano S.p.A.
(banking)...................... 45,000 267,110
Unione Immobiliare S.p.A. (real
estate)........................ 60,000 31,342
-----------
5,052,980
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
JAPAN (10.9%)
Ajinomoto Co., Inc. (food &
household products) (b)........ 25,000 $ 265,980
Bank of Tokyo-Mitsubishi, Ltd.
(banking) (b).................. 23,000 238,584
Bridgestone Corp. (industrial
components) (b)................ 10,000 227,413
Denso Corp. (industrial
components) (b)................ 9,000 166,770
Fanuc, Ltd. (electronic
components & instruments)
(b)............................ 4,000 137,246
Fujitsu, Ltd. (data processing &
reproduction) (b).............. 2,000 26,687
Hitachi Corp., Ltd. (electrical
& electronics) (b)............. 48,000 297,898
Honda Motor Co., Ltd.
(automobiles) (b).............. 7,000 230,250
Industrial Bank of Japan, Ltd.
(The) (banking) (b)............ 43,000 198,625
Ito-Yokado Co., Ltd.
(merchandising)................ 3,000 210,124
Kansai Electric Power Co., Inc.
(utilities-electrical & gas)
(b)............................ 7,000 153,603
Kirin Brewery Co., Ltd.
(beverages & tobacco) (b)...... 35,000 446,846
Komatsu, Ltd. (machinery &
engineering) (b)............... 27,000 141,954
Matsushita Electric Industrial
Co., Ltd. (appliances &
household durables) (b)........ 15,000 265,847
Mitsubishi Chemical Corp.
(chemicals) (b)................ 687 1,450
Mitsubishi Electric Corp.
(electrical & electronics) (a)
(b)............................ 56,000 176,256
Mitsubishi Estate Co., Ltd.
(real estate) (b).............. 5,000 44,906
Mitsubishi Heavy Industries,
Ltd. (machinery & engineering)
(b)............................ 52,000 202,854
Mitsui Fudosan Co., Ltd. (real
estate)........................ 7,000 53,063
NEC Corp. (electrical &
electronics)................... 19,000 175,192
Nintendo Co., Ltd. (recreation &
other consumer goods).......... 3,000 291,248
Nippon Express Co., Ltd.
(transportation-road & rail)... 9,000 50,749
Nippon Oil Co., Ltd. (energy
sources)....................... 12,000 41,918
Nippon Telegraph & Telephone
Corp. (telecommunications)..... 70 541,151
Nomura Securities Co., Ltd.
(financial services)........... 24,000 209,592
NTT Data Corp. (business &
public services)............... 52 258,639
NTT Mobile Communication
Network, Inc.
(telecommunications)........... 23 948,167
Olympus Optical Co., Ltd.
(electronic components &
instruments)................... 21,000 241,856
Osaka Gas Co., Ltd. (utilities-
electrical & gas).............. 6,000 20,693
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 375
MainStay International Equity Fund
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
JAPAN (CONTINUED)
Rohm Co., Ltd. (electronic
components & instruments)...... 3,000 $ 273,693
Sankyo Co., Ltd. (health &
personal care)................. 6,000 131,394
Sanyo Electric Co., Ltd.
(appliances & household
durables)...................... 19,000 58,959
Sekisui Chemical Co., Ltd.
(building materials &
components).................... 1,000 6,738
Sharp Corp. (appliances &
household durables)............ 14,000 126,482
Shiseido Co., Ltd. (health &
personal care)................. 18,000 231,722
Sony Corp. (appliances &
household durables)............ 2,000 145,934
Sumitomo Bank, Ltd. (banking)... 17,000 174,837
Sumitomo Electric Industries
(industrial components)........ 20,000 225,374
Sumitomo Forestry Co., Ltd.
(building materials &
components).................... 36,000 258,533
Takeda Chemical Industries, Ltd.
(health & personal care)....... 7,000 269,970
TDK Corp. (electronic components
& instruments)................. 3,000 274,757
Tobu Railway Co., Ltd.
(transportation-road & rail)... 44,000 128,734
Tohoku Electric Power Co., Inc.
(utilities-electrical & gas)... 2,000 35,464
Tokyo Electric Power Co., Inc.
(utilities-electrical & gas)... 8,000 197,889
Tokyo Seimitsu Co., Ltd.
(electronic components &
instruments)................... 7,000 279,279
Toppan Printing Co., Ltd.
(business & public services)... 1,000 12,235
Toshiba Corp. (electrical &
electronics)................... 41,000 244,640
Tostem Corp. (building materials
& components).................. 13,000 258,178
Toyota Motor Corp.
(automobiles).................. 25,000 680,466
Yamanouchi Pharmaceutical Co.,
Ltd. (health & personal
care).......................... 17,000 548,628
-----------
10,829,467
-----------
NETHERLANDS (5.4%)
ABN AMRO Holding N.V.
(banking)...................... 25,000 526,199
Akzo Nobel N.V. (chemicals)..... 7,200 328,029
Elsevier N.V. (broadcasting &
publishing).................... 6,200 86,888
Heineken N.V. (beverages &
tobacco)....................... 7,100 427,514
ING Groep N.V. (financial
services)...................... 13,707 836,298
Koninklijke KPN N.V.
(telecommunications)........... 6,965 348,869
Royal Dutch Petroleum Co.
(energy sources)............... 31,300 1,559,441
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
NETHERLANDS (CONTINUED)
TNT Post Group N.V. (business &
public services)............... 6,665 $ 214,866
Unilever CVA N.V. (food &
household products)............ 9,100 778,269
Wolters Kluwer CVA N.V.
(broadcasting & publishing).... 1,203 257,566
-----------
5,363,939
-----------
NEW ZEALAND (1.4%)
Fletcher Challenge Building
(building materials &
components).................... 317,856 491,976
Telecom Corp. of New Zealand
Ltd. (telecommunications)...... 185,278 807,466
Telecom Corp. of New Zealand
Ltd. (telecommunications) (a)
(c)............................ 51,200 112,244
-----------
1,411,686
-----------
PORTUGAL (1.3%)
Banco Comercial Portugues, S.A.
Registered (banking)........... 7,300 224,427
Banco Espirito Santo e Comercial
de Lisboa, S.A. Registered
(banking)...................... 4,400 136,559
Electricidade de Portugal, S.A.
(utilities-electrical & gas)... 16,800 369,877
Jeronimo Martins & Filho SGPS,
S.A. (merchandising)........... 2,900 158,643
Portugal Telecom, S.A.
Registered
(telecommunications)........... 8,300 380,543
-----------
1,270,049
-----------
SPAIN (4.5%)
Acerinox, S.A. (metals-steel)... 2,030 47,353
Argentaria, Caja Postal y Banco
Hipotecario de Espana, S.A.
Registered (banking)........... 12,960 336,158
Autopistas Concesionaria
Espanola, S.A. (business &
public services)............... 8,340 138,918
Banco Bilbao Vizcaya, S.A.
Registered (banking)........... 39,870 626,121
Banco Central Hispanoamericano,
S.A. (banking)................. 25,260 300,410
Banco Santander, S.A. Registered
(banking)...................... 18,800 374,187
Corporacion Mapfre, S.A.
(insurance).................... 2,060 55,977
Endesa, S.A.
(utilities-electrical & gas)... 20,480 543,500
Fomento de Construcciones y
Contratas, S.A. (construction &
housing)....................... 1,710 127,330
Gas Natural SDG, S.A.
(utilities-electrical & gas)... 2,930 319,505
Iberdrola, S.A.
(utilities-electrical & gas)... 23,390 438,305
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 376
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SPAIN (CONTINUED)
Repsol, S.A. (energy sources)... 7,060 $ 377,209
Telefonica, S.A.
(telecommunications)........... 18,350 817,235
Telefonica, S.A. Bonus Rights
(telecommunications) (a)....... 18,350 16,317
-----------
4,518,525
-----------
SWEDEN (3.0%)
Astra AB Series A (health &
personal care)................. 32,300 659,504
ForeningsSparbanken AB
(banking)...................... 9,500 246,127
Hennes & Mauritz AB Series B
(merchandising)................ 2,100 171,512
Skandia Forsakrings AB
(insurance).................... 10,600 162,160
Svenska Handelsbanken Series A
(banking)...................... 5,500 232,063
Telefonaktiebolaget LM Ericsson
Series B (electrical &
electronics)................... 58,100 1,383,407
Volvo AB Series B
(automobiles).................. 7,400 169,809
-----------
3,024,582
-----------
SWITZERLAND (8.1%)
Credit Suisse Group Registered
(banking)...................... 4,500 704,415
Nestle S.A. Registered (food &
household products)............ 850 1,850,408
Novartis S.A. Registered (health
& personal care)............... 837 1,645,381
Roche Holdings AG Genusscheine
(health & personal care)....... 100 1,220,257
Schweizerische
Rueckversicherungs Gesellschaft
Registered (insurance)......... 320 834,318
UBS AG Registered (banking)..... 3,615 1,110,703
Zurich Allied AG Registered
(insurance).................... 1,000 740,454
-----------
8,105,936
-----------
UNITED KINGDOM (21.0%)
Abbey National PLC (banking).... 25,080 537,040
Allied Zurich PLC (insurance)... 16,206 242,537
Barclays PLC (banking).......... 24,527 527,647
Bass PLC (leisure & tourism).... 72,671 1,022,294
BG PLC (utilities-electrical &
gas)........................... 95,030 600,426
Boots Co. PLC (merchandising)... 27,343 464,714
British Airways PLC
(transportation-airlines)...... 66,702 451,683
British American Tobacco PLC
(beverages & tobacco).......... 16,206 143,850
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
British Petroleum Co. PLC
(energy sources)............... 76,987 $ 1,148,975
British Telecommunications PLC
(telecommunications)........... 98,700 1,485,343
Cable & Wireless PLC
(telecommunications)........... 80,967 996,201
CGU PLC (insurance)............. 32,766 512,178
Diageo PLC (beverages &
tobacco)....................... 51,978 584,179
EMI Group PLC (recreation &
other consumer goods).......... 81,100 571,446
General Electric Co. PLC
(electrical & electronics)..... 75,486 678,205
Glaxo Wellcome PLC (health &
personal care)................. 42,818 1,468,268
Granada Group PLC (leisure &
tourism)....................... 13,560 240,614
Great Universal Stores PLC (The)
(merchandising)................ 33,110 346,781
HSBC Holdings PLC (banking)..... 19,933 542,903
Imperial Chemical Industries PLC
(chemicals).................... 67,680 584,425
Kingfisher PLC
(merchandising)................ 30,154 326,106
Lloyds TSB Group PLC
(banking)...................... 73,116 1,037,677
Marks & Spencer PLC
(merchandising)................ 50,396 344,199
National Power PLC (utilities-
electrical & gas).............. 30,620 270,521
National Westminster Bank PLC
(banking)...................... 27,890 537,351
Peninsular & Oriental Steam
Navigation Co. Deferred Stock
(The) (transportation-shipping) 8,611 101,722
Prudential Corp. PLC
(insurance).................... 34,700 524,512
Reed International PLC
(broadcasting & publishing).... 32,360 257,627
Rio Tinto PLC Registered
(metals-nonferrous)............ 26,460 305,527
Royal Bank of Scotland Group PLC
(banking)...................... 33,660 541,554
Sainsbury (J.) PLC
(merchandising)................ 34,475 268,299
Scottish Power PLC (utilities-
electrical & gas).............. 23,010 235,638
SmithKline Beecham PLC (health &
personal care)................. 95,610 1,336,237
Unilever PLC (food & household
products)...................... 72,500 814,825
Vodafone Group PLC
(telecommunications)........... 52,247 846,684
-----------
20,898,188
-----------
Total Common Stocks
(Cost $76,613,873)............. 95,220,448
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 377
MainStay International Equity Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (0.4%)
COMMERCIAL PAPER (0.4%)
UNITED STATES (0.4%)
Associates Corp. of North
America
5.08%, due 1/4/99
(financial services)........... $400,000 $ 399,831
-----------
Total Short-Term Investment
(Cost $399,831)................ 399,831
-----------
Total Investments
(Cost $77,013,704) (d)......... 96.0% 95,620,279(e)
Cash and Other Assets,
Less Liabilities............... 4.0 4,022,049
----- ---------
Net Assets...................... 100.0% $99,642,328
----- ---------
----- ---------
</TABLE>
- -------
(a) Non-income producing security.
(b) Segregated or partially segregated as collateral for forward foreign
currency contracts.
(c) Installment receipt is a transaction with a set contract price which is
paid in installments over a period of time.
(d) The cost for Federal income tax purposes is $78,398,192.
(e) At December 31, 1998 net unrealized appreciation for securities was
$17,222,087, 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 $20,404,313 and aggregate
gross unrealized depreciation for all investments on which there was an
excess of cost over market value of $3,182,226.
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... $ 303,373 0.3%
Appliances & Household Durables... 597,223 0.6
Automobiles....................... 2,957,682 3.0
Banking........................... 14,278,451 14.3
Beverages & Tobacco............... 2,027,956 2.0
Broadcasting & Publishing......... 1,149,636 1.2
Building Materials & Components... 2,193,690 2.2
Business & Public Services........ 1,700,608 1.7
Chemicals......................... 2,577,491 2.6
Construction & Housing............ 196,811 0.2
Data Processing & Reproduction.... 26,687 0.0*
Electrical & Electronics.......... 5,682,074 5.7
Electronic Components &
Instruments...................... 1,206,831 1.2
Energy Sources.................... 5,584,566 5.6
Financial Services................ 1,445,721 1.5
Food & Household Products......... 4,995,919 5.0
Forest Products & Paper........... 838,413 0.8
Health & Personal Care............ 9,695,891 9.7
Industrial Components............. 699,775 0.7
Insurance......................... 7,421,765 7.5
Leisure & Tourism................. 1,262,908 1.3
Machinery & Engineering........... 344,808 0.3
Merchandising..................... 4,740,679 4.8
Metals--Nonferrous................ 780,287 0.8
Metals--Steel..................... 47,353 0.0*
Multi-Industry.................... 75,926 0.1
Real Estate....................... 604,298 0.6
Recreation & Other Consumer
Goods............................ 862,694 0.9
Telecommunications................ 13,653,465 13.7
Textile & Apparel................. 199,376 0.2
Transportation--Airlines.......... 591,849 0.6
Transportation--Road & Rail....... 179,483 0.2
Transportation--Shipping.......... 101,722 0.1
Utilities--Electrical & Gas....... 6,594,868 6.6
----------- -----
95,620,279 96.0
Cash and Other Assets,
Less Liabilities................. 4,022,049 4.0
----------- -----
Net Assets........................ $99,642,328 100.0%
=========== =====
</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.
20
<PAGE> 378
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$77,013,704).............................................. $ 95,620,279
Cash denominated in foreign currencies (identified cost
$1,776,523)............................................... 1,801,676
Cash........................................................ 158,714
Receivables:
Dividends and interest.................................... 259,726
Investment securities sold................................ 749,953
Fund shares sold.......................................... 1,686,413
Unrealized appreciation on forward foreign currency
contracts................................................. 133,687
Unamortized organization expense............................ 5,592
------------
Total assets.............................................. 100,416,040
------------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 120,997
MainStay Management....................................... 83,872
NYLIFE Distributors....................................... 66,742
Transfer agent............................................ 31,509
Custodian................................................. 23,000
Trustees.................................................. 770
Accrued expenses............................................ 83,575
Unrealized depreciation on forward foreign currency
contracts................................................. 363,247
------------
Total liabilities......................................... 773,712
------------
Net assets.................................................. $ 99,642,328
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 19,749
Class B................................................... 62,511
Class C................................................... 9
Additional paid-in capital.................................. 83,979,164
Accumulated distribution in excess of net investment
income.................................................... (755,640)
Accumulated net realized loss on investments................ (2,051,711)
Net unrealized appreciation on investments.................. 18,606,575
Net unrealized depreciation on translation of other assets
and liabilities in foreign currencies and forward foreign
currency contracts........................................ (218,329)
------------
Net assets.................................................. $ 99,642,328
============
CLASS A
Net assets applicable to outstanding shares................. $ 24,115,065
============
Shares of beneficial interest outstanding................... 1,974,901
============
Net asset value per share outstanding....................... $ 12.21
Maximum sales charge (5.50% of offering price).............. 0.71
------------
Maximum offering price per share outstanding................ $ 12.92
============
CLASS B
Net assets applicable to outstanding shares................. $ 75,516,488
============
Shares of beneficial interest outstanding................... 6,251,105
============
Net asset value and offering price per share outstanding.... $ 12.08
============
CLASS C
Net assets applicable to outstanding shares................. $ 10,775
============
Shares of beneficial interest outstanding................... 892
============
Net asset value and offering price per share outstanding.... $ 12.08
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 379
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 1,476,273
Interest.................................................. 425,085
-----------
Total income............................................ 1,901,358
-----------
Expenses:
Management................................................ 906,887
Distribution--Class B..................................... 528,201
Distribution--Class C..................................... 10
Transfer agent............................................ 384,511
Shareholder communication................................. 78,779
Custodian................................................. 67,373
Service--Class A.......................................... 50,725
Service--Class B.......................................... 175,993
Service--Class C.......................................... 4
Registration.............................................. 45,954
Professional.............................................. 40,392
Recordkeeping............................................. 33,255
Amortization of organization expense...................... 8,012
Trustees.................................................. 2,680
Miscellaneous............................................. 29,722
-----------
Total expenses.......................................... 2,352,498
-----------
Net investment loss......................................... (451,140)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain from:
Security transactions..................................... 1,935,682
Option transactions....................................... (92,842)
Foreign currency transactions............................. 29,488
-----------
Net realized gain on investments and foreign currency
transactions.............................................. 1,872,328
-----------
Net change in unrealized appreciation on investments:
Security transactions..................................... 14,778,315
Translation of other assets and liabilities in foreign
currencies and forward foreign currency contracts....... (460,882)
-----------
Net unrealized gain on investments and foreign currency
transactions.............................................. 14,317,433
-----------
Net realized and unrealized gain on investments and foreign
currency transactions..................................... 16,189,761
-----------
Net increase in net assets resulting from operations........ $15,738,621
===========
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $202,947.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 380
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (451,140) $ (264,494)
Net realized gain (loss) on investments................... 1,935,682 (2,546,199)
Net realized loss on option transactions.................. (92,842) --
Net realized gain on foreign currency transactions........ 29,488 5,603,167
Net change in unrealized appreciation on investments...... 14,778,315 2,314,070
Net change in unrealized appreciation on translation of
other assets and liabilities in foreign currencies and
forward foreign currency contracts...................... (460,882) (2,399,668)
------------ ------------
Net increase in net assets resulting from operations...... 15,738,621 2,706,876
------------ ------------
Distributions to shareholders:
From net realized gain on investments and foreign currency
transactions:
Class A................................................. (372,585) (999,553)
Class B................................................. (713,493) (3,204,542)
Class C................................................. (101) --
------------ ------------
Total distributions to shareholders................... (1,086,179) (4,204,095)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 42,133,228 7,554,344
Class B................................................. 26,219,637 35,130,288
Class C................................................. 9,724 --
Net asset value of shares issued to shareholders in
reinvestment of distributions:
Class A................................................. 238,909 609,945
Class B................................................. 674,371 2,990,896
Class C................................................. 58 --
------------ ------------
69,275,927 46,285,473
Cost of shares redeemed:
Class A................................................. (39,188,478) (7,941,595)
Class B................................................. (25,790,198) (26,338,394)
------------ ------------
Increase in net assets derived from capital share
transactions......................................... 4,297,251 12,005,484
------------ ------------
Net increase in net assets............................ 18,949,693 10,508,265
NET ASSETS:
Beginning of year........................................... 80,692,635 70,184,370
------------ ------------
End of year................................................. $99,642,328 $ 80,692,635
============ ============
Accumulated distribution in excess of net investment income
at end of year............................................ $ (755,640) $ (67,560)
============ ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE> 381
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
----------------------------------------------
Year ended December 31,
----------------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.33 $ 10.48 $ 10.05 $ 9.77
------- ------- ------- -------
Net investment income (loss)................................ 0.01 0.80 0.29 0.27
Net realized and unrealized gain (loss) on investments...... 2.13 0.03 0.07 0.10
Net realized and unrealized gain (loss) on foreign currency
transactions.............................................. (0.06) (0.36) 0.62 0.14
------- ------- ------- -------
Total from investment operations............................ 2.08 0.47 0.98 0.51
------- ------- ------- -------
Less distributions:
From net realized gain on investments and foreign currency
transactions............................................ (0.20) (0.62) (0.52) (0.15)
In excess of net realized gain on investments............. -- -- (0.03) (0.08)
------- ------- ------- -------
Total distributions......................................... (0.20) (0.62) (0.55) (0.23)
------- ------- ------- -------
Net asset value at end of period............................ $ 12.21 $ 10.33 $ 10.48 $ 10.05
======= ======= ======= =======
Total investment return (a)................................. 20.17% 4.52% 9.78% 5.25%
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss)............................ 0.08% 0.19% (0.1%) (0.2%)
Expenses................................................ 2.01% 2.01% 2.0% 2.2%
Portfolio turnover rate..................................... 54% 43% 19% 25%
Net assets at end of period (in 000's)...................... $24,115 $17,452 $17,475 $12,856
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE> 382
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------------------------------------ --------------
September 13,* September 1**
Year ended December 31, through through
- ---------------------------------------------- December 31, December 31,
1998 1997 1996 1995 1994 1998
- ------- ------- ------- ------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 10.22 $ 10.38 $ 9.97 $ 9.77 $ 10.00 $10.60
- ------- ------- ------- ------- ------- ------
(0.08) 0.72 0.24 0.26 (0.04) (0.09)
2.10 0.03 0.07 0.07 (0.16) 1.72
(0.05) (0.37) 0.59 0.09 (0.03) (0.04)
- ------- ------- ------- ------- ------- ------
1.97 0.38 0.90 0.42 (0.23) 1.59
- ------- ------- ------- ------- ------- ------
(0.11) (0.54) (0.46) (0.15) -- (0.11)
-- -- (0.03) (0.07) -- --
- ------- ------- ------- ------- ------- ------
(0.11) (0.54) (0.49) (0.22) -- (0.11)
- ------- ------- ------- ------- ------- ------
$ 12.08 $ 10.22 $ 10.38 $ 9.97 $ 9.77 $12.08
======= ======= ======= ======= ======= ======
19.34% 3.78% 9.05% 4.27% (2.30%) 15.07%
(0.67%) (0.49%) (0.8%) (1.0%) (1.6%)+ (0.67%)+
2.76% 2.69% 2.7% 3.0% 3.9% + 2.76% +
54% 43% 19% 25% 9% 54%
$75,516 $63,241 $52,709 $25,341 $20,549 $ 11
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE> 383
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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on September 13,
1994 and September 1, 1998, respectively. Class A shares, Class B shares and
Class C 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 and Class C 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
26
<PAGE> 384
Notes to Financial Statements (continued)
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.
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
27
<PAGE> 385
MainStay International Equity Fund
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 December 31, 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
1/13/99........................................... A$ 2,259,000 $ 1,418,427 $ 32,562
Deutsche Mark vs. Irish Punt, expiring 1/4/99....... DM 11,807,826 IP 4,747,348 (10,854)
Deutsche Mark vs. U.S. Dollar, expiring 3/31/99..... DM 26,800,000 $ 16,104,318 (57,985)
Irish Punt vs. Deutsche Mark, expiring 1/4/99....... IP 4,747,348 DM11,823,000 19,966
Japanese Yen vs. U.S. Dollar, expiring 1/19/99...... Y 1,079,478,900 $ 9,300,000 (294,408)
New Zealand Dollar vs. U.S. Dollar, expiring
1/15/99........................................... N$ 2,660,000 $ 1,426,704 21,067
Contract Contract
Amount Amount
Purchased Sold
--------------- ------------
Foreign Currency Buy Contracts
Canadian Dollar vs. U.S. Dollar, expiring 1/25/99... C$ 9,015,000 $ 5,809,430 60,092
---------
Net unrealized depreciation on forward foreign
currency contracts................................ $(229,560)
=========
</TABLE>
PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put options
on its portfolio securities or foreign currencies. 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 or
foreign currency 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 or foreign currency below the exercise price.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value of the security or foreign
currency or to close out covered written put positions. Risks may arise from an
imperfect correlation between the change in market value of the securities or
foreign currencies held by the Fund and the prices of options relating to the
securities or foreign currencies purchased or sold by the Fund and from the
possible lack of a liquid secondary market
28
<PAGE> 386
Notes to Financial Statements (continued)
for an option. The maximum exposure to loss for any purchased option is limited
to the premium initially paid for the option.
Purchased option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
----------- ---------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- $ --
Options--assigned........................................... (8,951,000) (120,838)
Options--purchased.......................................... 24,164,000 268,783
Options--sold............................................... (3,151,500) (31,799)
Options--expired............................................ (12,061,500) (116,146)
----------- ---------
Options outstanding at December 31, 1998.................... -- $ --
=========== =========
</TABLE>
Short sale option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
---------- --------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- $ --
Options--short sale......................................... (8,951,000) (53,706)
Options--buybacks........................................... 8,951,000 53,706
---------- --------
Options outstanding at December 31, 1998.................... -- $ --
========== ========
</TABLE>
ORGANIZATION COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $49,000 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $819,751 and $29,488 have been reclassified
from accumulated net realized loss on investments and accumulated undistributed
net realized gain on foreign currency transactions to accumulated distribution
in excess of net investment income due to the tax treatment of foreign currency
losses and certain foreign investments.
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.
29
<PAGE> 387
MainStay International Equity Fund
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
Discounts on securities purchased for the Fund are accreted on the constant
yield method over the life of the respective securities. Premiums on securities
purchased are not amortized for this Fund.
EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when direct allocations of expenses can be made. The investment
income and expenses (other than expenses incurred under the Distribution Plan)
and realized and unrealized gains and losses on investments of the Fund are
allocated to separate classes of shares based upon their relative net asset
value on the date the income is earned or expenses and realized and unrealized
gains and losses are incurred.
FOREIGN CURRENCY INVESTING. The books and records of the Fund are recorded in
U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the
mean between the buying and selling rates last quoted by any major U.S. bank at
the following dates:
(i) market value of investment securities, other assets and liabilities--at the
valuation date,
(ii) purchases and sales of investment securities, income and expenses--at the
date of such transactions.
The assets and liabilities of the Fund are presented at the exchange rates and
market values at the close of the year. The changes in net assets arising from
fluctuations in exchange rates and the changes in net assets resulting from
changes in market prices are not separately presented. However, gains and losses
from certain foreign currency transactions are treated as ordinary income for
Federal income tax purposes.
Net realized gain (loss) on foreign currency transactions represents net gains
and losses on forward currency contracts, net currency gains or losses realized
as a result of differences between the amounts of securities sale proceeds,
purchase cost, dividends, interest and withholding taxes as recorded on the
Fund's books, and the U.S. dollar equivalent amount actually received or paid.
Net currency gains or losses from valuing foreign currency denominated assets
and liabilities other than investments at year end exchange rates are reflected
in unrealized foreign exchange gains.
30
<PAGE> 388
Notes to Financial Statements (continued)
Foreign currency held at December 31, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- ---------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
Australian Dollar A$ (926,362) $ (570,637) $ (568,229)
Belgian Franc BF 10,828 314 315
Canadian Dollar C$ 11,445 7,510 7,451
Deutsche Mark DM 3,070,428 1,824,157 1,843,425
Dutch Guilder NLG 719,247 381,635 383,251
French Franc FF 4,362 776 781
Irish Punt IP 12,364 18,460 18,435
Italian Lira IL 1,109,099 657 672
Japanese Yen Y 2,964,586 25,082 26,281
New Zealand Dollar N$ 27,206 14,199 14,373
Norwegian Krone NK 12 2 2
Pound Sterling L 31,708 52,764 52,756
Spanish Peseta SP 3,134,398 21,560 22,119
Swedish Krona SK 357 44 44
---------- ----------
$1,776,523 $1,801,676
========== ==========
</TABLE>
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
NOTE 3--FEES AND RELATED PARTY POLICIES:
MANAGER AND SUB-ADVISER. MainStay Management, Inc. (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 year ended December 31, 1998, the Manager
earned $906,887.
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% the
average daily net assets of the Fund.
31
<PAGE> 389
MainStay International Equity 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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the
Distributor for distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $11,418 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $102,712
for the period ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $384,511.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, NYLIFE Distributors beneficially held Class A
shares of the Fund with a net asset value of $7,632,503, which represents 31.7%
of the net assets of Class A shares at year end.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $2,312 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$33,255 for the year ended December 31, 1998.
32
<PAGE> 390
Notes to Financial Statements (continued)
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, capital loss
carryforwards of $795,870 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 and 2006. 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. The Fund
intends to elect to treat for Federal income tax purposes approximately
$1,154,256 of qualifying realized capital gains and foreign exchange gains that
arose during the year as if they arose on January 1, 1999.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $53,825 and $43,005, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
---------------------------------- --------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.................................. 3,750 2,295 1 707 3,242
Shares issued in reinvestment of dividends... 20 57 -- 59 296
------ ------ ---- ---- ------
3,770 2,352 1 766 3,538
Shares redeemed.............................. (3,484) (2,286) -- (745) (2,429)
------ ------ ---- ---- ------
Net increase................................. 286 66 1 21 1,109
====== ====== ==== ==== ======
</TABLE>
- -------
<TABLE>
<C> <S>
* First offered on September 1, 1998.
</TABLE>
33
<PAGE> 391
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay International Equity Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
34
<PAGE> 392
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a secondary consideration. Advisors, Inc.(2)
EQUITY INCOME FUND To realize maximum long-term total return from a MacKay Shields Financial
combination of capital appreciation and income. Corporation(2)
RESEARCH VALUE FUND To seek long-term capital appreciation by investing John A. Levin & Co.,
primarily in securities of large-capitalization Inc.
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.
35
<PAGE> 393
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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.
36
<PAGE> 394
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
37
<PAGE> 395
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN11-02/99
[RECYCLE LOGO]
MAINSTAY INTERNATIONAL EQUITY FUND
ANNUAL REPORT
DECEMBER 31, 1998
[MAINSTAY LOGO]
<PAGE> 396
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Money Market Fund Highlights 3
Portfolio Management Discussion and
Analysis 4
Yields & Lipper Rankings 6
Portfolio of Investments 7
Financial Statements 10
Notes to Financial Statements 16
Report of Independent Accountants 19
The MainStay Funds 20
</TABLE>
<PAGE> 397
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 398
MainStay Money Market Fund Highlights
1998 MARKET RECAP
- - In 1998, the money markets were influenced in various ways by modest
inflation, low unemployment, falling commodity prices, and a budget surplus
that reduced Treasury issuance.
- - During the first half of 1998, the money market yield curve was flat and
exhibited low volatility, while during the second half of the year, volatility
increased dramatically.
- - Financial difficulties in Asia, Russia, and Brazil resulted in a flight to
quality that raised demand for high-quality, highly liquid securities.
- - In the third quarter, problems at a major hedge fund disrupted market
activity, making it difficult for any but the strongest issuers to raise money
in the capital markets.
- - The Federal Reserve cut short-term interest rates three times between
September and November 1998 to restore stability to the markets.
1998 FUND RECAP
- - For the 7-day period ended 12/31/98, the MainStay Money Market Fund provided
an effective yield of 4.63% and a current yield of 4.53% for Class A, Class B,
and Class C shares.*
- - Throughout the first half of year, the Fund maintained its portfolio's days to
maturity in a relatively stable range, lengthening days to maturity in the
late summer, when Russian and Latin American difficulties began to affect the
market.
- - Concentration on top-tier securities helped the Fund outperform as spreads
widened to near-recession levels among second-tier names in the second half of
the year.
- - For the year ended 12/31/98, all share classes returned 5.01%, exceeding the
4.84% returned by the average Lipper* money market fund.
- -------
* See footnote and table on page 6 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
-
<PAGE> 399
Portfolio Management Discussion and Analysis
Overall, 1998 was a year of extremes in the bond and money markets, causing
investors to reevaluate risk at several levels. The first half of the year saw
the lowest level of volatility in 15 years, while volatility in the second half
of the year approached the highest level in a decade and a half.
A variety of forces fueled the progress of the income securities markets. The
federal budget surplus resulted in reduced issuance. Meanwhile, the economy
exhibited strong growth, low inflation, and low unemployment. In the third
quarter, financial problems in Russia and other emerging markets fueled a flight
to quality that greatly increased demand for government securities. The near
collapse of one of the world's largest hedge funds and disappointing corporate
earnings further eroded investor confidence. Yield spreads on second-tier money
market securities widened to near-recession levels while first-tier securities
remained strong. The Federal Reserve moved to stabilize the situation by cutting
short-term interest rates three times in the third and fourth quarters.
HOW DID THE MAINSTAY MONEY MARKET FUND PERFORM IN THIS MARKET ENVIRONMENT?
For the 7-day period ended 12/31/98, the MainStay Money Market Fund provided an
effective yield of 4.63% and a current yield of 4.53% for Class A, Class B, and
Class C shares.(*) For the year ended 12/31/98, all share classes returned
5.01%, exceeding the 4.84% return of the average Lipper(+) money market fund.
Class B shares also outperformed the average Lipper money market fund for the 5-
and 10-year periods ended 12/31/98.
WHAT ACCOUNTED FOR THE FUND'S ABOVE-AVERAGE PERFORMANCE?
Several factors contributed to the Fund's strong performance. In the first half
of the year, a flat yield curve provided few opportunities to add value by
changing days to maturity, so the Fund concentrated on securities with
yield-enhancing characteristics, such as Yankee issues, asset-backed commercial
paper, and floating-rate notes. Each of these helped the Fund outperform in the
first half of the year.
As financial difficulties in Russia and a major hedge fund setback began to
unsettle the markets, we lengthened the Fund's investment portfolio's days to
maturity, believing that the Federal Reserve Board would likely adopt an
accommodative policy to help stabilize the situation. From September through
December, the Federal Reserve Board moved to reduce short-term interest rates
three times, which had a positive impact on the Fund's performance.
DID THE FUND OWN ANY SECURITIES IN TROUBLED MARKETS?
No. The Fund maintained its high-quality orientation throughout the year,
avoiding emerging-market debt and Latin American issues. It concentrated
entirely on top-tier money market instruments, which means securities in the
highest rating category. It did not own any split-rated issues or second-tier
securities during 1998.
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.
HEDGE FUND
- --------------------
A private investment partnership or off-shore investment corporation that may
take both long and short positions, use leverage and derivative securities, and
invest across many markets. Hedge funds may use high-risk or speculative
investment strategies and move large amounts of money in and out of the markets
quickly.
YIELD SPREAD
- --------------------
The difference in yield between securities in different market sectors, such as
government and mortgage- backed securities--or between different securities in a
single sector, such as 2- and 30-year Treasuries or PRIME-1 and PRIME-2 rated
commercial paper.
- -------
* Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 to 8/31/98.
+ See footnote and table on page 6 for more information on Lipper Inc.
4
- -
<PAGE> 400
WHAT TYPES OF YANKEE SECURITIES DID THE FUND OWN?
The Fund invested in securities issued by highly rated entities from Canada,
Western Europe, and Australia. Most carried a long-term rating at or above
AA.(++) The Fund invested in Yankee instruments issued by banks that are among
the largest in the world and have strong franchises in their domestic markets.
DID ANY OF THE FUND'S SECURITIES FACE PROBLEMS DURING THE YEAR?
No they did not. This underscores the value of our decision to stick with the
highest-quality securities. In the second half of the year, spreads on
second-tier issues widened considerably, to near- recession levels. Since the
Fund did not own any of these securities, it did not face the negative impact on
performance that came with widening spreads.
WHERE DID THE FUND INVEST ITS ASSETS?
In extremely liquid investments, such as commercial paper and bank certificates
of deposit, and floating-rate notes. The Fund did not invest in less liquid
securities such as callable CDs or other issues with imbedded option features.
Instead, the Fund stuck with relatively plain "vanilla" issues.
In terms of asset allocation, the Fund concentrated most heavily in commercial
paper and CDs from banks and bank holding companies. Next were securities of
finance companies, followed by brokerage companies. The Fund also had a
relatively strong weighting in top-tier asset-backed securities. These are
securities backed by collateral such as agency conventional mortgage loans,
trade receivables, and corporate loans. Since these securities offer higher
yields than ordinary commercial paper, they contributed positively to
performance without compromising quality. In selecting asset-backed securities
for the Fund, we look for collateral with high-credit quality.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We expect the Federal Reserve Board to remain on hold for the early part of
1999, but believe they may shift to a bias toward easing interest rates later in
the year. We will manage the Fund's investment portfolio's days to maturity
accordingly. While we remain optimistic, recent developments illustrate that
risk is a major investor concern and dislocations can easily occur in the money
market as a result of international developments or problems with corporate
earnings. 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
FIRST-TIER/SECOND-TIER
- --------------------
Money market instruments in the highest rating category by two or more major
rating agencies are called first-tier or top-tier securities, while securities
in the second- highest rating category by two or more major rating agencies are
referred to as second- tier securities.
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.
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.
SPLIT-RATED ISSUES
- --------------------
Securities rated top tier by one credit rating agency and second tier by
another.
- -------
++ 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.
5
<PAGE> 401
Yields & Lipper Rankings as of 12/31/98
FUND SEC YIELDS*
<TABLE>
<CAPTION>
7-DAY EFFECTIVE YIELD 7-DAY CURRENT YIELD
<S> <C> <C>
Class A 4.63% 4.53%
Class B 4.63% 4.53%
Class C 4.63% 4.53%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 130 out of n/a n/a 100 out of
308 funds 224 funds
Class B 130 out of 86 out of 54 out of 45 out of
308 funds 200 funds 125 funds 98 funds
Class C n/a n/a n/a n/a
Average Lipper
money market
fund 4.84% 4.77% 5.20% 5.44%
</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 4.50%. The current yield is based on the
7-day period ending 12/31/98. The fee waivers and/or expense limitations
are voluntary and may be discontinued at any time.
(+) Lipper 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 12/31/98. The
Fund's Class A shares were first offered to the public on 1/3/95; Class C
shares on 9/1/98.
6
<PAGE> 402
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
- -------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (100.0%)+
ASSET-BACKED SECURITY (1.2%)
Bishop's Gate Residential
Mortgage Trust
Series 1998-2A Class A1
5.75%, due 11/22/99
(a)(b)(c).................... $ 7,000,000 $ 7,000,000
------------
CERTIFICATES OF DEPOSIT (13.1%)
ABN Amro Bank New York
5.75%, due 3/31/99 (c)....... 5,000,000 5,005,019
Bayerische Landesbank
Girozentrale
5.09%, due 3/23/99 (b)(c).... 9,000,000 8,998,448
5.41%, due 5/10/99 (b)(c).... 5,000,000 4,998,683
5.65%, due 7/22/99 (b)(c).... 4,000,000 4,002,327
Commerzbank AG New York
5.67%, due 3/5/99 (c)........ 4,000,000 4,000,294
Deutsche Bank New York
5.65%, due 3/22/99 (c)....... 5,000,000 5,003,200
5.70%, due 1/7/99 (c)........ 4,000,000 3,999,995
Dresdner Bank AG
5.15%, due 3/29/99 (c)....... 7,000,000 6,999,548
ING Bank NV
5.14%, due 3/15/99 (c)....... 5,000,000 4,999,906
Rabobank Nederland NV New York
4.83%, due 10/6/99 (c)....... 5,000,000 5,000,000
5.64%, due 7/30/99 (c)....... 3,000,000 3,009,455
5.74%, due 4/28/99 (c)....... 6,000,000 6,002,388
Societe Generale New York
5.56%, due 1/19/99 (c)....... 2,950,000 2,949,986
5.70%, due 1/7/99 (c)........ 5,000,000 5,000,139
5.80%, due 4/27/99 (c)....... 1,000,000 1,000,565
5.80%, due 4/28/99 (c)....... 4,000,000 4,002,245
------------
74,972,198
------------
COMMERCIAL PAPER (78.9%)
Abbey National North America
5.20%, due 1/6/99............ 5,000,000 4,996,389
Alliance & Leicester PLC
5.28%, due 3/8/99 (a)........ 4,000,000 3,961,280
5.33%, due 3/8/99 (a)........ 2,740,000 2,713,226
Allianz of America Finance
Corp.
5.10%, due 3/24/99 (a)....... 5,000,000 4,941,917
5.15%, due 2/19/99 (a)....... 5,000,000 4,964,951
Allomon Funding Corp.
5.20%, due 3/23/99 (a)....... 6,200,000 6,127,460
5.45%, due 1/11/99 (a)....... 5,000,000 4,992,431
American Express Credit Corp.
5.18%, due 3/12/99........... 4,000,000 3,959,711
5.25%, due 2/10/99........... 4,000,000 3,976,667
5.25%, due 2/12/99........... 4,000,000 3,975,500
American General Finance Corp.
5.04%, due 3/30/99........... 5,000,000 4,938,400
5.23%, due 2/1/99............ 5,000,000 4,977,482
- -------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal Amortized
Amount Cost
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
ANZ (Delaware) Inc.
5.06%, due 3/12/99........... $ 5,000,000 $ 4,950,854
Associates Corp. of North
America
5.04%, due 2/10/99........... 4,800,000 4,773,120
5.16%, due 1/20/99........... 5,000,000 4,986,383
5.25%, due 1/4/99............ 10,000,000 9,995,625
Banca CRT Financial Corp.
5.10%, due 3/8/99............ 2,000,000 1,981,300
5.15%, due 1/6/99............ 3,550,000 3,547,461
5.40%, due 1/25/99........... 5,000,000 4,982,000
5.45%, due 1/27/99........... 3,000,000 2,988,192
5.50%, due 1/19/99........... 4,182,000 4,170,500
5.52%, due 2/8/99............ 4,000,000 3,976,693
Bayerische Hypo-Und
Vereinsbank AG
4.77%, due 6/30/99........... 5,000,000 4,880,959
BCI Funding Corp.
4.95%, due 5/17/99........... 2,150,000 2,109,795
5.09%, due 3/8/99............ 5,000,000 4,953,342
5.12%, due 2/17/99........... 5,000,000 4,966,578
5.23%, due 1/6/99............ 5,000,000 4,996,368
5.25%, due 2/9/99............ 5,000,000 4,971,563
BellSouth Telecommunications
Inc.
5.00%, due 3/11/99........... 3,900,000 3,862,625
5.05%, due 2/18/99........... 2,600,000 2,582,493
BTR Dunlop Finance Inc.
5.15%, due 2/23/99 (a)....... 5,000,000 4,962,090
Caisse Centrale Desjardins du
Quebec
4.93%, due 6/1/99............ 5,000,000 4,896,607
5.00%, due 4/1/99............ 5,000,000 4,937,500
5.18%, due 1/26/99........... 5,000,000 4,982,014
Chevron USA Inc.
4.65%, due 3/12/99........... 5,000,000 4,954,792
Commerzbank U.S Finance Inc.
5.20%, due 2/4/99............ 5,045,000 5,020,223
Cregem North America Inc.
5.00%, due 4/6/99............ 5,000,000 4,934,028
5.49%, due 1/5/99............ 8,000,000 7,995,120
5.49%, due 1/27/99........... 4,000,000 3,984,140
Deutsche Bank Financial Inc.
5.15%, due 1/5/99............ 5,000,000 4,997,139
Ford Motor Credit Co.
5.04%, due 3/29/99........... 5,000,000 4,939,100
5.08%, due 1/29/99........... 5,000,000 4,980,244
5.15%, due 2/19/99........... 3,900,000 3,872,662
Formosa Plastics Corp. U.S.A.
4.95%, due 6/14/99........... 4,000,000 3,909,800
5.15%, due 2/9/99............ 5,000,000 4,972,104
Franklin Resources Inc.
5.17%, due 2/25/99 (a)....... 3,974,000 3,942,611
General Electric Capital Corp.
4.85%, due 3/10/99........... 5,000,000 4,954,194
5.10%, due 3/10/99........... 4,000,000 3,961,467
5.13%, due 1/25/99........... 5,000,000 4,982,900
5.16%, due 2/2/99............ 5,000,000 4,977,067
5.30%, due 1/20/99........... 5,000,000 4,986,014
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
7
-
<PAGE> 403
MainStay Money Market Fund
<TABLE>
<CAPTION>
Principal Amortized
Amount Cost
- -------------------------------------------------------------
SHORT-TERM INVESTMENTS (CONTINUED)
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
Generale Bank Inc.
4.85%, due 6/15/99........... $ 5,000,000 $ 4,888,854
Goldman Sachs Group L.P. (The)
5.23%, due 2/11/99........... 5,000,000 4,970,218
5.24%, due 2/26/99........... 4,000,000 3,967,395
5.25%, due 1/14/99........... 5,100,000 5,090,331
KFW International Finance Inc.
4.90%, due 5/28/99........... 5,000,000 4,899,958
Lloyds Bank PLC
4.83%, due 6/3/99............ 5,000,000 4,897,362
Merrill Lynch & Co. Inc.
5.16%, due 3/19/99........... 5,000,000 4,944,817
5.34%, due 1/15/99........... 4,000,000 3,991,693
5.35%, due 1/11/99........... 5,000,000 4,992,569
Morgan (JP) & Co. Inc.
5.05%, due 3/25/99........... 5,000,000 4,941,785
5.07%, due 1/27/99........... 5,000,000 4,981,692
Morgan Stanley, Dean Witter,
Discover & Co.
5.13%, due 1/12/99........... 5,000,000 4,992,163
5.15%, due 1/21/99........... 5,000,000 4,985,695
5.15%, due 2/4/99............ 4,350,000 4,328,842
5.26%, due 3/12/99........... 2,100,000 2,078,522
5.40%, due 1/29/99........... 4,000,000 3,983,200
National Rural Utilities
Cooperative Finance Corp.
4.85%, due 4/27/99........... 3,600,000 3,543,740
5.12%, due 1/14/99........... 5,100,000 5,090,571
5.12%, due 2/8/99............ 3,200,000 3,182,706
Norwest Corp.
4.95%, due 2/3/99............ 5,000,000 4,977,313
5.09%, due 2/5/99............ 5,000,000 4,975,257
Prudential Finance (Jersey)
Ltd.
5.08%, due 3/17/99........... 5,000,000 4,947,083
5.18%, due 2/11/99........... 5,000,000 4,970,503
5.25%, due 1/8/99............ 5,000,000 4,994,896
Prudential Funding Corp.
5.06%, due 3/11/99........... 5,000,000 4,951,508
5.12%, due 1/13/99........... 5,000,000 4,991,467
Receivables Capital Corp.
5.40%, due 1/29/99 (a)....... 4,275,000 4,257,045
5.50%, due 1/13/99 (a)....... 5,000,000 4,990,833
Rio Tinto America Inc.
5.35%, due 1/29/99 (a)....... 3,800,000 3,784,188
Salomon Smith Barney Holdings
Inc.
5.12%, due 1/25/99........... 3,050,000 3,039,589
5.14%, due 2/10/99........... 5,000,000 4,971,444
5.23%, due 1/15/99........... 4,575,000 4,565,695
5.40%, due 1/19/99........... 4,000,000 3,989,200
5.44%, due 2/4/99............ 2,420,000 2,407,567
San Paolo U.S. Financial Co.
5.19%, due 2/19/99........... 5,000,000 4,964,679
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Principal Amortized
Amount Cost
<S> <C> <C>
COMMERCIAL PAPER (CONTINUED)
Svenska Handelsbanken Inc.
5.05%, due 3/15/99........... $ 5,000,000 $ 4,948,799
5.08%, due 2/26/99........... 5,000,000 4,960,489
5.10%, due 3/30/99........... 8,000,000 7,900,267
5.27%, due 1/4/99............ 5,000,000 4,997,804
UBS Finance (Delaware) Inc.
5.01%, due 3/4/99............ 10,000,000 9,913,717
5.12%, due 2/12/99........... 5,000,000 4,970,157
UNIfunding Inc.
5.21%, due 3/9/99............ 3,550,000 3,515,578
5.24%, due 3/9/99............ 5,900,000 5,842,462
Woodstreet Funding Corp.
5.27%, due 1/29/99........... 3,000,000 2,987,703
Xerox Corp.
5.15%, due 1/22/99........... 5,000,000 4,984,979
Xerox Credit Corp.
5.07%, due 1/26/99........... 5,000,000 4,982,396
------------
452,877,812
------------
MEDIUM-TERM NOTES (6.8%)
First Union Corp.
5.61%, due 7/1/99 (b)(c)..... 5,000,000 5,000,629
Goldman Sachs Group L.P. (The)
5.25%, 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 8,998,469
Merrill Lynch & Co. Inc.
Series B
5.20%, due 3/17/99 (b)(c).... 6,400,000 6,400,669
National Rural Utilities
Cooperative Finance Corp.
5.17%, due 9/21/99 (b)(c).... 4,000,000 4,000,000
Norwest Corp.
5.27%, due 2/24/99 (b)(c).... 7,300,000 7,301,225
------------
39,200,992
------------
Total Short-Term Investments
(Amortized Cost $574,051,002)
(e).......................... 100.0% 574,051,002
Liabilities in Excess of
Cash and Other Assets........ (0.0)(d) (108,137)
---- ----------
Net Assets.................... 100.0% $573,942,865
---- ----------
---- ----------
</TABLE>
- -------
(a) May be sold to institutional investors only.
(b) Floating rate. Rate shown is the rate in effect at December 31, 1998.
(c) Coupon interest bearing security.
(d) Less than one tenth of a percent.
(e) The cost stated also represents the aggregate cost for Federal income tax
purposes.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
8
<PAGE> 404
Portfolio of Investments (Continued)
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 Loans..................... $ 13,792,007 2.4%
Banks #........................ 248,010,056 43.2
Brokerage...................... 96,023,045 16.7
Computers & Office Equipment... 18,965,844 3.3
Domestic Oils.................. 4,954,792 0.9
Finance........................ 138,258,284 24.1
Industrial..................... 4,962,090 0.9
Insurance...................... 19,822,750 3.4
Residential Mortgage Loans..... 7,000,000 1.2
Telecommunication Services..... 6,445,118 1.1
Utilities--Electric............ 15,817,016 2.8
------------ -----
574,051,002 100.0
Liabilities in Excess of
Cash and Other Assets......... (108,137) (0.0)##
------------ -----
Net Assets..................... $573,942,865 100.0%
============ =====
</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.
## 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.
9
-
<PAGE> 405
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (amortized cost
$574,051,002)............................................. $574,051,002
Cash........................................................ 177,428
Receivables:
Interest.................................................. 2,334,242
Fund shares sold.......................................... 122,000
------------
Total assets........................................ 576,684,672
------------
LIABILITIES:
Payables:
MainStay Management....................................... 151,228
Transfer agent............................................ 128,001
Fund shares redeemed...................................... 110,431
Custodian................................................. 5,905
Trustees.................................................. 4,020
Accrued expenses............................................ 148,254
Dividend payable............................................ 2,193,968
------------
Total liabilities................................... 2,741,807
------------
Net assets.................................................. $573,942,865
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 1,497,503
Class B................................................... 4,241,831
Class C................................................... 184
Additional paid-in capital.................................. 568,212,260
Accumulated net realized loss on investments................ (8,913)
------------
Net assets.................................................. $573,942,865
============
CLASS A
Net assets applicable to outstanding shares................. $149,750,320
============
Shares of beneficial interest outstanding................... 149,750,320
============
Net asset value and offering price per share outstanding.... $ 1.00
============
CLASS B
Net assets applicable to outstanding shares................. $424,174,193
============
Shares of beneficial interest outstanding................... 424,183,106
============
Net asset value and offering price per share outstanding.... $ 1.00
============
CLASS C
Net assets applicable to outstanding shares................. $ 18,352
============
Shares of beneficial interest outstanding................... 18,352
============
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> 406
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.................................................. $26,728,486
-----------
Expenses:
Management................................................ 2,297,072
Transfer agent............................................ 1,629,928
Registration.............................................. 151,239
Shareholder communication................................. 148,672
Recordkeeping............................................. 74,315
Custodian................................................. 56,327
Professional.............................................. 52,103
Trustees.................................................. 15,009
Miscellaneous............................................. 22,576
-----------
Total expenses before reimbursement..................... 4,447,241
Expense reimbursement from Manager.......................... (1,107,346)
-----------
Net expenses............................................ 3,339,895
-----------
Net investment income....................................... 23,388,591
-----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................ 6,969
-----------
Net increase in net assets resulting from operations........ $23,395,560
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
11
-
<PAGE> 407
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
-------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 23,388,591 $ 20,223,457
Net realized gain (loss) on investments................... 6,969 (1,381)
-------------- -------------
Net increase in net assets resulting from operations...... 23,395,560 20,222,076
-------------- -------------
Dividends to shareholders:
From net investment income:
Class A................................................. (5,052,302) (3,484,902)
Class B................................................. (18,336,171) (16,738,555)
Class C................................................. (118) --
-------------- -------------
Total dividends to shareholders....................... (23,388,591) (20,223,457)
-------------- -------------
Capital share transactions:
Net proceeds from sales of shares:
Class A................................................. 892,119,103 296,699,694
Class B................................................. 663,115,998 560,499,416
Class C................................................. 18,352 --
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 4,475,675 3,089,563
Class B................................................. 17,087,587 15,596,777
-------------- -------------
1,576,816,715 875,885,450
Cost of shares redeemed:
Class A................................................. (827,769,898) (272,754,087)
Class B................................................. (592,657,906) (556,956,479)
-------------- -------------
Increase in net assets derived from capital share
transactions......................................... 156,388,911 46,174,884
-------------- -------------
Net increase in net assets............................ 156,395,880 46,173,503
NET ASSETS:
Beginning of year........................................... 417,546,985 371,373,482
-------------- -------------
End of year................................................. $ 573,942,865 $ 417,546,985
============== =============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
- -
<PAGE> 408
This page intentionally left blank
13
-
<PAGE> 409
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
-----------------------------------------------
Year ended December 31,
-----------------------------------------------
1998 1997 1996 1995
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- ------- ------- -------
Net investment income....................................... 0.05 0.05 0.05 0.05
-------- ------- ------- -------
Less dividends from net investment income................... (0.05) (0.05) (0.05) (0.05)
-------- ------- ------- -------
Net asset value at end of period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======= ======= =======
Total investment return (a)................................. 5.01% 5.08% 4.91% 5.51%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 4.90% 4.97% 4.8% 5.4%
Net expenses............................................ 0.70% 0.70% 0.7% 0.7%
Expenses (before reimbursement)......................... 0.93% 0.95% 1.0% 0.9%
Net assets at end of period (in 000's)...................... $149,751 $80,925 $53,890 $34,880
</TABLE>
- -------
<TABLE>
<C> <S>
* The Fund changed its fiscal year end from August 31 to December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is not annualized.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 410
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------------------------------- -------------
September 1 September 1**
Year ended December 31, through Year ended through
----------------------------------------- December 31, August 31, December 31,
1998 1997 1996 1995 1994* 1994 1998
-------- -------- -------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- ------
0.05 0.05 0.05 0.05 0.02 0.03 0.02
-------- -------- -------- -------- -------- -------- ------
(0.05) (0.05) (0.05) (0.05) (0.02) (0.03) (0.02)
-------- -------- -------- -------- -------- -------- ------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======
5.01% 5.08% 4.91% 5.51% 1.54% 3.08% 1.60%
4.90% 4.97% 4.8% 5.4% 4.6%+ 3.1% 4.90%+
0.70% 0.70% 0.7% 0.7% 0.7%+ 0.7% 0.70%+
0.93% 0.95% 1.0% 0.9% 0.9%+ 1.0% 0.93%+
$424,174 $336,622 $317,483 $279,843 $221,912 $192,477 $ 18
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 411
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 three classes of shares. Class A shares, Class B
shares and Class C shares whose distribution commenced on January 3, 1995, May
1, 1986 and September 1, 1998, respectively, 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
16
- -
<PAGE> 412
Notes to Financial Statements
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
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 year ended
December 31, 1998, the Manager earned $2,297,072 and reimbursed the Fund
$1,107,346.
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 or Class C shares of
the Fund, the applicable contingent deferred sales charge will be assessed when
shares are redeemed from the Fund if the shareholder previously exchanged his or
her investment into the Fund from another Fund in the Trust. The Fund was
advised that NYLIFE Distributors received from shareholders the proceeds from
contingent deferred sales charges for the year ended December 31, 1998, in the
amount of $892,546.
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
17
-
<PAGE> 413
MainStay Money Market Fund
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 accrued for the
year ended December 31, 1998 amounted to $1,629,928.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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 $12,579 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$74,315 for the year ended December 31, 1998.
NOTE 4--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. The
funds pay a commitment fee; at an annual rate of 0.065% of the average
commitment amount, regardless of usage. Such commitment fees are allocated
amongst the funds based upon net assets and other factors. Interest on revolving
credit loans is charged based upon the Federal Funds Advances rate. There were
no borrowings on the line of credit at December 31, 1998.
NOTE 5--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
------------------------------ -------------------
Class A Class B Class C* Class A Class B
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shares sold............................. 892,119 663,116 18 296,700 560,499
Shares issued in reinvestment of
dividends............................. 4,476 17,088 -- 3,089 15,597
-------- -------- -------- -------- --------
896,595 680,204 18 299,789 576,096
Shares redeemed......................... (827,770) (592,658) -- (272,754) (556,956)
-------- -------- -------- -------- --------
Net increase............................ 68,825 87,546 18 27,035 19,140
======== ======== ======== ======== ========
</TABLE>
- -------
* First offered on September 1, 1998.
18
- -
<PAGE> 414
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Money Market Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
19
-
<PAGE> 415
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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> 416
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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> 417
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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> 418
MAINSTAY MONEY MARKET FUND
ANNUAL REPORT
DECEMBER 31, 1998
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY(R) LOGO]
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.
(C)1999. All rights reserved. MSAN12-02/99
RECYCLE.LOGO
23
-
[MAINSTAY(R) BACKCOVER LOGO]
24
- -
<PAGE> 419
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification of Holdings--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 12
Portfolio of Investments 14
Financial Statements 16
Notes to Financial Statements 22
Report of Independent Accountants 27
The MainStay Funds 28
</TABLE>
<PAGE> 420
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 421
MainStay New York Tax Free Fund Highlights
1998 MARKET RECAP
- - Seeking to take advantage of lower interest rates, many municipalities issued
securities, dramatically increasing the supply of new issues in New York.
- - Despite lower interest rates, the oversupply, combined with modest demand,
left municipal prices virtually flat throughout the year, which caused
practically all of the New York municipal market's total return to come from
coupon payments.
- - While municipal bonds tend to show less appreciation than government bonds
when interest rates decline, in 1998, municipals underperformed Treasuries to
a large degree.
- - New York State had a generally positive year, with increasing tax revenues,
gains on Wall Street, strong tourism, higher real-estate prices, and a budget
surplus in New York City.
- - Despite these positive factors, upstate regions remain dependent on low-growth
businesses, unemployment remains higher than the national average, and budget
deficits are projected for New York City in future years.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay New York Tax Free Fund returned
5.38% for Class A shares and 5.00% for Class B and Class C shares,* excluding
all sales charges.
- - The Fund's shifting duration strategy alternately helped and hurt performance
as the market made minor moves that were largely unpredictable.
- - Diversification across various locations and types of municipal issuers helped
the Fund manage risk, and concentration on stronger credits helped improve the
quality of the Fund's portfolio.
- - Although funds that could invest in lower-rated municipals tended to have
higher yields, we believe that municipal "junk bonds" did not adequately
compensate investors for the risks they had to assume.
- - All share classes underperformed the average Lipper* New York municipal debt
fund, which returned 5.64% for the year ended 12/31/98.
- -------
* See footnote and table on page 12 for more information on Lipper Inc.
Performance figures for Class C shares include the performance of Class B
shares from 1/1/98 through 8/31/98.
3
-
<PAGE> 422
$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 0.64%, 5-Year 4.43%, since inception 6.22%
<TABLE>
<CAPTION>
MAINSTAY NEW YORK TAX FREE LEHMAN BROTHERS MUNICIPAL
Year end FUND BOND INDEX* INFLATION+
- -------- -------------------------- ------------------------- ----------
<S> <C> <C> <C>
10/1/91 9550 10000 10000
12/91 9749 10335 10051
12/92 10628 11247 10349
12/93 11916 12628 10632
12/94 11353 11975 10908
12/95 13167 14066 11192
12/96 13569 14689 11563
12/97 14708 16038 11758
12/98 15499 17077 11947
</TABLE>
CLASS B & CLASS C SHARES
Class B SEC Returns: 1-Year 0.00%, 5-Year 4.85%, since inception 6.75%
Class C SEC Returns: 1-Year 4.00%, 5-Year 5.18%, since inception 6.75%
<TABLE>
<CAPTION>
MAINSTAY NEW YORK TAX LEHMAN BROTHERS
Year end FREE FUND CLASS B & C MUNICIPAL BOND INDEX* INFLATION+
- -------- --------------------- --------------------- ----------
<S> <C> <C> <C>
10/1/91 10000 10000 10000
12/91 10208 10335 10051
12/92 11128 11247 10349
12/93 12477 12628 10632
12/94 11888 11975 10908
12/95 13751 14066 11192
12/96 14145 14689 11563
12/97 15297 16038 11758
12/98 16062 17077 11947
</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. Performance data for the two
classes vary after this date based on differences in their load and expense
structures. 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.) The Class C graph
assumes an initial investment of $10,000 made on 10/1/91 and includes the
historical performance of Class A shares for periods 10/1/91 through 12/31/94
and Class B shares for periods 1/1/95 through 8/31/98. Performance data varies
after this date based on differences in their load and expense structures.
Returns shown do not reflect the 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. It is not possible to make an investment
directly into an index.
+ 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> 423
Portfolio Management Discussion and Analysis
When interest rates decline, bond prices rise. While municipal bonds typically
appreciate less than government bonds, in 1998, their underperformance was more
severe than usual. Historically, when a 30-year municipal bond yields 80% of a
Treasury bond it is more than fully valued. Conversely, when it yields 90%, it
is undervalued. But at the end of 1998, the ratio for municipal bonds
nationwide was 98% or severely undervalued, and during early October when
Treasuries were at their peak, the ratio rose to 103%.
New York municipal bonds followed this national trend and at year-end 1998 were
exceedingly inexpensive on a relative basis. Nevertheless, the municipal market
seemed unable to generate investor enthusiasm during 1998, as the stock market
soared to new highs and long-term Treasury bonds provided total returns over
20%.
Seeking to take advantage of lower interest rates, many New York municipalities
issued securities, sending the supply of new issues to high levels. This
oversupply, combined with lackluster demand, left prices virtually flat
throughout most of the year. As a result, practically all of the total return
opportunities in the municipal bond market came from coupon payments.
From an economic standpoint, New York State had a generally positive year. With
the boom on Wall Street, income and tax revenues rose. New York City enjoyed a
budget surplus and anticipates an even larger surplus in 1999. Crime is down,
which has helped fuel a boom in tourism and higher real estate prices. Against
this positive backdrop, however, upstate New York continues to rely on
manufacturing and low-growth businesses, and continues to lag the state as a
whole. Unemployment in New York State remains significantly higher than the
national average, and New York City's comptroller has cautioned that budget
deficits are likely in future years.
New York City general obligation debt, which has been upgraded from BBB* to
A3/A-,(+) now trades very well, but no longer provides the yield it once did.
HOW DID THE MAINSTAY NEW YORK TAX FREE FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay New York Tax Free Fund returned 5.38% for Class A shares and 5.00%
for Class B and Class C shares(++) for the year ended 12/31/98, excluding all
sales charges. All share classes underperformed the average Lipper(sec.) general
municipal debt fund, which returned 5.64% for the year.
WHAT WERE THE PRIMARY REASONS THE FUND UNDERPERFORMED ITS PEERS?
The MainStay New York Tax Free Fund must limit its long-term investments to
securities that at the time of purchase are in the top four rating categories by
Moody's or S&P, or deemed by the subadvisor to be of comparable quality. This
high-quality profile sets the Fund at a slight disadvantage to other funds that
can invest in lower-quality bonds with higher yields. The effect was magnified
in 1998, when flat municipal prices meant that virtually all of the total return
for
- -------
* Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
+ Bonds rated A by Moody's possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future. The modifier 3 indicates that the issue ranks in the lower end
of its generic rating category. Debt rated A by S&P 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. Ratings may be modified by the addition of a plus or minus
sign to show the relative standing within the major rating categories.
++ Performance figures for Class C shares include the performance of Class B
shares from 1/1/98 through 8/31/98
sec. See footnote and table on page 12 for more information on Lipper Inc.
5
-
<PAGE> 424
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.
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.
COUPON
- --------------------
The interest rate an issuer promises to pay on a debt security until maturity,
expressed as an annual percentage of the face value.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
<TABLE>
<CAPTION>
Year 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
12/98 5.38
</TABLE>
See footnote * on page 12 for more information on performance.
CLASS B & CLASS C SHARES
<TABLE>
<CAPTION>
Year 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
12/98 5.00
</TABLE>
Class B share returns reflect the historical performance of the Class A shares
for the periods 12/91 through 12/94.
Class C share returns reflect the historical performance of the Class A shares
for periods 12/91 through 12/94 and B shares for periods 1/95 through 8/98.
See footnote * on page 12 for more information on performance.
municipal bonds came from coupon payments.
The Fund's duration strategy also impacted the Fund's performance. In the first
quarter, the Fund's duration was longer than what we take to be the average in
the municipal universe. But we changed the Fund's duration strategy to neutral
just when the market rebounded, which had a negative impact on the portfolio.
Since midyear, the Fund has generally had a long duration, which was a plus in
the third quarter, but negative in the fourth quarter of 1998.
WHY HAS THE FUND MAINTAINED A LONG DURATION?
The Fund's long duration reflects our belief that municipal bonds are at their
6
<PAGE> 425
DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Transportation - (Bridge/Toll Road/Highway/Ports) 18.1%
Education/Dormitory 16.4%
Health Care 12.6%
Hospital/Nursing home 9.8%
Utility - Water 9.5%
All Other 33.6%
</TABLE>
Actual percentages will vary over time.
most attractive level compared to Treasuries since 1986. At year end, the Fund
was positioned to benefit from lower interest rates, with relatively large
positions in zero-coupon bonds and noncallable bonds. These securities tend to
perform especially well in declining rate environments.
WAS 1998 A PARTICULARLY DIFFICULT MARKET FOR NEW YORK MUNICIPAL INVESTORS?
In many ways it was. Given the historical relationship of municipals and
Treasuries, we would have expected more interest in municipal bonds. But given
the oversupply in the market, which flattened price performance severely, the
Fund faced a challenge to find ways to remain competitive.
HOW DID THE FUND ADDRESS THAT CHALLENGE?
One way was by taking a more aggressive stance on the coupon structure of the
Fund's holdings. We pared back on the Fund's coupon holdings such as 5.00% and
5.125% coupons and added zero-coupon bonds, noncallable bonds, and 4.50% to
4.75% coupons. These coupons generally do much better in a declining
interest-rate environment, either because they have a longer duration or are
likely to reach their par value later than bonds with slightly higher coupons.
When a bond reaches its par value, it may be priced as if it had reached its
call date, which lowers the bond's duration and typically has a negative impact
on total return. We believe shifting the Fund's coupon structure helped position
the portfolio positively in the general market environment.
WHAT IS THE OVERALL CREDIT QUALITY OF THE SECURITIES IN THE FUND'S INVESTMENT
PORTFOLIO?
As of 12/31/98, it was about AA(|), which is relatively high quality. About 64%
of the credits in the Fund's portfolio were rated AAA(#) by S&P and 6.9% of the
Fund's assets were invested in lower-rated BBB credits, with the rest of the
portfolio invested in between.
In recent years, there has been a continuing increase in insured credits, or
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
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 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.
# 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.
7
-
<PAGE> 426
ZERO-COUPON SECURITY
- --------------------
A security that makes no periodic interest payments but instead is sold at a
deep discount from its face value. The buyer receives the rate of return by
gradual appreciation of the security, which is redeemed at face value upon
maturity.
NONCALLABLE SECURITY
- --------------------
A security that cannot be redeemed at the option of the issuer prior to
maturity.
BASIS POINT
- --------------------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
reduces the risk of default, regardless of the issuer's credit quality. The
increase in insured credits has made it more difficult to find securities that
provide yield advantages in the municipal market.
HOW HAS THE FUND DEALT WITH THIS CHALLENGE?
By diversifying the portfolio across various quality ratings allowed by the
prospectus and seeking bonds we believe provide attractive compensation for
their level of risk. When yield spreads across different ratings are narrow, we
may prefer the potential safety of higher-quality bonds as opposed to gaining a
couple of basis points in yield from a lower-quality issue. Even when a bond is
insured, we look at the quality of the underlying credit to make sure the return
is commensurate with other bonds that may be available.
In selecting bonds, we also pay close attention to prerefunding potential, which
can have a dramatic impact on performance. Prerefundings tend to occur as rates
decline and issuers with higher-coupon bonds find that they can refinance at
advantageous rates. If the bonds are not prerefunded, they may provide
attractive yields, which may also benefit the Fund.
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 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.
ARE PREREFUNDING CANDIDATES GOOD MUNICIPAL INVESTMENTS?
We think they are, and several of the Fund's best-performing bonds in 1998
QUALITY BREAKDOWN--TOP 5 AS OF 12/31/98
<TABLE>
<S> <C>
AAA 64.1%
AA 10.8%
A 19.1%
BBB 5.6%
Cash, Equivalents & Other Assets, Less Liabilities 0.4%
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's.
See the prospectus for details.
8
<PAGE> 427
benefited from their prerefunding potential. In addition, several of the Fund's
most significant purchases in 1998 were bought at least partially because they
may be prerefunded in the future.
The Fund bought New York City Water Authority 5.75% bonds due 2026 for their
prerefunding potential. The same was true of New York City General Obligation
6.00% bonds of 2025 and New York State Medical Care 6.00% bonds of 2035. While
we believe each of these issues has an attractive coupon and should contribute
positively to performance over time, these purchases were unable to realize
their prerefunding potential in the virtually flat market in 1998, so their
contribution to performance was essentially neutral.
DID YOU MAKE ANY PURCHASES FOR THE FUND FOR OTHER REASONS?
Of course, we may have a variety of reasons for purchasing bonds for the
portfolio. In the fourth quarter, the Fund purchased New York City Industrial
Development Authority 4.50% bonds due 2033. The bonds helped maintain a long
duration with a deep-discount coupon and were part of our coupon restructuring
strategy. Unfortunately, long-duration bonds tended to underperform in the
fourth quarter, so the impact on the Fund was negative. Late in December, the
Fund purchased Port Authority of New York 5.375% bonds due 2027. We feel the
issuer is a very solid trading name and believe we bought the bonds at a
reasonable price, but because they were purchased so late in the year, they had
little impact on performance. The Fund also purchased Triborough Bridge and
Tunnel Authority 6.125% bonds due 2021. These noncallable bonds should do well
in a declining interest rate environment. We believe the purchase had a positive
effect in positioning the Fund for the future.
WHAT WERE SOME OF THE FUND'S MAJOR SALES IN 1998?
The Fund sold New York City Transitional Finance Authority 5.00% bonds due 2027
as part of its coupon restructuring. The Fund used the proceeds to purchase
bonds with a lower--and we believe less-vulnerable--coupon. The same was true of
Orange County New York 5.125% bonds due 2020. With New York City Water 5.125%
bonds of 2022, we were able to use the proceeds to buy bonds with a higher
coupon from the same issuer. All of these sales helped position the portfolio
positively should interest rates decline.
During the year, the Fund also sold New York Port Jervis Industrial Development
Authority bonds at a profit as part of a general strategy to reduce its exposure
to BBB-rated hospitals. In 1998, Moody's downgraded over $11 billion of health
care credits while upgrading only $1.7 billion. In addition, a major bankruptcy
at Allegheny Health System, a large Pennsylvania-based hospital system, shocked
the market. While these events have not yet meaningfully impacted the entire
hospital sector, we believe they may have an increasing effect as more hospitals
experience financial trouble. As a result, we believe selling the Port Jervis
bonds was a positive decision.
WHICH BONDS WERE THE FUND'S STRONGEST PERFORMERS IN 1998?
The Fund purchased New York City Transitional Finance Authority 4.75% bonds due
2023 at a market low and
9
-
<PAGE> 428
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.
FEDERAL RESERVE BOARD
- --------------------
The seven-member governing board of the Federal Reserve System, which is the
central bank of the United States. The Board sets policies on reserve
requirements, establishes bank regulations, sets the discount rate, tightens or
loosens the availability of credit in the economy, and regulates the purchase of
securities on margin.
they were the Fund's best-performing assets. New York City Water 5.75% bonds due
2026 were also purchased at a low point in the market. Since they also offered
prerefunding potential, they provided a strongly positive contribution to the
Fund's performance. Another issue, New York State Dormitory Authority St. John's
5.75% bonds due 2027, also benefited from prerefunding potential. New York State
Dormitory Rockefeller College 4.75% bonds due 2037 were high-quality,
long-duration bonds that showed strong performance for the year. The Fund had
purchased Niagara Falls Bridge & Toll 5.25% bonds due 2015 several years ago.
These noncallable bonds performed better than many other noncallable issues.
Finally, New York State Dormitory Manhattanville College zero-coupon bonds due
2019 and 2021 showed very strong performance as the supply of zero-coupon issues
was limited and demand for long-duration bonds was generally high throughout the
year.
DID THE FUND OWN BONDS THAT DIDN'T PERFORM AS WELL?
With an oversupply of new issues strongly affecting the market, it was difficult
to anticipate when the market would be up or down. As a result, the Fund made
several purchases near the market top, which turned out to be poor performers as
prices declined. Issues that fit that description included New York State
Dormitory 4.50% bonds due 2028, Metropolitan Transit Authority 5.625% bonds due
2027, and New York City Water 5.50% bonds due 2027.
WAS THE FUND UNDERWEIGHTED IN ANY SECTORS AT YEAR END?
The Fund seeks diversification across different portions of the state and a wide
variety of municipal sectors. It invests in everything from roads, airports, and
hospitals to water, pollution control, and education bonds. In 1998, the Fund
was heavily underweighted in energy bonds and electric-utility issues because we
were concerned about the potential effects of deregulation. We believe this was
a prudent decision that worked in the interests of the Fund's shareholders.
While the Fund seeks a variety of coupons and maturities, at the end of the
year, the Fund had more zero-coupon, noncallable, and deep-discount bonds than
the average fund, seeking to take advantage of lower interest rates. Because of
the Fund's quality constraints, the Fund was underweighted in lower-rated
credits. During the year, we also underweighted housing credits, which we
believe had a positive impact on the Fund, since housing bonds tend to perform
poorly in a declining interest-rate environment as prepayment potential
increases.
WHAT MAJOR RISKS DO INVESTORS FACE, AND HOW ARE YOU MANAGING THEM?
Since the Fund has a long duration, it would tend to underperform if interest
rates began to rise. We manage this risk by continually monitoring the economy,
inflation, and anticipated action by the Federal Reserve Board. If inflation
were to increase, we would probably reduce the Fund's duration.
10
- -
<PAGE> 429
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
We have positioned the Fund to seek to take advantage of lower interest rates
and a return to the historical relationship between municipal and Treasury
bonds. We believe if rates continue to decline, the Fund's overweighted
positions in zero-coupon bonds, noncallable issues, and deep-discount bonds
should contribute positively to performance. We believe our concentration on
prerefunding candidates may also help the Fund enjoy gains if municipal rates
drop as much as 50 basis points.
Ravi Akhoury
James Flood
Portfolio Managers
MacKay Shields Financial Corporation
Past performance is no guarantee of future results.
11
-
<PAGE> 430
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS THROUGH 12/31/98
<S> <C> <C> <C>
Class A 5.38% 5.40% 6.90%
Class B 5.00% 5.18% 6.75%
Class C 5.00% 5.18% 6.75%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS THROUGH 12/31/98
<S> <C> <C> <C>
Class A 0.64% 4.43% 6.22%
Class B 0.00% 4.85% 6.75%
Class C 4.00% 5.18% 6.75%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS THROUGH 12/31/98
<S> <C> <C> <C>
Class A 66 out of 27 out of 30 out of
99 funds 58 funds 40 funds
Class B 85 out of n/a 63 out of
99 funds 77 funds
Class C n/a n/a n/a
Average Lipper
NY municipal
debt fund 5.64% 5.17% 7.08%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.08 $0.4617 $0.0787
Class B $10.01 $0.4323 $0.0787
Class C $10.01 $0.1408 $0.0787
</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 load and expense structures. Class A shares are sold with a maximum
initial sales charge of 4.5% and a 12b-1 fee of .25%. Class C shares, first
offered to the public on 9/1/98, are sold with no initial sales charge, but
are subject to a CDSC of 1% if redeemed within one year 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 and B shares for periods 1/1/95 up to 8/31/98.
Performance data for the two classes after this date vary based on differences
in their load.
12
- -
<PAGE> 431
+ Lipper 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
12/31/98. Class B shares were first offered to the public on 1/3/95; Class C
shares on 9/1/98.
13
-
<PAGE> 432
Mainstay New York Tax Free Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS (99.7%)+
NEW YORK (98.1%)
Battery Park City Authority
Revenue
Series A
5.50%, due 11/1/26.............. $ 900,000 $ 937,125
Metropolitan Transportation
Authority
New York Commuter Facilities
Revenue Series A
5.625%, due 7/1/27.............. 850,000 899,937
New York City General Obligation
Series D
6.00%, due 2/15/25 (c).......... 955,000 1,024,237
Series C
7.20%, due 8/15/15 (c).......... 50,000 53,625
Series F
8.20%, due 11/15/04 (c)......... 60,000 67,650
New York City Industrial
Development
Agency Civic Facility Revenue
Lighthouse International Project
4.50%, due 7/1/33............... 1,790,000 1,617,712
New York City Municipal Water
Finance Authority, Water and
Sewer
Systems Revenue, Series B
5.50%, due 6/15/27.............. 400,000 417,452
5.75%, due 6/15/26.............. 1,200,000 1,285,500
5.875%, due 6/15/26............. 500,000 533,750
New York City Transitional
Finance Authority Revenue
Future Tax Secured
Series C
4.75, due 5/1/23................ 600,000 570,750
Series B
4.75%, due 11/15/23............. 500,000 475,625
New York State Dormitory
Authority
Revenue
Manhattanville
(zero coupon), due 7/1/19....... 2,175,000 774,844
(zero coupon), due 7/1/21....... 1,175,000 376,000
New York University Series A
5.75%, due 7/1/27............... 500,000 565,000
Park Ridge Housing Income
Project
7.85%, due 2/1/29 (d)........... 800,000 817,712
Rockefeller University
4.75%, due 7/1/37............... 900,000 850,500
St. Johns University
5.70%, due 7/1/26............... 500,000 531,875
State University Educational
Facilities
5.50%, due 5/15/26.............. 750,000 774,375
</TABLE>
- -------
+ Percentages indicated are based on fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
NEW YORK (CONTINUED)
New York State Dormitory
Authority
Revenue
Services Facilities
Mental Health
4.50%, due 8/15/28.............. $ 600,000 $ 545,250
New York State Energy Research &
Development Authority
Electric Co. Facilities Revenue
Con Edison, Project A
7.50% due 1/1/26 (a)............ 500,000 520,720
New York State Environmental
Facilities Corp. Pollution
Control
Series B
7.50% due 3/15/11............... 600,000 616,602
New York State Local Government
Assistance Corp.
(zero coupon), due 4/1/14....... 1,500,000 723,750
New York State Medical Care
Facilities
Finance Agency Revenue
7.35%, due 2/15/29.............. 615,000 640,184
7.375%, due 8/15/19............. 400,000 415,276
7.50%, due 2/15/21.............. 315,000 340,988
7.875%, due 8/15/20............. 55,000 59,125
8.875%, due 8/15/07............. 455,000 465,797
Hospital & Nursing Home
8.00%, due 2/15/28.............. 20,000 20,486
Montefiore Medical Center
6.00%, due 2/15/35 (d).......... 850,000 924,375
St. Francis Hospital of Roslyn
Project A
7.625%, due 11/1/21 (d)......... 1,035,000 1,068,969
New York State Thruway Authority
Service Contract Revenue
Local Highway and Bridge
5.75%, due 4/1/16............... 900,000 954,549
Niagara Falls New York Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15.............. 715,000 757,900
Port Authority of New York &
New Jersey Consolidated Bonds
Series 52
9.00%, due 11/1/14.............. 650,000 677,820
Series 109
5.375%, due 7/15/27............. 1,000,000 1,032,500
Triborough Bridge & Tunnel
Authority
of New York, General Purpose
Revenue, Series Y
6.125%, due 1/1/21.............. 750,000 866,250
----------
23,204,210
----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 433
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- ------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS
(CONTINUED)
PUERTO RICO (1.6%)
Puerto Rico Commonwealth
General Obligation
Public Improvement
4.75%, due 7/1/23.............. $400,000 $ 380,500
-----------
Total Long-Term Municipal Bonds
(Cost $23,194,979)............. 23,584,710
-----------
SHORT-TERM INVESTMENT (2.5%)
New York State Energy Research &
Development Authority
Pollution Control Revenue
Electric & Gas, Series B
5.05%, due 2/1/29 (b)......... 600,000 600,000
-----------
Total Short-Term Investment
(Cost $600,000)................ 600,000
-----------
Total Investments
(Cost $23,794,979) (e)......... 102.2% 24,184,710(f)
Liabilities in Excess of Cash
and Other Assets............... (2.2) (518,689)
----- ---------
Net Assets...................... 100.0% $23,666,021
----- ---------
----- ---------
</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) Prerefunding securities -- issuer has or will issue new bonds and use the
proceeds to purchase Treasury securities that mature at or near the same
date as the original issue's call date.
(d) Segregated as collateral for futures contracts.
(e) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(f) At December 31, 1998, net unrealized appreciation was $389,731, 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 $630,283 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $240,552.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 434
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$23,794,979).............................................. $24,184,710
Cash........................................................ 357,458
Receivables:
Interest.................................................. 359,444
Fund shares sold.......................................... 77,158
MainStay Management....................................... 6,478
-----------
Total assets............................................ 24,985,248
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,253,062
Fund shares redeemed...................................... 4,580
NYLIFE Distributors....................................... 6,570
Transfer agent............................................ 4,312
Custodian................................................. 5,705
Trustees.................................................. 183
Accrued expenses............................................ 44,563
Variation margin on futures contracts....................... 252
-----------
Total liabilities....................................... 1,319,227
-----------
Net assets.................................................. $23,666,021
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 15,330
Class B................................................... 8,208
Additional paid-in capital.................................. 23,233,018
Accumulated undistributed net realized gain on
investments............................................... 19,734
Unrealized appreciation on investments...................... 389,731
-----------
Net assets.................................................. $23,666,021
===========
CLASS A
Net assets applicable to outstanding shares................. $15,448,514
===========
Shares of beneficial interest outstanding................... 1,532,975
===========
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................. $ 8,217,256
===========
Shares of beneficial interest outstanding................... 820,767
===========
Net asset value and offering price per share outstanding.... $ 10.01
===========
CLASS C
Net assets applicable to outstanding shares................. $ 251
===========
Shares of beneficial interest outstanding................... 25
===========
Net asset value and offering price per share outstanding.... $ 10.01
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
<PAGE> 435
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.................................................. $1,201,755
----------
Expenses:
Management................................................ 106,011
Shareholder communication................................. 54,535
Transfer agent............................................ 40,666
Service--Class A.......................................... 36,654
Service--Class B.......................................... 16,351
Professional.............................................. 24,234
Custodian................................................. 20,733
Distribution--Class B..................................... 16,337
Recordkeeping............................................. 8,000
Registration.............................................. 5,556
Trustees.................................................. 638
Miscellaneous............................................. 20,207
----------
Total expenses before reimbursement..................... 349,922
Expense reimbursement from Manager.......................... (70,678)
----------
Net expenses............................................ 279,244
----------
Net investment income....................................... 922,511
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions..................................... 252,505
Futures transactions...................................... (1,761)
----------
Net realized gain on investments............................ 250,744
Net change in unrealized appreciation on investments........ (86,245)
----------
Net realized and unrealized gain on investments............. 164,499
----------
Net increase in net assets resulting from operations........ $1,087,010
==========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<PAGE> 436
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 922,511 $ 910,529
Net realized gain on investments.......................... 250,744 389,340
Net change in unrealized appreciation on investments...... (86,245) 213,878
----------- -----------
Net increase in net assets resulting from operations...... 1,087,010 1,513,747
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (649,522) (695,736)
Class B................................................. (272,985) (218,110)
Class C................................................. (4) --
From net realized gain on investments:
Class A................................................. (141,453) (184,623)
Class B................................................. (71,954) (73,041)
Class C................................................. (2) --
----------- -----------
Total dividends and distributions to shareholders..... (1,135,920) (1,171,510)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 3,306,693 542,479
Class B................................................. 3,642,989 1,935,502
Class C................................................. 250 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 377,476 375,244
Class B................................................. 208,607 184,143
Class C................................................. 4 --
----------- -----------
7,536,019 3,037,368
Cost of shares redeemed:
Class A................................................. (2,017,731) (2,924,796)
Class B................................................. (1,201,673) (728,335)
----------- -----------
Increase (decrease) in net assets derived from capital
share transactions................................... 4,316,615 (615,763)
----------- -----------
Net increase (decrease) in net assets................. 4,267,705 (273,526)
NET ASSETS:
Beginning of year........................................... 19,398,316 19,671,842
----------- -----------
End of year................................................. $23,666,021 $19,398,316
=========== ===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 437
This page intentionally left blank
19
-
<PAGE> 438
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------
September 1
Year ended December 31, through Year ended
------------------------------------------- December 31 August 31,
1998 1997 1996 1995 1994* 1994
------- ------- ------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period........ $ 10.09 $ 9.91 $ 10.12 $ 9.20 $ 9.58 $ 10.43
------- ------- ------- ------- ------- -------
Net investment income......................... 0.45 0.49 0.50 0.52 0.19 0.56
Net realized and unrealized gain (loss) on
investments................................. 0.08 0.32 (0.21) 0.91 (0.39) (0.59)
------- ------- ------- ------- ------- -------
Total from investment operations.............. 0.53 0.81 0.29 1.43 (0.20) (0.03)
------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income.................. (0.46) (0.49) (0.50) (0.51) (0.18) (0.57)
From net realized gain on investments....... (0.08) (0.14) -- -- -- (0.25)
------- ------- ------- ------- ------- -------
Total dividends and distributions............. (0.54) (0.63) (0.50) (0.51) (0.18) (0.82)
------- ------- ------- ------- ------- -------
Net asset value at end of period.............. $ 10.08 $ 10.09 $ 9.91 $ 10.12 $ 9.20 $ 9.58
======= ======= ======= ======= ======= =======
Total investment return (a)................... 5.38% 8.39% 3.06% 15.97% (2.11%) (0.35%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income..................... 4.43% 4.88% 5.0% 5.4% 6.1%+ 5.7%
Net expenses.............................. 1.24% 1.24% 1.24% 1.24% 0.99%+ 0.99%
Expenses (before reimbursement)........... 1.57% 1.41% 1.4% 1.4% 1.2%+ 1.1%
Portfolio turnover rate....................... 157% 212% 114% 114% 39% 169%
Net assets at end of period (in 000's)........ $15,499 $13,814 $15,572 $18,248 $17,106 $17,862
</TABLE>
- -------
<TABLE>
<S> <C>
* The Fund changed its fiscal year end from August 31 to
December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
(b) Less than one thousand.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
- -
<PAGE> 439
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------ --------------
September 1**
Year ended December 31, through
------------------------------------------ December 31,
1998 1997 1996 1995 1998
------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C>
$10.03 $ 9.84 $10.02 $ 9.20 $10.11
------ ------ ------ ------ ------
0.43 0.45 0.45 0.59 0.13
0.06 0.33 (0.18) 0.82 (0.01)
------ ------ ------ ------ ------
0.49 0.78 0.27 1.41 0.12
------ ------ ------ ------ ------
(0.43) (0.45) (0.45) (0.59) (0.14)
(0.08) (0.14) -- -- (0.08)
------ ------ ------ ------ ------
(0.51) (0.59) (0.45) (0.59) (0.22)
------ ------ ------ ------ ------
$10.01 $10.03 $ 9.84 $10.02 $10.01
====== ====== ====== ====== ======
5.00% 8.14% 2.86% 15.67% 1.18%
4.18% 4.63% 4.7% 5.1% 4.18%+
1.49% 1.49% 1.49% 1.49% 1.49%+
1.82% 1.66% 1.6% 1.6% 1.82%+
157% 212% 114% 114% 157%
$8,217 $5,585 $4,100 $1,588 --(b)
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
-
<PAGE> 440
MainStay New York Tax Free Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 three classes of shares. Class A shares whose
distribution commenced on October 1, 1991, are offered at net asset value per
share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on January 3, 1995
and September 1, 1998, respectively. Class A shares, Class B shares and Class C
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
and Class C 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
22
- -
<PAGE> 441
Notes to Financial Statements
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 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.
Permanent book-tax difference of $32,286 has been reclassified from accumulated
undistributed net realized gain on investments to accumulated undistributed net
investment income due to recharacterization of distributions.
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
23
-
<PAGE> 442
MainStay New York Tax Free Fund
distributions are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles.
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when direct allocations of expenses can be made. The investment
income and expenses (other than expenses incurred under the Distribution Plan)
and realized and 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 Fund's
average daily net assets. 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%, 1.49% and 1.49% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. For the year ended December
31, 1998, the Manager earned $106,011 and reimbursed the Fund $70,678.
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.
24
- -
<PAGE> 443
Notes to Financial Statements
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.25% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $3,909 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $13,598
for the year ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $40,666.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, NYLIFE Distributors beneficially held shares of
Class A of the Fund with a net asset value of $5,034,853 which represents 32.6%
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 $555 for the year ended December
31, 1998.
25
-
<PAGE> 444
MainStay New York Tax Free Fund
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$8,000 for the year ended December 31, 1998.
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $36,729 and $32,897, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rates. There were no borrowings on the
line of credit at December 31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
------------------------------------ ---------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.............................. 327 362 -- 55 195
Shares issued in reinvestment of
dividends and distributions............ 37 21 -- 37 18
---- ---- -- ---- ---
364 383 -- 92 213
Shares redeemed.......................... (199) (119) -- (294) (73)
---- ---- -- ---- ---
Net increase (decrease).................. 165 264 --(a) (202) 140
==== ==== == ==== ===
</TABLE>
- -------
<TABLE>
<S> <C>
* First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
26
- -
<PAGE> 445
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay New York Tax Free Fund
(one of the portfolios constituting The MainStay Funds, hereafter referred to as
the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
27
-
<PAGE> 446
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a secondary consideration. Advisors, Inc.(2)
EQUITY INCOME FUND To realize maximum long-term total return from a MacKay Shields Financial
combination of capital appreciation and income. Corporation(2)
RESEARCH VALUE FUND To seek long-term capital appreciation by investing John A. Levin & Co.,
primarily in securities of large-capitalization Inc.
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.
28
- -
<PAGE> 447
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
4 "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
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.
29
-
<PAGE> 448
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
30
- -
<PAGE> 449
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY.LOGO]
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.
(C)1999. All rights reserved. MSAN13-02/99
[RECYCLE.LOGO]
MAINSTAY NEW YORK TAX FREE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 450
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Research Value Fund Highlights 3
$10,000 Invested in the MainStay
Research Value Fund versus S&P/Barra
Large Value Index and Inflation--Class
A, Class B, & Class C Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 and 12/31/98 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Fund & Lipper Returns 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Financial Statements 15
Notes to Financial Statements 19
Report of Independent Accountants 24
The MainStay Funds 25
</TABLE>
<PAGE> 451
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 452
MainStay Research Value Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - Growth stocks outperformed value stocks within the large-capitalization
sector, and a small group of large-cap companies accounted for most of the
positive performance of the S&P 500* Index.
- - Russia's economic collapse, a weakening economic outlook in Latin America, and
ongoing economic woes in Asia along with lower corporate profits and
expectations of slower growth in the U.S. caused U.S. equity markets to tumble
in the third quarter.
- - Fears of global recession and financial market instability prompted three
successive 0.25% interest-rate cuts by the Federal Reserve Board beginning in
late September, providing a psychological boost that set the stage for the
equity market's unexpectedly speedy rebound in the fourth quarter.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - The MainStay Research Value Fund commenced operations on 6/1/98.
- - The Fund returned 3.00% for Class A shares and 2.50% for Class B and Class C
shares,(+) excluding all sales charges, for the since-inception period from
6/1/98 through 12/31/98.
- - The Fund's performance results reflected a period when the value management
style was generally out of favor.
- - Each share class underperformed the average Lipper(+) growth & income fund,
which returned 4.88% for the since-inception period.
- -------
* "S&P 500(R)" is a trademark 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. An investment may not be made directly into an index.
(+) See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from inception (6/1/98) through 8/31/98.
3
<PAGE> 453
$10,000 Invested in the MainStay Research Value Fund versus S&P/Barra Large
Value Index and Inflation
CLASS A SHARES SEC Returns: since inception -2.67%
<TABLE>
<CAPTION>
MAINSTAY RESEARCH VALUE S&P/BARRA LARGE VALUE
FUND INDEX* INFLATION (CPI)(+)
----------------------- --------------------- ----------------
<S> <C> <C> <C>
6/01/98 9450.00 10000.00 10000.00
6/30/98 9327.00 10076.00 10006.00
9/30/98 8203.00 8775.00 10043.00
12/31/98 9733.00 10305.00 10098.00
</TABLE>
CLASS B SHARES SEC Returns: since inception -2.50%
<TABLE>
<CAPTION>
MAINSTAY RESEARCH VALUE S&P/BARRA LARGE VALUE
FUND INDEX* INFLATION (CPI)(+)
----------------------- --------------------- ----------------
<S> <C> <C> <C>
6/01/98 10000.00 10000.00 10000.00
6/30/98 9870.00 10076.00 10006.00
9/30/98 8660.00 8775.00 10043.00
12/31/98 9750.00 10305.00 10098.00
</TABLE>
CLASS C SHARES SEC Returns: since inception 1.50%
<TABLE>
<CAPTION>
MAINSTAY RESEARCH VALUE S&P/BARRA LARGE VALUE
FUND INDEX* INFLATION (CPI)(+)
----------------------- --------------------- ----------------
<S> <C> <C> <C>
6/01/98 10000.00 10000.00 10000.00
6/30/98 9870.00 10076.00 10006.00
9/30/98 8660.00 8775.00 10043.00
12/31/98 10150.00 10305.00 10098.00
</TABLE>
4
<PAGE> 454
- ------------
Past performance is no guarantee of future results. The Class A graph assumes
an initial investment of $10,000 made on 6/1/98 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 6/1/98. Returns shown reflect a 5% Contingent Deferred Sales
Charge (CDSC), which would apply for the period shown. The Class C graph
assumes an initial investment of $10,000 made on 6/1/98 and includes the
performance of Class B shares for periods 6/1/98 through 8/31/98. Performance
data for the two classes vary after this date based on differences in their
load. Returns shown reflect the CDSC, 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.
* "S&P 500(R)," "S&P(R)," and "500" are trademarks of The McGraw-Hill
Companies, Inc. The S&P/Barra Large Value Index is an unmanaged,
market-capitalization weighted index like the S&P 500, and is made up of
those companies in the S&P 500 with lower price-to-book ratios. It is not
possible to make an investment directly into an index.
+ 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.
5
<PAGE> 455
Portfolio Management Discussion and Analysis
Overall, tame inflation, solid corporate earnings growth, and a corresponding
drop in interest rates had a tremendous positive impact on stock prices, with
the S&P 500* Index gaining 28.58% for the one-year period ended 12/31/98.
However, the performance of the S&P 500 Index demonstrated a significant
tiering effect, whereby a small number of large-capitalization, high-priced
stocks accounted for the bulk of the market's return. In addition, within the
large-capitalization sector, growth stocks outperformed value stocks by the
widest margin ever measured.
Volatility also increased throughout the period. In fact, during the period
since the Fund's inception, the equity markets experienced particularly dramatic
swings. After a sluggish month in June, lower corporate profits, expectations of
slower U.S. economic growth, and the General Motors strike pushed stocks to
tumble in a July sell-off. Bad news continued in August, as Russia devalued its
currency and defaulted on its domestic debt. Weak commodity prices dampened the
economic outlook for Latin America, and ongoing economic instability in Asia
impacted markets worldwide. Declining consumption of U.S. goods and inexpensive
exports from these nations placed considerable downward pressure on U.S.
corporate profitability. An impending credit crunch, political infighting, and
the collapse of a high-profile hedge fund only added to investor concerns. One
result was that investors preferred large-growth companies without regard to
valuation considerations.
The S&P 500 Index scored large gains early in September, which helped it quickly
recover more than half of its August losses before faltering toward the end of
the month. Frustrated by a move by the Federal Reserve Board to reduce interest
rates by just 0.25%, the markets tumbled once again, only to rebound as the
Federal Reserve rapidly cut rates 0.25% twice more in the fourth quarter. This
demonstrated commitment to maintaining global financial stability--along with a
lack of panic among small-market investors after the summer plunge--was all the
markets needed to spark a powerful rally that fueled the strongest fourth-
quarter returns for most of the major U.S. large-cap equity indices in some
twenty years. The quarter was led by the technology sector in general and
Internet-related stocks in particular.
GIVEN THIS CONTEXT, HOW DID THE MAINSTAY RESEARCH VALUE FUND PERFORM IN 1998?
The MainStay Research Value Fund commenced operations on 6/1/98. For the
seven-month period ended 12/31/98, the Fund returned 3.00% for Class A shares
and 2.50% for Class B and Class C shares,(+) excluding all sales charges. All
share classes underperformed the average Lipper(++) growth & income fund, which
returned 4.88% over the same seven-month period.
WHAT FACTORS CAUSED THE FUND TO UNDERPERFORM ITS PEERS?
The market environment during the Fund's since-inception period was extremely
tiered, with gains being concentrated in a small number of growth
- -------
* See footnote on page 3 for more information on the S&P Index.
(+) Performance for Class C shares includes the historical performance of
Class B shares from inception (6/1/98) through 8/31/98.
(++) See footnote and table on page 11 for more information on Lipper Inc.
6
<PAGE> 456
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
<TABLE>
<CAPTION>
Period end Total Return %
<S> <C>
6/98 -1.30 Class A
12/98 3.00 Class A
6/98 -1.30 Class B & Class C
12/98 2.50 Class B & Class C
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 6/98 through 8/98.
See footnote * on page 11 for more information on performance.
stocks trading at high price/earnings multiples. Prolonged periods of investment
uncertainty throughout 1998 favored companies with historically reliable
earnings growth, as well as specific sectors of the market, such as the
technology and consumer discretionary sectors.
While some value managers tried to improve returns by stepping into the
high-growth arena, the MainStay Research Value Fund remained true to its
discipline, focusing on stocks with value characteristics, such as low
price-to-earnings and price to cash flow ratios, which have the potential to
perform well over time. Thus, many of the Fund's investments were in sectors of
the market that did not perform well relative to the S&P 500 Index as a whole.
For example, many of the traditional value sectors of the market--capital goods,
financials, and energy--proved to be very challenging areas in which to find
outperformers in 1998. These sectors were hurt more in the third-quarter
downturn than the average stock. Also, by holding even small cash balances in
the portfolio, the Fund did not fully benefit from the market's strong recovery
in the fourth quarter of 1998.
Still, given our long-term view of the market, we believe the Fund's portfolio
is well positioned should investors begin to look beyond high-valuation, high
growth-oriented equities and toward the many attractively valued sectors.
WHAT CHANGES WERE MADE TO THE FUND'S PORTFOLIO DURING THE REPORTING PERIOD?
During the 7-month reporting period, we sought to take advantage of changing
market conditions by trimming the Fund's positions in certain relative
outperformers and reinvesting the proceeds from those sales in some stocks that
had underperformed. This strategy successfully enabled us to build the Fund's
positions in stocks at what we believed to be attractive prices. We also made
many individual buy and sell decisions for the Fund as a result of assessing
stock-specific issues, including the outlook for profits
PRICE-TO-EARNINGS RATIO
- -----------------------
Price of a stock divided by its earnings per share.
PRICE TO CASH FLOW RATIO
- ------------------------
Relationship between the price of the stock and the amount of free cash flow the
company is able to generate.
7
<PAGE> 457
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Insurance 10.2%
Broadcast/Media 7.9%
Natural Gas Distributors & Pipelines 7.3%
Computers 6.3%
Aerospace/Defense 5.3%
All Other 63.0%
</TABLE>
Actual percentages will vary over time.
and the presence of a catalyst to unlock value for shareholders.
WHAT WERE SOME OF THE FUND'S MOST SIGNIFICANT PURCHASES?
In the fourth quarter of 1998, the Fund purchased or significantly added to
holdings in three companies--MediaOne Group, AirTouch Communications, and The
Williams Companies. In each case, we believe the asset value of the underlying
company is significantly higher than the stock's market value and that the
company has a strong business outlook.
WHAT WERE SOME OF THE FUND'S MOST SIGNIFICANT SALES?
We sold some of the Fund's position in Genentech from October through November,
as the stock approached the target price at which we believed downside risk
outweighed potential upside opportunity. The Fund also reduced some of its
position in PepsiCo during the same time period, since it had produced solid
relative performance through a challenging market environment and had achieved
the price target we had set. We sold the Fund's holding in J.C. Penney in
December because of ongoing disappointments in the earnings of this department
store chain.
WHICH OF THE FUND'S HOLDINGS PROVIDED THE BEST PERFORMANCE?
Texas Instruments generated the single highest gain for the year, rising
90%(sec.) on strength in the Digital Signal Processor (DSP) market, the
company's announced sale of its memory business, and the rally in the technology
sector in general. IBM rose 76% on this sector rally, based on its strength in
the services business, and improvements in its mainframe and personal computer
businesses. Other strong performers included AirTouch Communications, up 74%;
Pfizer, up 67%; and Anheuser-Busch, up 49%.
WHICH OF THE FUND'S STOCKS UNDERPERFORMED?
Unocal Corp. was the worst-performing stock in the Fund's portfolio, with a
decline of 25%, as crude oil prices became severely depressed during 1998.
- -------
(sec.) Returns reflect performance for the 12-month period ended 12/31/98.
Please note the Fund's inception date was 6/1/98 and the Fund was not in
existence for the full 12-month period.
8
<PAGE> 458
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
CASH, EQUIVALENTS & OTHER ASSETS,
COMMON STOCKS PREFERRED STOCKS LESS LIABILITIES
- ------------- ---------------- ---------------------------------
<S> <C> <C>
89.4 % 2.90 % 7.70 %
</TABLE>
Owens-Illinois, a container/packaging company purchased in mid-June, fell 19%,
on concerns about its business exposure to economically weak emerging markets.
Loral Space & Communications declined 17%, after the failure of its
telecommunications satellite launch and concerns over the viability of its
technology. Lockheed Martin fell 14% over general concerns about aerospace
stocks and certain failures of execution within the company itself.
IS THE FUND OVERWEIGHTED OR UNDERWEIGHTED IN ANY PARTICULAR SECTORS?
We are not top-down portfolio managers who seek to invest in or avoid particular
sectors, based on market timing or macroeconomic factors. 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 of a particular sector. For the period ended 12/31/98,
the Fund was neither deliberately underweighted nor overweighted in any
particular sector.
WHAT IS YOUR OUTLOOK GOING FORWARD?
As 1998 has once again proved, equity markets are unpredictable, particularly in
the short term. Volatility will almost certainly continue in 1999. It also seems
unlikely that stock market returns can continue at the levels we have seen in
recent years.
That said, we see strong, positive economic signs in the months ahead, which
bodes well for the U.S. equity markets. We anticipate solid economic growth, low
inflation, favorable consumer fundamentals, and low interest rates. Certain
equity sectors may be impacted, however, by slowing profitability. The
industrial sectors, in particular, may be additionally affected by adverse
developments abroad. There also remains an ongoing, wide valuation disparity
between value stocks and growth stocks, which may persist for some time.
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 over-weighted in a sector when that portion of the
portfolio is greater than the sector's general relationship to the market as a
whole.
9
<PAGE> 459
However, we do believe that the vast disparity between these large-
capitalization sectors has become so wide and the growth style has dominated
for so long that a change in fashion may not be too far off. The growth style
of investing among large-capitalization stocks has been favored for more than
five years now, as represented by the S&P 500/Barra's Growth and Value Indices.
Prior to this run favoring growth, the longest period in which one style
remained in favor without a significant reversal was three years. It is too
early to declare that a change is at hand, even with the fourth quarter's
upturn and slight narrowing of the valuation gulf, but we are cautiously
optimistic that it might be.
Our experience has shown it is often when the value investment style is out of
favor that we can concentrate on favorable buying opportunities in undervalued
stocks that have the potential to generate strong long-term performance. Thus,
we will pursue investments for the Fund that our research-intensive process
identifies as having attractive return potential with limited risk of capital
loss. In particular, we will seek to identify companies with catalysts that we
believe could create value for shareholders going forward.
Regardless of market movements, 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 research-intensive process 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.
10
<PAGE> 460
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND THROUGH 12/31/98
<S> <C>
Class A 3.00%
Class B 2.50%
Class C 2.50%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND THROUGH 12/31/98
<S> <C>
Class A -2.67%
Class B -2.50%
Class C 1.50%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND THROUGH 12/31/98
<S> <C>
Average Lipper
growth & income fund 4.88%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.30 $0.0000 $0.0000
Class B $10.25 $0.0000 $0.0000
Class C $10.25 $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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (6/1/98) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
(+) Lipper 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 Class A and Class B shares (on
6/1/98) through 12/31/98. The Fund's Class C shares were first offered to
the public on 9/1/98.
11
<PAGE> 461
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Tribune Co. $580,800
MediaOne Group, Inc. 493,500
First Data Corp. 491,156
Texas Instruments Inc. 470,594
Aetna Inc. 463,887
International Business Machines Corp. 461,875
KeySpan Energy Corp. 449,500
Bell Atlantic Corp. 448,819
AirTouch Communications, Inc. 447,175
Bank of New York Co., Inc. (The) 418,600
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
KeySpan Energy Corp. $612,254
Tribune Co. 557,491
First Data Corp. 474,151
Owens-Illinois, Inc. 472,778
Black & Decker Corp. (The) 457,583
Aetna Inc. 444,055
MediaOne Group, Inc. 442,112
Unocal Corp. 408,589
TRW Inc. 401,495
Bell Atlantic Corp. 380,430
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Philip Morris Cos., Inc. $339,704
General Mills, Inc. 287,506
Penney (J.C.) Co. 260,486
TIG Holdings, Inc. 259,803
Minnesota Mining & Manufacturing Co. 254,659
Fortune Brands, Inc. 246,794
Hewlett-Packard Co. 244,309
Lilly (Eli) & Co. 243,629
Kimberly-Clark Corp. 239,766
First Union Corp. 235,737
</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> 462
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (89.4%)+
AEROSPACE/DEFENSE (5.3%)
Lockheed Martin Corp. .......... 2,700 $ 228,825
Sundstrand Corp. ............... 5,600 290,500
United Technologies Corp. ...... 2,550 277,313
-----------
796,638
-----------
AUTO PARTS & EQUIPMENT (2.8%)
TRW Inc. ....................... 7,400 415,788
-----------
BANKS (5.2%)
Bank of New York Co., Inc.
(The).......................... 10,400 418,600
Mellon Bank Corp. .............. 4,800 330,000
Northern Trust Corp. ........... 400 34,925
-----------
783,525
-----------
BEVERAGES (1.7%)
Anheuser-Busch Cos. Inc. ....... 2,800 183,750
PepsiCo, Inc. .................. 1,700 69,594
-----------
253,344
-----------
BIOTECHNOLOGY (1.2%)
Genentech, Inc. (a)............. 2,300 183,281
-----------
BROADCAST/MEDIA (6.3%)
Chancellor Media Corp. (a)...... 8,300 397,362
Fox Entertainment Group Inc.--
Class A (a).................... 2,400 60,450
MediaOne Group, Inc. (a)........ 10,500 493,500
-----------
951,312
-----------
CHEMICALS (3.7%)
Du Pont (E. I.) de Nemours &
Co. ........................... 3,900 206,944
Monsanto Co. ................... 7,400 351,500
-----------
558,444
-----------
COMPUTERS (6.3%)
First Data Corp. ............... 15,500 491,156
International Business Machines
Corp. ......................... 2,500 461,875
-----------
953,031
-----------
CONTAINERS--METALS & GLASS (2.4%)
Owens-Illinois, Inc. (a)........ 12,000 367,500
-----------
- ------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
ELECTRICAL EQUIPMENT (4.6%)
General Electric Co. ........... 3,600 $ 367,425
Philips Electronics NV-NY....... 4,900 331,669
-----------
699,094
-----------
ELECTRONICS (3.1%)
Texas Instruments Inc. ......... 5,500 470,594
-----------
FOOD (3.6%)
Nabisco Holdings Corp.--Class
A.............................. 7,100 294,650
Ralston Purina Co. ............. 7,500 242,812
-----------
537,462
-----------
GOLD & PRECIOUS METALS MINING
(0.8%)
Getchell Gold Corp. (a)......... 4,200 114,450
-----------
HARDWARE & TOOLS (2.0%)
Black & Decker Corp. (The)...... 5,500 308,344
-----------
HEALTH CARE--DRUGS (2.8%)
Lilly (Eli) & Co. .............. 1,700 151,087
Pfizer Inc. .................... 2,150 269,691
-----------
420,778
-----------
INSURANCE (10.2%)
Ace, Ltd. ...................... 9,800 337,487
Aetna Inc. ..................... 5,900 463,887
EXEL Ltd.--Class A.............. 3,700 277,500
Partnerre Ltd. ................. 5,600 256,200
Tokio Marine & Fire Insurance
Co. Ltd. (The)................. 3,500 212,625
-----------
1,547,699
-----------
MANUFACTURING (1.1%)
Allied Signal Inc. ............. 3,800 168,388
-----------
MISCELLANEOUS (1.3%)
Harris Corp. ................... 5,400 197,775
-----------
NATURAL GAS DISTRIBUTORS &
PIPELINES (7.3%)
KeySpan Energy Corp............. 14,500 449,500
Sempra Energy................... 11,800 299,425
Williams Cos., Inc. (The)....... 11,500 358,656
-----------
1,107,581
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
<PAGE> 463
MainStay Research Value Fund
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL & GAS--EXPLORATION &
PRODUCTION (1.4%)
Conoco Inc.--Class A (a)........ 9,900 $ 206,662
-----------
OIL--INTEGRATED (4.7%)
Amerada Hess Corp. ............. 2,000 99,500
Chevron Corp. .................. 3,300 273,694
Unocal Corp. ................... 11,700 341,494
-----------
714,688
-----------
PAPER & FOREST PRODUCTS (1.1%)
Macmillan Bloedel Ltd. ......... 16,500 165,000
-----------
PUBLISHING (3.9%)
Tribune Co. .................... 8,800 580,800
-----------
TELECOMMUNICATIONS (3.6%)
AirTouch Communications, Inc.
(a)............................ 6,200 447,175
Loral Space & Communications
Ltd. (a)....................... 5,600 99,750
-----------
546,925
-----------
TELEPHONE (3.0%)
Bell Atlantic Corp. ............ 7,900 448,819
-----------
Total Common Stocks
(Cost $12,371,537)............. 13,497,922
-----------
PREFERRED STOCKS (2.9%)
BROADCAST/MEDIA (1.6%)
News Corp Ltd.--Pfd. (b)........ 9,700 239,469
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
CONTAINERS--METALS & GLASS (0.1%)
Owens-Illinois, Inc. 4.75%
(Conv)......................... 700 $ 29,750
-----------
MANUFACTURING (1.2%)
Sealed Air Corp. (Conv)......... 3,400 176,375
-----------
Total Preferred Stocks
(Cost $382,471)................ 445,594
-----------
Principal
Amount
-----------
SHORT-TERM INVESTMENT (8.1%)
TIME DEPOSIT (8.1%)
Cayman Bank of New York
4.375%, due 1/4/99............. $1,222,000 1,222,000
-----------
Total Short-Term Investment
(Cost $1,222,000).............. 1,222,000
-----------
Total Investments
(Cost $13,976,008) (c)......... 100.4% 15,165,516(d)
Liabilities in Excess of Cash,
and Other Assets............... (0.4) (60,526)
----- -----------
Net Assets...................... 100.0% $15,104,990
----- -----------
----- -----------
</TABLE>
- -------
(a) Non-income producing security.
(b) ADR--American Depository Receipt
(c) The cost for Federal income tax purposes is $14,029,091.
(d) At December 31, 1998, net unrealized appreciation was $1,136,425, 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 $1,626,085 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $489,660.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE> 464
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$13,976,008).............................................. $15,165,516
Cash........................................................ 360
Receivables:
Fund shares sold.......................................... 104,269
Dividends and interest.................................... 9,892
Unamortized organization expense............................ 59,631
-----------
Total assets........................................ 15,339,668
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 114,694
Fund shares redeemed...................................... 45,212
MainStay Management....................................... 10,405
Custodian................................................. 9,439
NYLIFE Distributors....................................... 5,937
Transfer agent............................................ 4,517
Trustees.................................................. 154
Accrued expenses............................................ 44,320
-----------
Total liabilities................................... 234,678
-----------
Net assets.................................................. $15,104,990
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 10,078
Class B................................................... 4,477
Class C................................................... 135
Additional paid-in capital.................................. 14,364,871
Accumulated net realized loss on investments................ (464,079)
Net unrealized appreciation on investments.................. 1,189,508
-----------
Net assets.................................................. $15,104,990
===========
CLASS A
Net assets applicable to outstanding shares................. $10,378,084
===========
Shares of beneficial interest outstanding................... 1,007,847
===========
Net asset value per share outstanding....................... $ 10.30
Maximum sales charge (5.50% of offering price).............. 0.60
-----------
Maximum offering price per share outstanding................ $ 10.90
===========
CLASS B
Net assets applicable to outstanding shares................. $ 4,588,901
===========
Shares of beneficial interest outstanding................... 447,712
===========
Net asset value and offering price per share outstanding.... $ 10.25
===========
CLASS C
Net assets applicable to outstanding shares................. $ 138,005
===========
Shares of beneficial interest outstanding................... 13,464
===========
Net asset value and offering price per share outstanding.... $ 10.25
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 465
Statement of Operations
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 101,506
Interest.................................................. 33,193
----------
Total income............................................ 134,699
----------
Expenses:
Management................................................ 61,472
Shareholder communication................................. 41,683
Transfer agent............................................ 23,957
Registration.............................................. 21,056
Professional.............................................. 18,650
Service--Class A.......................................... 13,506
Service--Class B.......................................... 4,484
Service--Class C.......................................... 90
Distribution--Class B..................................... 13,365
Distribution--Class C..................................... 270
Custodian................................................. 9,439
Organization.............................................. 7,828
Recordkeeping............................................. 7,133
Trustees.................................................. 328
Miscellaneous............................................. 18,965
----------
Total expenses.......................................... 242,226
----------
Net investment loss......................................... (107,527)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (464,079)
Net unrealized appreciation on investments.................. 1,189,508
----------
Net realized and unrealized gain on investments............. 725,429
----------
Net increase in net assets resulting from operations........ $ 617,902
==========
</TABLE>
- -------
* Commencement of operations.
(a) Dividends recorded net of foreign withholding taxes of $73.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 466
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (107,527)
Net realized loss on investments.......................... (464,079)
Net unrealized appreciation on investments................ 1,189,508
-----------
Net increase in net assets resulting from operations...... 617,902
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 10,183,730
Class B................................................. 4,678,889
Class C................................................. 124,376
Cost of shares redeemed:
Class A................................................. (123,065)
Class B................................................. (376,840)
Class C................................................. (2)
-----------
Increase in net assets derived from capital share
transactions......................................... 14,487,088
-----------
Net increase in net assets............................ 15,104,990
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $15,104,990
===========
</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.
17
<PAGE> 467
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
---------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.00 $ 10.00 $ 8.30
------- ------- -------
Net investment loss (a)..................................... (0.07) (0.10) (0.06)
Net realized and unrealized gain on investments............. 0.37 0.35 2.01
------- ------- -------
Total from investment operations............................ 0.30 0.25 1.95
------- ------- -------
Net asset value at end of period............................ $ 10.30 $ 10.25 $ 10.25
======= ======= =======
Total investment return (b)................................. 3.00% 2.50% 23.49%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss..................................... (1.48%)+ (2.23%)+ (2.23%)+
Expenses................................................ 3.15%+ 3.90%+ 3.90%+
Portfolio turnover rate..................................... 53% 53% 53%
Net assets at end of period (in 000's)...................... $10,378 $ 4,589 $ 138
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ 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.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 468
Notes to Financial Statements
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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
19
<PAGE> 469
MainStay Research Value 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 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 $67,459 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required. A
permanent book-tax difference of $107,527 has been reclassified from accumulated
net investment loss to additional paid-in capital, due to net investment loss
incurred during the period.
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.
20
<PAGE> 470
Notes to Financial Statements (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 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 December 31, 1998, the
Manager earned $61,472.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $2,903 for the period ended
December 31, 1998. The Fund was also advised
21
<PAGE> 471
MainStay Research Value Fund
that the Distributor retained contingent deferred sales charges on redemption of
Class B shares of $1,171 for the period ended December 31, 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 accrued for the period ended December 31,
1998, amounted to $23,957.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MainStay Management or NYLIFE Distributors, are paid an annual fee of $45,000,
$2,000 for each Board meeting and $1,000 for each Committee meeting attended
plus reimbursement for travel and out-of-pocket expenses. The Trust allocates
this expense in proportion to the net assets of the respective Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $9,270,000 and $1,025,000, respectively. This
represents 89.3% and 22.3% of the net assets at period end for Class A and B,
respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $396 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$7,133 for the period ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, a capital loss
carryforward of $410,996 is available, to the extent provided by regulations, to
offset future realized gains through 2006.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $19,272 and $6,054, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
22
<PAGE> 472
Notes to Financial Statements (continued)
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998* through
December 31, 1998
-------------------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold................................................ 1,021 488 13
Shares redeemed............................................ (13) (40) --
----- --- --
Net increase............................................... 1,008 448 13
===== === ==
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
</TABLE>
23
<PAGE> 473
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Research Value Fund (one
of the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
24
<PAGE> 474
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
25
<PAGE> 475
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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.
26
<PAGE> 476
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
27
<PAGE> 477
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN23-02/99
[RECYCLE LOGO]
MAINSTAY RESEARCH VALUE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 478
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Small Cap Growth Fund
Highlights 3
$10,000 Invested in the MainStay Small
Cap Growth Fund versus Russell 2000
Index and Inflation--Class A, Class B, &
Class C Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 & 12/31/98 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Fund & Lipper Returns 11
Top 10 Holdings 12
10 Largest Purchases 12
10 Largest Sales 12
Portfolio of Investments 13
Financial Statements 15
Notes to Financial Statements 19
Report of Independent Accountants 24
The MainStay Funds 25
</TABLE>
<PAGE> 479
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 480
MainStay Small Cap Growth Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - Successive problems in Asia, Russia, and Latin America resulted in a general
flight to quality in the second half of 1998.
- - Investors showed a decided preference for highly liquid, large-capitalization
growth stocks, causing small-cap stocks to underperform.
- - In the small-cap universe, growth stocks outpaced value issues by a wide
margin for the year ended 12/31/98.
- - Investors rewarded small-cap companies that had a high degree of liquidity and
strong, consistent earnings growth trends, while minor weaknesses were often
magnified by severe market setbacks.
- - Volatility in the small-cap equity market was much higher than in the stock
market as a whole, underscoring the importance of careful research and
continual market monitoring.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - From its inception on 6/1/98 through 12/31/98, the MainStay Small Cap Growth
Fund returned 5.10% for Class A shares and 4.60% for Class B and Class C
shares,* excluding all sales charges.
- - The Fund's focus on high-quality issues backed by strong management,
consistent earnings growth records, and positive earnings acceleration was
consistent with general market preferences during the second half of 1998.
- - The Fund underweighted financial stocks and those with exposure to
commodities, international markets, or cyclical forces and overweighted
companies in a wide variety of service sectors.
- - The Fund exercised diligence in seeking to avoid potential risks such as
international exposure, as a global economic recession heightened investor
awareness of risk factors.
- - All share classes outperformed the average Lipper* small-cap fund, which
returned -4.88% for the seven-month period ended 12/31/98.
- -------
* See footnote and table on page 11 for more information on Lipper Inc.
Performance for Class C shares includes the historical performance of Class B
shares from inception (6/1/98) through 8/31/98.
3
<PAGE> 481
$10,000 Invested in the MainStay Small Cap
Growth Fund versus Russell 2000 Index
and Inflation
CLASS A SHARES SEC Returns: since inception -0.68%
<TABLE>
<CAPTION>
CLASS A BENCHMARK INFLATION (CPI)+
------- --------- ---------------
<S> <C> <C> <C>
6/01/98 9450 10000 10000
6/98 10272 10021 10006
9/98 8505 8002 10043
12/98 9932 9307 10098
</TABLE>
CLASS B SHARES SEC Returns: since inception -0.40%
<TABLE>
<CAPTION>
CLASS B BENCHMARK INFLATION (CPI)+
------- --------- ---------------
<S> <C> <C> <C>
6/01/98 10000 10000 10000
6/98 10860 10021 10006
9/98 8980 8002 10043
12/98 9960 9307 10098
</TABLE>
CLASS C SHARES SEC Returns: since inception 3.60%
<TABLE>
<CAPTION>
CLASS C BENCHMARK INFLATIONI (CPI)+
------- --------- -----------------
<S> <C> <C> <C>
6/01/98 10000 10000 10000
6/98 10860 10021 10006
9/98 8980 8002 10043
12/98 10360 9307 10098
</TABLE>
4
<PAGE> 482
Past performance is no guarantee of future results. The Class A graph assumes
an initial investment of $10,000 made on 6/1/98 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 6/1/98. Returns shown reflect a 5% Contingent Deferred Sales
Charge (CDSC), which would apply for the period shown. The Class C graph
assumes an initial investment of $10,000 made on 6/1/98 and includes the
performance of Class B shares for periods 6/1/98 through 8/31/98. Performance
data for the two classes vary after this date based on differences in their
load. Returns shown reflect the CDSC, 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 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. It is not possible to make an investment directly into an index.
+ 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.
5
<PAGE> 483
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of 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.
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 potenial to
increase in value over time.
Portfolio Management Discussion and Analysis
Overall, the last seven months of 1998 saw extreme volatility for stocks, with
small-cap issues experiencing much wider and more frequent swings than larger
issues. Financial difficulties in Asia, Russia, and Brazil resulted in a
general flight to quality, with investors seeking refuge in highly liquid,
large-capitalization growth stocks. While small-cap stocks tended to
underperform stocks in general, within the small-cap universe, investors showed
a strong preference for growth over value disciplines.
Based on several fundamental measures, small-cap growth stocks showed stronger
growth prospects than large-capitalization stocks. Yet investors' interest in
highly liquid issues caused the performance gap between large- and small-cap
stocks to widen substantially. Small-cap issues, which by their very nature are
less liquid than large-cap stocks, saw several periods when sellers were
abundant, but buyers could not be found.
During the second half of 1998, the market rewarded liquidity, strong
management, and consistent earnings growth. Both strengths and weaknesses were
magnified by the volatility of the market, with investors showing little
tolerance for stocks that failed to meet the market's expectations.
With the Asian crisis resulting in lower manufacturing output and reduced demand
for oil and other commodities, companies with cyclical, commodity, or Asian
exposure tended to underperform. Purely domestic companies, on the other hand,
tended to perform well, with selected Internet and technology stocks showing
very strong results.
HOW DID THE MAINSTAY SMALL CAP GROWTH FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Small Cap Growth Fund began operations on 6/1/98 and returned 5.10%
for Class A shares and 4.60% for Class B and Class C shares* for the seven-
month period ended 12/31/98, excluding all sales charges. All share classes
outperformed the average Lipper(+) small-cap fund, which returned -4.88% for the
seven-month period ended 12/31/98.
WHAT CAUSED THE FUND TO OUTPERFORM ITS PEERS?
Primarily, the Fund's investment approach stressed many of the key factors that
the market rewarded during the reporting period. Recognizing the potential
fallout from the Asian crisis, the Fund tried to avoid companies with cyclical,
commodity, or international exposure, which was generally positive for the
Fund's performance. The Fund also benefited from an underweighted position in
financial stocks, which we believed were likely to underperform.
The Fund's focus on companies with highly visible, stable, and consistent growth
in sales and earnings was essen tially what other investors wanted. So the
stocks we purchased for the Fund tended to perform well, on average.
Most of the Fund's holdings showed strong results. We believe that on average
the Fund's securities showed less volatility than small-cap stocks in general
during both the market decline and rebound in October. The Fund's strength on
the
- -------
* Performance for Class C shares includes the historical performance of Class
B shares from inception (6/1/98) through 8/31/98.
(+) See footnote and table
on page 11 for more
information on
Lipper Inc.
6
<PAGE> 484
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
<TABLE>
<CAPTION>
CLASS A CLASS B & CLASS C
------- -----------------
<S> <C> <C>
6/98 8.7 8.6
12/98 5.1 4.6
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 6/98 through 8/98.
See footnote * on page 11 for more information on performance.
downside was key to its outperforming other small-cap funds.
WERE THERE OTHER STRATEGIC STEPS THAT HELPED THE FUND?
We tried to keep the Fund widely diversified, with a slight emphasis on stocks
that were superior performers. While the Fund underweighted financial stocks,
for example, it held several financial stocks with slightly smaller-than-normal
positions. The Fund also focused on what we thought were likely to be growing
industries, such as technology, health care, and services.
WHAT WERE SOME OF THE FUND'S TOP-PERFORMING STOCKS?
uBid, Inc. is an Internet company that gives consumers a way to participate in
bidding auctions on computer equipment and appliances. The stock rose quickly
amid the Internet fever that spread through the stock market in 1998. The Fund
sold the stock when it overshot what we believed would be a reasonable
valuation. Although it continued to climb and the Fund missed some opportunity
in the stock, we believe our approach reflected a realistic value assessment and
helped reduce potential risk. Even with the Fund's early sale, the stock was the
largest positive contributor to performance.
Plantronics is a company that makes portable headsets that are becoming more
popular in an age of telemarketing and telephone-oriented customer service. The
company had superior fundamentals, strong sales and earnings growth, and
appeared to be undervalued when we purchased the stock for the Fund. It was also
a strong performer over the seven-month reporting period.
Gilat Satellite is a strong, well-positioned company in the rapidly growing
satellite communications industry. The company's market experience and insight
helped it grow rapidly in 1998, contributing positively to the Fund's
performance.
Two of the service names in the Fund's portfolio were Metzler Group and Sylvan
Learning Systems. Metzler Group provides consulting services, predominantly to
electric utilities that are undergoing deregula-
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.
CYCLICALS
- --------------------
Securities that tend to rise quickly with economic upturns and fall quickly when
the economy slows. Non- cyclical industries, such as food, insurance, and
pharmaceuticals, are likely to have more consistent performance regardless of
economic changes.
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
<PAGE> 485
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.
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Specialized Services 22.3%
Computers 10.9%
Health Care 8.3%
Retail 8.3%
Health Care-Medical Products 6.3%
All Other 43.9%
</TABLE>
Actual percentages will vary over time.
tion. As the oldest, most experienced name in this rapidly expanding market,
Metzler Group has strong growth potential and contributed positively to the
Fund's performance. Sylvan Learning Systems provides computerized testing
services, tutoring services, and various courses of study in English as a
foreign language. As educational systems become more computerized and are slowly
but progressively being privatized, the company showed strong growth and
positive performance for the Fund.
A final issue was Waters Corp., which manufactures very sophisticated analytical
and measuring devices for industrial and pharmaceutical applications. The
company had all of the elements we look for--strong management, highly visible
growth in sales and earnings, and a dominant position in its market. It also
contributed positively to the Fund's overall results.
WERE THERE SOME STOCKS THAT DIDN'T PERFORM AS WELL FOR THE FUND?
Yes, there were several stocks that underperformed. Monarch Dental is a company
that manages dental practices. Despite its rapid growth, we believe the company
outgrew its ability to manage its operations. When the stock declined, the Fund
sold it, which had a negative impact on performance, but allowed us to invest
the assets in ways we believed would be more productive.
Windmere Durables is a manufacturer of small consumer appliances that also
underperformed. The company had acquired a consumer division of Black & Decker
but failed to efficiently integrate the new company into its product line. A
slowdown in consumer purchases hurt Windmere's bottom line, and we sold the
stock at a loss to redeploy the assets in more productive ways. Cort Business
Systems rents and sells furniture to corporations. Unfortunately, as Cort
improved productivity by downsizing, the furniture market slowed. This trend
took a toll on the stock's performance and we also sold it at a loss. Both of
these sales had a negative impact on the Fund's performance.
8
<PAGE> 486
DID THE FUND HAVE ANY STOCKS THAT SUFFERED AS A RESULT OF THE PROBLEMS OVERSEAS?
While the Fund tried to focus primarily on domestic companies, it did own one
stock that suffered from underlying exposure to Asia. The company was EFTC, an
electronic component manufacturer that works as an outsourcing contractor for
major computer and electronics companies. Unfortunately, just as the company was
bringing a new plant on line, some of their major clients suffered setbacks from
difficulties in the Asian markets. The new operations were too immature to
sustain the challenge gracefully, so the Fund sold the stock with a negative
impact on performance. This led us to redouble our efforts to uncover any hidden
or underlying risks stemming from the Asian situation that might cause problems
for the Fund's holdings. While the sale itself detracted from performance, the
added vigilance was a positive factor throughout the remainder of the year.
Schein Pharmaceutical was another stock on which the Fund took a loss. Despite
rapid growth and strong positioning in its marketplace, the company had a
disagreement with the Food and Drug Administration, which later shut down the
company's major plant. Naturally, the impact was negative on the Fund's
performance.
Although we couldn't have predicted this outcome, it serves as an excellent
illustration of what can happen in the small-cap market. Problems that might be
minor setbacks for larger companies may have a magnified impact on smaller ones.
As the Internet mania showed in 1998, however, small successes may also be
magnified--sometimes beyond what could be reasonably expected.
WHAT DO YOU THINK WERE THE BEST DECISIONS YOU MADE FOR THE FUND DURING THE LAST
SEVEN MONTHS OF 1998?
Our commitment to the Fund's investment disciplines, which are based on strong
fundamentals and consistent earnings growth, certainly served the Fund well. The
Fund's emphasis on technology
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
CASH, EQUIVALENTS & OTHER ASSETS,
COMMON STOCKS LESS LIABILITIES
- ------------- ---------------------------------
<S> <C>
98.0% 2.0%
</TABLE>
Actual percentages will vary over time.
9
<PAGE> 487
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.
and services stocks also had a very positive impact. In fact, of the Fund's 15
best-performing stocks, five were in technology and seven in services of one
kind or another.
As investors, we take our cues from a number of sources. Sometimes we learn
about a small company from our research into larger ones. It may be a supplier,
a competitor, or a provider of a new product, service, or technology. But no
matter how we discover a growth candi-date for the Fund, it is our disciplined
investment process that determines what to buy and when to sell. Our best
decision was to stick with our disciplines, which helped us evaluate companies
and decide which ones have the management expertise to move to the next level in
a challenging market environment.
WHAT IS YOUR OUTLOOK GOING FORWARD?
Although we anticipate continued volatility, we don't believe it's possible to
predict the markets. Whatever the markets may bring, we'll continue to look for
companies with consistent sales and earnings growth, strong managers, innovative
ideas, and leadership positions in their respective industries or sectors. The
Fund seeks long-term capital appreciation, and we're pursuing it for the Fund's
shareholders through vigilant research and individual stock selection.
Edmund C. Spelman
Rudolph C. Carryl
Portfolio Managers
MacKay Shields Financial Corporation
10
<PAGE> 488
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A 5.10%
Class B 4.60%
Class C 4.60%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A -0.68%
Class B -0.40%
Class C 3.60%
</TABLE>
LIPPER+ CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Average Lipper
small-cap fund -4.88%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.51 $0.0000 $0.0000
Class B $10.46 $0.0000 $0.0000
Class C $10.46 $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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (6/1/98) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
+ Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
average listed above is not class specific. Life of fund return is from the
period of the initial offering of Class A and Class B shares (on 6/1/98)
through 12/31/98. The Fund's Class C shares were first offered to the
public on 9/1/98.
11
<PAGE> 489
- -------
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. and federal
agency issues are excluded. See Portfolio of Investments for specific type of
security held.
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Gilat Satellite Networks $826,875
Metzler Group, Inc. (The) 774,131
Plantronics, Inc. 748,200
Sylvan Learning Systems, Inc. 732,000
Tetra Tech, Inc. 711,744
I2 Technologies, Inc. 683,438
Expeditors International of Washington, Inc. 667,800
Iron Mountain Inc. 665,353
Citadel Communications Corp. 662,400
Mettler-Toledo Holding, Inc. 659,469
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
Pre-Paid Legal Services, Inc. $577,122
HNC Software Inc. 568,550
Expeditors International of Washington, Inc. 555,088
Visio Corp. 544,306
Gilat Satellite Networks 539,106
Iron Mountain Inc. 517,238
IDEXX Laboratories, Inc. 515,719
Cerner Corp. 510,806
Metzler Group, Inc. (The) 510,706
Acxiom Corp. 509,525
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Dominick's Supermarkets, Inc. $475,300
Theglobe.com, Inc. 466,109
Inktomi Corp. 372,091
Alpine Group, Inc. (The) 364,672
Restoration Hardware, Inc. 360,739
Agribiotech, Inc. 353,195
Allied Waste Industries, Inc. 288,476
Cyberian Outpost, Inc. 278,991
HCR Manor Care, Inc. 272,476
Idex Corp. 251,735
</TABLE>
12
<PAGE> 490
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.0%)+
AEROSPACE/DEFENSE (1.3%)
AAR Corp........................ 19,900 $ 475,113
-----------
BANKS (2.3%)
Cullen/Frost Bankers, Inc....... 8,100 444,487
Southwest Bancorporation of
Texas, Inc. (a)................ 21,200 378,950
-----------
823,437
-----------
BROADCAST/MEDIA (1.8%)
Citadel Communications Corp.
(a)............................ 25,600 662,400
-----------
COMPUTERS (10.9%)
HNC Software Inc. (a)........... 15,800 638,912
I2 Technologies, Inc. (a)....... 22,500 683,438
International Telecommunication
Data Systems, Inc. (a)......... 18,000 265,500
QRS Corp. (a)................... 10,900 523,200
Sanchez Computer Associates,
Inc. (a)....................... 18,500 541,125
Sapient Corp. (a)............... 10,400 582,400
Visio Corp. (a)................. 14,000 511,875
XOOM.com, Inc. (a).............. 5,200 171,600
-----------
3,918,050
-----------
DISTRIBUTION/WHOLESALE (1.0%)
Daisytek International Corp.
(a)............................ 18,400 349,600
-----------
ELECTRICAL EQUIPMENT (3.6%)
Gilat Satellite Networks (a).... 15,000 826,875
Watsco, Inc..................... 27,150 454,762
-----------
1,281,637
-----------
ELECTRONICS (5.2%)
Mettler-Toledo Holding, Inc.
(a)............................ 23,500 659,469
Plantronics, Inc. (a)........... 8,700 748,200
Waters Corp. (a)................ 5,300 462,425
-----------
1,870,094
-----------
ENGINEERING & CONSTRUCTION (2.0%)
Tetra Tech, Inc. (a)............ 26,300 711,744
-----------
FINANCE (2.3%)
HealthCare Financial Partners,
Inc. (a)....................... 9,200 365,125
Mutual Risk Management Ltd...... 12,200 477,325
-----------
842,450
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
FOOD & HEALTH CARE
DISTRIBUTORS (4.1%)
American Italian Pasta Co.
(a)............................ 20,000 $ 527,500
Aurora Foods Inc. (a)........... 23,700 469,556
United Natural Foods, Inc.
(a)............................ 20,100 484,913
-----------
1,481,969
-----------
HEALTH CARE (8.3%)
Assisted Living Concepts, Inc.
(a)............................ 31,000 406,875
Curative Health Services, Inc.
(a)............................ 16,100 539,350
MedQuist Inc. (a)............... 15,000 592,500
Parexel International Corp.
(a)............................ 19,000 475,000
RehabCare Group, Inc. (a)....... 24,000 448,500
Total Renal Care Holdings, Inc.
(a)............................ 17,600 520,300
-----------
2,982,525
-----------
HEALTH CARE--DRUGS (1.6%)
AmeriSource Health Corp. (a).... 9,100 591,500
-----------
HEALTH CARE--MEDICAL
PRODUCTS (6.3%)
Hanger Orthopedic Group, Inc.
(a)............................ 26,700 600,750
IDEXX Laboratories, Inc. (a).... 23,500 632,298
Ocular Sciences, Inc. (a)....... 16,400 438,700
Xomed Surgical Products, Inc.
(a)............................ 19,050 609,600
-----------
2,281,348
-----------
INSURANCE (3.1%)
CMAC Investment Corp............ 8,700 399,656
Enhance Financial Services Group
Inc............................ 14,900 447,000
Triad Guaranty Inc. (a)......... 12,900 284,606
-----------
1,131,262
-----------
LEISURE TIME (2.3%)
Family Golf Centers, Inc. (a)... 20,500 404,875
Intrawest Corp.................. 25,600 432,000
-----------
836,875
-----------
MACHINERY (1.5%)
Applied Power Inc............... 14,300 539,825
-----------
MANUFACTURING (1.4%)
SPS Technologies, Inc. (a)...... 9,000 500,625
-----------
RENTALS (0.8%)
Rental Service Corp. (a)........ 18,700 293,356
-----------
</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> 491
MainStay Small Cap Growth Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RETAIL (8.3%)
Blue Rhino Corp. (a)............ 25,000 $ 556,250
Duane Reade Inc. (a)............ 16,300 627,550
Linens 'n Things, Inc. (a)...... 16,300 645,888
Men's Wearhouse, Inc. (The)
(a)............................ 16,950 538,162
Whole Foods Market, Inc. (a).... 12,700 614,363
-----------
2,982,213
-----------
SCHOOLS (4.9%)
Bright Horizons Family
Solutions, Inc. (a)............ 16,200 437,400
ITT Educational Services, Inc.
(a)............................ 18,000 612,000
Sylvan Learning Systems, Inc.
(a)............................ 24,000 732,000
-----------
1,781,400
-----------
SPECIALIZED SERVICES (22.3%)
Abacus Direct Corp. (a)......... 10,200 464,100
Acxiom Corp. (a)................ 17,800 551,800
American Bank Note Holographics,
Inc. (a)....................... 36,000 630,000
Boron, Lepore & Associates, Inc.
(a)............................ 17,900 617,550
Central Parking Corp............ 10,600 343,837
Cerner Corp. (a)................ 19,500 521,625
Consolidated Graphics, Inc.
(a)............................ 9,700 655,356
Equity Corporation International
(a)............................ 14,400 382,500
Iron Mountain Inc. (a).......... 18,450 665,353
Lason, Inc. (a)................. 10,900 634,244
Maximus, Inc. (a)............... 15,500 573,500
Metzler Group, Inc. (The) (a)... 15,900 774,131
Pre-Paid Legal Services, Inc.
(a)............................ 18,700 617,100
Profit Recovery Group
International, Inc. (The)
(a)............................ 16,600 621,463
-----------
8,052,559
-----------
TEXTILES--HOME FURNISHINGS
(0.8%)
Interface, Inc.................. 31,250 290,041
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION (1.9%)
Expeditors International of
Washington, Inc................ 15,900 $ 667,800
-----------
Total Common Stocks (Cost
$31,644,160)................... 35,347,823
-----------
<CAPTION>
Principal
Amount
<S> <C> <C>
----------
SHORT-TERM INVESTMENTS (5.6%)
COMMERCIAL PAPER (5.6%)
American Express Credit Corp.
5.85%, due 1/8/99.............. $ 905,000 903,969
Xerox Credit Corp.
5.10%,due 1/4/99............... 1,115,000 1,114,526
-----------
Total Short-Term Investments
(Cost $2,018,495).............. 2,018,495
-----------
Total Investments
(Cost $33,662,655) (b)......... 103.6% 37,366,318(c)
Liabilities in Excess of Cash,
and Other Assets............... (3.6) (1,298,695)
---------- -----------
Net Assets...................... 100.0% $36,067,623
========== ===========
</TABLE>
- -------
(a) Non-income producing security.
(b) The cost stated also represents the aggregate cost for Federal income tax
purposes.
(c) At December 31, 1998, net unrealized appreciation was $3,703,663 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 $5,125,931 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,422,268.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
<PAGE> 492
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$33,662,655).............................................. $37,366,318
Cash........................................................ 56,796
Receivables:
Investment securities sold................................ 541,173
Fund shares sold.......................................... 162,334
Dividends and interest.................................... 1,843
Unamortized organization expense............................ 59,631
-----------
Total assets........................................ 38,188,095
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 1,996,322
MainStay Management....................................... 27,657
NYLIFE Distributors....................................... 18,625
Custodian................................................. 12,962
Transfer agent............................................ 11,236
Fund shares redeemed...................................... 3,603
Trustees.................................................. 253
Accrued expenses............................................ 49,814
-----------
Total liabilities................................... 2,120,472
-----------
Net assets.................................................. $36,067,623
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 14,575
Class B................................................... 19,831
Class C................................................... 1
Additional paid-in capital.................................. 33,960,347
Accumulated net realized loss on investments................ (1,630,794)
Net unrealized appreciation on investments.................. 3,703,663
-----------
Net assets.................................................. $36,067,623
===========
CLASS A
Net assets applicable to outstanding shares................. $15,319,123
===========
Shares of beneficial interest outstanding................... 1,457,546
===========
Net asset value per share outstanding....................... $ 10.51
Maximum sales charge (5.50% of offering price).............. 0.61
-----------
Maximum offering price per share outstanding................ $ 11.12
===========
CLASS B
Net assets applicable to outstanding shares................. $20,747,845
===========
Shares of beneficial interest outstanding................... 1,983,138
===========
Net asset value and offering price per share outstanding.... $ 10.46
===========
CLASS C
Net assets applicable to outstanding shares................. $ 655
===========
Shares of beneficial interest outstanding................... 63
===========
Net asset value and offering price per share outstanding.... $ 10.46
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 493
Statement of Operations
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 18,564
Interest.................................................. 100,139
-----------
Total income............................................ 118,703
-----------
Expenses:
Management................................................ 136,799
Transfer agent............................................ 50,483
Distribution--Class B..................................... 49,375
Distribution--Class C..................................... 1
Shareholder communication................................. 44,324
Service--Class A.......................................... 17,741
Service--Class B.......................................... 16,458
Service--Class C.......................................... 1
Registration.............................................. 21,103
Professional.............................................. 19,330
Custodian................................................. 12,962
Organization.............................................. 7,828
Recordkeeping............................................. 7,280
Trustees.................................................. 564
Miscellaneous............................................. 24,698
-----------
Total expenses.......................................... 408,947
-----------
Net investment loss......................................... (290,244)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (1,630,794)
Net unrealized appreciation on investments.................. 3,703,663
-----------
Net realized and unrealized gain on investments............. 2,072,869
-----------
Net increase in net assets resulting from operations........ $ 1,782,625
===========
</TABLE>
- -------
* Commencement of operations.
(a) Dividends recorded net of foreign withholding taxes of $98.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 494
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31,
1998
-------------
<S> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (290,244)
Net realized loss on investments.......................... (1,630,794)
Net unrealized appreciation on investments................ 3,703,663
-----------
Net increase in net assets resulting from operations...... 1,782,625
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 15,576,522
Class B................................................. 21,163,932
Class C................................................. 577
Cost of shares redeemed:
Class A................................................. (991,817)
Class B................................................. (1,464,204)
Class C................................................. (12)
-----------
Increase in net assets derived from capital share
transactions......................................... 34,284,998
-----------
Net increase in net assets............................ 36,067,623
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $36,067,623
===========
</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.
17
<PAGE> 495
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
---------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.00 $ 10.00 $ 8.43
------- ------- -------
Net investment loss (a)..................................... (0.10) (0.12) (0.09)
Net realized and unrealized gain on investments............. 0.61 0.58 2.12
------- ------- -------
Total from investment operations............................ 0.51 0.46 2.03
------- ------- -------
Net asset value at end of period............................ $ 10.51 $ 10.46 $ 10.46
======= ======= =======
Total investment return (b)................................. 5.10% 4.60% 24.08%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss..................................... (2.12%)+ (2.87%)+ (2.87%)+
Expenses................................................ 2.63%+ 3.38%+ 3.38%+
Portfolio turnover rate..................................... 32% 32% 32%
Net assets at end of period (in 000's)...................... $15,319 $20,748 $ 1
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ 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.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 496
Notes to Financial Statements
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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
19
<PAGE> 497
MainStay Small Cap Growth Fund
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.
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 $67,459 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $290,244 have been reclassified from
accumulated net investment loss to additional paid-in capital, due to net
investment loss incurred by the Fund in 1998.
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
20
<PAGE> 498
Notes to Financial Statements (continued)
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 1.00% of the average
daily net assets of the Fund. For the period ended December 31, 1998, the
Manager earned $136,799.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
21
<PAGE> 499
MainStay Small Cap Growth Fund
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $9,699 for the period ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $4,526 for
the period ended December 31, 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 accrued for the period ended December 31,
1998 amounted to $50,483.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $9,459,000 and $1,046,000, respectively. This
represents 61.7% and 5.0% of the net assets at period end for Class A and B,
respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $610 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$7,280 for the period ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, a capital loss
carryforward of $1,410,209 is available, to the extent provided by regulations,
to offset future realized gains through 2006. In addition, the Fund intends to
elect, to the extent provided by the regulations, to treat $220,585 of
qualifying capital losses that arose during the year as if they arose on January
1, 1999.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $39,993 and $6,718, respectively.
22
<PAGE> 500
Notes to Financial Statements (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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998* through
December 31, 1998
-------------------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold.............................................. 1,563 2,140 1
Shares redeemed.......................................... (106) (157) --
----- ----- -----
Net increase............................................. 1,457 1,983 1
===== ===== =====
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
</TABLE>
23
<PAGE> 501
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Small Cap Growth Fund (one
of the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
24
<PAGE> 502
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
25
<PAGE> 503
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
26
<PAGE> 504
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
27
<PAGE> 505
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998
[MAINSTAY FUNDS LOGO]
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.
(C)1999. All rights reserved. MSAN24-02/99
[RECYCLE LOGO]
MAINSTAY SMALL CAP GROWTH FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 506
Table of Contents
<TABLE>
<S> <C>
President's Letter 2
MainStay Small Cap Value Fund Highlights 3
$10,000 Invested in the MainStay Small
Cap Value Fund versus Russell 2000 Index
and Inflation--Class A, Class B, & Class
C Shares 4
Portfolio Management Discussion and
Analysis 6
Fund Performance for the Since-Inception
Periods Ended 6/30/98 & 12/31/98 7
Diversification by Industry--Top 5 8
Portfolio Composition 9
Fund & Lipper Returns 10
Top 10 Holdings 11
10 Largest Purchases 11
10 Largest Sales 11
Portfolio of Investments 12
Financial Statements 14
Notes to Financial Statements 18
Report of Independent Accountants 23
The MainStay Funds 24
</TABLE>
<PAGE> 507
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 508
MainStay Small Cap Value Fund Highlights
MARKET RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - Concerns over both foreign and domestic economies turned investor preferences
toward large-capitalization stocks over small-capitalization stocks.
- - Following a severe tumble in August, a fourth-quarter market rebound led by
Internet stocks resulted in poor performance for small-capitalization value
stocks versus growth stocks.
- - Corporate earnings growth slowed, especially in the industrial sector.
- - The Initial Public Offering (IPO) market essentially shut down in the fourth
quarter.
FUND RECAP FOR THE SEVEN-MONTH PERIOD ENDED 12/31/98
- - The MainStay Small Cap Value Fund commenced operations on June 1, 1998.
- - The Fund returned -9.70% for Class A shares and -10.00% for Class B and Class
C shares,* for the since-inception period from 6/1/98 through 12/31/98.
- - The Fund's performance results reflected a period when both
small-capitalization stocks and the value management style were generally out
of favor.
- - All share classes underperformed the average Lipper* small-cap fund, which
returned -4.88% over the same since-inception period.
- -------
* See footnote and table on page 10 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from inception (6/1/98) through 8/31/98.
3
-
<PAGE> 509
$10,000 Invested in the MainStay Small Cap
Value Fund versus Russell 2000 Index
and Inflation
CLASS A SHARES SEC Returns: since inception -14.67%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY SMALL CAP VALUE
FUND RUSSELL 2000 INDEX* INFLATION(+)
------------------------ ------------------- ----------
<S> <C> <C> <C>
6/1/98 9450 10000 10000
6/98 9119 10021 10006
9/98 7532 8002 10043
12/98 8533 9307 10098
</TABLE>
CLASS B SHARESSEC Returns: since inception -14.50%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY SMALL CAP VALUE
FUND RUSSELL 2000 INDEX* INFLATION(+)
------------------------ ------------------- ----------
<S> <C> <C> <C>
6/1/98 10000.00 10000.00 10000.00
6/98 9640.00 10021.00 10006.00
9/98 7950.00 8002.00 10043.00
12/98 8550.00 9307.00 10098.00
</TABLE>
CLASS C SHARESSEC Returns: since inception -10.90%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY SMALL CAP VALUE
FUND RUSSELL 2000 INDEX* INFLATION(+)
------------------------ ------------------- ----------
<S> <C> <C> <C>
6/1/98 10000.00 10000.00 10000.00
6/98 9640.00 10021.00 10006.00
9/98 7950.00 8002.00 10043.00
12/98 8910.00 9307.00 10098.00
</TABLE>
4
<PAGE> 510
Past performance is no guarantee of future results. The Class A graph assumes an
initial investment of $10,000 made on 6/1/98 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
6/1/98. Returns shown reflect a 5% Contingent Deferred Sales Charge (CDSC),
which would apply for the period shown. The Class C graph assumes an initial
investment of $10,000 made on 6/1/98 and includes the performance of Class B
shares for periods 6/1/98 through 8/31/98. Performance data for the two classes
vary after this date based on differences in their load. Returns shown reflect
the CDSC, 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 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. It is not possible to make an investment directly into an index.
(+) 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.
5
-
<PAGE> 511
Portfolio Management Discussion and Analysis
The second half of 1998 was difficult for small-capitalization stocks in general
and small-cap value stocks in particular. Worries about declining economies in
Asia and a renewed focus on slower growth in U.S. corporate earnings during the
third quarter of the year contributed to market volatility and caused investors
to gravitate toward large-capitalization, blue-chip companies. In fact, lower
corporate profits, expectations of slower economic growth, and the General
Motors strike contributed to a period of heavy selling in July.
Small-cap stocks were particularly hard hit in August, as the market experienced
a correction. That month, Russia defaulted on its domestic debt, weak commodity
prices dampened the economic outlook for Latin America, and ongoing instability
in Asia impacted virtually all major U.S. equity indices. The Russell 2000
Index,* which measures the small-capitalization equity market, posted one of the
five worst returns in its 19-year history in August.
However, investor confidence returned and the market bounced back strongly when
the Federal Reserve Board lowered interest rates in a series of three rapid
moves beginning on September 29. With double-digit returns for the fourth
quarter, small-cap stocks finished the year in a rally that was led primarily by
Internet-related stocks. Overall, however, the late rally was not enough to pull
the Russell 2000 Index into positive territory either for the year or for the
seven months ended 12/31/98.
GIVEN THIS CONTEXT, HOW DID THE MAINSTAY SMALL CAP VALUE FUND PERFORM IN 1998?
The MainStay Small Cap Value Fund commenced operations on 6/1/98. For the seven
months ended 12/31/98, the Fund returned -9.70% for Class A shares and -10.00%
for Class B and Class C shares,(+) excluding all sales charges. All share
classes underperformed the average Lipper(++) small-cap fund, which returned
- -4.88% over the same since-inception period.
WHAT FACTORS CAUSED THE FUND TO UNDERPERFORM ITS PEERS?
While some value managers tried to improve returns by stepping into the growth
arena, the MainStay Small Cap Value Fund remained true to its discipline,
focusing solely on companies with true value characteristics, such as low
price-to-earnings and price-to-book ratios. In many cases, these small-cap value
holdings underperformed the market during the first months of the Fund's
operations. In our long-term view of the market, however, these stocks and the
Fund's portfolio appear to be well positioned should investors begin to look
beyond high-valuation, high growth-oriented equities.
WHAT WERE SOME OF THE FUND'S MOST SIGNIFICANT PURCHASES?
In July, the Fund purchased DENTSPLY, a dental equipment company, which we
believed to be stable although it experienced a slight dip in earnings growth.
This presented a buying opportunity for the Fund, and the stock did help boost
Fund performance. In November, the
CAPITALIZATION
- --------------------
The amount of outstanding equity a company has issued. Companies may vary
greatly in the amount of equity capital they have raised, and their
capitalization may change with new issues or stock repurchases.
PRICE-TO-EARNINGS
RATIO
- --------------------
The price of a stock divided by its earnings per share.
PRICE-TO-BOOK RATIO
- --------------------
The price of a stock divided by its book value per share.
- -------
* See footnote on page 5 for more information on the Russell 2000 Index.
(+) Performance figures for Class C shares include the historical performance of
Class B shares from inception (6/1/98) through 8/31/98.
(++) See footnote and table on page 10 for more information on Lipper Inc.
6
<PAGE> 512
FUND PERFORMANCE FOR THE SINCE-INCEPTION PERIODS ENDED 6/30/98 & 12/31/98
<TABLE>
<CAPTION>
CLASS A CLASS B & CLASS C
------- -----------------
<S> <C> <C>
6/98 -3.5 -3.6
12/98 -9.7 -10
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 6/98 through 8/98. See footnote * on page 10 for more information
on performance.
Fund purchased Landry Seafood, an attractively priced stock that was selling at
50% of its book value and at a very low price-earnings multiple. Although it is
still early, we believe Landry Seafood will contribute positively to the Fund's
performance in the coming months.
WERE THERE ANY SALES DURING THIS REPORTING PERIOD?
We sold the Fund's holding in Beverly Enterprises in August, because of a
government lawsuit that created concerns about the stock's valuation. The Fund
sold Houston Exploration as fundamentals in the oil industry continued to
deteriorate. While both of these stocks were sold at a loss, we believe it may
be prudent for the Fund to sell stocks when their prospects are weakening. The
Fund sold Quorum Health Group in November because of concerns about a government
inquiry, but this holding was bought when prices were low and sold at a
significant short-term profit. The Fund's strict sell disciplines served the
portfolio well during this challenging period.
WHAT CHANGES WERE MADE TO THE FUND'S PORTFOLIO?
As concerns about an economic slowdown mounted during the second and third
quarters of 1998, we decreased the Fund's positions in industrial cyclicals. The
decision to underweight industrials helped the Fund avoid some of the problems
this sector encountered as its prospects began to weaken. In addition, we
lowered the Fund's Real Estate Investment Trust (REIT) position in response to
economic concerns about the real estate market. This decision proved positive
for the portfolio, as the real estate sector continued to underperform through
the year.
Unfortunately, our decision to add to the Fund's energy holdings during the
summer was premature. Industry fundamentals continued to deteriorate and
energy-related stocks declined in value, hindering Fund performance. Although
the Fund added technology stocks to its holdings, it did not participate fully
in the powerful rally in this sector during the fourth quarter. We simply did
not anticipate the extent of the Internet-led growth stock
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.
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 less than the sector's general relationship to the market as a
whole.
7
-
<PAGE> 513
DIVERSIFICATION BY INDUSTRY -- TOP 5 AS OF 12/31/98
[PIE CHART]
enthusiasm. This hampered the Fund's relative performance as well.
WHICH OF THE FUND'S HOLDINGS PROVIDED THE BEST PERFORMANCE?
The Fund's best performers were companies in the technology or consumer
discretionary sectors. These included Jones Intercable, Hutchinson Technology,
THQ, and Plantronics. Jones Intercable, an attractively priced company with
strong fundamentals, appreciated over 46%* for the seven-month period ended
December 31, 1998. Hutchinson Technology's introduction of improved disk drive
technology helped boost the value of its shares 52% since June. THQ, a video
game developer, experienced excellent sales growth since it was added to the
Fund's holdings near the Fund's inception. It appreciated 44%. Finally,
Plantronics, a company that benefited from continued growth in headset demand,
appreciated 74% since the Fund purchased its shares in June.
WHICH OF THE FUND'S STOCKS WERE THE WORST PERFORMERS?
Some of the Fund's worst performers included Aftermarket Technology Co., which
declined on disappointing earnings results primarily due to customer inventory
reductions. Giant Industries, Inc. experienced deteriorating margins in the
refining industry, and Oneida suffered when the company delayed several new
product introductions.
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
At the end of 1998, small-cap value stocks were significantly undervalued
relative to the larger-capitalization sector. As a result, we anticipate a
significant increase in mergers, which may help to refocus investor attention on
the small-cap value sector of the market. It is likely we will continue to see
high volatility and reduced financial liquidity within the small-cap equity
sector, but we believe small-cap fundamentals and earnings
CONSUMER DISCRETIONARY
- ----------------------
Nonessential consumer items.
- -------
* Returns reflect performance for the period in which the securities were
held in the portfolio.
8
<PAGE> 514
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
CASH, EQUIVALENTS & OTHER ASSETS,
COMMON STOCKS LESS LIABILITIES
------------- ---------------------------------
<S> <C> <C>
93.6 6.4
</TABLE>
Actual percentages will vary over time.
growth remain strong. We will seek to use the volatility of the market to make
new stock purchases or add to existing Fund positions at attractive prices.
Wherever the markets may move, however, the Fund will continue to seek long-
term capital appreciation by investing primarily in securities of attractively
valued small-cap companies.
Timothy Dalton, Jr.
Kenneth Greiner
Portfolio Managers
Dalton, Greiner, Hartman, Maher & Co.
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.
9
-
<PAGE> 515
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A -9.70%
Class B -10.00%
Class C -10.00%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Class A -14.67%
Class B -14.50%
Class C -10.90%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
THROUGH 12/31/98
<S> <C>
Average Lipper
small-cap fund -4.88%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $9.03 $0.0000 $0.0000
Class B $9.00 $0.0000 $0.0000
Class C $9.00 $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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for this class include the historical performance of
the Class B shares for periods from inception (6/1/98) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
(+) Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
average listed above is not class specific. Life of Fund return is for
the period from the initial offering of Class A and Class B shares (on
6/1/98) through 12/31/98. The Fund's Class C shares were first offered to
the public on 9/1/98.
10
<PAGE> 516
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
DII Group, Inc. (The) $624,775
THQ Inc. 543,200
Plantronics, Inc. 541,800
Sbarro, Inc. 534,225
Claire's Stores, Inc. 512,500
TNP Enterprises, Inc. 508,363
West Co., Inc. (The) 503,194
Hutchinson Technology Inc. 502,312
Physician Reliance Network, Inc. 483,000
Jones Intercable, Inc. Class A 466,688
</TABLE>
10 Largest Purchases for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
Sbarro, Inc. $516,730
Claire's Stores, Inc. 477,991
DII Group, Inc. (The) 453,200
Houston Exploration Co. (The) 447,824
TNP Enterprises, Inc. 444,654
Plantronics, Inc. 437,903
Banta Corp. 432,860
Lancaster Colony Corp. 421,175
Aftermarket Technology Corp. 419,812
West Co., Inc. (The) 419,462
</TABLE>
10 Largest Sales for the period ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Cybex Computer Products Corp. $444,610
Houston Exploration Co. (The) 352,935
Berkley Corp. (W.R.) 226,952
Urban Shopping Centers, Inc. 224,155
Bradley Real Estate 191,782
Plantronics, Inc. 178,053
Beverly Enterprises, Inc. 165,155
Powerwave Technologies, Inc. 145,834
BancorpSouth, Inc. 142,205
Titan International, Inc. 141,204
</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.
11
-
<PAGE> 517
MainStay Small Cap Value Fund
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (93.6%)(+)
AUTO PARTS & EQUIPMENT (2.2%)
Aftermarket Technology Corp.
(a)............................ 29,300 $ 230,737
Borg-Warner Automotive, Inc. ... 4,700 262,319
-----------
493,056
-----------
BANKS (6.0%)
Colonial BancGroup, Inc.
(The).......................... 21,900 262,800
ISB Financial Corp. ............ 11,300 250,013
Local Financial Corp. (a)....... 28,000 252,000
SIS Bancorp, Inc. .............. 5,000 226,250
Staten Island Bancorp, Inc. .... 19,100 380,806
-----------
1,371,869
-----------
BROADCAST/MEDIA (3.1%)
Gaylord Entertainment Co. ...... 7,800 234,975
Jones Intercable, Inc. Class A
(a)............................ 13,100 466,688
-----------
701,663
-----------
BUILDING MATERIALS (2.8%)
NCI Building Systems, Inc.
(a)............................ 8,700 244,687
Simpson Manufacturing Co., Inc.
(a)............................ 10,500 393,094
-----------
637,781
-----------
COMMUNICATIONS--EQUIPMENT (0.7%)
Electromagnetic Sciences, Inc.
(a)............................ 10,900 152,600
-----------
COMPUTERS (5.8%)
Cybex Computer Products Corp.
(a)............................ 2,650 77,844
Hutchinson Technology Inc.(a)... 14,100 502,312
Systems & Computer Technology
Corp. (a)...................... 13,500 185,625
THQ Inc. (a).................... 19,400 543,200
-----------
1,308,981
-----------
ELECTRIC POWER COMPANIES (3.8%)
TNP Enterprises, Inc. .......... 13,400 508,363
Washington Water Power Co.,
(The).......................... 18,700 359,975
-----------
868,338
-----------
ELECTRONICS (10.5%)
DII Group, Inc. (The) (a)....... 26,800 624,775
Etec Systems, Inc. (a).......... 11,100 444,000
Exar Corp. (a).................. 17,300 278,963
Harman International Industries,
Inc. .......................... 7,900 301,187
Harmon Industries, Inc. ........ 8,700 200,644
- -------------------------------------------------------------
(+) Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
ELECTRONICS (CONTINUED)
Optek Technology, Inc. (a)...... 12,800 $ 241,600
Technitrol, Inc. ............... 9,100 290,062
-----------
2,381,231
-----------
ENERGY--MISCELLANEOUS (1.4%)
C&D Technologies, Inc. ......... 11,400 313,500
-----------
FOOD (1.0%)
Tasty Baking Co. ............... 15,600 236,925
-----------
HEALTH CARE (4.0%)
Mallinckrodt Inc. .............. 6,100 187,956
Physician Reliance Network, Inc.
(a)............................ 36,800 483,000
Trigon Healthcare, Inc. (a)..... 6,600 246,263
-----------
917,219
-----------
HEALTH CARE--MEDICAL PRODUCTS (5.6%)
Arrow International, Inc. ...... 11,900 373,362
DENTSPLY International, Inc. ... 15,700 404,275
West Co., Inc. (The)............ 14,100 503,194
-----------
1,280,831
-----------
HOMEBUILDING (3.3%)
Coachmen Industries, Inc. ...... 12,500 328,125
Skyline Corp. .................. 12,700 412,750
-----------
740,875
-----------
HOUSEHOLD--FURNISHINGS & APPLIANCES (1.5%)
Haverty Furniture Cos., Inc. ... 16,300 342,300
-----------
HOUSEWARES (0.8%)
Oneida Ltd. .................... 12,200 180,713
-----------
INSURANCE (3.4%)
American Heritage Life
Investment Corp. .............. 14,000 342,125
American Medical Security Group,
Inc. .......................... 12,300 176,044
Reliance Group Holdings,
Inc. .......................... 19,000 244,625
-----------
762,794
-----------
MACHINERY--DIVERSIFIED (2.0%)
IDEX Corp. ..................... 4,900 120,050
Specialty Equipment Co., Inc.
(a)............................ 12,000 324,750
-----------
444,800
-----------
MANUFACTURING (8.3%)
Brady Corp. Class A............. 4,400 118,525
CLARCOR Inc. ................... 13,500 270,000
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
12
- -
<PAGE> 518
Portfolio of Investments
December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MANUFACTURING (CONTINUED)
Hussmann International, Inc. ... 19,300 $ 373,937
Lancaster Colony Corp. ......... 11,400 366,225
Matthews International Corp. ... 6,400 201,600
Plantronics, Inc. (a)........... 6,300 541,800
-----------
1,872,087
-----------
METALS--PROCESS & FABRICATION (1.1%)
Hawk Corp. Class A (a).......... 31,100 260,463
-----------
OFFICE EQUIPMENT & SUPPLIES (0.6%)
Hunt Corp. ..................... 12,500 132,812
-----------
OIL & GAS--EQUIPMENT & SERVICES (0.8%)
Giant Industries, Inc. ......... 20,200 189,375
-----------
PAPER & FOREST PRODUCTS (1.3%)
FiberMark, Inc. (a)............. 21,700 295,663
-----------
PUBLISHING (3.5%)
Hollinger International Inc. ... 26,200 365,162
R. H. Donnelley Corp. .......... 28,700 417,944
-----------
783,106
-----------
REAL ESTATE INVESTMENT/MANAGEMENT (6.6%)
Bedford Property Investors,
Inc. .......................... 13,600 229,500
Berkshire Realty Co., Inc. ..... 22,700 215,650
Boykin Lodging Co. ............. 16,900 209,138
CB Richard Ellis Services Inc.
(a)............................ 13,700 248,312
LNR Property Corp. ............. 16,700 332,956
Pan Pacific Retail Properties,
Inc. .......................... 12,800 255,200
-----------
1,490,756
-----------
RESTAURANTS (3.3%)
Landry's Seafood Restaurants,
Inc. (a)....................... 29,200 219,000
Sbarro, Inc. ................... 20,400 534,225
-----------
753,225
-----------
RETAIL (3.8%)
Claire's Stores, Inc. .......... 25,000 512,500
Payless Shoe Source Inc. (a).... 7,400 350,575
-----------
863,075
-----------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Value
<S> <C> <C>
SPECIALIZED SERVICES (2.9%)
Banta Corp. .................... 14,500 $ 396,937
Inacom Corp. (a)................ 12,400 184,450
Staff Leasing, Inc. (a)......... 6,300 73,238
-----------
654,625
-----------
TELECOMMUNICATIONS--LONG DISTANCE (1.0%)
Norstan, Inc. (a)............... 13,000 230,750
-----------
TRANSPORTATION--MISCELLANEOUS (2.5%)
Arnold Industries, Inc. ........ 24,900 401,512
Varlen Corp. ................... 7,625 175,852
-----------
577,364
-----------
Total Common Stocks
(Cost $21,336,884)............. 21,238,777
-----------
<CAPTION>
Principal
Amount
----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (8.7%)
TIME DEPOSIT (8.7%)
Cayman Bank of New York
4.375%, due 1/4/99............. $1,961,000 1,961,000
-----------
Total Short-Term Investment
(Cost $1,961,000).............. 1,961,000
-----------
Total Investments
(Cost $23,297,884) (b)......... 102.3% 23,199,777(c)
Liabilities in Excess of Cash,
and Other Assets............... (2.3) (518,956)
---------- -----------
Net Assets...................... 100.0% $22,680,821
========== ===========
</TABLE>
- -------
(a) Non-income producing security.
(b) The cost for Federal income tax purposes is $23,302,387.
(c) At December 31, 1998, net unrealized depreciation was $102,610 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 $1,839,368 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $1,941,978.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
13
-
<PAGE> 519
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$23,297,884).............................................. $23,199,777
Cash........................................................ 468
Receivables:
Investment securities sold................................ 200,956
Fund shares sold.......................................... 82,638
Dividends and interest.................................... 30,609
Unamortized organization expense............................ 59,631
-----------
Total assets........................................ 23,574,079
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 776,210
Fund shares redeemed...................................... 19,645
MainStay Management....................................... 18,002
Custodian................................................. 14,984
NYLIFE Distributors....................................... 10,438
Transfer agent............................................ 7,230
Trustees.................................................. 165
Accrued expenses............................................ 46,584
-----------
Total liabilities................................... 893,258
-----------
Net assets.................................................. $22,680,821
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 13,663
Class B................................................... 11,272
Class C................................................... 218
Additional paid-in capital.................................. 23,344,812
Accumulated net investment income........................... 7,614
Accumulated net realized loss on investments................ (598,651)
Net unrealized depreciation on investments.................. (98,107)
-----------
Net assets.................................................. $22,680,821
===========
CLASS A
Net assets applicable to outstanding shares................. $12,339,150
===========
Shares of beneficial interest outstanding................... 1,366,325
===========
Net asset value per share outstanding....................... $ 9.03
Maximum sales charge (5.50% of offering price).............. 0.53
-----------
Maximum offering price per share outstanding................ $ 9.56
===========
CLASS B
Net assets applicable to outstanding shares................. $10,145,444
===========
Shares of beneficial interest outstanding................... 1,127,175
===========
Net asset value and offering price per share outstanding.... $ 9.00
===========
CLASS C
Net assets applicable to outstanding shares................. $ 196,227
===========
Shares of beneficial interest outstanding................... 21,808
===========
Net asset value and offering price per share outstanding.... $ 9.00
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 520
Statement of Operations
for the period June 1, 1998* through December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends................................................. $ 137,398
Interest.................................................. 42,370
---------
Total income............................................ 179,768
---------
Expenses:
Management................................................ 95,249
Shareholder communication................................. 50,851
Transfer agent............................................ 37,685
Distribution--Class B..................................... 26,034
Distribution--Class C..................................... 343
Service--Class A.......................................... 14,989
Service--Class B.......................................... 8,709
Service--Class C.......................................... 115
Registration.............................................. 21,056
Professional.............................................. 18,975
Custodian................................................. 14,985
Organization.............................................. 7,828
Recordkeeping............................................. 7,133
Trustees.................................................. 391
Miscellaneous............................................. 21,339
---------
Total expenses.......................................... 325,682
---------
Net investment loss......................................... (145,914)
---------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments............................ (611,042)
Net unrealized depreciation on investments.................. (98,107)
---------
Net realized and unrealized loss on investments............. (709,149)
---------
Net decrease in net assets resulting from operations........ $(855,063)
=========
</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.
15
-
<PAGE> 521
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
June 1, 1998*
through
December 31, 1998
-----------------
<S> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment loss....................................... $ (145,914)
Net realized loss on investments.......................... (611,042)
Net unrealized depreciation on investments................ (98,107)
-----------
Net decrease in net assets resulting from operations...... (855,063)
-----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 13,399,780
Class B................................................. 10,830,274
Class C................................................. 183,607
Cost of shares redeemed:
Class A................................................. (201,264)
Class B................................................. (676,513)
-----------
Increase in net assets derived from capital share
transactions......................................... 23,535,884
-----------
Net increase in net assets............................ 22,680,821
NET ASSETS:
Beginning of period......................................... --
-----------
End of period............................................... $22,680,821
===========
Accumulated undistributed net investment income at end of
period.................................................... $ 7,614
===========
</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.
16
- -
<PAGE> 522
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
June 1, 1998* September 1, 1998**
through through
December 31, 1998 December 31, 1998
---------------------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period...................... $10.00 $10.00 $ 7.49
------ ------ ------
Net investment loss (a)..................................... (0.06) (0.09) (0.06)
Net realized and unrealized gain on investments............. (0.91) (0.91) 1.57
------ ------ ------
Total from investment operations............................ (0.97) (1.00) 1.51
------ ------ ------
Net asset value at end of period............................ $ 9.03 $ 9.00 $ 9.00
====== ====== ======
Total investment return (b)................................. (9.70%) (10.00%) 20.16%
Ratios (to average net assets)/
Supplemental Data:
Net investment loss..................................... (1.53%)+ (2.28%)+ (2.28%)+
Expenses................................................ 3.14%+ 3.89%+ 3.89%+
Portfolio turnover rate..................................... 24% 24% 24%
Net assets at end of period (in 000's)...................... $12,339 $10,145 $196
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
Per share data based on average shares outstanding during
(a) the period.
Total return is calculated exclusive of sales charges and is
(b) not annualized.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<PAGE> 523
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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on June 1, 1998. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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
18
- -
<PAGE> 524
Notes to Financial Statements
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.
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 $67,459 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $153,528 and $12,391 have been reclassified
from accumulated net investment loss and accumulated net realized loss on
investments to additional paid-in capital, primarily due to net investment loss
incurred during the period.
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
19
-
<PAGE> 525
MainStay Small Cap Value Fund
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 Dalton, Greiner,
Hartman, Maher & Co. (the "Sub-Adviser"). 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 December 31, 1998, the
Manager earned $95,249.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
20
- -
<PAGE> 526
Notes to Financial Statements (continued)
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $7,842 for the period ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges of $3,797 on redemptions of Class B shares for
the period ended December 31, 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 accrued for the period ended December 31,
1998, amounted to $37,685.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MainStay Management or NYLIFE Distributors, are paid an annual fee of $45,000,
$2,000 for each Board meeting and $1,000 for each Committee meeting attended
plus reimbursement for travel and out-of-pocket expenses. The Trust allocates
this expense in proportion to the net assets of the respective Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with net asset values of $8,127,000 and $900,000, respectively. This represents
65.9% and 8.9% of the net assets at period end for Class A and B, respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $494 for the period ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$7,133 for the period ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, a capital loss
carryforward of $594,148 is available, to the extent provided by regulations, to
offset future realized gains through 2006.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the period ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $25,652 and $3,704, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other
21
-
<PAGE> 527
MainStay Small Cap Value Fund
factors. Interest on revolving credit loans is charged based upon the Federal
Funds Advances rate. There were no borrowings on the line of credit at December
31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
June 1, 1998* through
December 31, 1998
-------------------------------------
Class A Class B Class C**
------- ------- ---------
<S> <C> <C> <C>
Shares sold................................................ 1,390 1,207 22
Shares redeemed............................................ (24) (80) --
----- ----- ---
Net increase............................................... 1,366 1,127 22
===== ===== ===
</TABLE>
- -------
<TABLE>
<C> <S>
* Commencement of operations.
** First offered on September 1, 1998.
</TABLE>
22
- -
<PAGE> 528
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Small Cap Value Fund (one
of the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for the period June 1, 1998
(commencement of operations) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
23
-
<PAGE> 529
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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> 530
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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> 531
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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> 532
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY FUNDS LOGO]
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.
(C)1999. All rights reserved. MSAN25-02/99
[RECYCLE LOGO]
MAINSTAY SMALL CAP VALUE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[MAINSTAY FUNDS LOGO]
<PAGE> 533
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 6
Year-by-Year Performance 7
Asset Allocation 8
Portfolio Composition 9
Returns & Lipper Rankings 12
Top 10 Holdings 13
10 Largest Purchases 13
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 25
Notes to Financial Statements 30
Report of Independent Accountants 40
The MainStay Funds 41
</TABLE>
<PAGE> 534
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 535
MainStay Strategic Income Fund Highlights
1998 MARKET RECAP
- - Modest inflation, a strong U.S. dollar, and lower interest rates helped most
established bond markets, while emerging markets suffered from difficulties in
Asia, Russia, and Latin America.
- - The domestic high-grade bond market had mediocre performance in the first half
of 1998, but rallied significantly in the second half of the year as the
Federal Reserve Board moved to lower interest rates three times.
- - High-yield securities had a challenging year as concerns about emerging
markets and hedge-fund viability caused a flight to higher-quality bonds,
which drew money away from high-yield securities, reducing the liquidity of
the high-yield market.
- - European bond markets showed strong performance as investors moved away from
emerging markets and concentrated on developed markets likely to benefit from
European Monetary Union.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Strategic Income Fund returned
5.17% for Class A shares and 4.35% for Class B and Class C shares,(*)
excluding all sales charges.
- - The Fund benefited from an allocation of close to 30% in international, 40% in
high-grade domestic, and 30% in high-yield bonds throughout the year.
- - The Fund benefited from diversified European investments, in countries that
would participate in European Monetary Union and others that would not.
- - The high-yield portion of the Fund's portfolio benefited from careful security
selection and buying opportunities when prices fell in the third quarter of
1998.
- - All three share classes outperformed the average Lipper(*) multisector income
fund, which returned 1.30% for the year ended 12/31/98. Class A shares ranked
in the top 10% of all peer funds and Class B shares in the top 15%.
- -------
(*) See footnote and table on page 12 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 536
$10,000 Invested in the MainStay
Strategic Income Fund versus Lehman Brothers
Aggregate Bond Index and Inflation
CLASS A SHARES SEC Returns: 1-year 0.44%, since inception 3.80%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY STRATEGIC INCOME LEHMAN BROTHERS AGGREGATE
FUND BOND INDEX* INFLATION(+)
------------------------- ------------------------- ------------
<S> <C> <C> <C>
2/28/97 9550.00 10000.00 10000.00
3/31/97 9445.00 9889.00 10006.00
6/30/97 9834.00 10253.00 10031.00
9/30/97 10181.00 10594.00 10093.00
12/31/97 10183.00 10907.00 10131.00
3/31/98 10467.00 11075.00 10137.00
6/30/98 10650.00 11334.00 10199.00
9/30/98 10485.00 11813.00 10237.00
12/31/98 10709.00 11854.00 10294.00
</TABLE>
CLASS B SHARES Class B SEC Returns: 1-year -0.65%, since inception 3.55%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY STRATEGIC INCOME LEHMAN BROTHERS AGGREGATE
FUND CLASS B BOND INDEX* INFLATION(+)
------------------------- ------------------------- ------------
<S> <C> <C> <C>
2/28/97 10000 10000 10000
3/31/97 9890 9889 10006
6/30/97 10268 10253 10031
9/30/97 10612 10594 10093
12/31/97 10602 10907 10131
3/31/98 10877 11075 10137
6/30/98 11037 11334 10199
9/30/98 10856 11813 10237
12/31/98 10662 11854 10294
</TABLE>
CLASS C SHARES Class C SEC Returns: 1-year 3.35%, since inception 5.65%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY STRATEGIC INCOME LEHMAN BROTHERS AGGREGATE
FUND BOND INDEX* INFLATION(+)
------------------------- ------------------------- ------------
<S> <C> <C> <C>
2/28/97 10000.00 10000.00 10000.00
3/31/97 9890.00 9889.00 10006.00
6/30/97 10268.00 10253.00 10031.00
9/30/97 10612.00 10594.00 10093.00
12/31/97 10602.00 10907.00 10131.00
3/31/98 10877.00 11075.00 10137.00
6/30/98 11037.00 11334.00 10199.00
9/30/98 10856.00 11813.00 10237.00
12/31/98 11062.00 11854.00 10294.00
</TABLE>
4
<PAGE> 537
- -------
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. The Class C graph assumes an initial investment of $10,000 made on
2/28/97 and includes the historical performance of Class B shares for
periods 2/28/97 through 8/31/98. Performance data for the two classes vary
after this date based on differences in their load. Returns shown do not
reflect the 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 Aggregate Bond Index includes fixed-rate debt issues
rated investment grade or higher by Moody's Investors Service, Standard &
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. An investment cannot
be made directly into an index.
(+) 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.
5
<PAGE> 538
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.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
Portfolio Management Discussion and Analysis
Overall, 1998 was generally a very good year for high-grade bonds, as
difficulties in Asia, Russia, and Brazil caused a global flight to quality, with
investors focused on highly liquid investments. This movement, had a negative
impact on high-yield securities, decreasing the level of demand necessary to
support liquidity in the high-yield market.
Inflation remained modest and interest rates declined in most developed markets
over the course of the year, providing a favorable environment for bond
investors because as rates decline bond prices tend to rise. As core European
nations moved closer to European Monetary Union, bond prices and yields tended
to converge, creating opportunities in countries that were out of line with the
rest of Europe. Nations such as the United Kingdom, which chose not to
participate in European Monetary Union, provided attractive diversification
opportunities and strong performance. Although some Asian markets began to
stabilize toward the end of the year, Japanese bonds suffered from the nation's
recession and provided meager returns throughout the year.
A strong U.S. dollar, attractive real returns, and the perception of "safety"
attracted investors to U.S. government bonds and pushed prices higher. Canadian
bonds also benefited from the flight to quality, providing attractive returns
for investors.
HOW DID THE MAINSTAY STRATEGIC INCOME FUND PERFORM IN THIS MARKET ENVIRONMENT?
Quite well. The MainStay Strategic Income Fund returned 5.17% for Class A shares
and 4.35% for Class B and Class C shares* for the year ended 12/31/98,
excluding all sales charges. All share classes outperformed the average
Lipper(+) multisector income fund, which returned 1.30% for the year.
HOW DID THE FUND MANAGE TO DO SO WELL?
The primary reason the Fund outperformed its peers was asset allocation. From
the beginning of the year, we believed that the high-yield sector was unlikely
to provide sufficient compensation for the level of risk assumed. As a result,
we allocated only 21.7% to this sector as of year end. When liquidity in the
high-yield market dried up in the third quarter of 1998, the Fund's
underweighted position worked in its favor. As prices fell, the Fund was able to
buy lower-rated securities at prices we believed were very attractive.
Throughout the year, judicious security selection and careful attention to risk
and reward also helped the Fund's high-yield investments contribute to the
Fund's outperformance.
Anticipating opportunities in Europe, we allocated about 26% of the Fund's
assets to a wide range of European bond markets, including countries that would
participate in European Monetary Union and ones that would not. Our decision to
heavily overweight the Fund in bonds of the United Kingdom proved beneficial.
Although the U.K. will not participate in European Monetary Union, it was the
Fund's best-performing market. The international portion of the Fund's portfolio
also benefited from advances in Canadian bonds, which largely tracked the
performance of U.S. Treasuries, while providing a greater yield.
- -------
* Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
(+) See footnote and table on page 12 for more information on Lipper Inc.
6
<PAGE> 539
YEAR-BY-YEAR PERFORMANCE
[BAR CHART]
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B & CLASS C SHARES
-------------- ------------------------
<S> <C> <C>
12/97 6.62 6.02
12/98 5.17 4.35
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 12/97 through 8/98.
See footnote * on page 12 for more information on performance.
Throughout the year, we also allocated about 40% of the Fund to domestic high-
grade bonds. Although domestic bonds underperformed the Fund's European
holdings, they also contributed positively to the Fund's overall performance.
WHAT WAS THE FUND'S EUROPEAN STRATEGY IN 1998?
The Fund sought to benefit from the convergence of various economies with the
approach of European Monetary Union on January 1, 1999. As part of this
strategy, the Fund invested across several European countries participating in
EMU, with special emphasis on Ireland, Italy, and Belgium.
WHY DID YOU FOCUS ON THOSE COUNTRIES?
We believed that those nations would experience more positive effects from the
convergence of interest rates and bond prices. At the beginning of 1998,
interest rates across Europe were widely divergent, but we believed that
eventually the gaps would have to close. Our assessment proved correct and the
results were positive for the Fund's performance, with the Irish bond market
returning 13.99%, Italy 12.19%, and Belgium 12.10% for the year, all in local
currency terms. Overall, Europe provided returns in the 12% to 15% range, which
was strongly positive for the Fund.
DID YOU HAVE OTHER POINTS OF FOCUS FOR THE FUND IN EUROPE?
Yes, we believed there were strong opportunities in the United Kingdom. Since
the U.K. elected not to participate in European Monetary Union, we felt that the
British pound would attract money from investors seeking a way to diversify
within Europe. At the same time, the British economy was slowing and the central
bank began to cut interest rates, which had a decidedly positive effect on bond
prices. For the year, the U.K. bond market was up about 19.55% in local currency
terms. Since the Fund hedges most of its foreign investments, we were able to
capture the bulk of those returns.
EUROPEAN MONETARY UNION (EMU)
- -----------------------------
A system that allows participating European countries to operate with a common
currency or monetary unit.
DIVERSIFICATION
- ---------------
Spreading risk by placing assets in several categories of investments, which may
include different asset classes, geographic regions, or sectors within a
specific market.
REAL RETURN
- -----------
The return on an investment after adjustment for the effects of inflation.
7
<PAGE> 540
ASSET ALLOCATION
- --------------------
Apportioning of investment funds among categories of assets or market sectors.
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.
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.
ASSET ALLOCATION AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
Domestic Securities 39.6%
International Securities 26.4%
High-Yield Securities 21.7%
Cash, Equivalents & Other Assets,
Less Liabilities 12.3%
</TABLE>
Actual percentages will vary over time.
WAS THE FLIGHT TO QUALITY THE MAIN FACTOR THAT AFFECTED THE U.S. BOND MARKET?
We believe it was certainly an important factor. During the first half of the
year, the domestic bond markets were relatively flat, with few opportunities to
benefit from the yield curve or interest rates. During this period, volatility
was at its lowest level in 15 years.
Starting around midyear, however, the situation changed dramatically. Market
volatility in the second half of 1998 was at its highest level in 15 years.
Problems in Asia, Russia, and Latin America helped spur a dramatic flow of funds
into domestic high-grade debt. With a government surplus limiting the amount of
new bonds issued, the overall effect was a dramatic rise in prices as yields
declined to record levels.
Later in the year, the Federal Reserve Board moved three times to reduce
interest rates, which helped stabilize the bond market. The overall effect was
positive for bond investors and helped contribute to the Fund's outperformance.
WHICH DOMESTIC BOND SECTORS HAD THE BEST PERFORMANCE?
Given the flight to quality, 30-year Treasury bonds were the best-performing
securities for the year. Although the Fund's duration strategy varied from
quarter to quarter, the Fund's duration was generally neutral to long during the
year, which contributed positively to the Fund's overall performance. In the
second quarter, the Fund was positioned for a flattening yield curve, which
helped returns as the 30-year Treasury outperformed. During the second half of
the year, market volatility allowed the Fund to profit from various trades and
from having longer-maturity bonds as the yield curve again flattened.
HOW DID THE FUND'S MORTGAGE-BACKED SECURITIES PERFORM?
Anticipating prepayments, the Fund entered the year underweighted in
mortgage-backed securities, which was positive for performance. In the second
quarter, the Fund added bonds we believed would not be interest-rate sensi-
8
<PAGE> 541
tive, but they underperformed. The Fund's general underweighting of
mortgage-related bonds was positive in the third quarter, as interest rates fell
and prepayments rose. And during the fourth quarter, we were able to purchase
mortgage-backed bonds for the Fund at distressed prices from hedge funds that
were forced to liquidate their holdings. This contributed positively to
performance as the Federal Reserve Board moved to lower interest rates and
restore order to the markets.
WHAT OTHER DOMESTIC HIGH-GRADE INVESTMENTS DID THE FUND OWN?
The Fund invested in asset-backed securities, favoring high-quality,
shorter-term issues that provided a measure of prepayment protection. The
securities enhanced the portfolio's yield and added value during the flight to
quality.
The Fund also invested in corporate bonds, which were not strong performers in
1998. Given the Asian difficulties, the Fund focused primarily on strong, liquid
domestic issuers with little Asian exposure. In the second half of the year, we
overweighted the Fund's corporate sector, concentrating on cable and media,
utilities, retailers, and regional banks. Unfortunately, corporate bonds showed
their worst performance in a decade, so the Fund's overweighted position took a
toll on the Fund's overall performance.
HOW DID THE FUND INVEST IN THE HIGH-YIELD MARKET?
Throughout 1998, the Fund was underweighted in high-yield securities as a
sector, believing that higher returns could be achieved elsewhere with a more
appropriate level of risk. This certainly proved true in the third quarter, when
the flight to quality focused investor attention on high-grade bonds, causing
liquidity to virtually disappear in the high-yield market. The Fund used
defensive positioning and careful assessment of risk and reward to maintain
relative strength in a difficult market environment.
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C>
Foreign Bonds 26.4%
Corporate Bonds 21.6%
U.S. Government &
Federal Agencies 21.8%
Convertible Bonds 6.4%
Yankee Bonds 3.3%
Securities
Asset-Backed 3.0%
Mortgage-Backed
Securities 1.7%
Loan Assignments 0.2%
Cash, Equivalents &
Other Assets, Less
Liabilities 12.3%
All Other 3.3%
</TABLE>
Actual percentages will vary over time.
9
<PAGE> 542
HOW WERE THE FUND'S HIGH-YIELD INVESTMENTS POSITIONED DEFENSIVELY?
At the beginning of the year, the Fund was underweighted in paper, steel, and
oil and gas. Since commodity-related securities generally performed poorly
throughout the year, this proved beneficial for the Fund. The Fund was also
underweighted in telecommunications, even though it is one of the largest areas
of high-yield issuance, because the available securities weren't suitable given
our assessment of risk and reward. This also proved beneficial in the third
quarter, when prices all but collapsed.
Another defensive strategy was to examine each security's default-adjusted
spread. That's the amount of yield the security may be expected to provide after
subtracting the historical default rate for comparably rated securities. Using
this as a measure of value, we saw opportunities shift among various quality
ratings throughout the year, and altered the Fund's investments accordingly. In
particular, the Fund was able to purchase lower-rated securities at bargain
prices in the third quarter, then improved the quality of the portfolio in the
fourth quarter as higher-rated securities provided more attractive
default-adjusted spreads. This prevented the Fund from taking on risk without
adequate compensation and contributed positively to performance. At the end of
the year, the overall credit quality of the high-yield securities in the Fund's
investment portfolio was B+. Debt rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation. This rating is modified with a plus sign
to show relative standing within its rating category.
WHAT WERE SOME OF THE FUND'S BEST-PERFORMING HIGH-YIELD SECURITIES?
CD Radio is a satellite radio enterprise that benefited when major investors
gave credibility to the company's business plan. UIH is an international cable
company that we purchased in the third quarter, when the price of their
securities dropped significantly. The company tendered for the bonds, which was
highly profitable for the Fund. Centennial Cellular was another case where the
Fund received a tender for its bonds, in this case by an acquirer.
WERE THERE OTHER HIGH-YIELD BONDS THAT DIDN'T DO AS WELL?
Every portfolio has winners and losers. In 1998, our investment in Northern
Offshore failed to perform well as oil prices continued to decline and rigs that
were scheduled for operation were not put into service. Entex is a distributor
of computer equipment and software that missed its earnings projections and was
a poor performer. The Fund continues to hold the securities, believing that more
positive results are likely in the near future. Medaphis is a company that
provides a variety of services to doctors, hospitals, and medical professionals.
They missed their earnings projections and underperformed, but had a successful
asset sale that has improved the company's cash position. While the company's
momentum has improved, its performance for the year was negative and detracted
from the Fund's overall performance.
10
<PAGE> 543
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
We believe that emerging markets may continue to experience some difficulties in
1999, which could have a positive impact on domestic high-grade securities and
established European markets where investors seeking a "safe haven" may turn
their focus. We believe that the high-yield market will continue to follow the
trends of corporate earnings, and that at year end, the upper tiers of the
high-yield market were offering the most attractive levels of compensation for
the risks assumed. For investors seeking income, we believe the diversification
offered by the MainStay Strategic Income Fund can be valuable in volatile and
highly unpredictable markets. Wherever the markets may move, the Fund will
continue to seek 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
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.
11
<PAGE> 544
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND THROUGH 12/31/98
<S> <C> <C>
Class A 5.17% 6.43%
Class B 4.35% 5.65%
Class C 4.35% 5.65%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND THROUGH 12/31/98
<S> <C> <C>
Class A 0.44% 3.80%
Class B -0.65% 3.55%
Class C 3.35% 5.65%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
1 YEAR LIFE OF FUND THROUGH 12/31/98
<S> <C> <C>
Class A 7 out of 93 funds 11 out of 78 funds
Class B 14 out of 93 funds 21 out of 78 funds
Class C n/a n/a
Average Lipper
multisector income fund 1.30% 4.49%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $9.71 $0.6994 $0.0000
Class B $9.70 $0.6315 $0.0000
Class C $9.70 $0.2147 $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%. Class C shares, first offered to the public on 9/1/98, are sold with no
initial sales charge, but are subject to a CDSC of 1% if redeemed within
one year of purchase and an annual 12b-1 fee of 1%. Performance figures for
Class C shares include the historical performance of the Class B shares for
periods from inception (2/28/97) up to 8/31/98. Performance data for the
two classes after this date vary based on differences in their load.
(+) Lipper 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 Class A shares and Class B shares
on 2/28/97 through 12/31/98. The Fund's Class C shares were first offered
to the public on 9/1/98.
12
<PAGE> 545
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING COUNTRY AMOUNT
<S> <C> <C>
Buoni Poliennali del Tesoro, 8.25%
due 7/1/01 Italy $1,726,886
Nykredit, Series ANN1, 6.00% due
10/1/29 Denmark 1,726,627
Kingdom of Denmark, 7.00% due
11/10/24 Denmark 1,483,260
MascoTech, Inc., 4.50%, due 12/15/03 United States 1,207,500
United Kingdom Treasury Bond, 8.00%
due 12/7/15 United Kingdom 1,102,166
Canadian Government, Series VR22
7.50%, due 3/1/01 Canada 1,086,807
General Growth Properties, Inc.,
7.25% Series A United States 1,030,000
Finnish Government, 9.50%, due
3/15/04 Finland 1,008,683
Cirrus Logic, Inc., 6.00%, due
12/15/03 United States 912,500
Halifax, PLC., 9.375%, due 5/15/21 United Kingdom 893,603
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF PURCHASE
<S> <C> <C>
United Kingdom Treasury Bonds
6.50% - 10.00%
due 2/26/01 - 12/7/15 United Kingdom $9,335,819
Nykredit, 6.00% - 7.00%
due 10/1/26 - 10/1/29 Denmark 6,272,319
Irish Government, 6.00% - 8.00%
due 10/18/00 - 8/18/08 Ireland 6,122,159
Buoni Poliennali del Tesoro
5.00% - 12.00%
due 7/15/00 - 11/1/27 Italy 4,728,313
New Zealand Government, 7.00% - 8.00%
due 2/15/01 - 7/15/09 New Zealand 4,700,001
Canadian Government, 5.25%-10.25%
due 3/1/01 - 6/1/27 Canada 4,590,806
Norwegian Government, 5.50% - 7.00%
due 5/31/01 - 5/15/09 Norway 3,692,559
Kingdom of Denmark, 7.00% - 9.00%
due 11/15/00 - 11/10/24 Denmark 3,687,220
Australian Government, 6.75% - 10.00%
due 3/15/02 - 8/15/08 Australia 3,609,146
Bundesobligation, 4.50% - 7.375%
due 5/17/02 - 1/4/28 Germany 2,218,242
</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> 546
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY COUNTRY AMOUNT OF SALE
<S> <C> <C>
United Kingdom Treasury Bond
6.50% - 10.00%
due 2/26/01 - 12/7/15 United Kingdom $10,096,062
Irish Government, 6.00% - 8.00%
due 10/18/00 - 8/18/08 Ireland 6,545,538
Nykredit, 6.00% - 7.00%
due 10/1/26 - 10/1/29 Denmark 6,284,082
Buoni Poliennali del Tesoro
5.00% - 12.00%
due 7/15/00 - 11/1/27 Italy 4,221,076
Canadian Government, 5.25% - 10.25%
due 3/1/01 - 7/15/28 Canada 3,559,697
New Zealand Government, 7.00% - 8.00%
due 2/15/01 - 7/15/09 New Zealand 2,908,207
Australian Government, 6.75% - 10.00%
due 3/15/02 - 8/15/08 Australia 2,859,200
Norwegian Government, 5.50% - 6.75%
due 5/31/01 - 5/15/09 Norway 2,825,637
Kingdom of Denmark, 7.00% - 9.00%
due 11/15/00 - 11/10/24 Denmark 2,000,005
Inco Ltd., 5.75%, due 7/1/04 United States 1,917,112
</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.
14
<PAGE> 547
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
LONG-TERM BONDS (84.4%)(+)
ASSET-BACKED SECURITIES (3.0%)
AIRPLANE LEASES (0.7%)
AerCo Ltd.
Series 1A Class A1
5.7255%, due 7/15/23 (c)(d).... $ 150,000 $ 148,939
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19............. 421,443 445,044
-----------
593,983
-----------
AUTO LEASES (0.7%)
Premier Auto Trust
Series 1998-4 Class A3
5.69%, due 6/8/02.............. 320,000 321,702
Toyota Auto Lease Trust
Series 1998-B Class A1
5.35%, due 7/25/02............. 310,000 309,811
-----------
631,513
-----------
CONSUMER LOANS (0.4%)
Green Tree Recreational
Equipment & Consumer Trust
Series 1997-C Class A1
6.49%, due 2/15/18............. 370,750 374,346
-----------
CREDIT CARD RECEIVABLES (0.2%)
Chase Credit Card Master Trust
Series 1997-2 Class A
6.30%, due 4/15/03............. 220,000 223,434
-----------
EQUIPMENT LOANS (0.1%)
Newcourt Equipment Trust
Securities
Series 1998-1 Class A3
5.24%, due 12/20/02............ 100,000 99,315
-----------
TRANSPORTATION (0.3%)
Federal Express Corp.
Pass-Through Certificates
Series 98-1A Class A
6.72%, due 1/15/22............. 225,000 232,684
-----------
UTILITY LOANS (0.6%)
Comed Transitional Funding Trust
Series 1998-1 Class A7
5.74%, due 12/25/10 (r)........ 520,000 519,839
-----------
Total Asset-Backed Securities
(Cost $2,662,820).............. 2,675,114
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (6.4%)
COMPUTER PERIPHERALS (0.9%)
Adaptec, Inc.
4.75%, due 2/1/04 (c).......... $ 1,000,000 $ 775,000
-----------
COMPUTERS & OFFICE EQUIPMENT
(0.8%)
S3, Incorporated
5.75%, due 10/1/03............. 1,000,000 716,250
-----------
CONGLOMERATES (0.5%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (k)......... 195,000 177,450
Hutchison Delta Finance Ltd.
7.00%, due 11/8/02 (k)......... 170,000 183,600
Loxley Public Co. Ltd.
3.50%, due 4/20/05 (k)......... 245,000 63,700
-----------
424,750
-----------
DOMESTIC OILS (1.4%)
MascoTech, Inc.
4.50%, due 12/15/03............ 1,500,000 1,207,500
-----------
HEALTH CARE (1.6%)
Elan Finance Corp. Ltd.
(zero coupon), due 12/14/18
(c)............................ 1,500,000 845,625
PhyCor, Inc.
4.50%, due 2/15/03............. 800,000 491,000
Sun Healthcare Group, Inc.
6.00%, due 3/1/04 (c).......... 75,000 48,000
-----------
1,384,625
-----------
REAL ESTATE (0.1%)
Paliburg International Finance
Co.
3.50%, due 2/6/01 (k).......... 110,000 65,312
-----------
RESTAURANTS & LODGING (0.0%) (B)
Boston Chicken, Inc.
(zero coupon), due 6/1/15
(i)............................ 1,500,000 15,000
-----------
RETAIL (0.1%)
Nine West Group, Inc.
5.50%, due 7/15/03............. 125,000 98,750
-----------
TECHNOLOGY (1.0%)
Cirrus Logic, Inc.
6.00%, due 12/15/03............ 1,250,000 912,500
-----------
Total Convertible Bonds
(Cost $6,477,741).............. 5,599,687
-----------
</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> 548
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (21.6%)
AEROSPACE (0.2%)
DeCrane Aircraft Holdings, Inc.
12.00%, due 9/30/08 (u)........ $ 195 $ 195,000
-----------
BANKS (1.2%)
B.F. Saul Real Estate
Investment Trust
Series B
9.75%, due 4/1/08.............. 170,000 158,100
Banc One Corp.
7.60%, due 5/1/07.............. 80,000 89,781
Capital One Bank
Series BKNT
6.375%, due 2/15/03............ 190,000 187,597
Local Financial Corp.
11.00%, due 9/8/04............. 410,000 422,300
Tokai Preferred Capital Co.
L.L.C.
9.98%, due 12/29/49
11.0914%, beginning 6/30/08
(c)(k)......................... 230,000 197,800
-----------
1,055,578
-----------
CABLE (1.4%)
@Entertainment, Inc.
Series B
(zero coupon), due 7/15/08
14.50%, beginning 7/15/03...... 790,000 347,600
American Telecasting, Inc.
(zero coupon), due 6/15/04
14.50%, beginning 6/15/99...... 537,836 64,540
Primestar, Inc.
12.3788%, due 4/1/99 (d)(g).... 500,000 200,000
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 05/15/01..... 930,000 483,600
United International Holdings,
Inc.
Series B
(zero coupon), due 2/15/08
10.75%, beginning 2/15/03...... 265,000 143,100
-----------
1,238,840
-----------
CASINOS (1.2%)
Argosy Gaming Co.
13.25%, due 6/1/04............. 170,000 190,400
Circus Circus Enterprises, Inc.
6.70%, due 11/15/96............ 50,000 47,342
Harrah's Operating Company, Inc.
7.875%, due 12/15/05........... 150,000 151,662
Harvey Casinos Resorts
10.625%, due 6/1/06............ 170,000 183,600
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
CASINOS (CONTINUED)
Penn National Gaming, Inc.
10.625%, due 12/15/04.......... $ 300,000 $ 315,000
President Riverboat Casinos,
Inc.
12.00%, due 9/15/01 (c)(g)..... 47,000 47,000
13.00%, due 9/15/01............ 94,000 80,840
-----------
1,015,844
-----------
CELLULAR TELEPHONE (0.3%)
Centennial Cellular Corp.
10.75%, due 12/15/08 (c)....... 195,000 194,025
International Wireless
Communications Holdings, Inc.
(zero coupon), due 8/15/01
(g)(i)......................... 475,000 47,500
-----------
241,525
-----------
CHEMICALS (0.1%)
Bordon Chemicals & Plastics L.P.
9.50%, due 5/1/05.............. 60,000 49,800
-----------
CONSTRUCTION & ENGINEERING
(0.4%)
Cathay International Holdings,
Inc.
13.00%, due 4/15/08 (c)(k)..... 675,000 256,500
Traffic Stream (BVI)
Infrastructure Ltd.
14.25%, due 5/1/06 (c)......... 205,000 94,300
-----------
350,800
-----------
COSMETICS (0.3%)
Jafra Cosmetics International,
Inc.
11.75%, due 5/1/08 (c)......... 260,000 236,600
-----------
DOMESTIC OIL & GAS (0.5%)
Belco Oil & Gas Corp.
Series B
8.875%, due 9/15/07............ 55,000 50,325
Denbury Management, Inc.
9.00%, due 3/1/08.............. 55,000 49,500
KCS Energy, Inc.
Series B
11.00%, due 1/15/03............ 85,000 78,200
Queens Sand Resources, Inc.
12.50%, due 7/1/08............. 135,000 97,200
Stone Energy Corp.
8.75%, due 9/15/07............. 200,000 194,000
-----------
469,225
-----------
DRUGS (0.4%)
Biovail Corporation
International
10.875%, due 11/15/05 (c)...... 190,000 190,950
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 549
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
DRUGS (CONTINUED)
ICN Pharmaceuticals, Inc.
8.75%, due 11/15/08 (c)........ $ 190,000 $ 191,900
-----------
382,850
-----------
ELECTRIC UTILITIES (0.7%)
Niagara Mohawk Power Corp.
Series B
7.00%, due 10/1/00............. 430,000 434,326
Public Service Electric & Gas
Co.
Series UU
6.75%, due 3/1/06.............. 145,000 155,585
-----------
589,911
-----------
FINANCE (0.5%)
CB Richard Ellis Services, Inc.
8.875%, due 6/1/06............. 240,000 235,200
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (h)......... 900,000 135,000
ContiFinancial Corp.
7.50%, due 3/15/02............. 55,000 37,400
-----------
407,600
-----------
FINANCIAL SERVICES (0.5%)
Conseco, Inc.
6.40%, due 6/15/11............. 210,000 202,889
Equitable Companies, Inc. (The)
7.00%, due 4/1/28.............. 110,000 115,064
Household Finance Corp.
6.50%, due 11/15/08............ 125,000 130,000
-----------
447,953
-----------
FOOD, BEVERAGES & TOBACCO (1.0%)
Coca-Cola Enterprises, Inc.
6.95%, due 11/15/26............ 340,000 364,592
Philip Morris Companies, Inc.
6.15%, due 3/15/10............. 330,000 332,561
Standard Commercial Corp.
8.875%, due 8/1/05............. 225,000 216,000
-----------
913,153
-----------
HEALTH CARE (1.5%)
Columbia/HCA Healthcare Corp.
7.50%, due 11/15/95............ 360,000 313,362
Magellan Health Services, Inc.
9.00%, due 2/15/08............. 150,000 133,500
Medaphis Corp.
9.50%, due 2/15/05............. 510,000 397,800
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
HEALTH CARE (CONTINUED)
Quest Diagnostics, Inc.
10.75%, due 12/15/06........... $ 355,000 $ 395,825
Sun Healthcare Group, Inc.
9.375%, due 5/1/08 (c)......... 80,000 64,000
-----------
1,304,487
-----------
HOUSING (0.5%)
Greystone Homes, Inc.
10.75%, due 3/1/04............. 450,000 474,750
-----------
INDUSTRIAL (0.4%)
Generac Portable Products L.L.C.
11.25%, due 7/1/06 (c)(k)...... 100,000 101,000
Thermadyne Holdings Corp.
(zero coupon), due 6/1/08
12.50%, beginning 6/1/03....... 400,000 176,000
9.875%, due 6/1/08............. 50,000 45,500
-----------
322,500
-----------
LEISURE (0.2%)
Bally Total Fitness Holding
Corp.
Series B
9.875%, due 10/15/07........... 185,000 181,300
-----------
MEDIA (1.0%)
Time Warner, Inc.
8.375%, due 7/1/13............. 492,000 590,680
Walt Disney Co. (The)
5.62%, due 12/1/08............. 195,000 194,550
Young America Corp.
Series B
11.625%, due 2/15/06........... 180,000 84,600
-----------
869,830
-----------
MINING (0.2%)
Great Central Mines Ltd.
8.875%, due 4/1/08............. 145,000 145,000
-----------
OIL SERVICES (0.3%)
Grey Wolf, Inc.
8.875%, due 7/1/07............. 65,000 48,100
Northern Offshore ASA
10.00%, due 5/15/05 (c)........ 110,000 57,200
R&B Falcon Corp.
9.50%, due 12/15/08 (c)........ 195,000 195,000
-----------
300,300
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 550
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
OTHER TRANSPORTATION (0.1%)
Ultrapetrol (Bahamas) Ltd.
10.50%, due 4/1/08............. $ 125,000 $ 100,000
-----------
PAPER & FOREST PRODUCTS (0.2%)
Georgia-Pacific Corp.
7.25%, due 6/1/28.............. 180,000 179,431
-----------
PUBLISHING (0.3%)
Affiliated Newspapers
Investments, Inc.
(zero coupon), due 7/1/06
13.25%, beginning 7/1/99....... 150,000 154,500
General Media, Inc.
10.625%, due 12/31/00.......... 100,000 88,000
-----------
242,500
-----------
REAL ESTATE (2.4%)
Crescent Real Estate Equities
Co.
7.50%, due 9/15/07............. 630,000 585,900
EOP Operating L.P.
6.50%, due 6/15/04............. 270,000 265,391
Health Care Property Investors,
Inc.
6.875%, due 6/8/05............. 205,000 193,084
Highwoods Realty L.P.
8.00%, due 12/1/03............. 385,000 387,888
8.125%, due 1/15/09............ 200,000 198,000
Hospitality Properties Trust
7.00%, due 3/1/08.............. 225,000 201,033
LNR Property Corp.
9.375%, due 3/15/08............ 230,000 220,800
Meditrust Co. (The)
Series MTN
7.77%, due 8/16/02............. 70,000 65,409
-----------
2,117,505
-----------
RECREATION & ENTERTAINMENT (0.2%)
Alliance Entertainment Corp.
Series B
11.25%, due 7/15/05 (h)(i)..... 160,000 1,600
Hollywood Entertainment Corp.
Series B
10.625%, due 8/15/04........... 190,000 193,800
-----------
195,400
-----------
RESTAURANTS & LODGING (0.9%)
Advantica Restaurant Group, Inc.
11.25%, due 1/15/08............ 290,000 292,175
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
RESTAURANTS & LODGING (CONTINUED)
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99
(c)(g)......................... $ 320,000 $ 302,400
HMH Properties, Inc.
Series C
8.45%, due 12/1/08............. 195,000 195,000
-----------
789,575
-----------
RETAIL (0.5%)
Albertson's, Inc.
Series C
6.625%, due 6/1/28............. 120,000 123,385
Dayton Hudson Corp.
5.875%, due 11/1/08............ 105,000 106,594
Wal-Mart Stores, Inc.
5.65%, due 2/1/10.............. 200,000 200,896
-----------
430,875
-----------
SPECIALIZED SERVICES (0.6%)
Cendant Corp.
7.75%, due 12/1/03............. 425,000 432,370
WPP Finance (USA) Corp.
6.625%, due 7/15/05............ 135,000 134,328
-----------
566,698
-----------
STEEL, ALUMINUM & OTHER METALS
(1.1%)
Carpenter Technology Corp.
Series B
6.275%, due 4/7/03............. 85,000 85,414
GS Technologies Operating Co.
12.25%, due 10/1/05............ 300,000 201,000
Republic Engineered Steels, Inc.
9.875%, due 12/15/01........... 275,000 281,188
Schuff Steel Co.
10.50%, due 6/1/08............. 240,000 208,800
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05............ 90,000 94,500
WCI Steel, Inc.
Series B
10.00%, due 12/1/04............ 115,000 114,138
-----------
985,040
-----------
TECHNOLOGY (0.3%)
Electronic Retailing Systems
International, Inc.
(zero coupon), due 2/1/04
13.25%, beginning 2/1/00....... 200,000 72,000
Entex Information Services, Inc.
12.50%, due 8/1/06 (c)......... 85,000 58,650
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 551
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
TECHNOLOGY (CONTINUED)
Metawave Communications Corp.
13.75%, due 4/28/00
(d)(g)(o)...................... $ 165,656 $ 165,656
-----------
296,306
-----------
TELECOMMUNICATION SERVICES (1.4%)
Globalstar L.P. Capital Corp.
11.50%, due 6/1/05............. 250,000 188,750
HighwayMaster Communications,
Inc.
Series B
13.75%, due 9/15/05............ 350,000 112,000
ICO Global Communications
Holdings Ltd.
15.00%, due 8/1/05 (v)......... 100 74,500
Orion Network System, Inc.
(zero coupon), due 1/15/07
12.50%, beginning 1/15/02...... 250,000 156,250
Sprint Capital Corp.
6.125%, due 11/15/08........... 100,000 102,180
T/SF Communications Corp.
Series B
10.375%, due 11/1/07........... 180,000 181,350
Telehub Communications Corp.
(zero coupon), due 7/31/05
13.875%, beginning 7/31/01
(c)(t)......................... 550 330,000
WorldCom, Inc.
6.125%, due 8/15/01............ 95,000 96,592
-----------
1,241,622
-----------
TEXTILE & APPAREL (0.4%)
Delta Mills, Inc.
Series B
9.625%, due 9/1/07............. 140,000 135,450
Norton McNaughton, Inc.
12.50%, due 6/1/05............. 40,000 34,000
Tommy Hilfiger U.S.A., Inc.
6.50%, due 6/1/03.............. 220,000 217,092
-----------
386,542
-----------
TRANSPORTATION (0.4%)
Cenargo International, PLC
9.75%, due 6/15/08 (c)......... 130,000 124,963
Equimar Shipholdings Ltd.
9.875%, due 7/1/07............. 95,000 75,050
Pacific & Atlantic (Holdings)
Inc. 11.50%, due 5/30/08....... 150,000 105,000
-----------
305,013
-----------
Total Corporate Bonds
(Cost $20,356,515)............. 19,029,353
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
FOREIGN BONDS (26.4%)
AUSTRALIA (1.2%)
Australian Government
Series 808
8.75%, due 8/15/08............. A$ 297,000 $ 233,596
Series 904
9.00%, due 9/15/04............. 796,000 588,635
Treasury Corp. of Victoria
8.25%, due 10/15/03............ 295,000 204,477
-----------
1,026,708
-----------
CANADA (1.5%)
Canadian Government
Series WH31
6.00%, due 6/1/08.............. C$ 347,000 245,123
Series VR22
7.50%, due 3/1/01.............. 1,580,000 1,086,807
-----------
1,331,930
-----------
DENMARK (4.2%)
Kingdom of Denmark
7.00%, due 11/10/24............ DK 7,375,000 1,483,260
8.00%, due 5/15/03............. 2,528,000 460,805
Nykredit
Series ANN1
6.00%, due 10/1/29............. 11,196,000 1,726,627
-----------
3,670,692
-----------
FINLAND (1.1%)
Finnish Government
Series RG
9.50%, due 3/15/04............. FM 4,000,000 1,008,683
-----------
GERMANY (2.7%)
Bundes Republic Deutschland
Series 98
5.625%, due 1/4/28............. DM 556,000 376,225
Bundesobligation
Series 123
4.50%, due 5/17/02 (x)......... 1,397,000 870,692
Discover Card Offerings
Series DM
5.25%, due 6/20/08............. 800,000 503,122
Euronet Services, Inc.
Series DTCU
(zero coupon), due 7/1/06
12.375%, beginning 7/1/02
(w)............................ 645 116,174
Land Baden-Wuerttemberg
Series 38
7.50%, due 10/22/04............ 290,000 207,104
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 552
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C>
FOREIGN BONDS (CONTINUED)
GERMANY (CONTINUED)
Norddeutsche Landesbank
Series 5
4.75%, due 7/7/08.............. DM 484,000 $ 300,849
-----------
2,374,166
-----------
GREECE (0.9%)
Hellenic Republic
8.90%, due 4/1/03.............. GRD 69,000,000 258,221
8.90%, due 3/21/04............. 140,300,000 535,917
-----------
794,138
-----------
ITALY (3.5%)
Buoni Poliennali del Tesoro
5.00%, due 5/1/08.............. IL 1,320,000,000 859,254
6.50%, due 11/1/27............. 680,000,000 514,447
8.25%, due 7/1/01.............. 2,550,000,000 1,726,886
-----------
3,100,587
-----------
NEW ZEALAND (1.2%)
New Zealand Government
Series 709
7.00%, due 7/15/09............. N$ 442,000 261,437
Series 1106
8.00%, due 11/15/06............ 1,291,000 792,387
-----------
1,053,824
-----------
NORWAY (0.9%)
Norwegian Government
5.50%, due 5/15/09............. NK 2,033,000 269,963
7.00%, due 5/31/01............. 3,985,000 535,814
-----------
805,777
-----------
SPAIN (0.6%)
Spanish Government
6.00%, due 1/31/08............. SP 64,420,000 520,718
-----------
SWEDEN (0.8%)
AB Spintab
Series 164
8.50%, due 12/19/01............ SK 1,000,000 138,235
Swedish Government
Series 1040
6.50%, due 5/5/08.............. 3,600,000 520,616
-----------
658,851
-----------
UNITED KINGDOM (5.5%)
European Investment Bank
6.25%, due 12/7/08.........pound sterling 449,000 816,743
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C>
UNITED KINGDOM (CONTINUED)
Federal National Mortgage
Association
Series EMTN
6.875%, due 6/7/02.........pound sterling 420,000 $ 735,103
Series EMTN
7.125%, due 8/10/99............ 250,000 419,538
Halifax, PLC
9.375%, due 5/15/21............ 370,000 893,603
Regional Independent Media Group
(zero coupon), due 7/1/08
12.875%, beginning 7/1/03
(c)............................ 100,000 91,510
United Kingdom Gilt
9.50%, due 10/25/04............ 377,000 785,947
United Kingdom Treasury Bond
8.00%, due 12/7/15............. 467,000 1,102,166
-----------
4,844,610
-----------
UNITED STATES (2.3%)
Camuzzi Gas Pampeana S.A.
9.25%, due 12/15/01 (e)........ $ 200,000 193,500
Conproca, S.A.
12.00%, due 6/16/10 (c)(k)..... 313,000 294,220
Innova S de R.L.
12.875%, due 4/1/07 (e)........ 30,000 20,700
Nacional Financiera SNC
9.375%, due 4/23/99 (c)(k)..... 150,000 150,000
Republic of Colombia
7.625%, due 2/15/07............ 500,000 410,000
Republic of Venezuela
Series W-A
6.75%, due 3/31/20............. 294,000 204,514
TPSA Finance B.V.
7.75%, due 12/10/08 (c)........ 580,000 574,200
YPF Sociedad Anonima
Series MTNA
7.75%, due 8/27/07 (e)......... 200,000 176,000
-----------
2,023,134
-----------
Total Foreign Bonds
(Cost $22,869,893)............. 23,213,818
-----------
LOAN ASSIGNMENTS (0.2%)
FOOD, BEVERAGES & TOBACCO (0.2%)
Domino's Pizza, Inc.
Bank debt
Tranche B
8.75%, due 12/31/06
(d)(g)(s)...................... 100,000 100,000
Bank debt
Tranche C
9.00%, due 12/31/07
(d)(g)(s)...................... 100,000 100,000
-----------
200,000
-----------
Total Loan Assignments
(Cost $200,000)................ 200,000
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 553
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES
(1.7%)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE
OBLIGATIONS) (1.7%)
DLJ Commercial Mortgage Corp.
Series 1998-CF2 Class A1B
6.24%, due 11/12/31............ $ 180,000 $ 183,488
LB Commercial Conduit
Mortgage Trust
Series 1998-C4 Class A1B
6.21%, due 10/15/08............ 275,000 279,554
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C2 Class A1
7.2778%, due 6/15/21 (d)....... 155,677 158,476
Morgan Stanley Capital I
Series 1998-HF2 Class A1
6.01%, due 11/15/30............ 99,437 100,385
Mortgage Capital Funding, Inc.
Series 1998-MC3 Class A2
6.337%, due 11/18/31........... 215,000 219,066
Nationslink Funding Corp.
Series 1998-2 Class A1
6.001%, due 11/20/07........... 99,478 100,224
SASCO Floating Rate Commercial
Mortgage Trust
Series 1998-C3A Class A1A
6.1744%, due 10/25/99 (c)(d)... 431,240 431,240
-----------
1,472,433
-----------
Total Mortgage-Backed Securities
(Cost $1,466,664).............. 1,472,433
-----------
U.S. GOVERNMENT & FEDERAL AGENCIES
(21.8%)
FEDERAL AGENCY (COLLATERALIZED
MORTGAGE OBLIGATION) (0.1%)
Fannie Mae-Aces
Series 1998-M1 Class A1
5.96%, due 5/25/07............. 125,117 126,173
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (0.6%)
5.75%, due 4/15/03............. 490,000 503,000
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (MORTGAGE PASS-
THROUGH SECURITIES) (6.9%)
6.50%, due 5/1/13-10/1/28...... 4,411,807 4,444,514
6.50%, due 2/11/29 TBA (l)..... 790,000 794,448
7.00%, due 12/1/12............. 777,593 794,358
-----------
6,033,320
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II
(MORTGAGE PASS-THROUGH
SECURITIES) (5.3%)
7.00%, due 7/15/25-9/15/28..... $ 2,539,447 $ 2,598,185
7.50%, due 12/15/23-11/25/28... 958,644 988,191
7.50%, due 1/21/29 TBA (l)..... 485,000 499,856
8.00%, due 11/25/28............ 528,126 548,427
-----------
4,634,659
-----------
UNITED STATES TREASURY BONDS
(2.8%)
6.125%, due 11/15/27........... 680,000 761,172
6.375%, due 8/15/27............ 920,000 1,057,420
7.625%, due 2/15/25............ 345,000 453,568
8.875%, due 8/15/17............ 150,000 211,288
-----------
2,483,448
-----------
UNITED STATES TREASURY NOTES
(6.1%)
5.25%, due 8/15/03............. 265,000 271,750
5.375%, due 6/30/03............ 1,410,000 1,450,975
5.625%, due 11/30/00 (m)....... 2,140,000 2,178,113
6.375%, due 3/31/01............ 185,000 191,764
6.875%, due 5/15/06............ 395,000 446,595
7.875%, due 11/15/99-11/15/04.. 800,000 849,157
-----------
5,388,354
-----------
Total U.S. Government & Federal
Agencies
(Cost $19,154,246)............. 19,168,954
-----------
YANKEE BONDS (3.3%)
BROADCAST/MEDIA (0.1%)
TV Azteca, S.A. de C.V.
Series B
10.50%, due 2/15/07............ 60,000 49,350
-----------
CELLULAR TELEPHONE (0.1%)
Millicom International Cellular,
S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01....... 120,000 84,900
-----------
CHEMICALS (0.6%)
Octel Developments, PLC
10.00%, due 5/1/06............. 490,000 514,500
-----------
CONSUMER DURABLES (0.1%)
International Semi-Technology
Microelectronics, Inc.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00...... 550,000 55,000
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 554
MainStay Strategic Income Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- ----------------------------------------------------------------
<S> <C> <C>
YANKEE BONDS (CONTINUED)
ELECTRIC UTILITIES (0.2%)
United Utilities, PLC
6.45%, due 4/1/08.............. $ 190,000 $ 195,565
-----------
FINANCE (0.3%)
Fairfax Financial Holdings Ltd.
6.875%, due 4/15/08............ 310,000 306,100
-----------
MINING (0.2%)
Echo Bay Mines Ltd.
12.00%, due 4/1/27............. 180,000 97,200
Glencore Nickel Property Ltd.
9.00%, due 12/1/14............. 125,000 101,250
-----------
198,450
-----------
MULTI-INDUSTRIAL (0.3%)
Tyco International Group S.A.
7.00%, due 6/15/28............. 255,000 263,757
-----------
OIL SERVICES (0.3%)
Petroleum Geo-Services ASA
7.125%, due 3/30/28............ 260,000 245,544
-----------
PAPER & FOREST PRODUCTS (0.2%)
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c)........ 150,000 155,062
-----------
STEEL, ALUMINUM & OTHER METALS
(0.3%)
Ivaco, Inc.
11.50%, due 9/15/05............ 300,000 300,000
-----------
TRANSPORTATION (0.6%)
Alpha Shipping, PLC
Series A
9.50%, due 2/15/08............. 200,000 57,000
Ermis Maritime Holdings Ltd.
12.50%, due 3/15/06............ 175,000 54,250
Ford Capital Co. B.V.
9.50%, due 6/1/10.............. 330,000 424,364
-----------
535,614
-----------
Total Yankee Bonds
(Cost $2,924,850).............. 2,903,842
-----------
Total Long-Term Bonds
(Cost $76,112,729)............. 74,263,201
-----------
<CAPTION>
Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (0.0%) (B)
HEALTH CARE (0.0%) (B)
General Healthcare Group Ltd.
(a)(j)......................... 25 $ 1,248
-----------
Total Common Stock.............. 1,248
-----------
PREFERRED STOCKS (3.3%)
BIOTECHNOLOGY (0.3%)
Monsanto Co.
6.50% (f)...................... 5,000 245,000
-----------
CABLE (0.4%)
United International Holdings,
Inc.
4.00%, Series A (a)(f)(g)...... 1,840 358,800
-----------
CELLULAR TELEPHONE (0.2%)
Centaur Funding Corp.
9.08%, Series B (c)............ 195 202,800
-----------
MINING (0.6%)
Freeport McMoran Copper & Gold,
Inc.
7.00%, Series A (f)(n)......... 35,400 526,575
-----------
OIL SERVICES (0.2%)
Unocal Corp.
6.25% (f)...................... 3,000 143,250
-----------
REAL ESTATE (1.2%)
General Growth Properties, Inc.
7.25%, Series A (f)............ 40,000 1,030,000
-----------
RESTAURANTS & LODGING (0.4%)
Lodgian Capital Trust I
7.00% (c)(f)................... 20,000 352,500
-----------
Total Preferred Stocks
(Cost $3,508,832).............. 2,858,925
-----------
WARRANTS (0.0%) (B)
CABLE (0.0%) (B)
@Entertainment, Inc.
expire 7/15/08 (a)(c).......... 3,160 7,900
-----------
FOOD, BEVERAGES & TOBACCO
(0.0%) (B)
Colorado Prime Corp.
expire 12/31/03 (a)(c)......... 150 1,500
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 555
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Shares Value
-----------------------------
<S> <C> <C>
WARRANTS (CONTINUED)
TECHNOLOGY (0.0%) (B)
Metawave Communications Corp.
expire 4/28/00 (a)(g).......... 2,873 $ 20,111
-----------
TELECOMMUNICATION SERVICES
(0.0%) (B)
HighwayMaster Communications,
Inc. expire 9/15/05 (a)(c)..... 200 2
-----------
Total Warrants
(Cost $31,558)................. 29,513
-----------
Principal
Amount
--------------
SHORT-TERM INVESTMENTS (7.3%)
COMMERCIAL PAPER (4.5%)
Xerox Credit Corp.
5.10%, due 1/4/99.............. $ 4,005,000 4,003,298
-----------
Total Commercial Paper
(Cost $4,003,298).............. 4,003,298
-----------
FOREIGN SHORT TERM BONDS (0.2%)
UNITED STATES (0.2%)
Nacional Financiera SNC
6.2194%, due 3/15/99 (d)....... 155,000 155,000
-----------
Total Foreign Short Term Bonds
(Cost $155,124)................ 155,000
-----------
SHORT-TERM BONDS (2.6%)
BUILDING MATERIALS (1.8%)
American Standard Companies,
Inc.
10.875%, due 5/15/99........... 1,590,000 1,593,975
-----------
FINANCE (0.8%)
WestFed Holdings, Inc.
15.50%, due 9/15/99 (h)........ 800,000 704,000
-----------
Total Short-Term Bonds
(Cost $2,263,788).............. 2,297,975
-----------
</TABLE>
<TABLE>
<CAPTION>
Value
- ----------------------------------------------------------------
<S> <C> <C>
Total Short-Term Investments
(Cost $6,422,210).............. $ 6,456,273
-----------
Total Investments
(Cost $86,075,329) (p)......... 95.0% 83,609,160(q)
Cash and Other Assets,
Less Liabilities............... 5.0 4,358,261
----- -----------
Net Assets...................... 100.0% $87,967,421
===== ===========
</TABLE>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Floating rate. Rate shown is the rate in effect at
December 31, 1998.
(e) Yankee bond.
(f) Convertible preferred stock.
(g) Restricted security.
(h) Issue in default.
(i) Issuer in bankruptcy.
(j) British security.
(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) Partially 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 or dividend payment is
made with cash or additional securities.
(p) The cost for Federal income tax purposes is
$86,200,137.
(q) At December 31, 1998, net unrealized depreciation
was $2,590,977, 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
$1,578,428 and aggregate gross unrealized
depreciation for all investments on which there was
an excess of cost over market value of $4,169,405.
(r) Rate Reduction Bond.
(s) Multiple tranche facilities.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE> 556
MainStay Strategic Income Fund
(t) 550 Units--each unit reflects $1,000 principal
amount of 0%/13.875% Senior Discounted Note plus
warrants to acquire 8% of the company's common stock
at a future date.
(u) 195 Units--each unit reflects $1,000 principal
amount of 12.00% Senior Subordinated Notes plus 1
warrant to acquire 1.55 shares of common stock at
$35.65 per share at a future date.
(v) 100 Units--each unit reflects $1,000 principal
amount of 15.00% Senior Notes plus 1 warrant to
acquire 19.85 shares of common stock at $13.20 per
share at a future date.
(w) 645 Units--each unit reflects $1,000 principal
amount of 0%/ 12.375% Senior Discounted Notes plus 3
warrants to acquire 1.05 shares of common stock at
$2.00 per share at a future date.
(x) Segregated as collateral for forward foreign
currency contracts.
(y) The following abbreviations are used in the above
portfolio:
A$--Australian Dollar
C$--Canadian Dollar
DK--Danish Krone
DM--Deutsche Mark
FM--Finnish Markka
GRD--Greek Drachma
IL--Italian Lira
N$--New Zealand Dollar
NK--Norwegian Krone
Pound Sterling --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.
24
<PAGE> 557
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$86,075,329).............................................. $83,609,160
Cash........................................................ 1,976,798
Cash denominated in foreign currencies (identified cost
$2,373,776)............................................... 2,376,236
Receivables:
Dividends and interest.................................... 1,255,711
Fund shares sold.......................................... 505,270
Investment securities sold................................ 343,699
Unrealized appreciation on forward foreign currency
contracts................................................. 133,611
Unamortized organization expense............................ 131,757
-----------
Total assets........................................ 90,332,242
-----------
LIABILITIES:
Payables:
Investment securities purchased........................... 2,031,827
NYLIFE Distributors....................................... 59,011
MainStay Management....................................... 46,350
Custodian................................................. 19,600
Fund shares redeemed...................................... 18,669
Transfer agent............................................ 12,248
Trustees.................................................. 535
Accrued expenses............................................ 87,678
Unrealized depreciation on forward foreign currency
contracts................................................. 88,903
-----------
Total liabilities................................... 2,364,821
-----------
Net assets.................................................. $87,967,421
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 22,240
Class B................................................... 68,292
Class C................................................... 94
Additional paid-in capital.................................. 90,253,233
Accumulated distribution in excess of net investment
income.................................................... (99,692)
Accumulated undistributed net realized gain on
investments............................................... 133,445
Net unrealized depreciation on investments.................. (2,466,169)
Net unrealized appreciation on translation of other assets
and liabilities in foreign currencies and forward foreign
currency contracts........................................ 55,978
-----------
Net assets.................................................. $87,967,421
===========
CLASS A
Net assets applicable to outstanding shares................. $21,603,016
===========
Shares of beneficial interest outstanding................... 2,223,982
===========
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................. $66,273,045
===========
Shares of beneficial interest outstanding................... 6,829,161
===========
Net asset value and offering price per share outstanding.... $ 9.70
===========
CLASS C
Net assets applicable to outstanding shares................. $ 91,360
===========
Shares of beneficial interest outstanding................... 9,417
===========
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.
25
<PAGE> 558
Statement of Operations
for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends................................................. $ 145,182
Interest(a)............................................... 5,561,975
-----------
Total income............................................ 5,707,157
-----------
Expenses:
Management................................................ 455,063
Distribution--Class B..................................... 421,359
Distribution--Class C..................................... 27
Service--Class A.......................................... 49,104
Service--Class B.......................................... 140,497
Service--Class C.......................................... 9
Transfer agent............................................ 127,222
Shareholder communication................................. 81,473
Registration.............................................. 58,297
Amortization of organization expense...................... 41,676
Custodian................................................. 40,641
Professional.............................................. 34,871
Recordkeeping............................................. 28,380
Trustees.................................................. 2,158
Miscellaneous............................................. 19,322
-----------
Total expenses before reimbursement..................... 1,500,099
Expense reimbursement from Manager.......................... (30,927)
-----------
Net expenses............................................ 1,469,172
-----------
Net investment income....................................... 4,237,985
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS:
Net realized gain (loss) from:
Security transactions..................................... 870,013
Option transactions....................................... (58,477)
Foreign currency transactions............................. 84,933
-----------
Net realized gain on investments and foreign currency
transactions.............................................. 896,469
-----------
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions..................................... (1,711,052)
Translation of assets and liabilities in foreign
currencies and forward foreign currency contracts....... (120,882)
-----------
Net unrealized loss on investments and foreign currency
transactions.............................................. (1,831,934)
-----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (935,465)
-----------
Net increase in net assets resulting from operations........ $ 3,302,520
===========
</TABLE>
- -------
(a) Interest recorded net of foreign withholding taxes of $166.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE> 559
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
February 28, 1997*
Year ended through
December 31, 1998 December 31, 1997
----------------- -------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 4,237,985 $ 2,815,744
Net realized gain on investments.......................... 870,013 1,182,881
Net realized gain on foreign currency transactions........ 84,933 111,334
Net realized loss on option transactions.................. (58,477) --
Net change in unrealized depreciation on investments...... (1,711,052) (755,117)
Net change in unrealized appreciation on translation of
other assets and liabilities in foreign currencies and
forward foreign currency contracts...................... (120,882) 176,860
----------- -----------
Net increase in net assets resulting from operations...... 3,302,520 3,531,702
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (1,361,694) (1,504,251)
Class B................................................. (3,579,831) (1,461,165)
Class C................................................. (213) --
From net realized gain on investments and foreign currency
transactions:
Class A................................................. -- (431,115)
Class B................................................. -- (871,088)
Class C................................................. -- --
In excess of net investment income:
Class A................................................. (27,470) --
Class B................................................. (72,218) --
Class C................................................. (4) --
----------- -----------
Total dividends and distributions to shareholders..... (5,041,430) (4,267,619)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 8,072,354 13,170,997
Class B................................................. 35,572,822 42,685,916
Class C................................................. 90,944 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 1,057,437 1,749,283
Class B................................................. 2,923,414 1,998,370
Class C................................................. 216 --
----------- -----------
47,717,187 59,604,566
Cost of shares redeemed:
Class A................................................. (6,068,979) (16,049,724)
Class B................................................. (14,736,037) (3,024,765)
----------- -----------
Increase in net assets derived from capital share
transactions........................................ 26,912,171 40,530,077
----------- -----------
Net increase in net assets............................ 25,173,261 39,794,160
NET ASSETS:
Beginning of period......................................... 62,794,160 23,000,000
----------- -----------
End of period............................................... $87,967,421 $62,794,160
=========== ===========
Accumulated undistributed net investment income (excess
distribution) at end of period............................ $ (99,692) $ 15,118
=========== ===========
</TABLE>
- -------
* Commencement of operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
<PAGE> 560
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
------------------------------------------
February 28, 1997*
Year ended through
December 31, 1998 December 31, 1997
----------------- -------------------
<S> <C> <C>
Net asset value at beginning of period...................... $ 9.91 $ 10.00
------- -------
Net investment income....................................... 0.60 0.54
Net realized and unrealized gain on investments............. (0.09) 0.07
Net realized and unrealized gain (loss) on foreign currency
transactions.............................................. (0.01) 0.05
------- -------
Total from investment operations............................ 0.50 0.66
------- -------
Less dividends and distributions:
From net investment income................................ (0.69) (0.54)
From net realized gain on investments..................... -- (0.21)
In excess of net investment income........................ (0.01) --
------- -------
Total dividends and distributions........................... (0.70) (0.75)
------- -------
Net asset value at end of period............................ $ 9.71 $ 9.91
======= =======
Total investment return (a)................................. 5.17% 6.62%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 6.14% 6.46%(+)
Net expenses.............................................. 1.38% 1.15%(+)
Expenses (before reimbursement)........................... 1.42% 1.49%(+)
Portfolio turnover rate..................................... 325% 323%
Net assets at end of period (in 000's)...................... $21,603 $18,922
</TABLE>
- -------
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
(+) 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> 561
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------ -------------------
February 28, 1997* September 1, 1998**
Year ended through through
December 31, 1998 December 31, 1997 December 31, 1998
----------------- ------------------- -------------------
<S> <C> <C> <C>
$ 9.91 $ 10.00 $ 9.59
------- ------- -------
0.54 0.48 0.21
(0.11) 0.07 0.10
(0.01) 0.05 0.01
------- ------- -------
0.42 0.60 0.32
------- ------- -------
(0.62) (0.48) (0.21)
-- (0.21) --
(0.01) -- --(b)
------- ------- -------
(0.63) (0.69) (0.21)
------- ------- -------
$ 9.70 $ 9.91 $ 9.70
======= ======= =======
4.35% 6.02% 3.41%
5.39% 5.71%+ 5.39%+
2.13% 1.90%+ 2.13%+
2.17% 2.24%+ 2.13%+
325% 323% 325%
$66,273 $43,872 $ 91
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
29
<PAGE> 562
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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on February 28, 1997. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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. 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
30
<PAGE> 563
Notes to Financial Statements
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
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
31
<PAGE> 564
MainStay Strategic Income Fund
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 December 31, 1998:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
------------- ------------ --------------
<S> <C> <C> <C>
Foreign Currency Sale Contracts
- ------------------------------
Australian Dollar vs. US$, expiring 1/13/99.......... A$ 1,245,000 $ 776,164 $ 12,374
Danish Krone vs. Deutsche Mark, expiring 3/22/99..... DK 19,700,000 DM 5,167,213 12,867
Deutsche Mark vs. Irish Punt, expiring 1/4/99........ DM 6,159,960 IP 2,476,228 (6,243)
Deutsche Mark vs. Norwegian Krone, expiring
1/19/99............................................ DM 2,046,121 NK 9,139,000 (32,327)
Deutsche Mark vs. Norwegian Krone, expiring
3/15/99............................................ DM 456,675 NK 2,115,000 659
Deutsche Mark vs. US$, expiring 3/31/99.............. DM 16,570,000 $ 9,957,035 (35,851)
Irish Punt vs. Deutsche Mark, expiring 1/4/99........ IP 2,476,228 DM 6,165,454 9,542
New Zealand Dollar vs. US$, expiring 1/15/99......... ND 2,050,000 $ 1,102,983 19,691
Norwegian Krone vs. US$, expiring 1/19/99............ NK 9,139,000 $ 1,223,517 26,226
Norwegian Krone vs. Deutsche Mark, expiring
3/15/99............................................ NK 8,530,000 DM 1,822,260 (14,442)
Pound Sterling vs. Deutsche Mark, expiring 3/30/99... pound sterling 1,537,000 DM 4,288,537 35,384
Pound Sterling vs. US$, expiring 9/8/99.............. pound sterling 52,000 $ 86,163 (40)
Swedish Krona vs. Deutsche Mark, expiring 3/29/99.... SK 935,000 DM 195,484 2,070
</TABLE>
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Purchased Sold (Depreciation)
------------- ------------ --------
<S> <C> <C> <C>
Foreign Currency Buy Contracts
- ------------------------------
Canadian Dollar vs. US$, expiring 1/25/99............ C$ 2,220,000 $ 1,430,608 $ 14,798
--------
Net unrealized appreciation on forward foreign
currency contracts................................. $ 44,708
========
</TABLE>
PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put options
on its portfolio securities or foreign currencies. 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 or
foreign currency increase. By writing a covered put option, a
32
<PAGE> 565
Notes to Financial Statements (continued)
Fund, in exchange for the premium, accepts the risk of a decline in the market
value of the underlying security or foreign currency below the exercise price.
The Fund may purchase call and put options on its portfolio securities or
foreign currencies. The Fund may purchase call options to protect against an
increase in the price of the security or foreign currency it anticipates
purchasing. The Fund may purchase put options on its securities or foreign
currencies to protect against a decline in the value of the security or foreign
currency or to close out covered written put positions. Risks may arise from an
imperfect correlation between the change in market value of the securities or
foreign currencies held by the Fund and the prices of options relating to the
securities or foreign currencies 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.
Purchased option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
---------- --------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- $ --
Options--assigned........................................... (2,676,000) (36,126)
Options--purchased.......................................... 6,557,000 74,009
Options--sold............................................... (849,000) (8,566)
Options--expired............................................ (3,032,000) (29,317)
---------- --------
Options outstanding at December 31, 1998.................... -- $ --
========== ========
</TABLE>
Short sale option activity for the year ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premium
---------- --------
<S> <C> <C>
Options outstanding at December 31, 1997.................... -- $ --
Options--short sale......................................... (2,676,000) (16,056)
Options--buybacks........................................... 2,676,000 16,056
---------- --------
Options outstanding at December 31, 1998.................... -- $ --
========== ========
</TABLE>
33
<PAGE> 566
MainStay Strategic Income Fund
Restricted securities held at December 31, 1998:
<TABLE>
<CAPTION>
PRINCIPAL
DATE(S) OF AMOUNT/ 12/31/98 PERCENT OF
SECURITY ACQUISITION SHARES COST VALUE NET ASSETS
- ------------------------------------ ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Domino's Pizza, Inc.
Bank debt, Tranche B
8.75%, due 12/31/06 12/24/98 $100,000 $ 100,000 $ 100,000 0.1%
Bank debt, Tranche C
9.00%, due 12/31/07 12/24/98 100,000 100,000 100,000 0.1
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99 8/12/97 320,000 290,995 302,400 0.3
International Wireless
Communications Holdings, Inc.
(zero coupon), due 8/15/01 6/17/98 475,000 111,132 47,500 0.1
Metawave Communications Corp.
13.75%, due 4/28/00 (a) 4/28/98-10/28/98 165,656 165,656 165,656 0.2
Warrants, expire 4/28/00 4/28/98 2,873 0(c) 20,111 0.0(b)
President Riverboat Casinos, Inc.
12.00%, due 9/15/01 12/3/98 47,000 47,000 47,000 0.1
Primestar, Inc.
12.3788%, due 4/1/99 4/1/98 500,000 500,000 200,000 0.2
United International Holdings, Inc.
Convertible Preferred Stock
4.00%, Series A 8/1/97 1,840 250,655 358,800 0.4
---------- ---------- ---
$1,565,438 $1,341,467 1.5%
========== ========== ===
</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.
34
<PAGE> 567
Notes to Financial Statements (continued)
ORGANIZATIONAL COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $208,486 and are being
amortized over 60 months beginning at the commencement of operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $688,635 have been reclassified from
accumulated distribution in excess of net realized gain on investments to
accumulated undistributed net investment income and additional paid-in-capital
due to certain expenses being nondeductible for tax purposes, the tax treatment
of foreign currency gains, and the recharacterization of distributions of
short-term capital gains.
Investment income received by a Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
monthly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method 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.
35
<PAGE> 568
MainStay Strategic Income Fund
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 developments
and possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions.
Foreign currency held at December 31, 1998:
<TABLE>
<CAPTION>
Currency Cost Value
- ---------------------------------------------- ---------- ----------
<S> <C> <C> <C>
Australian Dollar A$ 50 $ 32 $ 31
Canadian Dollar C$ 9,818 6,405 6,392
Danish Krone DK 476 75 75
Deutsche Mark DM 3,437,107 2,062,324 2,063,584
New Zealand Dollar ND 51,699 27,834 27,313
Pound Sterling Pound Sterling 161,301 266,560 268,355
Swedish Krona SK 85,000 10,546 10,486
---------- ----------
$2,373,776 $2,376,236
========== ==========
</TABLE>
36
<PAGE> 569
Notes to Financial Statements (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 0.60%. 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 year ended December 31, 1998, the Manager earned $455,063 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 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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B shares and Class C
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 or Class C shares of the Fund.
37
<PAGE> 570
MainStay Strategic Income Fund
The Plan provides that the distribution and service fees are payable to NYLIFE
Distributors regardless of the amounts actually expended by the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $16,088 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemption of Class B shares of $76,399
period ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $127,222.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A with a net
asset value of $6,697,574 which represents 31.0% of the Class A net assets at
year end. NYLIFE Distributors held shares of Class B with a net asset value of
$5,531,435, which represents 8.34% of the Class B net assets at year end.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $1,934 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$28,380 for the year ended December 31, 1998.
NOTE 4--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of U.S. Government
securities were $103,183 and $94,036, respectively. Purchases and sales of
securities, other than U.S. Government securities, securities subject to
repurchase transactions and short-term securities, were $143,230 and $129,422,
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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
38
<PAGE> 571
Notes to Financial Statements (continued)
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 6--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
February 28**
Period ended through
December 31, 1998 December 31, 1997
---------------------------- ---------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.................................. 823 3,597 9 1,311 4,226
Shares issued in reinvestment of dividends
and distributions.......................... 108 297 -- 173 199
---- ------ -- ------ ------
931 3,894 9 1,484 4,425
Shares redeemed.............................. (615) (1,492) -- (1,576) (297)
---- ------ -- ------ ------
Net increase (decrease)...................... 316 2,402 9 (92) 4,128
==== ====== == ====== ======
</TABLE>
- -------
* First offered on September 1, 1998.
** Commencement of Operations.
39
<PAGE> 572
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Strategic Income Fund (one
of the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, and the results of its operations, the changes in
its net assets and the financial highlights for each of the periods indicated,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management, our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 1999
40
<PAGE> 573
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
41
<PAGE> 574
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
42
<PAGE> 575
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
43
<PAGE> 576
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN17-02/99
[RECYCLE LOGO]
MAINSTAY STRATEGIC INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 577
Table of Contents
<TABLE>
<S> <C>
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, &
Class C
Shares 4
Portfolio Management Discussion and
Analysis 6
Year-by-Year Performance 7
Asset Allocation 8
Portfolio Composition 10
Fund & Lipper Returns 13
Top 10 Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 23
Notes to Financial Statements 28
Report of Independent Accountants 35
The MainStay Funds 36
</TABLE>
<PAGE> 578
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 579
MainStay Strategic Value Fund Highlights
1998 MARKET RECAP
- - In 1998, the U.S. stock market provided double-digit returns for the fourth
consecutive year, with advances dominated by large-capitalization growth
stocks.
- - As the Asian financial crisis unfolded, low inflation, declining interest
rates, and falling commodity prices had a negative impact on economically
sensitive value sectors.
- - Amid extreme volatility, investors virtually ignored traditional value
measures such as low price-to-earnings ratios and instead sought refuge in the
market's largest and most familiar names, with little regard for cost.
- - The convertible market saw tight yield spreads and throughout the year, many
new issues carried low coupons and high premiums.
- - With the flight to higher-quality bonds in the third quarter, liquidity all
but evaporated for many lower-rated credits, resulting in lower prices and
attractive buying opportunities.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Strategic Value Fund returned
0.52% for Class A shares and -0.27% for Class B and Class C shares,* excluding
all sales charges.
- - The Fund maintained its strict deep-value equity disciplines throughout 1998,
despite the market's preference for large-capitalization growth stocks.
- - The Fund benefited from an overweighted position in electric utilities
throughout the year and from increasing financial services holdings after the
market correction, but was hurt by energy stocks and certain consumer cyclical
purchases that failed to provide anticipated value.
- - The Fund found buying opportunities among lower-rated high-yield and
convertible bonds during the third-quarter correction. As of year end, the
Fund held 12.3% of its assets in high-yield securities and 11.7% in
convertible securities, two sectors that offer good defensive qualities.
- - All three share classes underperformed the average Lipper* flexible portfolio
fund, which returned 14.20% for the year.
- -------
* See footnote and table on page 13 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 580
$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: 1-year -5.01%, since inception -0.93%
<TABLE>
<CAPTION>
LIPPER FLEXIBLE
MAINSTAY STRATEGIC PORTFOLIO FUND
VALUE FUND S&P 500* AVERAGE (+) INFLATION (++)
------------------ -------- --------------- ----------
<S> <C> <C> <C> <C>
10/22/97 9450.00 10000.00 10000.00 10000.00
12/31/97 9839.00 10243.00 10031.00 10019.00
3/31/98 10866.00 11672.00 10888.00 10025.00
6/30/98 10450.00 12057.00 11019.00 10087.00
9/30/98 8763.00 10857.00 10154.00 10124.00
12/31/98 9890.00 13170.00 11423.00 10180.00
</TABLE>
CLASS B SHARES SEC Returns: 1-year -5.26%, since inception -0.20%
<TABLE>
<CAPTION>
LIPPER FLEXIBLE
MAINSTAY STRATEGIC PORTFOLIO FUND
VALUE FUND S&P 500* AVERAGE (+) INFLATION (++)
------------------ -------- --------------- ----------
<S> <C> <C> <C> <C>
10/22/97 10000.00 10000.00 10000.00 10000.00
12/31/97 10404.00 10243.00 10031.00 10019.00
3/31/98 11455.00 11672.00 10888.00 10025.00
6/30/98 11008.00 12057.00 11019.00 10087.00
9/30/98 9210.00 10857.00 10154.00 10124.00
12/31/98 9976.00 13170.00 11423.00 10180.00
</TABLE>
CLASS C SHARES SEC Returns: 1-year -1.27%, since inception 3.15%
<TABLE>
<CAPTION>
LIPPER FLEXIBLE
MAINSTAY STRATEGIC PORTFOLIO FUND
VALUE FUND S&P 500* AVERAGE (+) INFLATION (++)
------------------ -------- --------------- ----------
<S> <C> <C> <C> <C>
10/22/97 10000.00 10000.00 10000.00 10000.00
12/31/97 10404.00 10243.00 10031.00 10019.00
3/31/98 11455.00 11672.00 10888.00 10025.00
6/30/98 11008.00 12057.00 11019.00 10087.00
9/30/98 9210.00 10857.00 10154.00 10124.00
12/31/98 10376.00 13170.00 11423.00 10180.00
</TABLE>
4
<PAGE> 581
- -------
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. The Class C graph assumes an initial investment of $10,000 made on
10/22/97 and includes the historical performance of the Class B shares for
periods 10/22/97 through 8/31/98. Performance data for the two classes vary
after this date based on differences in their load. Returns shown do not
reflect the 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. It is not possible to make an investment directly into an
index.
+ Lipper 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. According to Lipper,
a flexible portfolio fund allocates its investments across various asset
classes, including domestic common stocks, bonds, and money market
instruments, with a focus on total return.
++ 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.
5
<PAGE> 582
CORRECTION
- --------------------
A shift in security
prices, bringing them
more in line with
historically
appropriate levels.
INFLATION
- --------------------
An increase in the cost
of goods and services
over time. As prices
rise, the purchasing
power of the dollar
declines.
COMMODITIES
- --------------------
Bulk goods, such as
grains, precious metals,
industrial metals, and
foods traded on a
commodities exchange.
GROWTH VERSUS
VALUE
- --------------------
Growth investments
typically include stocks
with rising prices and
positive earnings
trends. Value stocks
typically include equi-
ties 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
As years go, 1998 was one of the most volatile in recent memory. Despite its ups
and downs, however, the S&P 500(*) Index closed the year with a 28.58% gain,
making 1998 the fourth year in a row domestic stocks in general have returned
more than 20%. About two-thirds of the market's gains, however, occurred in the
25 largest issues. Severe corrections among smaller- capitalization stocks were
largely overshadowed by tremendous gains in large technology and pharmaceutical
stocks.
As the Asian crisis unfolded, low inflation, declining interest rates,
and falling commodity prices helped rivet investor attention on growth stocks
and had a negative impact on economically sensitive value sectors. Extreme
volatility surrounding problems in Russia and Latin America caused a general
flight to quality, with investors seeking a "safe haven" in long-term U.S.
government bonds and many of the stock market's largest and most familiar
issues.
Throughout the year, investors seemed to ignore traditional value measures,
preferring a "bigger is better" approach, regardless of cost or
price-to-earnings ratios. As a result, value stocks, which traditionally
outperform in declining markets, severely underperformed in the late summer
correction. Small-cap deep-value stocks experienced their worst relative
performance since the decade began.
The convertible market saw tight yield spreads throughout the year, with many
new issues carrying low coupons and high premiums. During the flight to quality
in the third quarter of 1998, liquidity all but evaporated in the high-yield
market, lowering prices and creating buying opportunities among lower-rated
credits. As the market recovered, higher-rated bonds appeared to offer more
attractive default-adjusted spreads, providing buying opportunities.
HOW DID THE MAINSTAY STRATEGIC VALUE FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Strategic Value Fund returned 0.52% for Class A shares and -0.27%
for Class B and Class C shares(+) for the year ended 12/31/98, excluding all
sales charges. All share classes underperformed the average Lipper(++) flexible
portfolio fund, which returned 14.20% for the year.
WHY DID THE FUND UNDERPERFORM ITS PEERS?
There were a variety of reasons, but the most significant ones have to do with
our value disciplines. By virtually every measure, 1998 was a year for
large-capitalization growth stocks. Our disciplines lead us to invest in
smaller-capitalization value names, which were among the worst-performing stocks
in 1998. Rather than ignore the Fund's objective and jump on the growth
bandwagon, we continued to seek stocks with low price-to-earnings ratios and low
price to cash flow ratios, even as the market seemed to reward stocks with high
prices and high P/Es. In the convertible and high-yield portions of the Fund, we
also pursued value opportunities, despite extreme volatility and limited
opportunities to purchase new issues at attractive valuation levels until later
in the year.
- -------
* See footnote on page 5
for more information on
the S&P 500 Index.
(+) Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
(++) See footnote and table on page 13 for more information on Lipper Inc.
6
<PAGE> 583
YEAR-BY-YEAR PERFORMANCE
<TABLE>
<CAPTION>
Total Return%
CLASS A SHARES CLASS B & CLASS C SHARES
-------------- ------------------------
Year End
<S> <C> <C>
12/97 4.11 4.04
12/98 0.52 -0.27
</TABLE>
See footnote * on page 13 for more information on performance. Class C share
returns reflect the historical performance of the Class B shares for periods
10/97-8/98.
In the equity portion of the Fund, our concentration in traditional value
sectors, such as energy and basic materials, contributed to underperformance as
financial problems in Asia, Russia, and Latin America unfolded, bringing lower
prices for oil and other major commodities.
Fortunately, the dramatic declines in traditional deep-value sectors helped us
add to many of the Fund's stock and bond positions at what we believe to be
exceedingly attractive prices. So while the Fund underperformed its peers in the
"crisis mentality" of 1998, we believe that when investors once again focus on
valuation, our deep-value strategy will have strong appeal for investors seeking
to outperform over the long term.
The flexible portfolio category includes funds with a variety of allocation
parameters and growth and value disciplines, some of which may have given the
Fund a competitive disadvantage in 1998, when a larger allocation to growth
equities would have provided better performance.
WHAT WERE SOME OF THE POSITIVE DECISIONS YOU MADE FOR THE EQUITY PORTION OF THE
FUND IN 1998?
Although the Fund is generally underweighted in technology stocks, one of our
most successful decisions was to purchase Adaptec, a leader in producing
hardware and software to speed data
throughput. After buying the stock in the first quarter, the Asian crisis caused
its price to drop about 50%. We doubled the Fund's position and benefited when
the stock price rose strongly through the end of the year.
The Fund also purchased Philip Morris at the height of the controversy over
tobacco litigation, which caused the price to drop below the underlying asset
value. A substantial recovery made it one of the Fund's best-performing
equities. In the first half of the year, we also added electric utility stocks,
such as Texas Utilities, Illinova Corporation, OGE Energy Corp., Niagara Mohawk,
and Energy East to the Fund's portfolio. The sector showed strong performance
throughout
PRICE-TO-EARNINGS
RATIO
- --------------------
The price of a stock divided by its earnings per share.
DEEP-VALUE
INVESTING
- --------------------
An investment strategy
that focuses on
securities with the
lowest price-to-
earnings and price
to cash flow ratios
and fundamental
factors that may
stimulate a
turnaround in
performance at
the company.
YIELD SPREAD
- --------------------
The difference in yield
between securities in
different market
sectors, such as
convertible securities
and Treasury issues--
or between different
securities in a
single sector, such
as intermediate-term
and short-term
Treasury issues.
PRICE TO CASH
FLOW RATIO
- --------------------
The relationship
between the price
of a stock and the
amount of free cash
flow the company is
able to generate.
7
<PAGE> 584
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.
RESTRUCTURING
- --------------------
Any action designed to improve the overall financial structure, labor relations,
or productivity of a company. Restructuring may include such steps as changing
management, investing in new plant and equipment, engaging in mergers and
acquisitions, or taking other action to increase output or lower costs.
ASSET ALLOCATION AS OF 12/31/98
<TABLE>
<CAPTION>
[PIE CHART]
CASH, EQUIVALENTS & OTHER
CONVERTIBLE BONDS HIGH-YIELD SECURITIES COMMON STOCKS ASSETS, LESS LIABILITIES
- ----------------- --------------------- ------------- -------------------------
<S> <C> <C> <C>
11.7% 12.30% 73.00% 3.00%
</TABLE>
1998, and the Fund benefited from strong utility performance during the market
correction and from some sales near the market peak.
The Fund reinvested the proceeds of its utility stock sales in financial
services stocks, including SLM Holding, Washington Mutual, MGIC Investments, and
Conseco, all of which appeared to be much less expensive on a relative basis.
All of these stocks were trading in the range of 10 to 11 times earnings, when
the price of stocks in general was nearing 25 times earnings. Each of these
financial services stocks had a positive impact on the Fund through year end.
WERE THERE MAJOR DECISIONS THAT HAD A NEGATIVE IMPACT ON THE FUND'S EQUITY
PERFORMANCE?
Yes there were. As the price of oil declined, the Fund purchased stocks of
several midsized energy companies, including Unocal, Union Pacific Resources,
Noble Affiliates, and Oryx, believing that they were attractively priced. As oil
prices continued to fall, we continued to purchase more of these stocks for the
Fund at successively lower prices throughout the year. The overall effect was
negative in 1998, but we believe these purchases have positively positioned the
portfolio for the future.
WHAT OTHER SIGNIFICANT STOCK PURCHASES DID YOU MAKE FOR THE FUND IN 1998?
In the third quarter of 1998, we increased the Fund's HMO exposure with the
initial purchase of United Healthcare at what we believed to be bargain basement
prices. The stock's price has been up ever since. The Fund also purchased Ford
Motor Company at an attractive price and sold it in March at a substantial
profit. Since the stock later declined, the portfolio benefited from pricing and
timing.
Although Toys "R" Us met all of the Fund's deep-value disciplines, management
failed to deliver on their promises. Earnings have been disappointing and a
promised restructuring has not been completed. The Fund bought Coltec
Industries, a leading aerospace and industrial manufacturing company that had
poten-
8
<PAGE> 585
tial as a takeover target. Unfortunately, two offers for the company came in
below the Fund's purchase price, and we eventually decided to cut the Fund's
losses, since we no longer believed our objectives could be met.
DID THE FUND HAVE OTHER SIGNIFICANT STOCK SALES DURING THE YEAR?
Yes. Lexmark is a laser printer company and Allegiance is a health care
provider. Both stocks were sold at a substantial profit when they reached the
Fund's target values and began to behave like growth stocks. Tenneco, an
automotive parts and packaging company, was sold at a small loss, although the
Fund benefited from its reduction in economically sensitive sectors. The Fund
also benefited from our decision to sell Crown Cork & Seal, even at a loss,
since the company has suffered from its exposure to Asia and South America and
has continued in a downtrend. The Fund sold AMR, better known as American
Airlines, which was positive not only because the Fund captured a gain, but also
because the stock collapsed after it was sold. In October, we cut back on the
Fund's position in Columbia HCA, a health care provider that was suffering from
disappointing earnings trends and the inability to effectively restructure its
operations. The stock was down 40% from the Fund's original cost and took a toll
on performance.
WHAT WERE SOME OF THE BEST AND WORST-PERFORMING STOCKS IN THE FUND'S PORTFOLIO?
Lexmark, Allegiance, and Ford were all top performers. U.S. West also
contributed positively to the Fund's performance as it benefited from the
reappraisal of the telecommunications group. Finally, the Fund's investment in
the insurance giant CIGNA had a positive impact on performance.
Among the Fund's worst performers were two stocks which were purchased for their
restructuring potential. Venator, formerly known as Woolworth, confused the
market with its name change and it shifted into athletic footwear, an industry
that depends heavily on Far Eastern manufacturing, just as the Asian market
collapsed. Calaway Golf, a major golf club manufacturer, was purchased at a
deep-value multiple, but declined throughout the year as earnings
disappointments continued.
Union Pacific Resources is a leveraged oil stock that the Fund bought too early.
The price declined over the course of the year as oil prices fell. We added to
the Fund's position, and view the stock as one of our best turnaround candidates
for 1999.
Finally, Northwest Airlines, the principal air link between the United States
and the Far East, had a dismal year from the Asian crisis and a labor strike. As
of year end, the Fund continued to hold the stock, believing its long-term
potential will be realized as Asia stabilizes and the strike fades from recent
memory.
WHAT HAPPENED IN THE CONVERTIBLE PORTION OF THE FUND?
The Fund remained defensively positioned in convertible securities throughout
the year, which detracted from performance, particularly during the strong
market recovery in the fourth quarter. This helped the Fund avoid issues such as
9
<PAGE> 586
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CONVERTIBLE CONVERTIBLE PREFERRED CASH, EQUIVALENTS & OTHER ASSETS,
BONDS STOCKS CORPORATE BONDS COMMONS STOCKS LESS LIABILITIES
- ------------- --------------------- --------------- -------------- ---------------------------------
8.1% 3.6% 12.3% 73.0% 3.0%
</TABLE>
Sunbeam and FPA Medical that had major difficulties, but it also caused the
convertible portion of the portfolio to underperform convertible funds in
general. Our emphasis on risk management kept the convertible portion of the
Fund invested in relatively high-quality securities throughout the year,
although we found some value opportunities for the Fund in lower-rated credits
during the market dislocation in the third quarter.
One example was Amkor, a semiconductor packaging company that rose from the
Fund's purchase price in the high 40s to the low 90s by the end of the year. The
Fund also purchased PhyCor, which manages physicians and their practices, but
the company's clinics--and its convertibles--performed below expectations.
WERE THERE OTHER SIGNIFICANT CONVERTIBLE PURCHASES AND SALES DURING 1998?
Yes. The Fund owned Unisys convertibles at the beginning of the year. As the
stock price rose, they were converted, so the Fund purchased Unisys preferred,
which provided strong performance throughout the rest of the year. The Fund also
purchased Network Associates, a computer networking firm that profited from
corporate concerns over network security. In the second quarter, we bought Time
Warner for the Fund. The company's convertibles and preferred stock advanced
with improvements in cable, telephony, and high-speed data transmission, and the
Fund sold the securities at a profit as they reached our price targets. Newell
Corp. is an issue we purchased for the Fund at attractive prices during the
height of the Asian crisis. The company acquires major brands and streamlines
their operations, and was a successful addition to the portfolio.
During the year, the Fund also purchased bonds issued by Loews, an investment-
grade issuer, that were convertible into Diamond Offshore common stock. Despite
problems among oil services companies, the securities benefited from Loews'
quality and Diamond Offshore's deep-water drilling exposure, and we sold the
securities at a high point in the
10
<PAGE> 587
market, earning a substantial profit for the Fund.
All of these securities were among the Fund's top-performing holdings in the
convertible portion of the portfolio.
WERE THERE WEAKER PERFORMERS IN THE CONVERTIBLE PORTION OF THE FUND'S PORTFOLIO?
Servico bonds provided an attractive 15% coupon, but underperformed as investors
retreated from the hotel sector. Cendant suffered from accounting irregularities
at CUC International and was a very poor performer. Changes in Medicare
reimbursement policies also negatively impacted the Fund's holdings at Sun
Health Care and Integrated Health, both of which detracted from performance.
IN WHAT SECTORS WAS THE HIGH-YIELD PORTION OF THE FUND INVESTED?
The high-yield portion of the Fund's portfolio began the year defensively
positioned in light of Asian difficulties. The Fund underweighted economically
sensitive sectors throughout the year and tended to avoid telecommunications
issues, which we believed tended to represent poor value in 1998. Despite its
underweighted position in telecommunications, however, the Fund had good success
with Centennial Cellular, a cellular phone company that was acquired, and
Centaur Funding, a preferred obligation of AirTouch Communications.
During the liquidity problems in the third quarter of 1998, the Fund was able to
purchase some lower-quality bonds at attractive price levels, which helped
position the Fund going forward. In managing the high-yield portion of the
Fund's portfolio, we look for attractive spreads over Treasuries after adjusting
for the risk of default. In the third quarter, that drew us to lower-quality
bonds. In the fourth quarter, higher-quality bonds tended to provide higher
default-adjusted spreads, which allowed us to improve credit quality in the
high-yield portion of the Fund.
Overall, the Fund's high-yield investments were overweighted in media, health
care, electric utilities, and office properties. Since telecommunications
represents a large portion of the high-yield market, the Fund's underweighted
position was significant and positively impacted performance during the year.
WERE THERE SIGNIFICANT HIGH-YIELD PURCHASES AND SALES FOR THE FUND IN 1998?
There were several. The Fund purchased United International Holdings which was
profitable for the portfolio. We also bought Highwoods Properties, an office
property REIT that we felt was attractively priced, but the securities have not
yet impacted the Fund's performance. Medaphis provides billing services and
software for doctors and hospitals. Unfortunately, the company missed its
quarterly earnings projections just after the Fund purchased the bonds, which
had a negative impact on performance, yet we have added to the Fund's position
on positive developments at the company.
Many of the Fund's most significant sales were bonds that were tendered away
from the Fund at a profit. Among these were Rogers Communications, Centennial
Cellular, Harvey's Casino, and Grand Casino. The Fund also sold bonds of Vencor,
a nursing home operator, when changes in Medicare payments negatively impacted
the company and its high-yield bonds.
REIT
- ----------------
A REAL ESTATE INVESTMENT TRUST IS A COMPANY THAT PURCHASES AND MANAGES REAL
ESTATE PROPERTIES FOR THE BENEFIT OF ITS SHAREHOLDERS.
11
<PAGE> 588
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 mone-
tary 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.
The Fund also sold Viacom bonds at a profit when they reached our price target
in the first half of 1998.
WHAT WERE SOME OF THE FUND'S BEST AND WORST-PERFORMING HIGH-YIELD SECURITIES IN
1998?
CD Radio was the best-performing high-yield bond in the portfolio and benefited
from major investments that improved its credibility in the market. First
Pacific and Hutchison Whampoa are both Hong Kong conglomerates that offered high
quality, strong asset coverage, and stellar performance in 1998. The Fund also
had strong success with Quest Diagnostics, which benefited from strength in the
pharmaceutical sector and increased interest in diagnostic service providers.
Among the worst-performing names in the high-yield portion of the Fund were
Northern Offshore, Entex, and Medaphis. Northern Offshore is an oil services
company that suffered from declining oil prices and the failure to place new
rigs into service. Entex distributes computers and software, but missed its
earnings projections. We anticipate better performance from the company in 1999
and continue to hold its securities. Despite its problems, Medaphis has had a
successful asset sale and appears well positioned for positive operating
momentum going forward.
HOW WERE THE FUND'S ASSETS ALLOCATED AT YEAR END?
At the beginning of 1998, the Fund was invested 50% in value stocks, about 17%
in convertibles, about 11% in high-yield securities, with the remainder in cash
or cash equivalents. By the end of the year, those numbers had shifted to 73.0%
in value stocks, 11.7% in convertibles and 12.3% in high-yield securities, with
3.0% in cash.
WHAT IS YOUR OUTLOOK GOING FORWARD?
We believe that eventually, investors will have to ask themselves the questions
we've been asking all along--how does the price of securities relate to their
value? When that happens, we believe our deep-value disciplines will be
increasingly attractive and that evaluation of risk and reward will favor our
approach to convertible and high-yield investments. Until that happens, we will
continue to follow our disciplines, seeking value among common stocks,
convertible securities, and high-yield bonds.
Denis Laplaige
Steven Tananbaum
Neil Feinberg
Portfolio Managers
MacKay Shields Financial Corporation
12
<PAGE> 589
Fund & Lipper Returns as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR THROUGH 12/31/98
<S> <C> <C>
Class A 0.52 3.89%
Class B -0.27 3.15%
Class C -0.27 3.15%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR THROUGH 12/31/98
<S> <C> <C>
Class A -5.01 -0.93%
Class B -5.26 -0.20%
Class C -1.27 3.15%
</TABLE>
LIPPER(+) CATEGORY RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR THROUGH 12/31/98
<S> <C> <C>
Class A 198 out of 160 out of
207 funds 196 funds
Class B 204 out of 172 out of
207 funds 196 funds
Class C n/a n/a
Average Lipper
flexible portfolio fund 14.20% 12.31%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV
12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.18 $0.1549 $0.0083
Class B $10.17 $0.0848 $0.0083
Class C $10.17 $0.0462 $0.0083
</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%. Class C shares, first offered to the public on 9/1/98, are
sold with no initial sales charge, but are subject to a CDSC of 1% if
redeemed within one year of purchase and an annual 12b-1 fee of 1%.
Performance figures for Class C shares include the historical performance
of the Class B shares for periods from inception (10/22/97) up to 8/31/98.
Performance data for the two classes after this date vary based on
differences in their load.
(+) Lipper 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 Class A shares and Class B shares
on 10/22/97 through 12/31/98. The Fund's Class C shares were first
offered to the public on 9/1/98.
13
<PAGE> 590
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.
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
United HealthCare Corp. $2,282,313
Adaptec, Inc. 1,933,631
SLM Holding Corp. 1,344,000
Citigroup, Inc. 1,306,800
Federated Department Stores, Inc. 1,267,669
American Standard Cos., Inc. 1,232,656
Tosco Corp. 1,216,125
Washington Mutual, Inc. 1,164,719
Northrop Grumman Corp. 1,023,750
Harrah's Entertainment, Inc. 1,019,688
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNTT OF PURCHASE
<S> <C>
Adaptec, Inc., 4.75%, due 2/1/04 and Common Stock $4,418,399
International Business Machines Corp. Common Stock 3,485,283
American Standard Cos., Inc. Common Stock 3,063,941
Xerox Corp. Common Stock 3,044,991
Coltec Capital Trust, 5.25% Preferred Stock and Common Stock 2,866,472
Mark IV Industries, Inc., 4.75%, due 11/1/04 and Common
Stock 2,661,131
Shaw Industries, Inc. Common Stock 2,585,264
United Healthcare Corp. Common Stock 2,239,065
Foundation Health Systems, Inc. Class A Common Stock 1,834,727
AMR Corp. Common Stock 1,814,917
</TABLE>
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
International Business Machines Corp. Common Stock $3,993,972
Adaptec, Inc., 4.75%, due 2/1/04 and Common Stock 3,387,592
Xerox Corp. Common Stock 3,183,710
Shaw Industries, Inc. Common Stock 3,028,342
Coltec Capital Trust, 5.25% Preferred Stock and Common Stock 2,264,869
Foundation Health Systems, Inc. Class A Common Stock 1,958,305
AMR Corp. Common Stock 1,758,619
Standard and Poor's Depository Receipts 1,556,001
Telecomunicacoes Brasileiras S.A. Common Stock 1,419,365
Bowater, Inc. Common Stock 1,340,942
</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.
14
<PAGE> 591
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CONVERTIBLE SECURITIES
(11.7%) (+)
CONVERTIBLE BONDS (8.1%)
BANKS (0.4%)
Mitsubishi Bank Limited
International Finance (Bermuda)
Trust
3.00%, due 11/30/02............ $ 250,000 $ 243,750
-----------
COMPUTERS & OFFICE
EQUIPMENT (0.3%)
Cymer, Inc.
3.50, due 8/6/04............... 100,000 72,000
Western Digital Corp.
(zero coupon), due 2/18/18..... 300,000 91,875
-----------
163,875
-----------
COMPUTERS-NETWORKING (0.3%)
Adaptec, Inc.
4.75%, due 2/1/04 (a).......... 250,000 193,750
-----------
CONGLOMERATES (0.3%)
First Pacific Capital Ltd.
2.00%, due 3/27/02 (d)......... 85,000 77,350
Hutchison Delta Finance Ltd.
7.00%, due 11/8/02 (d)......... 60,000 64,800
-----------
142,150
-----------
ELECTRICAL EQUIPMENT (0.5%)
Antec Corp.
4.50%, due 5/15/03 (c)......... 300,000 297,750
-----------
ENERGY (0.4%)
Pennzoil Co.
Series U.S.
4.90%, due 8/15/08............. 250,000 242,500
-----------
HEALTH CARE (1.0%)
Elan Finance Corp. Ltd.
(zero coupon), due 12/14/18
(c)............................ 200,000 112,750
HEALTHSOUTH Corp.
3.25%, due 4/1/03.............. 150,000 127,875
PhyCor, Inc.
4.50%, due 2/15/03............. 200,000 122,750
Sun Healthcare Group, Inc.
6.00%, due 3/1/04 (c).......... 30,000 19,200
Veterinary Centers of America,
Inc.
5.25%, due 5/1/06.............. 200,000 165,000
-----------
547,575
-----------
</TABLE>
- --------------
(+) Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
LEISURE (0.3%)
Family Golf Centers, Inc.
5.75%, due 10/15/04............ $ 200,000 $ 185,250
-----------
OIL SERVICES (0.1%)
Loews Corp.
3.125%, due 9/15/07............ 100,000 79,625
-----------
PERSONAL SERVICES (0.4%)
Equity Corporation International
4.50%, due 12/31/04............ 100,000 120,375
Metamor Worldwide, Inc.
2.94%, due 8/15/04............. 100,000 78,250
-----------
198,625
-----------
POLLUTION & RELATED (0.3%)
Waste Management, Inc.
4.00%, due 2/1/02.............. 150,000 180,000
-----------
PUBLISHING (0.4%)
World Color Press, Inc.
6.00%, due 10/1/07............. 250,000 245,625
-----------
REAL ESTATE (0.0%) (B)
Paliburg International Finance
Co.
3.50%, due 2/6/01 (d).......... 40,000 23,750
-----------
RETAIL (0.1%)
Nine West Group, Inc.
5.50%, due 7/15/03............. 50,000 39,500
-----------
SEMICONDUCTORS (2.4%)
Amkor Technologies, Inc.
5.75%, due 5/1/03.............. 400,000 371,500
C-Cube Microsystem, Inc.
5.875%, due 11/1/05............ 100,000 102,875
Cirrus Technology, Inc.
6.00%, due 12/15/03............ 600,000 438,000
Cypress Semiconductor, Inc.
6.00%, due 10/1/02............. 175,000 153,125
Wind River Systems, Inc.
5.00%, due 8/1/02.............. 75,000 87,094
Xilinx, Inc.
5.25%, due 11/1/02 (c)......... 150,000 190,500
-----------
1,343,094
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
<PAGE> 592
MainStay Strategic Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CONVERTIBLE SECURITIES
(CONTINUED)
CONVERTIBLE BONDS (CONTINUED)
SOFTWARE (0.3%)
System Software Associates, Inc.
7.00%, due 9/15/02............. $ 100,000 $ 74,000
Vantive Corp. (The)
4.75%, due 9/1/02.............. 100,000 70,000
-----------
144,000
-----------
SPECIALIZED SERVICES (0.1%)
CUC International, Inc.
3.00%, due 2/15/02............. 50,000 47,750
-----------
TELECOMMUNICATION
SERVICES (0.3%)
Telecom Corp. of New Zealand
Ltd.
5.75%, due 4/1/03.............. 150,000 157,875
-----------
TELEPHONE UTILITIES (0.2%)
Bell Atlantic Financial
Services, Inc.
4.25%, due 9/15/05 (c)......... 100,000 104,000
-----------
Total Convertible Bonds
(Cost $4,483,347).............. 4,580,444
-----------
Shares
----------
PREFERRED STOCKS (3.6%)
AUTO PARTS (0.4%)
Tower Automotive Capital Trust
6.75% (c)...................... 4,000 204,000
-----------
BANKS (0.2%)
National Australia Bank, Inc.
7.875%......................... 4,000 111,500
-----------
BIOTECHNOLOGY (0.2%)
Alkermes, Inc.
6.50%.......................... 3,000 138,000
-----------
BUILDING MATERIALS (0.2%)
Owens Corning Capital L.L.C.
6.50% (c)...................... 2,000 97,250
-----------
CONTAINERS METAL & GLASS (0.2%)
Owens Illinois, Inc.
4.75%.......................... 2,500 106,250
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
---------------------------
<S> <C> <C>
FOOD (0.1%)
Suiza Capital Trust II
5.50% (c)...................... 2,000 $ 86,250
-----------
HEALTH CARE (0.2%)
Sun Financing I
7.00% (c)...................... 10,000 107,500
-----------
MACHINERY (0.1%)
Ingersoll-Rand Co.
6.75%.......................... 2,000 47,500
-----------
PAPER & FOREST PRODUCTS (0.1%)
International Paper Co.
5.25%.......................... 1,000 48,375
-----------
REAL ESTATE (0.7%)
General Growth Properties, Inc.
7.25%.......................... 15,000 386,250
-----------
SOFTWARE (1.1%)
Microsoft Corp.
$2.196, Series A............... 6,000 586,500
Tribune Co.
6.25%.......................... 2,000 49,250
-----------
635,750
-----------
TRANSPORTATION (0.1%)
Union Pacific Capital Trust
6.25%.......................... 1,500 67,875
-----------
Total Preferred Stocks
(Cost $2,073,605).............. 2,036,500
-----------
Total Convertible Securities
(Cost $6,556,952).............. 6,616,944
-----------
Principal
Amount
----------
CORPORATE BONDS (10.7%)
AEROSPACE (0.3%)
DeCrane Aircraft Holdings, Inc.
12.00%, due 9/30/08 (e)........ $ 75,000 75,000
Newport News Shipbuilding, Inc.
9.25%, due 12/1/06............. 70,000 74,025
-----------
149,025
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
<PAGE> 593
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
BANKS (0.4%)
Local Financial Corp.
11.00%, due 9/8/04............. $ 120,000 $ 123,600
Tokai Preferred Capital Co.
L.L.C.
9.98% due 12/29/49
11.0914%, beginning 6/30/08
(c)(d)......................... 90,000 77,400
-----------
201,000
-----------
BUILDINGS (0.2%)
Greystone Homes, Inc.
10.75%, due 3/1/04............. 120,000 126,600
-----------
CABLE (1.2%)
@Entertainment, Inc.
Series B
(zero coupon), due 7/15/08
14.50%, beginning 7/15/03...... 330,000 145,200
Marcus Cable Operating Co. L.P.
(zero coupon), due 8/1/04
13.50%, beginning 8/1/99....... 140,000 141,050
Primestar, Inc.
12.3788%, due 4/1/99 (f)(g).... 170,000 68,000
UIH Australia/Pacific, Inc.
Series B
(zero coupon), due 5/15/06
14.00%, beginning 5/15/01...... 390,000 202,800
United International Holdings,
Inc.
(zero coupon), due 2/15/08
10.75%, beginning 2/15/03...... 225,000 121,500
-----------
678,550
-----------
CASINOS (0.5%)
Circus Circus Enterprise, Inc.
6.70%, due 11/15/96............ 20,000 18,937
Harrahs Operating Co., Inc.
7.875%, due 12/15/05........... 55,000 55,609
Harvey Casinos Resorts
10.625%, due 6/1/06............ 70,000 75,600
Isle of Capri Casinos, Inc.
12.50%, due 8/1/03............. 65,000 71,987
Penn National Gaming, Inc.
10.625%, due 12/15/04.......... 80,000 84,000
-----------
306,133
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CELLULAR TELEPHONE (0.2%)
Centennial Cellular Corp.
10.75%, due 12/15/08 (c)....... $ 75,000 $ 74,625
International Wireless
Communications Holdings, Inc.
(zero coupon), due 8/15/01
(f)(h)......................... 200,000 20,000
-----------
94,625
-----------
CHEMICALS (0.0%) (B)
Borden Chemical & Plastic L.P.
9.50%, due 5/1/05.............. 25,000 20,750
-----------
CONSTRUCTION & ENGINEERING (0.2%)
Cathay International Holdings,
Inc.
13.00%, due 4/15/08 (c)........ 235,000 89,300
Traffic Stream (BVI)
Infrastructure Ltd.
14.25%, due 5/1/06 (c)......... 80,000 36,800
-----------
126,100
-----------
COSMETICS (0.2%)
Jafra Cosmetics International,
Inc.
11.75%, due 5/1/08 (c)......... 100,000 91,000
-----------
DOMESTIC OIL & GAS (0.3%)
Belco Oil & Gas Corp.
Series B
8.875%, due 9/15/07............ 20,000 18,300
Denbury Management, Inc.
9.00%, due 3/1/08.............. 20,000 18,000
KCS Energy, Inc.
11.00%, due 1/15/03............ 35,000 32,200
Queens Sand Resources, Inc.
12.50%, due 7/1/08............. 50,000 36,000
Stone Energy Corp.
8.75%, due 9/15/07............. 75,000 72,750
-----------
177,250
-----------
DRUGS (0.1%)
ICN Pharmaceuticals, Inc.
8.75%, due 11/15/08 (c)........ 80,000 80,800
-----------
ELECTRICAL EQUIPMENT (0.1%)
Electronic Retailing Systems,
Inc.
(zero coupon), due 2/1/04
13.25%, beginning 2/1/00 (d)... 80,000 28,800
-----------
ELECTRICAL UTILITIES (0.1%)
ESI Tractebel Acquisition Corp.
7.99%, due 12/30/11............ 40,000 39,800
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 594
MainStay Strategic Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
FINANCE (0.1%)
Cityscape Financial Corp.
Series A
12.75%, due 6/1/04 (i)......... $ 280,000 $ 42,000
ContiFinancial Corp.
7.50%, due 3/15/02............. 20,000 13,600
-----------
55,600
-----------
FOOD, BEVERAGES, &
TOBACCO (0.1%)
Standard Commercial Corp.
8.875%, due 8/1/05............. 75,000 72,000
-----------
HEALTH CARE (0.7%)
Columbia/HCA Healthcare Corp.
7.50%, due 11/15/95............ 140,000 121,863
Magellan Health Services, Inc.
9.00%, due 2/15/08............. 60,000 53,400
Medaphis Corp.
9.50%, due 2/15/05............. 200,000 156,000
Quest Diagnostics, Inc.
10.75%, due 12/15/06........... 40,000 44,600
Sun Healthcare Group, Inc.
9.375%, due 5/1/08 (c)......... 35,000 28,000
-----------
403,863
-----------
INDUSTRIAL (0.4%)
Generac Portable Products L.L.C.
11.25%, due 7/1/06 (c)(d)...... 40,000 40,400
Snyder Oil Corp.
8.75%, due 6/15/07............. 60,000 58,200
Thermadyne Holdings Corp.
(zero coupon), due 6/1/08
12.50%, beginning 6/1/03....... 165,000 78,375
9.875%, due 6/1/08............. 20,000 18,200
-----------
195,175
-----------
LEISURE (0.1%)
Bally Total Fitness Holdings
Corp.
Series B
9.875%, due 10/15/07........... 75,000 73,500
-----------
MEDIA (0.1%)
Young America Corp.
Series B
11.625%, due 2/15/06........... 75,000 35,250
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
MEDICAL EQUIPMENT (0.1%)
Biovail Corporation
International
10.875%, due 11/15/05 (c)...... $ 75,000 $ 75,375
-----------
MINING (0.2%)
Glencore Nickel Pty Ltd.
9.00%, due 12/1/14............. 45,000 36,450
Great Central Mines Ltd.
8.875%, due 4/1/08............. 55,000 55,000
-----------
91,450
-----------
OIL & GAS SERVICES (0.2%)
Grey Wolf, Inc.
8.875%, due 7/1/07............. 25,000 18,500
Northern Offshore ASA
10.00%, due 5/15/05 (c)........ 45,000 23,400
R & B Falcon Corp.
9.50%, due 12/15/08 (c)........ 75,000 75,000
-----------
116,900
-----------
OTHER TRANSPORTATION (0.1%)
Ultrapetrol (Bahamas) Ltd.
10.50%, due 4/1/08............. 50,000 40,000
-----------
PAPER & FOREST PRODUCTS (0.2%)
SD Warren Co.
Series B
12.00%, due 12/15/04........... 100,000 108,875
-----------
PUBLISHING (0.1%)
General Media, Inc.
10.625%, due 12/31/00.......... 45,000 39,600
-----------
REAL ESTATE (1.6%)
BF Saul Real Estate Investment
Trust
9.75%, due 4/1/08.............. 85,000 79,050
CB Richard Ellis Services, Inc.
8.875%, due 6/1/06............. 100,000 98,000
Crescent Real Estate Equities
Co.
7.50%, due 9/15/07............. 245,000 227,850
Health Care Properties Inc.
6.875%, due 6/8/05............. 120,000 113,025
Highwoods Realty L.P.
8.00%, due 12/1/03............. 150,000 151,125
8.125%, due 1/15/09............ 75,000 74,250
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 595
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
REAL ESTATE (1.6%) (CONTINUED)
Hospitality Properties, Inc.
7.00%, due 3/1/08.............. $ 80,000 $ 71,479
LNR Property Corp.
9.375%, due 3/15/08............ 95,000 91,200
Meditrust Co. (The)
Series MTN
7.77%, due 8/16/02............. 25,000 23,360
-----------
929,339
-----------
RECREATION &
ENTERTAINMENT (0.1%)
Hollywood Entertainment Corp.
Series B
10.625%, due 8/15/04........... 80,000 81,600
-----------
RESTAURANTS & LODGING (0.8%)
Advantica Restaurant Group, Inc.
11.25%, due 1/15/08............ 110,000 110,825
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99
(c)(f)......................... 250,000 236,250
HMH Properties, Inc.
8.45%, due 12/1/08............. 75,000 75,000
-----------
422,075
-----------
SPECIALIZED SERVICES (0.1%)
Cendant Corp.
7.75%, due 12/1/03............. 75,000 76,300
-----------
STEEL, ALUMINUM & OTHER
METALS (0.6%)
GS Technologies Operating Co.,
Inc.
12.25%, 10/1/05................ 125,000 84,375
Republic Engineered Steels, Inc.
9.875%, due 12/15/01........... 100,000 102,250
Schuff Steel Co.
10.50%, due 6/1/08............. 95,000 82,650
UCAR Global Enterprises, Inc.
Series B
12.00%, due 1/15/05............ 35,000 36,750
WCI Steel, Inc.
Series B
10.00%, due 12/1/04............ 50,000 49,625
-----------
355,650
-----------
TECHNOLOGY (0.1%)
Entex Information Services, Inc.
12.50%, due 8/1/06 (c)......... 40,000 27,600
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
TELECOMMUNICATION
SERVICES (0.8%)
Globalstar, L.P. Capital Corp.
11.50%, due 6/1/05............. $ 130,000 $ 98,150
HighwayMaster Communications,
Inc.
Series B
13.75%, due 9/15/05............ 150,000 48,000
ICO Global Communications
Holdings Ltd.
15.00%, due 8/1/05 (j)......... 40,000 29,800
Orion Network Systems, Inc.
(zero coupon), due 1/15/07
12.50%, beginning 1/15/02...... 100,000 62,500
T/SF Communications Corp.
Series B
10.375%, due 11/1/07........... 75,000 75,563
Telehub Communication Corp.
(zero coupon), due 7/31/05
13.875%, beginning 7/30/01
(c)(k)......................... 250 150,000
-----------
464,013
-----------
TEXTILE & APPAREL (0.2%)
Delta Mills, Inc.
9.625%, due 9/1/07............. 110,000 106,425
Norton Mcnaughton, Inc.
12.50%, due 6/1/05............. 20,000 17,000
-----------
123,425
-----------
TRANSPORTATION (0.2%)
Cenargo International, PLC
9.75%, due 6/15/08 (c)......... 50,000 48,063
Equimar Shipholdings Ltd.
9.875%, due 7/1/07............. 35,000 27,650
Pacific & Atlantic (Holdings)
Inc.
11.50%, due 5/30/08 (c)........ 60,000 42,000
-----------
117,713
-----------
Total Corporate Bonds
(Cost $6,595,010).............. 6,025,736
-----------
FOREIGN BONDS (0.1%)
PUBLISHING (0.1%)
Regional Independent Media Group
(zero coupon), due 7/1/08
12.875%, beginning 7/1/03
(c)............................ 45,000 41,179
-----------
Total Foreign Bonds
(Cost $41,583)................. 41,179
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 596
MainStay Strategic Value Fund
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
LOAN ASSIGNMENTS (0.1%)
FOOD, BEVERAGES &
TOBACCO (0.1%)
Domino's Pizza, Inc.
Bank Debt
Tranche B
8.75%, due 12/31/06
(f)(g)(l)...................... $ 40,000 $ 40,000
Tranche C
9.00%, due 12/31/07
(f)(g)(l)...................... 40,000 40,000
-----------
Total Loan Assignments
(Cost $80,000)................. 80,000
-----------
YANKEE BONDS (1.3%)
BROADCASTING/MEDIA (0.0%) (b)
TV Azteca, S.A. de C.V.
Series B
10.50%, due 2/15/07............ 25,000 20,563
-----------
CELLULAR TELEPHONE (0.1%)
Millicom International Cellular,
S.A.
(zero coupon), due 6/1/06
13.50%, beginning 6/1/01....... 50,000 35,375
-----------
CHEMICALS (0.4%)
Octel Developments, PLC
10.00%, due 5/1/06............. 200,000 210,000
-----------
CONSUMER DURABLES (0.0%) (b)
International Semi-Technology
Microelectronics, Inc.
(zero coupon), due 8/15/03
11.50%, beginning 8/15/00...... 200,000 20,000
-----------
MEDIA (0.0%) (b)
Rogers Communications, Inc.
8.875%, due 7/15/07............ 30,000 30,900
-----------
MINING (0.1%)
Echo Bay Mines Ltd.
12.00%, due 4/1/27............. 70,000 37,800
-----------
PAPER & FOREST PRODUCTS (0.4%)
Stone Container Finance Company
of Canada
11.50%, due 8/15/06 (c)........ 200,000 206,750
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
---------------------------
<S> <C> <C>
STEEL, ALUMINUM & OTHER
METALS (0.2%)
Ivaco, Inc.
11.50%, due 9/15/05............ $ 120,000 $ 120,000
-----------
TRANSPORTATION (0.1%)
Alpha Shipping, PLC
9.50%, due 2/15/08............. 75,000 21,375
Ermis Maritime Holdings Ltd.
12.50%, due 3/15/06............ 65,000 20,150
-----------
41,525
-----------
Total Yankee Bonds
(Cost $732,040)................ 722,913
-----------
Shares
----------
COMMON STOCKS (73.0%)
AEROSPACE/DEFENSE (3.5%)
Coltec Industries, Inc. (a)..... 4,100 79,950
Northrop Grumman Corp. ......... 14,000 1,023,750
Raytheon Co.
Class A........................ 16,500 852,844
-----------
1,956,544
-----------
AIRLINES (1.8%)
Northwest Airlines Corp.
Class A (a).................... 39,100 999,494
-----------
ALUMINUM (1.5%)
Reynolds Metals Co. ............ 16,000 843,000
-----------
AUTO PARTS & EQUIPMENT (3.2%)
LucasVarity PLC ADR (m)......... 25,400 850,900
Mark IV Industries, Inc. ....... 74,300 965,900
-----------
1,816,800
-----------
BANKS (4.4%)
BankAmerica Corp. .............. 11,700 703,462
Washington Federal, Inc. ....... 24,400 651,175
Washington Mutual, Inc. ........ 30,500 1,164,719
-----------
2,519,356
-----------
BUILDING MATERIALS (0.4%)
Sherwin-Williams Co. (The)...... 6,900 202,687
-----------
CASINOS/GAMBLING (1.8%)
Harrah's Entertainment, Inc.
(a)............................ 65,000 1,019,688
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 597
Portfolio of Investments (continued)
<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CHEMICALS (1.4%)
Agrium, Inc. ................... 25,000 $ 217,187
IMC Global, Inc. ............... 26,100 557,888
-----------
775,075
-----------
COMPUTERS-NETWORKING (3.4%)
Adaptec, Inc. (a)............... 110,100 1,933,631
-----------
CONSUMER FINANCE (2.7%)
Countrywide Credit Industries,
Inc. .......................... 4,200 210,787
SLM Holding Corp. .............. 28,000 1,344,000
-----------
1,554,787
-----------
CONTAINERS-METAL & GLASS (1.5%)
Owens Illinois, Inc. (a)........ 27,400 839,125
-----------
DIVERSIFIED FINANCIAL
SERVICES (3.0%)
Citigroup, Inc. ................ 26,400 1,306,800
Equitable Cos., Inc. (The)...... 7,100 410,913
-----------
1,717,713
-----------
ELECTRIC POWER COMPANIES (1.7%)
Illinova Corp. ................. 20,000 500,000
Texas Utilities Co. ............ 10,500 490,219
-----------
990,219
-----------
ELECTRONICS (1.8%)
Raychem Corp. .................. 30,900 998,456
-----------
HEALTH CARE (4.5%)
CIGNA Corp. .................... 3,500 270,594
United HealthCare Corp. ........ 53,000 2,282,313
-----------
2,552,907
-----------
INSURANCE (6.0%)
Allmerica Financial Corp. ...... 8,500 491,937
Allstate Corp. (The)............ 25,800 996,525
Conseco, Inc. .................. 30,000 916,875
MGIC Investment Corp. .......... 24,900 991,331
-----------
3,396,668
-----------
MACHINERY--DIVERSIFIED (2.2%)
American Standard Cos. Inc.
(a)............................ 34,300 1,232,656
-----------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>
NATURAL GAS DISTRIBUTERS &
PIPELINES (3.5%)
Coastal Corp. (The)............. 28,300 $ 988,731
Consolidated Natural Gas Co. ... 18,000 972,000
-----------
1,960,731
-----------
OIL & GAS SERVICES (10.4%)
Apache Corp. ................... 18,037 456,561
Enron Oil & Gas Co. (n) ........ 5,000 86,250
Noble Affiliates, Inc. ......... 33,000 812,625
Oryx Energy Co. ................ 65,800 884,187
Tosco Corp. .................... 47,000 1,216,125
Union Pacific Resources Group,
Inc. .......................... 80,900 733,156
Unocal Corp. ................... 29,000 846,438
Valero Energy Corp. ............ 40,700 864,875
-----------
5,900,217
-----------
OTHER TELECOMMUNICATIONS (2.3%)
Nippon Telegraph & Telephone
Corp. ADR (m).................. 13,000 487,500
US West, Inc. .................. 13,000 840,125
-----------
1,327,625
-----------
PAPER & FOREST PRODUCTS (0.8%)
Bowater, Inc. .................. 10,800 447,525
-----------
POLLUTION CONTROL (1.2%)
Browning-Ferris Industries,
Inc. .......................... 23,500 668,281
-----------
RETAIL (4.7%)
Dillard's, Inc. ................ 30,000 851,250
Federated Department Stores,
Inc. (a)....................... 29,100 1,267,669
Payless ShoeSource, Inc. (a).... 11,800 559,025
-----------
2,677,944
-----------
STEEL (0.5%)
UCAR International, Inc. (a).... 15,000 267,187
-----------
TEXTILE--APPAREL MANUFACTURERS
(2.9%)
Jones Apparel Group, Inc. (a)... 40,700 897,944
Liz Claiborne, Inc. ............ 23,000 725,938
-----------
1,623,882
-----------
TOBACCO (1.9%)
Philip Morris Companies,
Inc. .......................... 6,000 321,000
RJR Nabisco Holdings Corp. ..... 25,000 742,188
-----------
1,063,188
-----------
Total Common Stocks
(Cost $41,772,756)............. 41,285,386
-----------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 598
MainStay Strategic Value Fund
<TABLE>
<CAPTION>
Shares Value
----------------------------
<S> <C> <C>
PREFERRED STOCKS (0.1%)
CELLULAR TELEPHONE (0.1%)
Centuar Funding Corp.
9.08% Series B (c)............. 75 $ 78,000
-----------
Total Preferred Stocks
(Cost $75,000)................. 78,000
-----------
WARRANTS (0.0%) (b)
CABLE (0.0%) (b)
@Entertainment, Inc.
expire 7/15/08 (a)(c).......... 1,320 3,300
UIH Australia/Pacific, Inc.
expire 5/15/06 (a)............. 30 30
-----------
3,330
-----------
FOOD, BEVERAGES, & TOBACCO
(0.0%) (b)
Colorado Prime Corp.
expire 12/31/03 (a)(c)......... 15 150
-----------
TELECOMMUNICATION SERVICES
(0.0%) (b)
HighwayMaster
Communications, Inc.
expires 9/11/05 (a)(c)......... 85 1
-----------
Total Warrants
(Cost $12,502)................. 3,481
-----------
<CAPTION>
Principal
Amount
----------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.7%)
COMMERCIAL PAPER (2.7%)
Xerox Credit Co.
5.10%, due 1/4/99.............. $1,515,000 1,514,356
-----------
Total Short-Term Investment
(Cost $1,514,356).............. 1,514,356
-----------
Total Investments
(Cost $57,380,199) (o)......... 99.7% 56,367,995(p)
Cash and Other Assets,
Less Liabilities............... 0.3 189,581
----- ---------
Net Assets...................... 100.0% $56,557,576
===== =========
</TABLE>
- -------
(a) Non-income producing securities.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) Euro-Dollar bond.
(e) 75 units--each unit reflects $1,000 principal amount of 12.00% Senior
Subordinated Notes plus 1 warrant to acquire 1.55 shares of common stock at
$35.65 per share at a future date.
(f) Restricted Security.
(g) Floating rate. Rate shown is the rate in effect at December 31, 1998.
(h) Issuer in bankruptcy
(i) Issue in default.
(j) 40 units--each unit reflects $1,000 principal amount of 15.00% Senior Notes
plus 1 warrant to acquire 19.85 shares of common stock at $13.20 per share
at a future date.
(k) 250 units--each unit reflects $1,000 principal amount of 0%/13.875% Senior
Discounted Notes plus warrants to acquire 8% of the company's common stock
at a future date.
(l) Multiple tranche facilities.
(m) ADR - American Depository Receipt.
(n) Segregated as collateral for forward foreign currency contracts.
(o) The cost for Federal income tax purposes is $58,069,577.
(p) At December 31, 1998, net unrealized depreciation was $1,701,582, 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 $3,940,413 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $5,641,995.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 599
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$57,380,199).............................................. $56,367,995
Cash........................................................ 6,819
Receivables:
Dividends and interest.................................... 257,208
Investment securities sold................................ 94,124
Fund shares sold.......................................... 52,530
Unamortized organization expense............................ 140,660
-----------
Total assets........................................ 56,919,336
-----------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 171,414
MainStay Management....................................... 37,825
NYLIFE Distributors....................................... 36,243
Transfer agent............................................ 13,256
Custodian................................................. 3,486
Trustees.................................................. 474
Accrued expenses............................................ 88,772
Unrealized depreciation on forward foreign currency
contracts................................................. 10,290
-----------
Total liabilities................................... 361,760
-----------
Net assets.................................................. $56,557,576
===========
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 17,625
Class B................................................... 37,878
Class C................................................... 82
Additional paid-in capital.................................. 58,684,451
Accumulated distribution in excess of net investment
income.................................................... (4,459)
Accumulated distribution in excess of net realized gain on
investments............................................... (1,155,507)
Net unrealized depreciation on investments.................. (1,012,204)
Net unrealized depreciation on forward foreign currency
contracts................................................. (10,290)
-----------
Net assets.................................................. $56,557,576
===========
CLASS A
Net assets applicable to outstanding shares................. $17,946,024
===========
Shares of beneficial interest outstanding................... 1,762,515
===========
Net asset value per share outstanding....................... $ 10.18
Maximum sales charge (5.50% of offering price).............. 0.59
-----------
Maximum offering price per share outstanding................ $ 10.77
===========
CLASS B
Net assets applicable to outstanding shares................. $38,527,931
===========
Shares of beneficial interest outstanding................... 3,787,832
===========
Net asset value and offering price per share outstanding.... $ 10.17
===========
CLASS C
Net assets applicable to outstanding shares................. $ 83,621
===========
Shares of beneficial interest outstanding................... 8,220
===========
Net asset value and offering price per share outstanding.... $ 10.17
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE> 600
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 558,414
Interest.................................................. 1,113,082
-----------
Total income............................................ 1,671,496
-----------
Expenses:
Management................................................ 382,133
Distribution--Class B..................................... 252,327
Distribution--Class C..................................... 132
Transfer agent............................................ 126,988
Service--Class A.......................................... 43,224
Service--Class B.......................................... 84,109
Service--Class C.......................................... 45
Shareholder communication................................. 80,076
Registration.............................................. 57,695
Amortization of organization expense...................... 36,603
Professional.............................................. 31,486
Custodian................................................. 22,539
Recordkeeping............................................. 20,585
Trustees.................................................. 1,686
Miscellaneous............................................. 24,596
-----------
Total expenses.......................................... 1,164,224
-----------
Net investment income....................................... 507,272
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND FOREIGN
CURRENCY TRANSACTIONS:
Net realized loss on investments............................ (1,159,336)
Net change in unrealized appreciation (depreciation) on
investments:
Security transactions..................................... (1,468,668)
Forward foreign currency transactions..................... (10,290)
-----------
Net unrealized gain on investments and foreign currency
transactions.............................................. (1,478,958)
-----------
Net realized and unrealized loss on investments and foreign
currency transactions..................................... (2,638,294)
-----------
Net decrease in net assets resulting from operations........ $(2,131,022)
===========
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $3,674.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE> 601
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
October 22, 1997*
Year ended through
December 31, 1998 December 31, 1997
----------------- ------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 507,272 $ 43,730
Net realized gain (loss) on investments................... (1,159,336) 243,180
Net unrealized appreciation (depreciation) on
investments............................................. (1,468,668) 456,464
Net change in unrealized depreciation on forward foreign
currency contracts...................................... (10,290) --
----------- -----------
Net increase in net assets resulting from operations...... (2,131,022) 743,374
----------- -----------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (263,908) (34,556)
Class B................................................. (287,423) (20,217)
Class C................................................. (355) --
From net realized gain on investments:
Class A................................................. (14,617) (111,511)
Class B................................................. (31,491) (86,811)
Class C................................................. (68) --
----------- -----------
Total dividends and distributions to shareholders..... (597,862) (253,095)
----------- -----------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 8,115,590 4,223,379
Class B................................................. 38,978,176 11,097,588
Class C................................................. 95,601 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 295,580 120,532
Class B................................................. 358,344 96,515
Class C................................................. 301 --
----------- -----------
47,843,592 15,538,014
Cost of shares redeemed:
Class A................................................. (3,538,565) (32,189)
Class B................................................. (10,948,174) (49,794)
Class C................................................. (16,703) --
----------- -----------
Increase in net assets derived from capital share
transactions........................................ 33,340,150 15,456,031
----------- -----------
Net increase in net assets............................ 30,611,266 15,946,310
NET ASSETS:
Beginning of year........................................... 25,946,310 10,000,000
----------- -----------
End of year................................................. $56,557,576 $25,946,310
=========== ===========
Accumulated undistributed net investment income (excess
distribution) at end of year.............................. $ (4,459) $ 3,385
=========== ===========
</TABLE>
- -------
* Commencement of operations.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE> 602
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
----------------------------------------
October 22, 1997*
through
Year ended December 31,
December 31, 1998 1997
----------------- -----------------
<S> <C> <C>
Net asset value at beginning of period...................... $10.29 $10.00
------ ------
Net investment income....................................... 0.15 0.03
Net realized and unrealized gain on investments............. (0.10) 0.38
------ ------
Total from investment operations............................ 0.05 0.41
------ ------
Less dividends and distributions:
From net investment income................................ (0.15) (0.03)
From net realized gain on investments..................... (0.01) (0.09)
------ ------
Total dividends and distributions........................... (0.16) (0.12)
------ ------
Net asset value at end of period............................ $10.18 $10.29
====== ======
Total investment return (a)................................. 0.52% 4.11%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 1.49% 1.66%+
Expenses.................................................. 1.79% 2.73%+
Portfolio turnover rate..................................... 203% 29%
Net assets at end of period (in 000's)...................... $17,946 $13,622
</TABLE>
- -------
* Commencement of Operations.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
Total return is calculated exclusive of sales charges and is
(a) not annualized.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE> 603
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------ -------------------
October 22, 1997** September 1, 1998**
Year ended through through
December 31, 1998 December 31, 1997 December 31, 1998
----------------- ------------------- -------------------
<S> <C> <C> <C>
$10.29 $10.00 $ 9.15
------ ------ ------
0.08 0.02 0.05
(0.11) 0.38 1.03
------ ------ ------
(0.03) 0.40 1.08
------ ------ ------
(0.08) (0.02) (0.05)
(0.01) (0.09) (0.01)
------ ------ ------
(0.09) (0.11) (0.06)
------ ------ ------
$10.17 $10.29 $10.17
====== ====== ======
(0.27%) 4.04% 11.77%
0.74% 0.91%+ 0.74%+
2.54% 3.48%+ 2.54%+
203% 29% 203%
$38,528 $12,325 $84
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
<PAGE> 604
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 currently offers three classes of shares. Distribution of Class A
shares and Class B shares commenced on October 22, 1997. Class C shares were
initially offered on September 1, 1998. Class A shares are offered at net asset
value per share plus an initial sales charge. Class B shares and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Class A shares, Class B shares and Class C 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 and Class C 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
28
<PAGE> 605
Notes to Financial Statements
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
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
29
<PAGE> 606
MainStay Strategic Value Fund
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 December 31, 1998:
<TABLE>
<CAPTION>
Contract Contract Unrealized
Amount Amount Appreciation/
Sold Purchased (Depreciation)
----------- --------- --------------
<S> <C> <C> <C> <C>
Foreign Currency Sale Contracts
Japanese Yen vs. US$, expiring 3/16/99...................... yen 54,865,265 $481,000 (10,272)
Pound Sterling vs. US$, expiring 9/8/99..................... pound sterling 23,000 38,111 (18)
--------
Net unrealized depreciation on forward foreign currency
contracts................................................. $(10,290)
========
</TABLE>
RESTRICTED SECURITIES. A restricted security is a security which has been
purchased through a private offering and cannot be resold to the general public
without prior registration under the Securities Act of 1933. Disposal of these
securities may involve time-consuming negotiations and expense, and prompt sale
at an acceptable price may be difficult.
The issuers of the securities will bear the costs involved in registration under
the Securities Act of 1933 and in connection with the disposition of such
securities. The Fund does not have the right to demand that such securities be
registered. The Fund may not invest more than 15% of its net assets in illiquid
securities.
Restricted securities held at December 31, 1998:
<TABLE>
<CAPTION>
Percent
Acquisition Principal 12/31/98 of
Security Date Amount Cost Value Net Assets
- -------- ----------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Domino's Pizza, Inc.
Bank debt, Tranche B
8.75%, due 12/31/06................. 12/24/98 $ 40,000 $ 40,000 $ 40,000 0.1%
Bank debt, Tranche C
9.00%, due 12/31/07.............. 12/24/98 40,000 40,000 40,000 0.1
FRI-MRD Corp.
(zero coupon), due 1/24/02
15.00%, beginning 6/30/99........... 1/14/98 250,000 235,026 236,250 0.4
International Wireless Communications
Holdings, Inc.
(zero coupon), due 8/15/01.......... 6/22/98 200,000 62,944 20,000 0.0(a)
Primestar, Inc.
12.3788%, due 4/1/99................ 4/1/98 170,000 170,000 68,000 0.1
-------- -------- ---
$547,970 $404,250 0.7%
======== ======== ===
</TABLE>
- -------
(a) Less than one tenth of a percent.
30
<PAGE> 607
Notes to Financial Statements (continued)
ORGANIZATIONAL COSTS. Costs incurred in connection with the Fund's initial
organization and registration totalled approximately $173,175 and are being
amortized over a period not to exceed 60 months beginning at the commencement of
operations.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required.
Permanent book-tax differences of $41,717 and $5,147 have been reclassified from
accumulated distribution in excess of net investment income and accumulated
distribution in excess of net realized gain on investments, respectively, to
additional paid-in capital and accumulated distribution in excess of net
investment income, respectively, due to certain expenses being nondeductible for
tax purposes and the tax treatment of foreign currency gains, respectively.
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 many 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 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.
31
<PAGE> 608
MainStay Strategic 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 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 year ended December 31, 1998, the Manager
earned $382,133.
Pursuant to the terms of a Sub-Advisory Agreement between MainStay Management
and MacKay-Shields, the Manager pays the Sub-Adviser a monthly fee at the annual
rate of 0.375% of the average daily net assets of the Fund.
DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has a
Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"), an
indirect wholly owned subsidiary of New York Life. The Fund, with respect to
each class of shares, has adopted a Distribution Plan (the "Plan") in accordance
with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A
Plan, the Distributor receives a monthly 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 and Class C Plans, the
Fund pays the Distributor a monthly fee, which is an expense of the Class B and
Class C shares of the Fund, at the annual rate of 0.75% of the average daily net
assets of the Fund's Class B and Class C shares. The Distribution Plan provides
that the Class B and Class C 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 or
Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $20,954 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemption of Class B and Class C shares of
$86,652 and $150 for the period ended December 31, 1998, respectively.
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
32
<PAGE> 609
Notes to Financial Statements (continued)
("BFDS") by which BFDS will perform certain of the services for which MSS is
responsible. Transfer agent expense accrued for the year ended December 31,
1998, amounted to $126,988.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each Committee
meeting attended plus reimbursement for travel and out-of-pocket expenses. The
Trust allocates this expense in proportion to the net assets of the respective
Funds.
CAPITAL. At December 31, 1998, New York Life held shares of Class A and Class B
with a net asset values of $9,418,948 and $1,037,622, respectively. This
represents 52.5% and 2.7% of the net assets at year end for Class A and B,
respectively.
OTHER. Fees for the cost of legal services provided to the Fund by the Office
of General Counsel of New York Life amounted to $1,220 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$20,585 for the year ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, capital loss
carryforwards of $466,129 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 2006. 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. The Fund intends to elect to
treat for Federal income tax purposes approximately $10,418 of qualifying
foreign exchange losses that arose during the year as if they arose on January
1, 1999.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $132,393 and $95,392, 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
33
<PAGE> 610
MainStay Strategic Value Fund
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended October 22** through
December 31, 1998 December 31, 1997
---------------------------- -----------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold................................. 756 3,629 10 414 1,093
Shares issued in reinvestment of dividends
and distributions......................... 29 30 -- 12 10
---- ------ -- --- -----
785 3,659 10 426 1,103
Shares redeemed............................. (345) (1,069) (2) (3) (5)
---- ------ -- --- -----
Net increase................................ 440 2,590 8 423 1,098
==== ====== == === =====
</TABLE>
- -------
* First offered on September 1, 1998.
** Commencement of operations.
34
<PAGE> 611
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Strategic Value Fund (one
of the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for each
of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 1999
35
<PAGE> 612
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
36
<PAGE> 613
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may
not be made directly into the S&P 500 Index.
(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.
37
<PAGE> 614
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
38
<PAGE> 615
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN18-02/99
[RECYCLE LOGO]
MAINSTAY STRATEGIC VALUE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 616
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification by State--Top 5 7
Quality Breakdown 8
Returns & Lipper Rankings 11
Top 10 Holdings 13
Portfolio of Investments 14
Financial Statements 20
Notes to Financial Statements 26
Report of Independent Accountants 31
The MainStay Funds 32
</TABLE>
<PAGE> 617
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year
that domestic stocks in general returned more than 20%. Getting there,
however, was often like riding a roller-coaster. Just as the stock market
climbed to new highs in mid-July, preliminary corrections in various portions of
the market warned of an imminent decline. By the end of August, the U.S. stock
market had plummeted nearly 20%, turning earlier exhilaration into serious
investor concern. Remarkably, however, the market continued to charge ahead,
again reaching record levels in November, then dropping back slightly and ending
the year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 618
MainStay Tax Free Bond Fund Highlights
1998 MARKET RECAP
- - Seeking to take advantage of lower interest rates, many municipalities issued
securities, increasing the supply of new issues to $284 billion, just short of
the all-time record in 1993.
- - Despite lower interest rates, an oversupply of new municipal issues combined
with modest demand to leave municipal prices virtually flat throughout the
year, causing practically all of the municipal market's total return to come
from coupon payments.
- - While municipal bonds tend to show less appreciation than government bonds
when interest rates decline, in 1998, municipals underperformed Treasuries to
a large degree.
- - Medicare cuts and a major bankruptcy at a large Pennsylvania-based hospital
system resulted in weakness in the hospital sector.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Tax Free Bond Fund returned
4.98% for Class A shares and 4.83% for Class B and Class C shares,* excluding
all sales charges.
- - The Fund's shifting duration strategy alternately helped and hurt performance
as the market made minor moves that were largely unpredictable.
- - Diversification across several states and municipal sectors helped the Fund
manage risk, and reducing exposure to BBB hospital issues improved the quality
of the Fund's portfolio securities.
- - Although funds that could invest in lower-rated municipals tended to have
higher yields, we believe that municipal "junk bonds" did not adequately
compensate investors for the risks they had to assume.
- - All three share classes underperformed the average Lipper* general municipal
debt fund, which returned 5.32% for the year ended 12/31/98.
- -------
* See footnote and table on page 11 for more information on Lipper Inc.
Performance figures for Class C shares include the performance of Class B
shares from 1/1/98 through 8/31/98.
3
-
<PAGE> 619
$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 0.26%, 5-Year 4.13%, 10-Year 6.21%
<TABLE>
<CAPTION>
LEHMAN BROTHERS
MAINSTAY VALUE FUND MUNICIPAL BOND INDEX* INFLATION+
------------------- --------------------- ----------
<S> <C> <C> <C>
12/88 9450.00 10000.00 10000.00
12/89 11470.00 13162.00 10464.00
12/90 10777.00 12754.00 11118.00
12/91 15223.00 16631.00 11449.00
12/92 18194.00 17897.00 11788.00
12/93 20659.00 19694.00 12111.00
12/94 20614.00 19954.00 12426.00
12/95 26538.00 27444.00 12749.00
12/96 32334.00 33740.00 13171.00
12/97 39410.00 44996.00 13395.00
12/98 36490.00 57855.00 13611.00
</TABLE>
CLASS B & CLASS C SHARES
Class B SEC Returns: 1-Year -0.17%, 5-Year 4.60%, 10-Year 6.62%
Class C SEC Returns: 1-Year 3.83%, 5-Year 4.93%, 10-Year 6.62%
<TABLE>
<CAPTION>
MAINSTAY TAX FREE MAINSTAY TAX FREE LEHMAN BROTHERS
BOND FUND CLASS B BOND FUND CLASS C MUNICIPAL BOND INDEX* INFLATION+
----------------- ----------------- --------------------- ----------
<S> <C> <C> <C> <C>
12/88 10000.00 10000.00 10000.00 10000.00
12/89 10738.00 10738.00 11079.00 10464.00
12/90 11240.00 11240.00 11887.00 11118.00
12/91 12464.00 12464.00 13330.00 11449.00
12/92 13513.00 13513.00 14505.00 11788.00
12/93 14918.00 14918.00 16287.00 12111.00
12/94 14019.00 14019.00 15445.00 12426.00
12/95 16103.00 16103.00 18141.00 12749.00
12/96 16640.00 16640.00 18945.00 13171.00
12/97 18104.00 18104.00 20686.00 13395.00
12/98 18977.00 18977.00 22026.00 13611.00
</TABLE>
- -------
Past performance is no guarantee of future results. The Class A graph assumes
an initial investment of $10,000 made on 12/31/88 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 12/31/88 through 12/31/94. The Class B graph assumes
an initial investment of $10,000 made on 12/31/88. Performance data for the
two classes vary after this date based on differences in their load and
expense structures. Returns shown do not reflect the Contingent Deferred Sales
Charge (CDSC), as it would not apply for the period shown. The Class C graph
assumes an initial investment of $10,000 made on 12/31/88 and includes the
historical performance of Class B shares for periods 12/31/88 through 8/31/98.
Performance data for the two classes vary after this date based on differences
in their load. Returns shown do not reflect the 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. It is not possible to make an investment
directly into an index.
+ 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> 620
Portfolio Management Discussion and Analysis
When interest rates decline, bond prices rise. While municipal bonds typically
appreciate less than government bonds, in 1998, their underperformance was more
severe than usual. Although at year-end 1998, municipal bonds were exceedingly
inexpensive on a relative basis, the municipal market seemed unable to generate
investor enthusiasm during the year, as the stock market soared to new highs
and long-term Treasury bonds provided total returns over 20%.
Seeking to take advantage of lower interest rates, many municipalities issued
securities, sending the supply of new issues to $284 billion--or just short of
the $292 billion record in 1993. This heavy oversupply, combined with lackluster
demand, left prices virtually flat throughout most of the year. As a result,
practically all of the total return opportunities in the municipal bond market
came from coupon payments.
In July, Allegheny Health System, a large Pennsylvania-based hospital system,
shocked the market by filing for bankruptcy. The bankruptcy had a negative
impact on hospital bonds, but was perhaps the only major event that rocked the
municipal market during a relatively uneventful year.
HOW DID THE MAINSTAY TAX FREE BOND FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Tax Free Bond Fund returned 4.98% for Class A shares and 4.83% for
Class B and Class C shares(*) for the year ended 12/31/98, excluding all sales
charges. All three share classes underperformed the average Lipper(+) general
municipal debt fund, which returned 5.32% for the year.
WHAT WERE THE PRIMARY REASONS THE FUND UNDERPERFORMED ITS PEERS?
The MainStay Tax Free Bond Fund must limit its long-term investments to
securities that at the time of purchase are in the top four rating categories by
Moody's or S&P, or deemed by the subadvisor to be of comparable quality. This
high-quality profile sets the Fund at a slight disadvantage to other funds that
can invest in lower-quality bonds with higher yields. The effect was magnified
in 1998, when flat municipal prices meant that virtually all of the total return
from municipal bonds came from coupon payments.
The Fund's duration strategy also impacted its performance. In the first
quarter, the Fund's duration was longer than what we take to be the average in
the municipal universe. But we changed its duration to neutral just when the
market rebounded, which had a negative impact on the portfolio. Since midyear,
the Fund has generally had a long duration, which was a plus in the third
quarter, but a negative in the fourth quarter of 1998.
WAS 1998 A PARTICULARLY DIFFICULT MARKET FOR MUNICIPAL INVESTORS?
In many ways it was. Given the historical relationship of municipals and
Treasuries, we would have expected more interest in municipal bonds. But given
the oversupply in the market, which flattened price performance severely, we
faced a challenge to find ways to remain competitive.
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.
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.
- -------
* Performance figures for Class C shares include the performance of Class B
shares from 1/1/98 through 8/31/98.
+ See footnote and table on page 11 for more information on Lipper Inc.
5
-
<PAGE> 621
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
<TABLE>
<CAPTION>
Year 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
12/98 4.98
</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 & CLASS C SHARES
<TABLE>
<CAPTION>
Year 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
12/98 4.83
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for the periods 12/86 through 12/98.
See footnote * on page 11 for more information on performance.
HOW DID THE FUND ADDRESS THAT CHALLENGE?
One way was by taking a more aggressive stance on the coupon structure of the
Fund's holdings. We pared back on coupons such as 5.00% and 5.125% and added
zero-coupon bonds, noncallable bonds, and 4.50% to 4.75% coupons. These coupons
generally do much better in a declining interest-rate environment, either
because they have a longer duration or are likely to reach their par value later
than bonds with slightly higher coupons. When a bond reaches its par value, it
may be priced as if it had reached its call date, which lowers the bond's
duration and typically has a negative impact on total return. We believe
shifting the Fund's coupon structure helped position the portfolio positively in
the general market environment.
6
<PAGE> 622
DIVERSIFICATION BY STATE--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
New York California Illinois Florida Texas All Other
- -------- ---------- -------- ------- ----- ---------
<S> <C> <C> <C> <C> <C>
21.9% 10.9% 10.7% 6.7% 6.3% 43.5%
</TABLE>
Actual percentages will vary over time.
WERE THERE OTHER CHALLENGES DURING THE YEAR?
Yes. The health care industry was hurt by the 1997 Balanced Budget Act, which is
supposed to trim $115 billion from the Medicare program over the next five
years. Anticipating potential difficulties ahead, we reduced the Fund's exposure
to lower-rated hospitals, which reduced the yield of the portfolio, but had a
positive impact on the Fund's overall quality. The value of this decision was
underscored by the Allegheny Health System bankruptcy and the fact that in 1998,
Moody's downgraded over $11 billion worth of health care credits, while
upgrading only $1.7 billion.
DID THE FUND OWN ANY ALLEGHENY HEALTH SYSTEM BONDS?
No, but it did own a credit called Zurburgg Hospital, which was related to
Allegheny Health Systems and suffered in the wake of the Allegheny bankruptcy.
We sold the Fund's position at a few points below par value.
WHAT IS THE OVERALL CREDIT QUALITY OF THE SECURITIES IN THE FUND'S INVESTMENT
PORTFOLIO?
As of 12/31/98, it was AA,(++) which is relatively high quality. Of course, in
recent years, there has been a continuing increase in insured credits, or 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. The
increase in insured credits has made it more difficult to find securities that
provide yield advantages in the municipal market. And with the Fund reducing its
holdings among BBB-rated(sec.) hospitals, the difficulty was even greater.
- -------
++ Debt rated AA differs from the highest-rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation
is very strong.
sec. Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
7
-
<PAGE> 623
CALL PROTECTION
- --------------------
The length of time during which a security cannot be redeemed by the issuer. To
avoid subjecting a portfolio to the risk of having to reinvest at lower rates,
it may be advantageous to purchase bonds that increase call protection over
time.
QUALITY BREAKDOWN AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
AAA 63.4%
AA 17.0%
A 6.7%
BBB 12.0%
Cash, Equivalents & Other Assets, Less Liabilities 0.9%
</TABLE>
Actual percentages will vary over time. Bond quality ratings provided by
Standard & Poor's.
See the prospectus for details.
DOES THE FUND STILL HOLD ANY BBB-RATED HOSPITAL ISSUES?
The only BBB-rated hospital issues in the portfolio as of 12/31/98 were bonds
that had been 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 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.
ARE PREREFUNDING CANDIDATES GOOD MUNICIPAL INVESTMENTS?
We think they are, and many of our most significant purchases in 1998 were
bought at least partially for their prerefunding potential. Among the Fund's
largest purchases were New York City Water Authority 5.50% bonds due in 2027,
Chicago Board of Education 5.75% bonds that mature in 2020, Mayo Clinic,
Minnesota 5.50% bonds due in 2027, and Chicago Board of Education bonds with a
5.75% coupon maturing in 2027. All of these bonds were purchased for their
prerefunding potential and had a neutral to positive impact on performance.
DID YOU MAKE ANY PURCHASES FOR THE FUND FOR OTHER REASONS?
Of course, we may have a variety of reasons for purchasing bonds for the
portfolio. Sometimes it's to extend call protection, in other cases, it's to
change the coupon structure of the portfolio. One of the Fund's major purchases
in 1998 was a Florida Department of Transportation
8
<PAGE> 624
5.375% bond due in 2026. It was an excellent trading bond that the Fund was able
to purchase at a reasonable price and it had a positive impact on performance.
WHAT ABOUT MAJOR SALES?
The Fund sold Harvard University 5.375% bonds due 2032 to improve its call
protection. With a call date in 2005, we felt the value of the bond was likely
to decline the longer the Fund held it. The Fund also sold Dade County Florida
5.00% bonds of 2035 for the same reason.
The Fund's third largest sale was Massachusetts Turnpike 5.00% bonds due 2037,
which reflected a positive trading opportunity, but had little impact on
performance.
Other major sales included BBB-rated hospitals that the Fund sold in light of
the problems in the health care industry and in the wake of the Allegheny
bankruptcy. Among the issues the Fund sold were Illinois Health Proctor
Hospital, Southwest Illinois Medical Center, Schneck Hospital, Indiana, and the
portion of the Fund's Louisiana Health Pendelton Hospital holdings that was not
prerefundable. The bonds had various coupons and maturities, and we believe the
sales were well timed, reasonably priced, and had a positive overall impact on
the portfolio.
ASIDE FROM THE ALLEGHENY SCARE, WERE THERE ANY SURPRISES DURING THE YEAR?
The big surprise was how much municipal bonds underperformed Treasury
securities. Had performance been more closely in line with historical norms, we
believe many more of the Fund's higher-coupon holdings would have been
prerefunded.
WHICH OF THE FUND'S SECURITIES WERE PRE-REFUNDED IN 1998?
There were several. Genesys Health Michigan 7.50% bonds due in 2027 were
prerefunded, which had a positive impact on the Fund. A portion of the Fund's
Louisiana Health Pendelton Hospital 6.75% bonds due 2022, and Detroit City
General Obligation School District bonds with a 5.70% coupon and 2025 maturity
were also prerefunded. These issues were among the Fund's best-performing
securities.
Two other top performers for the Fund were Foothill Transportation California
zero-coupon bonds due in 2027 and 2028. The yield spreads between these and
other zero-coupon bonds narrowed because of the bonds' prerefunding potential.
WERE THERE OTHER STRONG PERFORMERS IN THE FUND IN 1998?
The Fund also had success with a Metropolitan Pier Illinois zero-coupon bond
that matures in 2029. The bond has a long duration and the Fund purchased it
near the market's low point. New York State Dormitory Authority for New York
University bonds with a 6.00% coupon and 2018 maturity also were strong
performers. The bonds were noncallable and bought near the market bottom.
DID THE FUND HAVE OTHER SECURITIES THAT DIDN'T DO AS WELL?
The Fund bought some bonds near the market's peak, which had a decidedly
negative impact on performance. Gulf Breeze 4.50% bonds of 2027 fell into that
category, and unfortunately, we sold the Fund's position near the market low. We
had similar unfortunate timing with
YIELD SPREAD
- --------------------
The difference in yield between securities in different market sectors, such as
government and mortgage-backed securities--or between different securities in a
single sector, such as 2-year and 30-year Treasuries.
9
-
<PAGE> 625
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.
BASIS POINT
- --------------------
One hundredth of one percent in the yield of an investment, i.e., 100 basis
points equals 1%.
Past performance is no guarantee of future results.
Puerto Rico 4.50% bonds of 2023. The Fund also saw mediocre results from
Southeastern Public Power Virginia, a noncallable bond that the Fund purchased
near the high point of the market.
As we noted, Zurburgg Hospital bonds were sold at a loss. The Fund also
purchased some 4.375% New York Local Government Assistance Corporation bonds and
Cal Tech California 4.50% bonds with a very aggressive structure to help protect
their price if yields should drop slightly below 5.00%. While these bonds
offered a measure of price protection, they had a negative impact on
performance.
WAS THE FUND OVERWEIGHTED OR UNDERWEIGHTED IN ANY SECTORS AT YEAR END?
The Fund seeks diversification in a wide range of states across the nation, and
a wide variety of municipal sectors. It invests in everything from roads,
airports, and hospitals to pollution control and education bonds. While the Fund
also seeks a variety of coupons and maturities, at the end of the year, the Fund
had more zero-coupon, noncallable, and deep discount bonds than the average
fund. This structure is designed to take advantage of lower interest rates more
than the average fund. Because of the Fund's quality constraints, the Fund is
currently underweighted in lower-quality credits relative to other municipal
funds. During the year, the Fund was also underweighted in housing credits,
which we believe had a positive impact on the Fund's investment portfolio,
because housing bonds tend to perform poorly in a declining interest-rate
environment as prepayment potential increases.
WHAT MAJOR RISKS DO INVESTORS FACE, AND HOW ARE YOU MANAGING THEM?
Since the Fund has a long duration, it would tend to underperform if interest
rates began to rise. We manage this risk by continually monitoring the economy,
inflation, and action by the Federal Reserve Board. If inflation were to
increase, we would probably reduce the Fund's duration.
WHAT IS YOUR OUTLOOK FOR THE FUTURE?
We have positioned the Fund to seek to take advantage of lower interest rates
and a return to the historical relationship between municipal and Treasury
bonds. We believe if rates continue to decline, the Fund's overweighted
positions in zero-coupon bonds, noncallable issues, and deep-discount bonds
should contribute positively to performance. We believe our concentration on
prerefunding candidates may also help the Fund enjoy gains if municipal rates
drop as much as 50 basis points.
Ravi Akhoury
James Flood
Portfolio Managers
MacKay Shields Financial Corporation
10
- -
<PAGE> 626
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 4.98% 5.09% 6.70% 6.48%
Class B 4.83% 4.93% 6.62% 6.42%
Class C 4.83% 4.93% 6.62% 6.42%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 0.26% 4.13% 6.21% 6.10%
Class B -0.17% 4.60% 6.62% 6.42%
Class C 3.83% 4.93% 6.62% 6.42%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 172 out of n/a n/a 128 out of
246 funds 178 funds
Class B 190 out of 111 out of 72 out of 51 out of
246 funds 141 funds 74 funds 53 funds
Class C n/a n/a n/a n/a
Average Lipper
general municipal
debt fund 5.32% 5.43% 7.68% 7.74%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $10.20 $0.4861 $0.0000
Class B $10.21 $0.4611 $0.0000
Class C $10.21 $0.1516 $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 load and 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
11
-
<PAGE> 627
purchase and an annual 12b-1 fee of .50%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of .50%. Performance figures for this class include the
historical performance of the Class B shares for periods from inception
(5/1/86) up to 8/31/98. Performance data for the two classes after this
date vary based on differences in their load.
+ Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
averages listed above are not class specific. Life of Fund return is from
the period of the Class B shares' initial offering through 12/31/98. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86; Class C shares on 9/1/98.
12
- -
<PAGE> 628
Top 10 Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
California Educational Facilities Authority Revenue,
Stanford University, Series N, 5.20%, due 12/1/27 $22,303,600
New York City Municipal Water Finance Authority,
Water & Sewer Systems Revenue, Series B, 5.50%, due
6/15/27 19,411,518
Michigan State Hospital Finance Authority Revenue,
Genesys Health Systems, Series A, 7.50%, due 10/1/27 18,382,275
Foothill-Eastern (California) Transportation Corridor
Agency,
Toll Road Revenue, Series A, (zero coupon), due 1/1/27 12,802,039
Florida State Department of Transportation Right of Way,
5.357%, due 7/1/26 12,403,608
Fulton County Georgia Water & Sewer Revenue
4.75%, due 1/1/28 12,398,750
Rochester Minnesota Health Care Facilities
Mayo Foundation, Series A, 5.50%, due 11/15/27 10,998,750
Wyandotte County Kansas City Unified Government
Utility Systems Revenue, 4.50%, due 9/1/28 10,975,600
New Hampshire Higher Educational & Health Facilities
Authority Revenue,
Dartmouth College, 5.125%, due 6/1/28 10,884,375
Chicago Board of Education, Chicago School Reform
5.75%, due 12/1/27 10,820,100
</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> 629
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS
(99.1%)+
ALABAMA (0.8%)
Birmingham Alabama Airport
Authority Revenue,
Series A
7.375%, due 7/1/10 (a)....... $ 3,600,000 $ 3,782,664
------------
CALIFORNIA (10.9%)
California Educational
Facilities Authority Revenue
California Institute of
Technology
4.50%, due 10/1/27........... 1,250,000 1,159,375
Pooled College & University
Projects Series A
5.625%, due 7/1/23........... 900,000 936,000
Stanford University
Series N
5.20%, due 12/1/27 (c)....... 21,920,000 22,303,600
California State University
Revenue & Colleges Housing
System
5.90%, due 11/1/21........... 2,100,000 2,302,125
Foothill-Eastern
Transportation
Corridor Agency, Toll Road
Revenue, Series A
(zero coupon), due 1/1/27.... 56,105,000 12,802,039
(zero coupon), due 1/1/28.... 23,540,000 5,095,233
(zero coupon), due 1/1/30.... 1,270,000 247,345
Inglewood Redevelopment Agency
Tax Allocation
5.25%, due 5/1/17............ 1,000,000 1,050,000
Laguna Salada Union
School District, Series B
(zero coupon), due 8/1/23.... 1,300,000 372,125
Modesto Irrigation District
Financing Authority Revenue
Domestic Water Project
Series D
4.75%, due 9/1/22............ 750,000 720,000
Palo Alto California Unified
School District, Series B
5.375%, due 8/1/18........... 1,275,000 1,322,813
Rancho Cucamonga California
Redevelopment Agency
Tax Allocation
6.75%, due 9/1/20............ 415,000 431,637
San Diego California
Industrial Development
Authority
San Diego Gas & Electric
Series A
5.90%, due 6/1/18............ 1,000,000 1,075,000
- -------------------------------------------------------------
</TABLE>
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
CALIFORNIA (CONTINUED)
San Francisco California City
& County Airports Commission,
International Airport Revenue
Second Series, Issue B
4.50%, due 5/1/28............ $ 1,400,000 $ 1,284,500
Santa Monica-Malibu Unified
School District
5.25%, due 8/1/13............ 855,000 922,331
Simi Valley California Unified
School District
Refundable & Capital
Improvement Projects
5.25%, due 8/1/22............ 300,000 315,000
------------
52,339,123
------------
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 (1.3%)
District of Columbia Revenue
Georgetown University
Series B
7.15%, due 4/1/21............ 3,350,000 3,438,842
Series A
7.40%, due 4/1/18............ 2,815,000 2,896,663
------------
6,335,505
------------
FLORIDA (6.7%)
Florida State Board of
Education Capital Outlay
Series D
4.50%, due 6/1/24............ 2,400,000 2,232,000
Series B
4.50%, due 6/1/27............ 9,120,000 8,447,400
Florida State Department of
Transportation
Right of Way
5.375%, due 7/1/26........... 12,040,000 12,403,608
Turnpike Authority Revenue
Series A
4.50%, due 7/1/27............ 10,000,000 9,237,500
------------
32,320,508
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
14
- -
<PAGE> 630
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS
(CONTINUED)
GEORGIA (4.1%)
Cherokee County Georgia
Water & Sewer Authority
Revenue
5.20%, due 8/1/25............ $ 4,605,000 $ 4,777,688
Fulton County Georgia
Water & Sewer Revenue
4.75%, due 1/1/28............ 13,000,000 12,398,750
Georgia Municipal Electric
Authority Power Revenue
Series Y
6.50%, due 1/1/17............ 2,000,000 2,380,000
------------
19,556,438
------------
HAWAII (1.3%)
Honolulu City & County
Wastewater Systems
Revenue
4.50%, due 7/1/28............ 7,000,000 6,413,750
------------
ILLINOIS (10.7%)
Chicago Board of Education
Chicago School Reform
5.75%, due 12/1/20........... 8,000,000 8,655,520
5.75%, due 12/1/27........... 10,000,000 10,820,100
(zero coupon), due 12/1/28... 6,000,000 1,260,000
Chicago Illinois Gas Supply
Revenue
Peoples Gas, Light & Coke Co.
Series A
8.10%, due 5/1/20 (a)........ 2,000,000 2,142,500
Chicago Illinois Midway
Airport
Revenue, Series A
5.50%, due 1/1/29............ 9,145,000 9,522,231
Chicago Illinois O'Hare
International Airport Revenue
Series A
5.50%, due 1/1/16............ 1,000,000 1,037,500
Chicago Illinois Park District
5.375%, due 1/1/25........... 1,500,000 1,535,625
Illinois Health Facilities
Authority
Revenue Glenoaks Hospital
Series E
9.50%, due 11/15/19 (d)...... 810,000 902,138
Hinsdale Hospital
Series B
9.00%, due 11/15/15 (d)...... 1,785,000 1,972,425
Series C
9.50%, due 11/15/19 (d)...... 5,220,000 5,813,775
Illinois Regional
Transportation
Authority, Series C
7.10%, due 6/1/25............ 1,500,000 1,730,625
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
ILLINOIS (CONTINUED)
Kankakee Illinois Sewer
Revenue
7.00%, due 5/1/16............ $ 2,000,000 $ 2,260,000
Metropolitan Pier & Exposition
Authority, Illinois Dedicated
State Tax Revenue
(zero coupon), due 6/15/29... 17,925,000 3,629,812
------------
51,282,251
------------
INDIANA (3.2%)
Indianapolis Exempt Facility
Revenue, Mid America Income
Resource Project
7.25%, due 12/1/11 (a)....... 2,000,000 2,063,020
Indianapolis Indiana Local
Public
Improvement Bond Bank
Series D
6.75%, due 2/1/20............ 6,000,000 6,637,500
Monroe County Community
School Building Corp.
First Mortgage
5.25%, due 7/1/12............ 5,000,000 5,225,000
Tippecanoe County Indiana
School Building Corp.
First Mortgage
6.00%, due 7/15/13........... 1,300,000 1,413,750
------------
15,339,270
------------
KANSAS (4.2%)
Burlington Pollution Control
Revenue Kansas Gas &
Electric Co. Project
7.00%, due 6/1/31............ 8,300,000 9,036,625
Wyandotte County, Kansas City
Unified Government Utility
Systems Revenue
4.50%, due 9/1/28............ 11,930,000 10,975,600
------------
20,012,225
------------
LOUISIANA (2.5%)
Louisiana Public Facilities
Authority, Hospital Revenue
Pendleton Memorial Methodist
6.75%, due 6/1/22 (d)........ 8,585,000 9,518,619
Louisiana State Offshore
Terminal
Authority, Deepwater Port
Revenue, Series E
7.60%, due 9/1/10............ 2,135,000 2,287,119
------------
11,805,738
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 631
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS
(CONTINUED)
MAINE (0.2%)
Maine Health & Higher
Educational Facility
Authority Revenue
Series B
5.75%, due 7/1/26............ $ 1,000,000 $ 1,076,250
------------
MASSACHUSETTS (2.1%)
Massachusetts Bay
Transportation
Authority General
Transportation
System, Series A
4.50%, due 3/1/26............ 7,500,000 6,937,500
Massachusetts State Health &
Educational Facilities
Authority
Revenue
Medical Center of
Central Massachusetts
7.10%, due 7/1/21 (d)........ 2,500,000 2,753,125
Issue A
7.10%, due 7/1/21 (d)........ 300,000 330,000
------------
10,020,625
------------
MICHIGAN (4.7%)
Detroit City General
Obligation
School District, Series A
5.70%, due 5/1/25............ 2,000,000 2,237,500
Michigan State Building
Authority
Revenue, Series 1
4.75%, due 10/15/21 (d)...... 2,000,000 1,915,000
Michigan State Hospital
Finance
Authority Revenue Genesys
Health System, Series A
7.50%, due 10/1/27 (c)(d).... 15,255,000 18,382,275
------------
22,534,775
------------
MINNESOTA (2.9%)
Minneapolis & Saint Paul
Minnesota
Metropolitan Airports
Commission
Series 7
7.80%, due 1/1/13 (a)........ 2,750,000 2,805,000
Rochester Minnesota Health
Care
Facilities, Mayo Foundation
Series A
5.50%, due 11/15/27 (c)...... 10,500,000 10,998,750
------------
13,803,750
------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
NEBRASKA (0.4%)
Nebraska Investment Finance
Authority, Single Family
Housing Revenue,
Series C
6.30%, due 9/1/28 (a)........ $ 1,990,000 $ 2,104,425
------------
NEW HAMPSHIRE (3.6%)
New Hampshire Higher
Educational & Health
Facilities Authority Revenue
Dartmouth College
5.125%, due 6/1/28........... 10,750,000 10,884,375
5.70%, due 6/1/27............ 5,900,000 6,298,250
------------
17,182,625
------------
NEW JERSEY (1.7%)
Middletown Township
General Obligation
New Jersey Board of Education
5.80%, due 8/1/22............ 3,850,000 4,090,625
New Jersey Sports & Exposition
Authority State Contract
Series A
4.50%, due 3/1/24............ 4,375,000 4,063,281
------------
8,153,906
------------
NEW YORK (21.9%)
Battery Park City Authority
Revenue, Series A
5.50%, due 11/1/26........... 100,000 104,125
Metropolitan Transportation
Authority
Commuter Facilities Revenue
Series A
5.625%, due 7/1/27........... 5,150,000 5,452,562
Service Contract
Transportation Facilities
Series 7
(zero coupon), due 7/1/14.... 3,930,000 1,822,537
Transit Facilities Revenue
Series C
5.50%, due 7/1/22............ 1,000,000 1,045,000
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
</TABLE>
<PAGE> 632
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS
(CONTINUED)
NEW YORK (CONTINUED)
New York City General
Obligation
Series D
6.00%, due 2/15/25 (d)....... $ 1,435,000 $ 1,539,038
Series B
7.00%, due 6/1/15 (d)........ 90,000 96,862
Series C
7.20%, due 8/15/15 (d)....... 150,000 160,875
Series A
7.75%, due 8/15/07 (d)....... 50,000 55,187
7.75%, due 8/15/15 (d)....... 80,000 88,100
7.75%, due 8/15/16 (d)....... 35,000 38,544
Series D
8.00%, due 8/1/04 (d)........ 55,000 61,119
Series F
8.20%, due 11/15/04 (d)...... 205,000 231,138
New York City Industrial
Development Agency
Civic Facility Revenue
Lighthouse International
Project
4.50%, due 7/1/33............ 3,750,000 3,389,062
New York City Municipal Water
Finance Authority, Water &
Sewer
Systems Revenue
Series B
5.50%, due 6/15/27........... 18,600,000 19,411,518
5.75%, due 6/15/29........... 1,000,000 1,078,750
New York City Transitional
Finance
Authority Revenue, Future Tax
Secured,
Series C
4.75%, due 5/1/23............ 6,900,000 6,563,625
Series B
4.75%, due 11/15/23.......... 9,500,000 9,036,875
New York State Dormitory
Authority
Revenue
Cornell University
Series A
7.375%, due 7/1/30........... 2,880,000 3,085,200
New York University
Series A
5.75%, due 7/1/27............ 2,500,000 2,825,000
6.00%, due 7/1/18............ 3,300,000 3,795,000
Park Ridge Housing Income
Project
7.85%, due 2/1/29............ 1,400,000 1,430,996
Rockefeller University
4.75%, due 7/1/37............ 850,000 803,250
St. Johns University
5.70%, due 7/1/26............ 3,250,000 3,457,188
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
NEW YORK (CONTINUED)
New York State Dormitory
Authority
Revenue (Continued)
State University Educational
Facilities
5.50%, due 5/15/26........... $ 6,250,000 $ 6,453,125
Series C
7.375%, due 5/15/10.......... 6,000,000 7,380,000
Series B
7.50%, due 5/15/11........... 4,250,000 5,296,563
New York State Energy Research
&
Development Authority
Gas Facilities Revenue
Brooklyn Union Gas Co.
Project
5.50%, due 1/1/21............ 1,250,000 1,301,562
New York State Environmental
Facilities Corp. Pollution
Control
Revenue, State Water
Series A
7.25%, due 6/15/10 (d)....... 400,000 439,000
7.50%, due 6/15/12........... 3,050,000 3,263,500
Series B
7.50%, due 3/15/11........... 700,000 719,369
New York State Local
Government
Assistance Corp.
Series C
(zero coupon), due 4/1/14.... 1,130,000 545,225
New York State Medical Care
Facilities
Finance Agency Revenue
7.375, due 8/15/19 (d)....... 1,615,000 1,676,677
7.875%, due 8/15/20.......... 450,000 483,750
Hospital & Nursing Home
Series A
8.00%, due 2/15/28 (d)....... 570,000 583,840
Montefiore Medical Center
Series A
6.00%, due 2/15/35........... 2,150,000 2,338,125
St. Francis Hospital of
Roslyn
Project A
7.625%, due 11/1/21.......... 3,875,000 4,002,177
New York State Thruway
Authority
Service Contract Revenue
Local Highway & Bridge
5.75%, due 4/1/16............ 100,000 106,061
Niagara Falls New York Bridge
Commission Toll Revenue
Series B
5.25%, due 10/1/15........... 500,000 530,000
Port Authority of New York &
New Jersey Consolidated Bonds
Series 109
5.375%, due 7/15/27.......... 3,500,000 3,613,750
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<PAGE> 633
MainStay Tax Free Bond Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
LONG-TERM MUNICIPAL BONDS
(CONTINUED)
NEW YORK (CONTINUED)
Triborough Bridge & Tunnel
Authority of New York
General Purpose Revenue
Series Y
6.125%, due 1/1/21........... $ 750,000 $ 866,250
------------
105,170,525
------------
NORTH CAROLINA (0.6%)
New Hanover County
Hospital Revenue, New Hanover
Regional Medical Center
Project
5.75%, due 10/1/26........... 2,500,000 2,668,750
------------
OHIO (0.5%)
Ohio State Air Quality
Development
Authority Revenue, Pollution
Control, Cleveland Co.
Project
8.00%, due 12/1/13........... 2,000,000 2,305,000
------------
PENNSYLVANIA (1.4%)
Emmaus Pennsylvania General
Authority Revenue, Series E
7.90%, due 5/15/18........... 6,450,000 6,500,052
------------
TEXAS (6.3%)
Houston Water & Sewer Systems
Revenue Junior Lien
Series C
5.375%, due 12/1/27.......... 1,000,000 1,023,750
Katy Independent School
District
Series A
4.50%, due 2/15/20........... 2,000,000 1,855,000
Matagorda County Navigation
District 1, Pollution Control
Revenue
Central Power & Light Co.
Project
7.50%, due 12/15/14.......... 2,400,000 2,541,528
Houston Lighting & Power Co.
Series E
7.20%, due 12/1/18 (c)....... 3,470,000 3,647,005
Nueces River Authority Texas
Water
Supply, Corpus Christi Lake
Project
5.50%, due 3/1/27............ 1,250,000 1,314,062
San Antonio Electric &
Gas Revenue,
Series A
4.50%, due 2/1/21............ 5,250,000 4,895,625
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
TEXAS (CONTINUED)
San Antonio Hotel Occupancy
Revenue Henry B. Gonzalez
Convention Center Expansion
Project
5.70%, due 8/15/26........... $ 2,200,000 $ 2,354,000
South Texas Community College
District
5.75%, due 8/15/15........... 1,500,000 1,605,000
Texas Water Resources Finance
Authority Revenue
7.625%, due 8/15/08.......... 10,560,000 10,807,738
------------
30,043,708
------------
UTAH (0.4%)
Utah Water Finance Agency
Revenue, Pooled Loan
Financing Program
Series A
5.75%, due 10/1/21........... 1,965,000 2,112,375
------------
VIRGINIA (3.8%)
Richmond Metropolitan
Authority
Expressway Revenue
5.25%, due 7/15/22........... 8,400,000 8,862,000
Southeastern Public Service
Authority Senior Lien Revenue
5.00%, due 7/1/15............ 9,000,000 9,180,000
------------
18,042,000
------------
WASHINGTON (0.9%)
Port Seattle Washington
Revenue, Series A
5.50%, due 10/1/17........... 2,000,000 2,105,000
Washington State Motor Vehicle
Fuel Tax Revenue, Series B
5.50%, due 6/1/20............ 2,000,000 2,075,000
------------
4,180,000
------------
Total Long-Term Municipal
Bonds
(Cost $463,638,536).......... 474,871,238
------------
SHORT-TERM MUNICIPAL BONDS (0.3%)
NEW JERSEY (0.2%)
New Jersey Economic
Development Authority
Revenue
5.00%, due 5/1/01 (e)........ 1,100,000 1,100,000
------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 634
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- -------------------------------------------------------------
<S> <C> <C>
SHORT-TERM MUNICIPAL BONDS
(CONTINUED)
WYOMING (0.1%)
Kemmerer County Pollution
Control Revenue
Exxon Project
5.10%, due 11/1/14 (e)....... $ 200,000 $ 200,000
Lincoln County Pollution
Control
Revenue, Exxon Project
Series C
5.05%, due 11/1/14 (e)....... 300,000 300,000
------------
500,000
------------
Total Short Term Municipal
Bonds
(Cost $1,600,000)............ 1,600,000
------------
Total Investments
(Cost $465,238,536) (f)...... 99.4% 476,471,238(g)
Cash and Other Assets,
Less Liabilities............. 0.6 2,821,788
---- ----------
Net Assets.................... 100.0% $479,293,026
===== ============
</TABLE>
- -------
(a) Interest on these securities is subject to alternative minimum tax.
(b) May be sold to institutional investors only.
(c) Segregated as collateral for futures contracts.
(d) Prerefunding securities--issuer has or will issue new bonds and use the
proceeds to purchase Treasury securities that mature at or near the same
date as the original issue's call date.
(e) Variable rate security that may be tendered back to issuer at any time
prior to maturity at par.
(f) The cost for Federal income tax purposes is $465,264,801.
(g) At December 31, 1998, net unrealized appreciation was $11,206,437, 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 $15,896,151 and aggregate gross unrealized depreciation
for all investments on which there was an excess of cost over market value
of $4,689,714.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
<PAGE> 635
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$465,238,536)............................................. $476,471,238
Cash........................................................ 86,535
Receivables:
Interest.................................................. 6,408,476
Investment securities sold................................ 955,172
Fund shares sold.......................................... 160,635
------------
Total assets........................................ 484,082,056
------------
LIABILITIES:
Payables:
Investment securities purchased........................... 4,086,815
MainStay Management....................................... 245,231
NYLIFE Distributors....................................... 206,821
Fund shares redeemed...................................... 121,780
Transfer agent............................................ 34,026
Custodian................................................. 5,123
Variation margin payable on futures contracts............. 3,780
Trustees.................................................. 3,661
Accrued expenses............................................ 81,793
------------
Total liabilities................................... 4,789,030
------------
Net assets.................................................. $479,293,026
============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 17,518
Class B................................................... 452,102
Class C................................................... 5
Additional paid-in capital.................................. 471,337,532
Accumulated net realized loss on investments................ (3,746,833)
Net unrealized appreciation on investments.................. 11,232,702
------------
Net assets.................................................. $479,293,026
============
CLASS A
Net assets applicable to outstanding shares................. $ 17,867,408
============
Shares of beneficial interest outstanding................... 1,751,806
============
Net asset value per share outstanding....................... $ 10.20
Maximum sales charge (4.50% of offering price).............. 0.48
------------
Maximum offering price per share outstanding................ $ 10.68
============
CLASS B
Net assets applicable to outstanding shares................. $461,420,272
============
Shares of beneficial interest outstanding................... 45,210,246
============
Net asset value and offering price per share outstanding.... $ 10.21
============
CLASS C
Net assets applicable to outstanding shares................. $ 5,346
============
Shares of beneficial interest outstanding................... 524
============
Net asset value and offering price per share outstanding.... $ 10.21
============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
- -
<PAGE> 636
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Interest.................................................. $27,284,330
-----------
Expenses:
Management................................................ 2,904,883
Distribution--Class B..................................... 1,172,345
Distribution--Class C..................................... 2
Service--Class A.......................................... 38,079
Service--Class B.......................................... 1,172,287
Service--Class C.......................................... 2
Transfer agent............................................ 412,281
Shareholder communication................................. 106,723
Recordkeeping............................................. 75,715
Professional.............................................. 57,047
Registration.............................................. 53,383
Custodian................................................. 49,252
Trustees.................................................. 14,567
Miscellaneous............................................. 37,799
-----------
Total expenses.......................................... 6,094,365
-----------
Net investment income....................................... 21,189,965
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) from:
Security transactions..................................... 6,112,552
Futures transactions...................................... (206,254)
-----------
Net realized gain on investments............................ 5,906,298
Net change in unrealized appreciation on investments........ (4,593,758)
-----------
Net realized and unrealized gain on investments............. 1,312,540
-----------
Net increase in net assets resulting from operations........ $22,502,505
===========
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
-
<PAGE> 637
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
DECREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 21,189,965 $ 24,426,541
Net realized gain on investments.......................... 5,906,298 6,139,324
Net change in unrealized appreciation on investments...... (4,593,758) 11,084,242
------------ ------------
Net increase in net assets resulting from operations...... 22,502,505 41,650,107
------------ ------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (708,345) (659,120)
Class B................................................. (20,489,979) (23,759,021)
Class C................................................. (41) --
In excess of net investment income:
Class A................................................. (23,223) --
Class B................................................. (671,754) --
Class C................................................. (1) --
------------ ------------
Total dividends and distributions to shareholders..... (21,893,343) (24,418,141)
------------ ------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 7,734,640 3,327,275
Class B................................................. 38,082,025 31,620,029
Class C................................................. 5,300 --
Net asset value of shares issued to shareholders in
reinvestment of dividends:
Class A................................................. 595,727 503,552
Class B................................................. 13,369,997 14,892,349
Class C................................................. 41 --
------------ ------------
59,787,730 50,343,205
Cost of shares redeemed:
Class A................................................. (3,521,161) (7,772,835)
Class B................................................. (72,709,355) (77,392,586)
Class C................................................. (2) --
------------ ------------
Decrease in net assets derived from capital share
transactions......................................... (16,442,788) (34,822,216)
------------ ------------
Net decrease in net assets............................ (15,833,626) (17,590,250)
NET ASSETS:
Beginning of year........................................... 495,126,652 512,716,902
------------ ------------
End of year................................................. $479,293,026 $495,126,652
============ ============
Accumulated undistributed net investment income at end of
year...................................................... $ -- $ 8,400
============ ============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
- -
<PAGE> 638
This page intentionally left blank
23
-
<PAGE> 639
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
---------------------------------------------
Year ended December 31,
---------------------------------------------
1998 1997 1996 1995
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.19 $ 9.84 $ 10.02 $ 9.20
------- ------- ------- ------
Net investment income....................................... 0.47 0.51 0.54 0.52
Net realized and unrealized gain (loss) on investments...... 0.03 0.35 (0.19) 0.83
------- ------- ------- ------
Total from investment operations............................ 0.50 0.86 0.35 1.35
------- ------- ------- ------
Less dividends and distributions:
From net investment income................................ (0.48) (0.51) (0.53) (0.53)
In excess of net investment income........................ (0.01) -- -- --
From net realized gain on investments..................... -- -- -- --
------- ------- ------- ------
Total dividends and distributions........................... (0.49) (0.51) (0.53) (0.53)
------- ------- ------- ------
Net asset value at end of period............................ $ 10.20 $ 10.19 $ 9.84 $10.02
======= ======= ======= ======
Total investment return (a)................................. 4.98% 9.02% 3.63% 15.00%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 4.61% 5.14% 5.4% 5.5%
Expenses................................................ 1.02% 1.01% 1.0% 1.0%
Portfolio turnover rate..................................... 116% 119% 95% 110%
Net assets at end of period (in 000's)...................... $17,868 $13,017 $16,486 $9,752
</TABLE>
- -------
<TABLE>
<S> <C>
The Fund changed its fiscal year end from August 31 to
* December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
Total return is calculated exclusive of sales charges and is
(a) not annualized.
(b) Less than one cent per share.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
- -
<PAGE> 640
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------------------------- --------------
September 1 September 1**
Year ended December 31, through Year ended through
----------------------------------------- December 31, August 31, December 31,
1998 1997 1996 1995 1994* 1994 1998
-------- -------- -------- -------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 10.19 $ 9.84 $ 10.03 $ 9.20 $ 9.71 $ 10.39 $10.25
-------- -------- -------- -------- -------- -------- ------
0.45 0.49 0.51 0.51 0.17 0.51 0.15
0.03 0.35 (0.19) 0.83 (0.51) (0.58) (0.04)
-------- -------- -------- -------- -------- -------- ------
0.48 0.84 0.32 1.34 (0.34) (0.07) 0.11
-------- -------- -------- -------- -------- -------- ------
(0.45) (0.49) (0.51) (0.51) (0.17) (0.53) (0.15)
(0.01) -- -- -- -- -- --(b)
-- -- -- -- -- (0.08) --
-------- -------- -------- -------- -------- -------- ------
(0.46) (0.49) (0.51) (0.51) (0.17) (0.61) (0.15)
-------- -------- -------- -------- -------- -------- ------
$ 10.21 $ 10.19 $ 9.84 $ 10.03 $ 9.20 $ 9.71 $10.21
======== ======== ======== ======== ======== ======== ======
4.83% 8.80% 3.33% 14.86% (3.53%) (0.69%) 1.09%
4.36% 4.93% 5.2% 5.2% 5.6%+ 5.4% 4.36%+
1.27% 1.22% 1.2% 1.2% 1.2%+ 1.2% 1.27%+
116% 119% 95% 110% 37% 92% 116%
$461,420 $482,209 $496,231 $543,314 $513,781 $552,156 $ 5
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
-
<PAGE> 641
MainStay Tax Free Bond Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on May 1, 1986 and
September 1, 1998, respectively. Class A shares, Class B and Class C 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 and
Class C 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
26
- -
<PAGE> 642
Notes to Financial Statements
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 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.
Permanent book-tax difference of $694,978 has been reclassified from additional
paid in capital to accumulated undistributed net investment income due to a
taxable distribution.
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.
27
-
<PAGE> 643
MainStay Tax Free Bond Fund
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Interest income is
accrued daily except when collection is not expected. Premiums on securities
purchased by the Fund are amortized on the constant yield method over the life
of the respective securities or, if applicable, over the period to the first
call date. Discounts are accreted when required by Federal tax regulations.
EXPENSES. Expenses of the Trust are allocated to the individual Funds in
proportion to the net assets of the respective Funds when the expenses are
incurred except when direct allocations of expenses can be made. The investment
income and expenses (other than expenses incurred under the Distribution Plan)
and realized and 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. For the year ended December 31, 1998, the Manager
earned $2,904,883.
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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the
28
- -
<PAGE> 644
Notes to Financial Statements (continued)
Class B and Class C shares of the Fund, at the annual rate of 0.25% of the
average daily net assets of the Fund's Class B and Class C shares. The
Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $5,062 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $350,238
for the year ended December 31, 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 accrued for the year ended December 31,
1998, amounted to $412,281.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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 $12,997 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$75,715 for the year ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
At December 31, 1998, for Federal income tax purposes, capital loss
carryforwards of $3,720,568 which have been deferred for Federal income tax
purposes, were available to the extent provided by the 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 $5,630,142
of capital loss carryforwards during the current fiscal year.
29
-
<PAGE> 645
MainStay Tax Free Bond Fund
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $552,161 and $578,910,
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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
------------------------------------ ---------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold.............................. 761 3,730 1 338 3,190
Shares issued in reinvestment of
dividends.............................. 59 1,312 -- 51 1,499
---- ------ -- ---- ------
820 5,042 1 389 4,689
Shares redeemed.......................... (346) (7,135) -- (787) (7,807)
---- ------ -- ---- ------
Net increase (decrease).................. 474 (2,093) --(a) (398) (3,118)
==== ====== == ==== ======
</TABLE>
- -------
<TABLE>
<S> <C>
* First offered on September 1, 1998.
(a) Less than one thousand.
</TABLE>
30
- -
<PAGE> 646
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Tax Free Bond Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
31
-
<PAGE> 647
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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> 648
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
4 "Standard & Poor's(R)," "S&P(R)," "S&P500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
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> 649
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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> 650
OFFICERS & TRUSTEES(*)
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
*As of December 31, 1998.
[MAINSTAY.LOGO]
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.
(C)1999. All rights reserved. MSAN14-02/99
[RECYCLE.LOGO]
MAINSTAY TAX FREE BOND FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 651
Table of Contents
<TABLE>
<S> <C>
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, & Class C
Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 10
Returns & Lipper Rankings 14
Top 10 Equity Holdings 15
Top 10 Bond Holdings 15
10 Largest Purchases 16
10 Largest Sales 16
Portfolio of Investments 17
Financial Statements 23
Notes to Financial Statements 28
Report of Independent Accountants 35
The MainStay Funds 36
</TABLE>
<PAGE> 652
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 653
MainStay Total Return Fund Highlights
1998 MARKET RECAP
- - The U.S. stock market was highly volatile throughout 1998, but provided
double-digit returns for the fourth year in a row in a growth-oriented
environment marked by low inflation and declining interest rates.
- - Difficulties in Asia, Russia, and Latin America caused a flight to quality in
both the stock and bond markets, with investors seeking highly liquid
securities and stocks of companies with steady earnings growth.
- - Technology and pharmaceutical stocks generally showed strong performance,
while cyclical, energy, and commodity-related stocks tended to underperform.
- - Long-term Treasury securities showed strong performance throughout the year,
while corporate bonds suffered from earnings disappointments and
mortgage-backed securities faced prepayment risk through much of the year.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Total Return Fund returned
26.93% for Class A shares and 25.96% for Class B and Class C shares,*
excluding all sales charges.
- - The Fund benefited from careful stock selection among large-capitalization
companies in technology, pharmaceuticals, and consumer staples and by reducing
positions in problem sectors such as energy.
- - The Fund benefited from a long to neutral duration throughout the year and
from being overweighted in 30-year Treasuries when the yield curve flattened.
- - The Fund alternated between an underweighted and overweighted position in
mortgage-backed securities, which generally proved beneficial.
- - All three share classes outperformed the average Lipper* balanced fund, which
returned 13.48% for the year. This placed these share classes in the top 5% of
their peers for the year.
- -------
* See footnote and table on page 14 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
<PAGE> 654
$10,000 Invested in the MainStay
Total Return Fund versus S&P 500
and Inflation
CLASS A SHARES SEC Returns: 1-year 19.95%, 5-year 15.06%, 10-year 14.33%
[Class A Line Graph]
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY TOTAL
RETURN FUND S&P 500* INFLATION
----------- -------- ---------
<S> <C> <C> <C>
12/88 9,450 10,000 10,000
12/89 10,867 13,162 10,464
12/90 11,416 12,754 11,118
12/91 15,622 16,631 11,449
12/92 16,187 17,897 11,788
12/93 17,887 19,694 12,111
12/94 17,456 19,954 12,426
12/95 22,459 27,444 12,749
12/96 25,429 33,740 13,171
12/97 30,067 44,996 13,395
12/98 38,165 57,855 13,611
</TABLE>
CLASS B & CLASS C SHARES
Class B Shares SEC Returns: 1-year 20.96%, 5-year 15.62%, 10-year 14.72%
Class C Shares SEC Returns: 1-year 24.96%, 5-year 15.84%, 10-year 14.72%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY TOTAL RETURN FUND S&P 500* INFLATION+
-------------------------- -------- ----------
<S> <C> <C> <C>
12/88 10,000.00 10,000.00 10,000.00
12/89 11,499.00 13,162.00 10,464.00
12/90 12,081.00 12,754.00 11,118.00
12/91 16,531.00 16,631.00 11,449.00
12/92 17,130.00 17,897.00 11,788.00
12/93 18,928.00 19,694.00 12,111.00
12/94 18,472.00 19,954.00 12,426.00
12/95 23,637.00 27,444.00 12,749.00
12/96 26,647.00 33,740.00 13,171.00
12/97 31,349.00 44,996.00 13,395.00
12/98 39,486.00 57,855.00 13,611.00
</TABLE>
- -------
Past performance is no guarantee of future results. The Class A graph
assumes an initial investment of $10,000 made on 12/31/88 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 12/31/88 through 12/31/94. The Class
B graph assumes an initial investment of $10,000 made on 12/31/88.
Performance data for the two classes vary after this date based on
differences in their load and expense structures. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply
for the period shown. The Class C graph assumes an initial investment of
$10,000 made on 12/31/88 and includes the historical performance of Class B
shares for periods 12/31/88 through 8/31/98. Performance data for the two
classes vary after this date based on differences in their load. Returns
shown do not reflect the 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. It is not possible to make an investment directly into an
index.
(+) 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> 655
Portfolio Management Discussion and Analysis
As years go, 1998 was one of the most volatile in recent memory. Despite its ups
and downs, however, the S&P 500(*) Index closed the year with a 28.58% gain,
making 1998 the fourth year in a row domestic stocks in general have returned
more than 20.00%.
With financial problems in Asia, Russia, and Latin America, declining oil
prices, and weaknesses in other commodities, investors sought refuge in stocks
they felt were least likely to be affected by these difficulties. The market
focused on large-capitalization growth stocks that appeared to have steady and
predictable earnings prospects, with particular attention to technology and
pharmaceutical issues. Purely domestic issues did well, while oil and
commodity-related stocks tended to show poor performance.
Declining interest rates improved earnings prospects for many companies in the
latter half of the year, and calm inflation also helped strengthen the stock
market's advance.
These same forces combined to make 1998 a year of extremes in the bond market.
The first half of the year saw the lowest level of volatility in 15 years, while
the second half of the year reflected the highest volatility in a decade and a
half.
A federal budget surplus reduced Treasury issuance and tightened supply, while
the flight to quality in the third quarter of 1998 dramatically increased demand
for government bonds. With emerging market problems prompting the near collapse
of one of the world's largest hedge funds, the rush to high-quality, highly
liquid issues drove government bond prices higher and reduced yields on 30-year
Treasury bonds to record lows. Corporate bonds suffered from earnings
disappointments and weak demand as the stock market offered much higher return
potential. Mortgage-backed securities showed mixed performance, with prepayments
reducing returns in the first three quarters and stronger performance in the
fourth quarter of 1998, as the Federal Reserve Board's moves to ease interest
rates helped stabilize the bond markets. Asset-backed securities generally
showed positive performance, particularly among highly rated, short-term issues,
where the likelihood of prepayment was low.
HOW DID THE MAINSTAY TOTAL RETURN FUND PERFORM IN THIS MARKET ENVIRONMENT?
Quite well. The MainStay Total Return Fund returned 26.93% for Class A shares
and 25.96% for Class B and Class C shares(+) for the year ended 12/31/98,
excluding all sales charges. Class A, B, and C shares outperformed the average
Lipper(++) balanced fund, which returned 13.48% for the year, with all share
classes ranking in the top 5% of their Lipper peer group.
HOW DID THE FUND MANAGE TO DO SO WELL?
A number of factors contributed positively to the Fund's performance, but we
believe the most important factor was sticking to our strict investment
disciplines. In the stock portion of the Fund's portfolio, we seek companies
with strong growth prospects, considering such factors such as steady growth in
revenues, accelerating earnings, and increasing earnings-per-share. During the
volatile market environment in 1998, we concentrated on large-capitalization
issues, which were
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
- -------
* See footnote on page 4 for more information on the S&P 500.
( +) Performance figures for Class C shares include the historical performance
of Class B shares from 1/1/98 to 8/31/98.
(++) See footnote and table on page 14 for more information on Lipper Inc.
5
<PAGE> 656
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.
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.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
<TABLE>
<CAPTION>
Year end Total Return %
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 -2.41
12/95 28.66
12/96 13.22
12/97 18.24
12/98 26.93
</TABLE>
Returns reflect the historical performance of the Class B shares for periods
12/87 through 12/94.
See footnote * on page 14 for more information on performance.
CLASS B & CLASS C SHARES
<TABLE>
<CAPTION>
Year end Total Return %
<S> <C>
12/87 0.50
12/88 7.65
12/89 14.99
12/90 5.06
12/91 36.84
12/92 3.62
12/93 10.50
12/94 -2.41
12/95 27.96
12/96 12.73
12/97 17.65
12/98 25.96
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 12/87 through 8/98.
See footnote * on page 14 for more information on performance.
among the stocks investors favored when problems in foreign markets caused a
flight to quality in both the stock and bond markets. We also reduced the Fund s
positions in sectors we felt were weak, such as oil and energy. By concentrating
on winners and largely avoiding losers, the Fund had an excellent year.
In the bond portion of the Fund s portfolio, the Fund benefited from a long to
neutral duration strategy throughout the year, from being overweighted in
30-year Treasuries as yield spreads tightened, and from being underweighted in
mortgage-backed securities when we believed the prepayment risk was high.
6
<PAGE> 657
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C>
All Other 47.10%
U.S. Government & Federal Agencies 20.1%
Retail 12.70%
Financial Services 7.30%
Drugs 7.20%
Software 5.60%
</TABLE>
Actual percentages will vary over time.
WHICH SECTORS CONTRIBUTED MOST STRONGLY TO THE FUND'S STOCK PERFORMANCE?
We don't select sectors. Instead, we choose stocks for the Fund based on their
individual merits after extensive quantitative analysis and fundamental
research. As a result of the Fund's selection process, however, we found a
number of technology stocks that we believed had strong growth potential and
they contributed to the Fund's significant outperformance. The Fund was
overweighted in technology stocks through all four quarters of 1998.
Pharmaceutical stocks also had an excellent year, and the Fund had a number of
holdings that did well. New drug introductions, direct-to-consumer advertising,
and a long pipeline of FDA-approved drugs awaiting release helped advance the
sector as a whole.
Consumer staples as a group showed relatively weak performance in 1998, but our
stock selection process positioned the Fund in relatively defensive, purely
domestic companies, such as supermarkets, which performed well at a time when
the market seemed to prefer stable growth and relatively predictable earnings.
As a group, supermarkets are benefiting from consolidation, which is helping
improve margins and profits.
CAN YOU GIVE SOME EXAMPLES OF TECHNOLOGY STOCKS THAT DID WELL?
Certainly. Lucent Technologies was the Fund's best-performing stock in 1998 and
also its largest equity holding. The company has done exceedingly well, with the
value of the Fund's position more than tripling during the year. Cisco Systems
is another technology stock that showed outstanding performance, with an
increase of 149%(sec.) in 1998.
In January, we purchased EMC Corp., a leader in corporate data storage systems,
hardware, and software. We believed the company had excellent potential, based
on increasing dominance in its market sector and rapidly accelerating earnings.
The Fund's position almost doubled in value during the year.
HEDGE FUND
- --------------------
A private investment partnership or off-shore investment corporation that may
take both long and short positions, use leverage and derivative securities, and
invest across many markets. Hedge funds may use high-risk or speculative
investment strategies and move large amounts of money in and out of the markets
quickly.
EARNINGS-PER-SHARE
- --------------------
The portion of a company's profit allocated to each share of outstanding common
stock.
- -------
(sec.) Returns reflect performance for the one-year period ended 12/31/98.
7
<PAGE> 658
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.
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.
YIELD SPREAD
- --------------------
The difference in yield between securities in different market sectors, such as
government and mortgage- backed securities--or between different securities in a
single sector, such as 2-year and 30-year Treasuries.
Compuware Corp. is a computer software company that was also among the Fund's
best-performing stocks, and it more than doubled in value during the year.
DID ALL OF THE FUND'S TECHNOLOGY STOCKS DO THAT WELL?
No. Computer Associates showed
relatively poor performance when the company's management team lowered its
earnings estimates and announced that it might have difficulty closing large
contracts. The stock was among the worst-performing issues in the Fund's
investment portfolio in 1998 returning 25%.
WHAT ABOUT PHARMACEUTICAL STOCKS?
Given the positive fundamentals in the pharmaceutical industry and the high unit
volume growth that these companies can generate in a low inflationary
environment, pharmaceuticals recorded strong gains in 1998. Although we
increased the Fund's position in Pfizer, our timing could have been better. In
the first half of the year, many investors were selling the stock to take
profits after the successful release of Viagra. Since the Fund seeks long-term
capital appreciation, however, we looked at the company's fundamentals and
continued to hold the stock in the Fund's portfolio, which had a modestly
positive impact for the year. During the year, we also increased the Fund's
position in Merck, a major drug company profiting from successful products such
as Pepcid, Propecia, and many others. The stock contributed positively to
performance.
Other positive performers among drug stocks included Eli Lilly, a stock the Fund
has held for some time, and Schering-Plough Corp. Schering-Plough's Claritin
product for allergy sufferers helped sales, earnings, and stock performance.
DID THE FUND REMAIN OVERWEIGHTED IN FINANCIAL STOCKS IN 1998?
No, over the course of the year, we decreased the Fund's weighting in financial
stocks for a number of reasons. First, we believed that growth was slowing in
the financial sector. Second, the huge mergers in the financial industry
produced companies that were more difficult to analyze and evaluate.
The NationsBank merger with BankAmerica is a good example. The combination added
to the company's financial risk because BankAmerica was invested in the D. E.
Shaw hedge fund when the market had just suffered a major setback from a debacle
at Long-Term Capital. Since the stock no longer fit the Fund's growth criteria
and risk profile, we cut back on the Fund's position, which had a slightly
negative impact. Although our decision to sell helped reduce portfolio risk, the
stock's subsequent performance suggested that the Fund would have been rewarded
for a more patient outlook.
Travelers and Citicorp joined to form CitiGroup during the year, which reduced
our confidence in the company, as management faced a substantial reorganization
in an uncertain financial environment. As a result, we cut back on our holdings
in the summer, which was not the best time to sell, so the transaction had a
negative impact on performance.
We also sold our holdings in MGIC Investment Corp., a mortgage lender that saw
decelerating growth and declining sales as interest rates dropped in the
8
<PAGE> 659
second half of the year. The decision was positive for the Fund, and allowed the
Fund to invest in more profitable securities. Washington Mutual was another
stock we sold to reduce the Fund's financial holdings. The stock had appreciated
significantly over the last few years, and we decided to take profits for the
Fund over its original cost when the company's earnings growth rate slowed.
Unfortunately, the stock had declined from the beginning of the year, so the
impact for 1998 was slightly negative. At year end, the Fund was weighted close
to the market in the financial sector.
WHAT WERE SOME OF THE MAJOR EQUITY PURCHASES THE FUND MADE DURING THE YEAR?
In addition to those already mentioned, the Fund established a position in Fred
Meyer, Inc., a large supermarket chain. We liked the company's fundamentals and
believed it might benefit from consolidation in the supermarket industry, which
happened when the company announced that it would be acquired by Kroger, another
of the Fund's investments. By the end of the year, Fred Meyer stock had
increased by about 50% from the Fund's purchase price.
In the first quarter, the Fund purchased Colgate-Palmolive. The company has
shown stable growth and had successfully launched Total toothpaste. Despite the
company's international exposure, we believed it could handle any difficulties
the market might generate. For the year, the stock was up 28%, which was in line
with the S&P 500 Index.
As new money came into the Fund over the course of the year, we used much of it
to add to the Fund's most successful positions, including Lucent Technologies,
Cisco Systems, EMC Corp., and others. So our buying strategy paralleled our
investment strategy of sticking with the winners in the Fund's investment
portfolio.
WERE ALL OF THE FUND'S STOCK PURCHASES EQUALLY SUCCESSFUL?
No. We purchased HBO & Company, a leading provider of health care software
systems, during the second quarter of 1998. The company looked attractive given
its size, market share, and growth rate. But shortly after we purchased the
stock, the company announced an acquisition that the market didn't like. Next,
they decided to merge with McKessen, a leading drug distributor. But
miscommunication about the merger caused the stock to substantially underperform
the market. Although the investment provided a positive return, it was
substantially lower than other holdings, and on a relative basis, had negative
impact on performance.
YOU MENTIONED SOME FINANCIAL STOCK SALES. WHAT OTHER STOCKS DID THE FUND SELL
DURING 1998?
Perhaps the Fund's most significant stock sales were in the energy sector. With
declining oil prices and weakening prospects for exploration, drilling, and oil
services, we sold the Fund's positions in Diamond Offshore, Halliburton, and
ENSCO. Since the impact of energy service stocks was almost uniformly negative
in 1998, we viewed the sales as positive for the portfolio, even though the Fund
lost money on each of these transactions. The wisdom of reallocating the assets
was further underscored as oil prices continued to decline.
9
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.
<PAGE> 660
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
<TABLE>
<S> <C> <C>
Common Stocks Bonds & Notes
64.3% 34.5%
Actual percentages will vary over time. Cash, Equivalents & Other Assets, Less Liabilities
1.2%
</TABLE>
We also sold toy maker Mattel during the first half of the year as fundamentals
deteriorated and Barbie sales declined. We were pleased to get out at a gain
over the Fund's original purchase price, although the Fund had a slightly
negative return on the stock in 1998. Later developments at the company
confirmed the wisdom of this sale.
DID THE FUND MAKE OTHER SIGNIFICANT STOCK SALES?
Yes. The Fund sold Tenet Healthcare and United Healthcare, both of which saw
decelerating earnings growth rates. Tenent is a large hospital chain that missed
its earnings projections. United Healthcare suffered from rising medical costs
and an inability to smoothly integrate recent acquisitions. Although both
companies declined after we sold the Fund's holdings, United Healthcare has
since recovered a bit. Nevertheless, we believe the sales were positive for the
Fund because they allowed us to put the assets to better use elsewhere.
Adaptec is a technology company we sold at a loss after the Asian crisis slowed
earnings growth. We sold the stock in the low twenties, and the stock continued
to decline even further throughout most of the year. So again, we consider the
decision a positive one for the Fund's shareholders.
Hewlett-Packard was a long-standing position in the Fund that simply failed to
live up to earnings expectations. We sold the stock at a huge gain over its
original cost, but at a slight loss for the year.
WHICH STOCKS WERE THE FUND'S WORST PERFORMERS IN 1998?
By far the worst stock was Cendant, which was plagued by news of accounting
irregularities at CUC International prior to CUC's merger with HFS in late 1997.
The stock, which was a major holding, was down nearly 44% for the year. The Fund
continues to own Cendant stock because we believe the market has overpenalized
the company, which is generating $1.5 billion of free cash flow.
Other poor performers included HEALTHSOUTH, a nationwide rehabilitation and
outpatient surgical provider,
10
<PAGE> 661
which surprised the market by missing third quarter earnings projections and
pre- announcing that problems would persist until 1999. Conseco is an insurance
company that acquired Green Tree Financial and suffered from negative
perceptions of its top management. Despite these and other negative performers,
the stock portion of the Fund's portfolio was still able to outperform the
market by a substantial margin.
WHAT FACTORS CONTRIBUTED SIGNIFICANTLY TO BOND PERFORMANCE IN THE FUND'S
PORTFOLIO?
We believe that duration is among the most important factors determining bond
fund performance and our strategy throughout the year was to remain long to
neutral. In the first half of the year, the Fund remained neutral as rates
headed higher and extended duration as rates rallied, which had a positive
impact on performance. In the second half, we shifted the Fund's duration with
the ebb and flow of the market, but shortened in the fourth quarter, which had a
negative impact on performance. Overall, however, our duration strategy was
positive for the portfolio.
Our yield-curve strategy was also a positive contributor to performance. We
remained overweighted in 30-year Treasuries, which helped the portfolio
throughout the year, but particularly in the second and fourth quarters, when
yield spreads narrowed, flattening the yield curve.
WERE THERE OTHER STRATEGIES THAT CONTRIBUTED POSITIVELY TO PERFORMANCE?
In the first half of the year, interest rates remained in a relatively narrow
range, so we used a variety of technical indicators to guide the Fund between
newer and older issues, which provided slight incremental gains.
Finding few opportunities elsewhere, the Fund was heavily weighted in Treasury
securities, which had a positive impact on performance throughout the year, but
particularly in the second half of 1998, when a drop in the stock market,
concerns over Asia, Russia, and Brazil, and problems with major hedge funds
caused investors to seek a "safe haven" in Treasury securities. The gains
during this period were exaggerated by the budget surplus, which decreased
Treasury issuance and limited supply at a time when demand for highly liquid,
high-quality securities was extremely high.
DOES THE FUND CONCENTRATE ON HIGH-QUALITY DEBT SECURITIES?
Yes it does. The Fund's income portfolio emphasized U.S. government bonds, high-
quality mortgage-backed and asset-backed securities, and high-grade corporate
issues. Overall, the bonds in the income portion of the Fund's portfolio were
high quality. In a period when investors were willing to pay a premium for
higher-quality bonds, our strategy contributed positively to performance.
HOW DID THE FUND'S MORTGAGE-BACKED SECURITIES PERFORM?
Anticipating prepayments, the Fund entered the year underweighted in high-
coupon mortgage-backed securities, which was positive for performance. In the
second quarter, we added bonds we believed would not be interest-rate sensitive
and managed to take some profits for the Fund as the market rallied.
Unfortunately, a second wave of prepayments hurt the Fund's holdings and an
11
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.
<PAGE> 662
overweighted position detracted from performance in the second quarter.
In the third quarter, we reduced the Fund to an underweighted position in
mortgage-related bonds, which proved beneficial as interest rates fell and
prepayments continued. During the fourth quarter, the Fund had an opportunity to
purchase mortgage-backed bonds at distressed prices from hedge funds that were
forced to liquidate their holdings. This contributed positively to performance
as the Federal Reserve moved to lower interest rates, which helped restore
investor confidence, bring order to the markets, and increase demand for
mortgage-backed securities.
WHAT OTHER INCOME INVESTMENTS DID THE FUND HAVE?
The Fund's corporate bonds had suffered a severe setback in the fourth quarter
of 1997, and given the impact of the Asian crisis, corporate spreads widened
substantially in the first quarter of 1998. We increased the Fund's corporate
exposure in the second quarter, seeking high-quality domestic issues with
minimal Asian exposure. With low volatility and the calm before the storm, the
contribution to performance was minimal for the second quarter.
In the second half of 1998, the Fund focused primarily on what we believed to be
capable media companies, utilities, retailers, and regional banks. But with the
financial problems in Russia and Brazil and difficulties at major hedge funds,
the corporate bond market as a whole faced a substantial setback. New issuance
all but stopped in the third quarter, and despite strong growth in America's
gross domestic product, corporate bonds provided their worst performance in a
decade. Although the Fund was positioned in high-quality, highly liquid issues
and in some of the top-performing sectors, the overall movement of the corporate
market had a negative impact on performance.
The Fund also had relatively small allocations in agency securities,
asset-backed securities, CMOs, and variable floating-rate notes. All of these
securities contributed positively to performance over the course of the year,
but there were few if any remarkable events in any of these markets. Among
asset-backed securities, the Fund's concentration on high-quality, shorter-term
issues provided a measure of prepayment protection, which was a positive factor.
The Fund's asset-backed securities increased the portfolio's yield and added
value during the flight to quality.
DID THE FUND MAKE ANY DRAMATIC SHIFTS IN ITS BOND SECTOR ALLOCATIONS DURING THE
YEAR?
As we noted, adding corporate bonds in the second quarter did not work in the
Fund's favor. Over the course of the year, perhaps the largest shift was a
decrease in Treasury holdings and an increase in mortgage-backed securities.
That change accelerated in the fourth quarter, when hedge-fund liquidations made
it possible to purchase mortgage-backed securities at what we believed to be
very attractive prices. The Fund took profits in Treasuries to purchase these
securities, and both the purchases and sales had a positive impact on
performance.
12
<PAGE> 663
WHAT IS YOUR OUTLOOK GOING FORWARD?
We continue to view the markets as highly volatile and generally unpredictable.
So instead of trying to time our investments or dodge and weave with the market,
we will continue to select stocks we believe have strong growth characteristics,
solid performance records, and reasons to perform well in the future. In the
bond markets, we believe that unless a major market shift occurs, the Federal
Reserve is likely to remain on hold for a while, though it may move to ease
interest rates further as the new year unfolds.
We continue to believe that diversification will be important for investors and
view the mix of stocks and bonds in the MainStay Total Return Fund as an
excellent way to spread risk while seeking high total-return potential. As long
as volatility continues, we believe investors will seek stocks with a history of
steady growth, and we have positioned the Fund's stock investments accordingly.
At year end, we anticipated reduced supply and higher demand for mortgage-backed
securities and had overweighted these bonds in the income portion of the Fund.
Whatever happens, we 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
13
Past performance is no guarantee of future results.
<PAGE> 664
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 26.93% 16.37% 14.98% 14.33%
Class B 25.96% 15.84% 14.72% 14.09%
Class C 25.96% 15.84% 14.72% 14.09%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 19.95% 15.06% 14.33% 13.74%
Class B 20.96% 15.62% 14.72% 14.09%
Class C 24.96% 15.84% 14.72% 14.09%
</TABLE>
FUND LIPPER(+) RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 17 out of n/a n/a 29 out of
409 funds 230 funds
Class B 19 out of 24 out of 5 out of 9 out of
409 funds 162 funds 56 funds 47 funds
Class C n/a n/a n/a n/a
Average Lipper
balanced fund 13.48% 13.84% 12.97% 12.95%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $24.96 $0.3872 $1.7725
Class B $24.96 $0.2125 $1.7725
Class C $24.96 $0.1054 $1.7725
</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 load and 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%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of 1%. Performance figures for this class include the
historical performance of the Class B shares for periods from inception
(12/29/87) up to 8/31/98. Performance data for the two classes after this
date vary based on differences in their load.
(+) Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
averages listed above are not class specific. Life of Fund return is from
the period of the Class B shares' initial offering through 12/31/98. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 12/29/87; Class C shares on 9/1/98.
14
<PAGE> 665
Top 10 Equity Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Lucent Technologies Inc. $37,961,000
Cisco Systems, Inc. 37,238,695
Tyco International Ltd. 37,075,611
Sun Microsystems, Inc. 35,962,500
EMC Corp. 34,331,500
Safeway, Inc. 33,515,625
Lilly (Eli) & Co. 32,883,750
MCI WorldCom, Inc. 31,909,234
Microsoft Corp. 31,204,688
Schering-Plough Corp. 31,194,150
</TABLE>
Top 10 Bond Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
United States Treasury Note 5.625%, due 11/30/00 $34,951,595
Federal National Mortgage Association (Mortgage Pass-Through
Security) 6.50%, due 10/1/28 29,007,856
Federal National Mortgage Association (Mortgage Pass-Through
Security) 6.50%, due 9/1/28 25,813,362
United States Treasury Bond 6.375%, due 8/15/27 25,567,736
Government National Mortgage Association I (Mortgage
Pass-Through Security) 7.00%, due 9/15/28 24,726,382
United States Treasury Note 5.375%, due 6/30/03 17,154,430
Federal National Mortgage Association (Mortgage Pass-Through
Security) 6.50%, due 2/11/29 TBA 15,461,561
Federal National Mortgage Association (Mortgage Pass-Through
Security) 7.00%, due 12/1/12 14,464,699
Government National Mortgage Association II (Mortgage
Pass-Through Security) 7.50%, due 1/21/29 TBA 14,212,388
United States Treasury Bond 5.375%, due 11/15/27 12,721,640
</TABLE>
15
- -------
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.
<PAGE> 666
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
United States Treasury Notes, due 11/15/98 - 5/15/07 $634,973,050
Federal National Mortgage Association (Mortgage
Pass-Through Securities), due 1/15/03 - 10/1/28 482,210,207
United States Treasury Bonds, due 8/15/13 - 11/15/27 330,990,385
Government National Mortgage Association I and II
(Mortgage Pass-Through Securities), due
7/21/25 - 1/21/29 306,914,224
Merrill Lynch Premier Institutional Fund 43,377,381
Citigroup Inc. due 1/5/10 - 1/15/28 21,513,494
Colgate-Palmolive Co. 17,376,009
HBO & Co. 15,318,243
Disney (Walt) Co. (The), due 12/1/08 and Common Stock 14,271,465
Pfizer, Inc. 12,978,087
</TABLE>
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
United States Treasury Notes, due 11/15/98 - 05/15/07 $625,039,059
Federal National Mortgage Association (Mortgage
Pass-Through Securities), due 7/23/99 - 8/13/28 475,175,624
United States Treasury Bonds, due 8/15/13 - 11/15/27 345,574,606
Government National Mortgage Association I and II
(Mortgage Pass-Through Securities), due
12/15/17 - 11/18/28 259,708,616
Merrill Lynch Premier Institutional Fund 43,377,381
Citigroup Inc., due 11/15/08 - 1/15/28 and Common
Stock 25,220,438
California Infrastructure & Economic Development
Bank, due 6/25/02 - 9/25/08 18,440,207
MGIC Investment Corp. 16,471,775
Household International, Inc. 14,970,084
Computer Associates International, Inc., due 4/15/05
and Common Stock 14,844,416
</TABLE>
16
- -------
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.
<PAGE> 667
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
LONG-TERM BONDS (34.5%)+
ASSET-BACKED SECURITIES (4.2%)
AIRPLANE LEASES (1.3%)
AerCo Ltd.
Series 1A Class A1
5.7255, 7/15/23 (c)(f)...... $ 3,520,000 $ 3,495,114
Aircraft Lease Portfolio
Securitization Ltd.
Series 1996-1 Class CX
6.9125%, due 6/15/06
(e)(f)...................... 4,085,735 4,081,894
Airplanes Pass-Through Trust
Series 1 Class C
8.15%, due 3/15/19 (e)...... 7,458,561 7,876,240
Morgan Stanley Aircraft
Finance
Series 1A Class A1
5.7455%, due 3/15/23
(c)(f)...................... 5,190,000 5,160,936
--------------
20,614,184
--------------
AUTO LEASES (0.8%)
Premier Auto Trust
Series 1998-4 Class A3
5.69%, due 6/8/02 (e)....... 6,190,000 6,222,931
Toyota Auto Lease Trust
Series 1998-B Class A1
5.35%, due 7/25/02 (e)...... 6,005,000 6,001,337
--------------
12,224,268
--------------
CONSUMER LOANS (0.5%)
Green Tree Recreational
Equipment & Consumer Trust
Series 1997-C Class A1
6.49%, due 2/15/18 (e)...... 8,773,356 8,858,457
--------------
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 4,925,709
--------------
ELECTRIC UTILITIES (0.1%)
CMS Energy Corp.
Pass-Through Trust I
7.00%, due 1/15/05.......... 880,000 858,000
--------------
EQUIPMENT LOANS (0.1%)
Newcourt Equipment Trust
Securities
Series 1998-1 Class A3
5.24%, due 12/20/02 (e)..... 1,840,000 1,827,396
--------------
- --------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
STUDENT LOANS (0.3%)
Brazos Student Loan
Finance Corp.
Series 1997-A Class A1
5.75%, due 12/1/04 (e)(f)... $ 2,851,500 $ 2,842,090
PNC Student Loan Trust I
Series 1997-2 Class A8
5.3294%, due 1/25/08
(e)(f)...................... 2,808,791 2,802,612
--------------
5,644,702
--------------
TRANSPORTATION (0.3%)
Federal Express Corp.
Pass-Through Certificates
Series 98-1A Class A
6.72%, due 1/15/22.......... 5,205,000 5,382,751
--------------
UTILITY LOANS (0.5%)
Comed Transitional Funding
Trust
Series 1998-1 Class A7
5.74%, due 12/25/10 (e)..... 8,870,000 8,867,250
--------------
Total Asset-Backed Securities
(Cost $68,982,893).......... 69,202,717
--------------
CORPORATE BONDS (6.4%)
AEROSPACE (0.1%)
Newport News Shipbuilding Inc.
8.625%, due 12/1/06......... 755,000 797,469
Wyman-Gordon Co.
8.00%, 12/15/07............. 775,000 769,188
--------------
1,566,657
--------------
BANKS (0.4%)
Banc One Corp.
7.60%, due 5/1/07........... 2,260,000 2,536,308
Capital One Bank
Series BKNT
6.375%, due 2/15/03......... 4,310,000 4,255,478
Tokai Preferred Capital Co.
L.L.C
Series A
9.98%, due 12/29/49
11.0914%, beginning
6/30/08 (c)................. 515,000 442,900
--------------
7,234,686
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
<PAGE> 668
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
CASINOS (0.1%)
Harrahs Operating Co. Inc.
7.875%, due 12/15/05........ $ 400,000 $ 404,432
Players International Inc.
10.875%, due 4/15/05........ 705,000 756,112
--------------
1,160,544
--------------
CHEMICALS (0.1%)
Agriculture Minerals &
Chemicals
10.75%, due 9/30/03......... 260,000 263,900
ISP Holdings, Inc.
Series B
9.00%, due 10/15/03......... 500,000 526,250
Terra Industries Inc.
Series B
10.50%, due 6/15/05......... 470,000 484,100
--------------
1,274,250
--------------
CONSUMER SERVICES (0.3%)
Cendant Corp.
7.75%, due 12/1/03.......... 4,835,000 4,918,839
--------------
DRUGS (0.0%)(B)
ICN Pharmaceuticals, Inc.
8.75%, due 11/15/08 (c)..... 800,000 808,000
--------------
ELECTRIC UTILITIES (0.7%)
ESI Tractebel Acquisition
Corp.
7.99%, due 12/30/11......... 800,000 796,000
Niagara Mohawk Power Corp.
Series B
7.00%, due 10/1/00.......... 7,535,000 7,610,802
Public Service Electric & Gas
Co.
Series UU
6.75%, due 3/1/06........... 2,835,000 3,041,955
--------------
11,448,757
--------------
FINANCE (0.1%)
CB Richard Ellis Services,
Inc.
8.875%, due 6/1/06.......... 950,000 931,000
--------------
FINANCIAL SERVICES (0.6%)
Equitable Cos. Inc. (The)
7.00%, due 4/1/28........... 2,495,000 2,609,870
Household Finance Corp.
6.50%, due 11/15/08......... 2,725,000 2,834,000
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES
(CONTINUED)
Sears Roebuck Acceptance Corp.
Medium-Term Note
Series IV
6.36%, due 12/4/01.......... $ 3,500,000 $ 3,573,150
--------------
9,017,020
--------------
FOOD, BEVERAGE &
TOBACCO (0.6%)
Coca-Cola Enterprises Inc.
6.95%, due 11/15/26......... 1,910,000 2,048,150
Philip Morris Cos., Inc.
6.15%, due 3/15/00 (h)...... 6,445,000 6,495,013
Standard Commercial Corp.
8.875%, due 8/1/05.......... 525,000 504,000
--------------
9,047,163
--------------
HEALTHCARE (0.1%)
Columbia/HCA Healthcare
7.50%, due 11/15/2095....... 935,000 813,872
Health Care Properties
Investors Inc.
6.875%, due 6/8/05 (i)...... 420,000 395,587
Quorum Health Group, Inc.
8.75%, due 11/1/05.......... 330,000 315,150
--------------
1,524,609
--------------
HOSPITAL MANAGEMENT &
SERVICES (0.1%)
Tenet HealthCare Corp.
8.125%, due 12/1/08......... 1,000,000 1,025,000
--------------
HOUSING (0.1%)
Greystone Homes, Inc.
10.75%, due 3/1/04.......... 980,000 1,033,900
--------------
INDUSTRIAL (0.0%)(b)
Price Communications Wire
Inc.
9.125%, due 12/15/06 (c).... 740,000 747,400
--------------
INSURANCE (0.4%)
Conseco, Inc.
6.40%, due 6/15/01 (i)...... 6,100,000 5,893,454
--------------
MEDIA & ENTERTAINMENT (0.5%)
CSC Holdings, Inc.
7.625%, due 7/15/18......... 530,000 519,718
Disney (Walt) Co. (The)
Medium-Term Note
5.62%, due 12/1/08.......... 3,555,000 3,546,788
Time Warner, Inc.
8.375%, due 7/1/13.......... 3,934,000 4,723,042
--------------
8,789,548
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
<PAGE> 669
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
MINING (0.0%)(b)
Great Central Mines, Ltd.
8.875%, due 4/1/08 (l)...... $ 200,000 $ 200,000
--------------
OIL SERVICES (0.0%)(b)
R & B Falcon Corp
9.50%, due 12/15/08 (c)..... 675,000 675,000
--------------
PAPER & FOREST PRODUCTS (0.2%)
Georgia-Pacific Corp.
7.25%, due 6/1/28........... 2,255,000 2,285,104
Pope & Talbot Inc.
8.375%, due 6/1/13.......... 1,300,000 1,235,000
--------------
3,520,104
--------------
PUBLISHING (0.0%)(b)
World Color Press Inc.
8.375%, due 11/15/08 (c).... 695,000 695,000
--------------
REAL ESTATE (0.5%)
Crescent Real Estate Equities
Co.
7.50%, due 9/15/07.......... 850,000 790,500
EOP Operating LP
6.50%, due 6/15/04.......... 6,300,000 6,183,909
6.763%, due 6/15/07......... 400,000 394,252
Highwoods Realty LP
8.00%, due 12/1/03.......... 400,000 403,000
--------------
7,771,661
--------------
RETAIL (0.7%)
Albertson's, Inc.
Medium-Term Note
Series C
6.625%, due 6/1/28.......... 4,460,000 4,585,817
Dayton Hudson Corp.
5.875%, due 11/1/08......... 1,840,000 1,867,931
K Mart Corp.
8.25%, due 1/1/22........... 460,000 473,470
8.375%, due 7/1/22.......... 500,000 514,334
Wal-Mart Stores, Inc.
5.65%, due 2/1/00 (h)....... 3,885,000 3,902,405
--------------
11,343,957
--------------
SPECIALIZED SERVICES (0.2%)
WPP Finance (USA) Corp.
6.625%, due 7/15/05......... 2,690,000 2,676,604
--------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
STEEL, ALUMINUM & OTHER
METALS (0.1%)
Carpenter Technology Corp.
Medium-Term Note
Series B
6.275%, due 4/7/03.......... $ 1,890,000 $ 1,899,204
--------------
TELECOMMUNICATION
SERVICES (0.3%)
MCI WorldCom Inc.
6.125%, due 8/15/01......... 1,885,000 1,916,329
Sprint Capital Corp.
6.125%, due 11/15/08........ 3,590,000 3,668,262
--------------
5,584,591
--------------
TEXTILE & APPAREL (0.2%)
Tommy Hilfiger USA, Inc.
6.50%, due 6/1/03........... 3,995,000 3,942,186
--------------
Total Corporate Bonds
(Cost $103,853,249)......... 104,729,134
--------------
MORTGAGE-BACKED SECURITIES (1.9%)
COMMERCIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE
OBLIGATIONS) (1.8%)
DLJ Commercial Mortgage Corp.
Series 1998-CF2 Class A1B
6.24%, due 11/12/31 (e)..... 3,285,000 3,348,663
LB Commercial Conduit
Mortgage Trust
Series 1998-C4 Class A1B
6.21%, due 10/15/08 (e)..... 4,995,000 5,077,717
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C2 Class A1
7.2778%, due 6/15/21
(e)(f)...................... 4,541,276 4,622,928
Morgan Stanley Capital I
Series 1998-HF2 Class A1
6.01%, due 11/15/30 (e)..... 2,386,489 2,409,233
Mortgage Capital Funding,
Inc.
Series 1998-MC3 Class A2
6.337%, due 11/18/31 (e).... 3,840,000 3,912,615
Nationslink Funding Corp.
Series 1998-2 Class A1
6.001%, due 11/20/07 (e).... 1,800,552 1,814,056
SASCO Floating Rate
Commercial Mortgage Trust
Series 1998-C3A Class A1A
6.1744%, due 6/25/15
(c)(f)...................... 7,881,277 7,881,277
--------------
29,066,489
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
<PAGE> 670
MainStay Total Return Fund
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES
(CONTINUED)
RESIDENTIAL MORTGAGE LOANS
(COLLATERALIZED MORTGAGE
OBLIGATION) (0.1%)
Structured Asset Securities
Corp.
Series 1996-2 Class A1
7.00%, due 8/25/26 (e)...... $ 1,656,715 $ 1,658,968
--------------
Total Mortgage-Backed
Securities (Cost
$30,602,687)................ 30,725,457
--------------
U.S. GOVERNMENT & FEDERAL
AGENCIES (20.1%)
FEDERAL AGENCY
(COLLATERALIZED MORTGAGE
OBLIGATION) (0.2%)
FANNIE MAE-ACES
Series 1998-M1 Class A1
5.96%, due 5/25/07........ 2,774,918 2,798,338
--------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (0.7%)
5.75%, due 4/15/03 (g)...... 10,970,000 11,261,034
--------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION
(MORTGAGE PASS-THROUGH SECURITIES) (6.1%)
6.50%, due 5/1/03-10/1/28... 68,883,438 69,423,183
6.50%, due 2/11/29 TBA
(d)....................... 15,375,000 15,461,561
7.00%, due 12/1/12.......... 14,159,422 14,464,699
--------------
99,349,443
--------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION I
(MORTGAGE PASS-THROUGH
SECURITIES) (4.4%)
7.00%, due 7/15/25-9/15/28.. 44,598,401 45,629,961
7.50%, due 12/15/23-11/15/28 16,299,596 16,801,263
8.00%, due 11/15/28......... 9,661,318 10,032,700
--------------
72,463,924
--------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II
(MORTGAGE PASS-THROUGH SECURITY) (0.9%)
7.50%, due 1/21/29 TBA
(d)....................... 13,790,000 14,212,388
--------------
UNITED STATES TREASURY
BONDS (3.0%)
6.125%, due 11/15/27 (g).... 11,365,000 12,721,640
6.375%, due 8/15/27 (g)..... 22,245,000 25,567,736
7.625%, due 2/15/25......... 4,610,000 6,060,721
8.875%, due 8/15/17......... 3,605,000 5,077,967
--------------
49,428,064
--------------
UNITED STATES TREASURY
NOTES (4.8%)
5.25%, due 8/15/03.......... 2,415,000 2,476,510
5.375%, due 6/30/03 (g)..... 16,670,000 17,154,430
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
UNITED STATES TREASURY NOTES
(CONTINUED)
5.625%, due 11/30/00 (g).... $34,340,000 $ 34,951,595
6.25%, due 2/28/02 (g)...... 10,350,000 10,817,406
6.375%, due 3/31/01 (g)..... 4,350,000 4,509,036
7.75%, due 11/30/99 (g)..... 4,450,000 4,570,996
7.875%, due 11/15/99........ 4,560,000 4,682,527
--------------
79,162,500
--------------
Total U.S. Government &
Federal Agencies
(Cost $328,619,810)......... 328,675,691
--------------
YANKEE BONDS (1.9%)
CABLE (0.1%)
Le Groupe Videotron Ltee
10.625%, due 2/15/05........ 475,000 513,594
Rogers Cablesystem Ltd.
10.125%, due 9/1/12......... 240,000 264,000
--------------
777,594
--------------
CONSUMER FINANCIAL
SERVICES (0.4%)
Ford Capital Co. B.V.
9.50%, due 6/1/10........... 5,615,000 7,220,609
--------------
ELECTRIC UTILITIES (0.3%)
United Utilities, PLC
6.45%, due 4/1/08........... 4,295,000 4,420,801
--------------
FINANCE (0.2%)
Fairfax Financial Holdings
Ltd.
6.875%, due 4/15/08......... 3,970,000 3,920,057
--------------
INDUSTRIAL (0.0%)(B)
Stena Line AB
10.50%, due 12/15/05........ 700,000 722,750
--------------
MEDIA (0.1%)
Rogers Communications, Inc.
8.875%, due 7/15/07......... 1,060,000 1,091,800
--------------
MINING (0.0%)(B)
Glencore Nickel Property Ltd.
9.00%, due 12/1/14.......... 500,000 405,000
--------------
MULTI-INDUSTRIAL (0.3%)
Tyco International Group S.A.
7.00%, due 6/15/28.......... 5,295,000 5,476,830
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
<PAGE> 671
Portfolio of Investments (Continued)
<TABLE>
<CAPTION>
Principal
Amount Value
- --------------------------------------------------------------
<S> <C> <C>
YANKEE BONDS (CONTINUED)
OIL SERVICES (0.4%)
Petroleum Geo-Services ASA
7.125%, due 3/30/28......... $ 6,635,000 $ 6,266,094
--------------
TRANSPORTATION (0.1%)
Cenargo International PLC
9.75%, due 6/15/08 (c)...... 860,000 826,675
--------------
Total Yankee Bonds
(Cost $31,164,452).......... 31,128,210
--------------
Total Long-Term Bonds
(Cost $563,223,091)......... 564,461,209
--------------
Shares
-----------
COMMON STOCKS (64.3%)
BANKS (1.1%)
SouthTrust Corp. ............ 127,000 4,691,063
Wells Fargo & Co. ........... 347,400 13,874,287
--------------
18,565,350
--------------
CABLE TELEVISION (0.2%)
Univision Communications Inc.
Class A (a)................. 100,000 3,618,750
--------------
COMPUTERS & OFFICE EQUIPMENT
(5.2%)
EMC Corp. (a)(g)............. 403,900 34,331,500
HBO & Co. ................... 490,300 14,065,481
Sun Microsystems, Inc. (a)... 420,000 35,962,500
--------------
84,359,481
--------------
CONSUMER DURABLES (1.3%)
Harley-Davidson, Inc. (g).... 455,600 21,584,050
--------------
CONSUMER SERVICES (1.6%)
Cendant Corp. (a)(g)......... 794,786 15,150,608
Service Corp. International
(g)......................... 287,000 10,923,937
--------------
26,074,545
--------------
COSMETICS (1.1%)
Colgate-Palmolive Co. (g).... 193,700 17,989,888
--------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
DRUGS (7.2%)
Elan Corp. PLC ADR
(a)(g)(j)................... 213,000 $ 14,816,813
Lilly (Eli) & Co. ........... 370,000 32,883,750
Merck & Co., Inc. ........... 98,300 14,517,681
Monsanto Co. ................ 201,700 9,580,750
Pfizer, Inc. ................ 114,600 14,375,137
Schering-Plough Corp. ....... 564,600 31,194,150
--------------
117,368,281
--------------
FINANCIAL SERVICES (6.7%)
Associates First Capital
Corp.
Class A..................... 512,000 21,696,000
Citigroup Inc. .............. 283,797 14,047,951
Equifax Inc. (g)............. 273,000 9,333,187
Fannie Mae................... 167,900 12,424,600
Freddie Mac.................. 136,100 8,769,944
Providian Financial Corp. ... 198,750 14,906,250
SunAmerica Inc. ............. 350,300 28,418,087
--------------
109,596,019
--------------
HEALTH CARE (2.4%)
Cardinal Health, Inc.
(a)(g)...................... 253,200 19,211,550
HEALTHSOUTH Corp. (a)........ 560,400 8,651,175
IMS Health Inc. ............. 148,100 11,172,294
--------------
39,035,019
--------------
INDUSTRIAL (0.6%)
Illinois Tool Works Inc.
(g)......................... 168,800 10,655,500
--------------
INSURANCE (1.7%)
American International
Group, Inc. (g)............. 191,550 18,508,519
Conseco, Inc. (g)............ 323,400 9,883,913
--------------
28,392,432
--------------
MEDIA (1.4%)
Chancellor Media Corp.
(a)(g)...................... 252,000 12,064,500
Clear Channel
Communications, Inc.
(a)(g)...................... 213,900 11,657,550
--------------
23,722,050
--------------
MEDICAL EQUIPMENT (5.0%)
Guidant Corp. (g)............ 268,000 29,547,000
Johnson & Johnson............ 276,688 23,207,206
Medtronic, Inc. (g).......... 400,000 29,700,000
--------------
82,454,206
--------------
MULTI-INDUSTRIAL (2.3%)
Tyco International Ltd. ..... 491,475 37,075,611
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
<PAGE> 672
MainStay Total Return Fund
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
POLLUTION & RELATED (0.9%)
Waste Management, Inc. ...... 300,400 $ 14,006,150
--------------
RECREATION & ENTERTAINMENT (0.2%)
Fox Entertainment Group, Inc.
Class A..................... 130,700 3,292,006
--------------
RETAIL (12.0%)
Bed Bath & Beyond, Inc.
(a)(g)...................... 396,000 13,513,500
CVS Corp. ................... 396,400 21,802,000
Dollar General Corp. (g)..... 409,746 9,680,250
Fred Meyer, Inc. (a)......... 267,900 16,140,975
Home Depot, Inc. (The) (g)... 458,900 28,078,944
Kohl's Corp. (a)............. 442,100 27,161,519
Kroger Co. (The) (a)(g)...... 309,200 18,706,600
Safeway, Inc. (a)(g)......... 550,000 33,515,625
Staples, Inc. (a)............ 626,000 27,348,375
--------------
195,947,788
--------------
SOFTWARE (5.6%)
Computer Associates
International, Inc. ........ 206,325 8,794,603
Compuware Corp. (a).......... 397,900 31,085,937
Microsoft Corp. (a).......... 225,000 31,204,688
Oracle Corp. (a)............. 457,750 19,740,469
--------------
90,825,697
--------------
TECHNOLOGY (3.5%)
Cisco Systems, Inc. (a)...... 401,225 37,238,695
Intel Corp. ................. 167,500 19,859,219
--------------
57,097,914
--------------
TELECOMMUNICATION EQUIPMENT
(2.3%)
Lucent Technologies Inc. .... 345,100 37,961,000
--------------
TELECOMMUNICATION SERVICES
(2.0%)
MCI WorldCom, Inc. (a)....... 444,728 31,909,234
--------------
Total Common Stocks
(Cost $485,473,322)......... 1,051,530,971
--------------
PREFERRED STOCKS (0.0%)(b)
CELLULAR TELEPHONE (0.0%)(b)
Centaur Funding Corp.
Series B
9.08%, 4/21/20 (c).......... 270,000 280,800
--------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
PAPER & FOREST PRODUCTS
(0.0%)(b)
Paperboard Industries
International, Inc.
5.00%, Class A (c)(k)(m).... 40,000 $ 646,159
--------------
Total Preferred Stocks
(Cost $935,690)............. 926,959
--------------
<CAPTION>
Principal
Amount
-----------
<S> <C> <C>
SHORT-TERM INVESTMENTS (2.4%)
COMMERCIAL PAPER (2.4%)
American Express Credit Corp.
5.85%, due 1/8/99........... $ 4,920,000 4,914,395
Associates Corp. of North
America
5.08%, due 1/4/99........... 23,860,000 23,849,898
Salomon Smith Barney, Inc.
5.57%, due 1/20/99.......... 10,000,000 9,970,557
--------------
Total Short-Term Investments
(Cost $38,734,850).......... 38,734,850
--------------
Total Investments
(Cost $1,088,366,953) (n)... 101.2% 1,655,653,989(o)
Liabilities in Excess of
Cash and Other Assets....... (1.2) (20,285,500)
--------- --------------
Net Assets................... 100.0% $1,635,368,489
========= ==============
</TABLE>
- -------
(a) Non-income producing security.
(b) Less than one tenth of a percent.
(c) May be sold to institutional investors only.
(d) TBA: Securities purchased on a forward commitment basis with an approximate
principal amount and maturity date. The actual principal amount and
maturity date will be determined upon settlement.
(e) Segregated as collateral for TBA.
(f) Floating rate. Rate shown is the rate in effect at December 31, 1998.
(g) Represent securities out on loan or a portion which is out on loan.
(h) Put Bonds -- May be redeemed prior to maturity for full face value.
(i) MOPPRS: Mandatory Par Put Remarketed Securities -- Subject to mandatory
tender on remarketing dates.
(j) ADR-American Depository Receipt.
(k) Restricted security
(l) Euro-Dollar bond
(m) Canadian Security
(n) The cost for Federal income tax purposes is $1,089,454,196.
(o) At December 31, 1998 net unrealized appreciation was $566,199,793, 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 $575,920,626 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $9,720,833.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
22
<PAGE> 673
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$1,088,366,953)........................................... $1,655,653,989
Cash........................................................ 38,837
Collateral held for securities loaned, at value (Note 4).... 285,589,179
Receivables:
Investment securities sold................................ 6,326,728
Dividends and interest.................................... 5,097,204
Fund shares sold.......................................... 2,667,884
Other Assets................................................ 22,015
--------------
Total assets.......................................... 1,955,395,836
--------------
LIABILITIES:
Securities lending collateral, at value (Note 4)............ 285,589,179
Payables:
Investment securities purchased........................... 29,590,291
Fund shares redeemed...................................... 2,301,820
NYLIFE Distributors....................................... 1,237,034
MainStay Management....................................... 829,923
Transfer agent............................................ 272,852
Custodian................................................. 12,500
Trustees.................................................. 11,726
Accrued expenses............................................ 182,022
--------------
Total liabilities..................................... 320,027,347
--------------
Net assets.................................................. $1,635,368,489
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 61,129
Class B................................................... 593,881
Class C................................................... 144
Additional paid-in capital.................................. 1,058,097,865
Accumulated undistributed net investment income............. 33,190
Accumulated undistributed net realized gain on
investments............................................... 9,295,244
Net unrealized appreciation on investments.................. 567,287,036
--------------
Net assets.................................................. $1,635,368,489
==============
CLASS A
Net assets applicable to outstanding shares................. $ 152,597,816
==============
Shares of beneficial interest outstanding................... 6,112,943
==============
Net asset value per share outstanding....................... $ 24.96
Maximum sales charge (5.50% of offering price).............. 1.45
--------------
Maximum offering price per share outstanding................ $ 26.41
==============
CLASS B
Net assets applicable to outstanding shares................. $1,482,411,352
==============
Shares of beneficial interest outstanding................... 59,388,114
==============
Net asset value and offering price per share outstanding.... $ 24.96
==============
CLASS C
Net assets applicable to outstanding shares................. $ 359,321
==============
Shares of beneficial interest outstanding................... 14,393
==============
Net asset value and offering price per share outstanding.... $ 24.96
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
23
<PAGE> 674
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 4,205,820
Interest.................................................. 35,931,336
------------
Total income............................................ 40,137,156
------------
Expenses:
Distribution--Class B..................................... 9,745,543
Distribution--Class C..................................... 218
Management................................................ 9,133,099
Service--Class A.......................................... 319,120
Service--Class B.......................................... 3,248,275
Service--Class C.......................................... 77
Transfer agent............................................ 3,243,762
Shareholder communication................................. 299,446
Recordkeeping............................................. 169,320
Custodian................................................. 152,565
Registration.............................................. 108,905
Professional.............................................. 98,205
Trustees.................................................. 43,737
Miscellaneous............................................. 62,100
------------
Total expenses before waiver............................ 26,624,372
Fees waived by Manager...................................... (371,167)
------------
Net expenses............................................ 26,253,205
------------
Net investment income....................................... 13,883,951
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments............................ 105,931,200
Net change in unrealized appreciation on investments........ 218,222,952
------------
Net realized and unrealized gain on investments............. 324,154,152
------------
Net increase in net assets resulting from operations........ $338,038,103
============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $8,069.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
24
<PAGE> 675
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income..................................... $ 13,883,951 $ 17,020,528
Net realized gain on investments.......................... 105,931,200 109,727,203
Net change in unrealized appreciation on investments...... 218,222,952 69,750,696
-------------- --------------
Net increase in net assets resulting from operations...... 338,038,103 196,498,427
-------------- --------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (2,124,948) (1,703,308)
Class B................................................. (11,787,858) (14,973,462)
Class C................................................. (451) --
From net realized gain on investments:
Class A................................................. (10,013,091) (8,289,909)
Class B................................................. (98,019,575) (94,264,958)
Class C................................................. (22,717) --
-------------- --------------
Total dividends and distributions to shareholders..... (121,968,640) (119,231,637)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 47,181,125 40,593,664
Class B................................................. 192,230,492 149,185,825
Class C................................................. 333,029 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 11,361,962 9,901,054
Class B................................................. 107,387,116 107,180,050
Class C................................................. 23,067 --
-------------- --------------
358,516,791 306,860,593
Cost of shares redeemed:
Class A................................................. (33,765,899) (16,589,193)
Class B................................................. (211,986,554) (159,856,590)
-------------- --------------
Increase in net assets derived from capital share
transactions......................................... 112,764,338 130,414,810
-------------- --------------
Net increase in net assets............................ 328,833,801 207,681,600
NET ASSETS:
Beginning of year........................................... 1,306,534,688 1,098,853,088
-------------- --------------
End of year................................................. $1,635,368,489 $1,306,534,688
============== ==============
Accumulated undistributed net investment income at end of
year...................................................... $ 33,190 $ 56,945
============== ==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
25
<PAGE> 676
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
--------------------------------------------------
Year ended December 31,
--------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 21.44 $ 20.09 $ 18.53 $ 14.76
-------- -------- -------- --------
Net investment income....................................... 0.39 0.40 0.37 0.42
Net realized and unrealized gain (loss) on investments...... 5.29 3.19 2.07 3.77
-------- -------- -------- --------
Total from investment operations............................ 5.68 3.59 2.44 4.19
-------- -------- -------- --------
Less dividends and distributions:
From net investment income................................ (0.39) (0.40) (0.37) (0.42)
From net realized gain on investments..................... (1.77) (1.84) (0.51) --
-------- -------- -------- --------
Total dividends and distributions........................... (2.16) (2.24) (0.88) (0.42)
-------- -------- -------- --------
Net asset value at end of period............................ $ 24.96 $ 21.44 $ 20.09 $ 18.53
======== ======== ======== ========
Total investment return (a)................................. 26.93% 18.24% 13.22% 28.66%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 1.66% 1.86% 1.9% 2.5%
Net expenses............................................ 1.16% 1.15% 1.1% 1.1%
Expenses (before waiver)................................ 1.18% 1.15% 1.1% 1.1%
Portfolio turnover rate..................................... 169% 182% 173% 228%
Net assets at end of period (in 000's)...................... $152,598 $108,329 $ 68,975 $ 19,206
</TABLE>
- -------
<TABLE>
<C> <S>
The Fund changed its fiscal year end from August 31 to
* December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
Total return is calculated exclusive of sales charges and is
(a) not annualized.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
26
<PAGE> 677
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------------------------------- --------------
September 1 September 1**
Year ended December 31, through Year ended through
----------------------------------------------- December 31 August 31, December 31,
1998 1997 1996 1995 1994** 1994 1998
---------- ---------- ---------- -------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 21.45 $ 20.10 $ 18.53 $ 14.76 $ 15.28 $ 15.42 $21.70
---------- ---------- ---------- -------- -------- -------- ------
0.21 0.29 0.27 0.33 0.11 0.38 0.11
5.28 3.19 2.08 3.77 (0.52) (0.02) 5.03
---------- ---------- ---------- -------- -------- -------- ------
5.49 3.48 2.35 4.10 (0.41) 0.36 5.14
---------- ---------- ---------- -------- -------- -------- ------
(0.21) (0.29) (0.27) (0.33) (0.11) (0.37) (.11)
(1.77) (1.84) (0.51) -- -- (0.13) (1.77)
---------- ---------- ---------- -------- -------- -------- ------
(1.98) (2.13) (0.78) (0.33) (0.11) (0.50) (1.88)
---------- ---------- ---------- -------- -------- -------- ------
$ 24.96 $ 21.45 $ 20.10 $ 18.53 $ 14.76 $ 15.28 $24.96
========== ========== ========== ======== ======== ======== ======
25.96% 17.65% 12.73% 27.96% (2.65%) 2.41% 23.94%
0.91% 1.36% 1.4% 2.0% 2.5%+ 2.5% 0.91%+
1.91% 1.65% 1.6% 1.7% 1.7%+ 1.7% 1.91%+
1.93% 1.65% 1.6% 1.7% 1.7%+ 1.7% 1.93%+
169% 182% 173% 228% 74% 273% 169%
$1,482,411 $1,198,206 $1,029,878 $860,881 $648,725 $639,619 $ 359
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
27
<PAGE> 678
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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on December 29, 1987
and September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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-
28
<PAGE> 679
Notes to Financial Statements
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 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 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.
Restricted security held at December 31, 1998:
<TABLE>
<CAPTION>
Percent
Acquisition 12/31/98 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 $646,159 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.
29
<PAGE> 680
MainStay Total Return Fund
SECURITIES LENDING. The Fund may lend its securities to broker-dealers and
financial institutions. The loans are secured by collateral (cash or securities)
at least equal at all times to the market value of the securities loaned. The
Fund may bear the risk of delay in recovery of, or loss of rights in, the
securities loaned should the borrower of the securities fail financially. The
Fund receives compensation for lending its securities in the form of fees or it
retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund.
FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to the shareholders of the Fund within the
allowable time limits. Therefore, no Federal income tax provision is required. A
permanent book-tax difference of $5,551 has been reclassified from accumulated
undistributed net realized gain on investments to accumulated undistributed net
investment income due to the tax treatment of gains (losses) on paydowns and tax
treatment of foreign currency gains.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from generally
accepted accounting principles.
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method 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.
30
<PAGE> 681
Notes to Financial Statements (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 0.64% 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 year ended December 31, 1998 the Manager earned
$9,133,099 and waived $371,167 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 and Class C Plans, the Fund pays the Distributor a monthly fee,
which is an expense of the Class B and Class C shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B and Class C
shares. The Distribution Plan provides that the Class B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
31
<PAGE> 682
MainStay Total Return Fund
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $67,358 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $908,734
for the year ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $3,243,762.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or NYLIFE Distributors, are paid an annual
fee of $45,000, $2,000 for each Board meeting and $1,000 for each 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 $37,233 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$169,320 for the year ended December 31, 1998.
NOTE 4--PORTFOLIO SECURITIES LOANED:
At December 31, 1998, the Fund had portfolio securities with a fair market value
of $280,187,742 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.
Investments made with cash collateral at December 31, 1998:
<TABLE>
<CAPTION>
Principal
Amount Value
----------- ------------
<S> <C> <C>
SHORT-TERM COMMERCIAL PAPER
Associates First Capital Corp.
5.622%, due 4/5/99....................................... $30,000,000 $ 30,000,000
Bankers Trust NY Corp.
5.15%, due 2/3/99........................................ 43,000,000 42,966,374
</TABLE>
32
<PAGE> 683
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
Principal
Amount Value
----------- ------------
<S> <C> <C>
SHORT-TERM COMMERCIAL PAPER (Continued)
Certain Funding Corp.
5.527%, due 1/11/99...................................... $36,600,000 $ 36,421,067
Certain Funding Corp.
5.777%, due 1/20/99...................................... 25,000,000 24,884,201
Concord Minutemen
5.351%, due 1/19/99...................................... 30,000,000 29,604,000
Concord Minutemen
5.445%, due 1/27/99...................................... 20,000,000 19,796,378
Corporate Receivables Corp.
5.593%, due 1/22/99...................................... 25,000,000 24,807,292
Countrywide Home
5.053%, due 1/4/99....................................... 7,930,000 7,925,550
First Tennessee Bank
5.20%, due 1/26/99....................................... 10,000,000 10,000,000
Greenwich Funding Corp.
5.677%, due 1/20/99...................................... 12,230,000 12,172,417
Midland International PLC
5.15%, due 3/17/99....................................... 17,000,000 17,011,900
------------
255,589,179
------------
REPURCHASE AGREEMENT
Bear Stearns & Co., Inc.
5.59%, due 12/31/99
(Collateralized by $31,270,000
GS Mortgage Securities Corp. II
6.562%, due 4/13/31
Market Value $32,725,931)............................. 30,000,000 30,000,000
------------
$285,589,179
============
</TABLE>
Net income earned on securities lending amounted to $458,322, net of broker fees
and rebates, for the year ended December 31, 1998, which is included as interest
income on the Statement of Operations.
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of U.S. Government
securities, other than short-term securities, were $1,759,924 and $1,695,379,
respectively. Purchases and sales of securities, other than U.S. Government
securities, securities subject to repurchase transactions and short-term
securities, were $683,315 and $680,795, respectively.
33
<PAGE> 684
MainStay Total Return 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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
---------------------------- -----------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold................................. 2,028 8,196 13 1,913 6,882
Shares issued in reinvestment of dividends
and distributions......................... 470 4,431 1 471 5,106
------ ------ -- ----- ------
2,498 12,627 14 2,384 11,988
Shares redeemed............................. (1,437) (9,102) -- (766) (7,372)
------ ------ -- ----- ------
Net increase................................ 1,061 3,525 14 1,618 4,616
====== ====== == ===== ======
</TABLE>
- -------
* First offered on September 1, 1998.
34
<PAGE> 685
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Total Return Fund (one of
the portfolios constituting The MainStay Funds, hereafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 26, 1999
35
<PAGE> 686
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
36
<PAGE> 687
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
(4) "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use 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. An investment may not be made directly into the S&P 500
Index.
(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.
37
<PAGE> 688
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
38
<PAGE> 689
OFFICERS & TRUSTEES*
<TABLE>
<C> <S>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN15-02/99
[RECYCLE LOGO]
MAINSTAY TOTAL RETURN FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]
<PAGE> 690
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
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, & Class C Shares 4
Portfolio Management Discussion and
Analysis 5
Year-by-Year Performance 6
Diversification by Industry--Top 5 7
Portfolio Composition 10
Returns & Lipper Rankings 12
Top 10 Equity Holdings 14
10 Largest Purchases 14
10 Largest Sales 14
Portfolio of Investments 15
Financial Statements 17
Notes to Financial Statements 22
Report of Independent Accountants 27
The MainStay Funds 28
</TABLE>
<PAGE> 691
President's Letter
At the close of 1998, investors celebrated the fourth consecutive year that
domestic stocks in general returned more than 20%. Getting there, however, was
often like riding a roller-coaster. Just as the stock market climbed to new
highs in mid-July, preliminary corrections in various portions of the market
warned of an imminent decline. By the end of August, the U.S. stock market had
plummeted nearly 20%, turning earlier exhilaration into serious investor
concern. Remarkably, however, the market continued to charge ahead, again
reaching record levels in November, then dropping back slightly and ending the
year on a strongly positive note. With this continuing volatility, investors
were left simply nodding at daily point shifts that once might have provoked
alarm.
What was behind the market swings? Investors' attitudes shifted repeatedly as
the world's economic and political drama unfolded. Overseas, the focus moved
from the financial crisis in Asia to economic woes in Russia and Latin America.
Meanwhile, most European markets continued to advance in anticipation of
European Monetary Union. Here at home, most U.S. investors remained highly
optimistic as evidenced by the strong advances in large-capitalization growth
stocks and Internet and other technology issues. Over the course of the year,
however, market sentiment rose and fell with modest inflation, corporate
earnings disappointments, interest rate cuts, military strikes in Iraq, and
impeachment action against President Clinton.
BOND TRADE-OFFS AND MARKET LESSONS
As interest rates declined, most domestic bond investors enjoyed rising prices,
but found it increasingly difficult to secure attractive yields. In the third
quarter, falling stock prices caused a general rush to high-quality bonds, which
helped some investors, but reduced the demand for domestic and global high-yield
bonds. Interest rate cuts, which generally have a positive impact on municipal
bond prices, had only a minimal impact because of the large number of municipal
issuers seeking to refinance at lower rates.
If there's a lesson to be learned from 1998, it's the importance of being guided
by long-range objectives rather than short-term results.
MORE CHOICES FROM MAINSTAY
At MainStay, we added seven new Funds and four new subadvisors in 1998--to give
you more ways to diversify your investments and help you cope with volatile
markets. Today, MainStay offers an indexed Fund that seeks to track the market
and 21 actively managed Funds whose portfolio managers seek to provide
competitive returns over time. Each of our Funds pursues its objective with a
carefully defined investment process, including strict guidelines on
diversification and risk management.
The following report will tell you more about the specific events that affected
your MainStay investment in 1998, with commentary from the portfolio managers
who guided your Fund through this challenging market environment.
Sincerely,
/s/ Stephen C. Roussin
Stephen C. Roussin
January 1999
2
<PAGE> 692
MainStay Value Fund Highlights
1998 MARKET RECAP
- - In 1998, the U.S. stock market provided double-digit returns for the fourth
consecutive year, with advances dominated by large-capitalization growth
stocks in the technology and pharmaceutical sectors.
- - As the Asian financial crisis unfolded, low inflation, declining interest
rates, and falling commodity prices had a negative impact on economically
sensitive value sectors.
- - Amid extreme volatility in the equity markets, many investors virtually
ignored traditional value measures such as low price-to-earnings ratios and
instead sought refuge in the market's largest and most familiar names, with
little regard for valuation.
- - Although value stocks traditionally outperform in declining markets, investors
continued to focus on growth investments as many stock prices fell in the
third quarter of 1998.
- - A spirit of confidence by many investors was reflected in the high prices of
several Internet stocks with little history and virtually no earnings.
1998 FUND RECAP
- - For the 12 months ended 12/31/98, the MainStay Value Fund returned -7.41% for
Class A shares and -8.09% for both Class B and Class C shares,* excluding all
sales charges.
- - The Fund maintained its strict deep-value disciplines throughout 1998, despite
the preference by many investors for large-capitalization growth stocks.
- - The Fund had an overweighted position in electric utilities that provided
positive returns, but was hurt by energy investments, which suffered from
declining oil prices.
- - Purchasing financial services stocks after the market correction had a
positive impact on performance, while certain retail and sporting goods stock
purchases based on restructuring potential had a negative impact on the Fund
in 1998.
- - All share classes underperformed the average Lipper* growth & income fund,
which returned 15.61% for the year.
- -------
* See footnote and table on page 12 for more information on Lipper Inc.
Performance figures for Class C shares include the historical performance of
Class B shares from 1/1/98 through 8/31/98.
3
-
<PAGE> 693
$10,000 Invested in the
MainStay Value Fund versus
S&P 500 and Inflation
CLASS A SHARES SEC Returns: 1-year -12.50%, 5-year 10.79%, 10-year 13.82%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY VALUE FUND S&P 500* INFLATION(+)
------------------- -------- ------------
<S> <C> <C> <C>
12/88 9450 10000 10000
12/89 11470 13162 10464
12/90 10777 12754 11118
12/91 15223 16631 11449
12/92 18194 17897 11788
12/93 20659 19694 12111
12/94 20614 19954 12426
12/95 26538 27444 12749
12/96 32334 33740 13171
12/97 39410 44996 13395
12/98 36490 57855 13611
</TABLE>
CLASS B & CLASS C SHARES Class B SEC Returns: 1-year -12.69%, 5-year 11.25%,
10-year 14.19%
Class C SEC Returns: 1-year -9.01%, 5-year 11.51%,
10-year 14.19%
[LINE GRAPH]
<TABLE>
<CAPTION>
MAINSTAY VALUE FUND S&P 500* INFLATION(+)
------------------- -------- ------------
<S> <C> <C> <C>
12/88 10000 10000 10000
12/89 12138 13162 10464
12/90 11404 12754 11118
12/91 16109 16631 11449
12/92 19253 17897 11788
12/93 21862 19694 12111
12/94 21814 19954 12426
12/95 27924 27444 12749
12/96 33820 33740 13171
12/97 41019 44996 13395
12/98 37699 57855 13611
</TABLE>
---------------
Past performance is no guarantee of future results. The
Class A graph assumes an initial investment of $10,000 made on 12/31/88
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 12/31/88 through 12/31/94.
Performance data for the two classes vary after this date based on
differences in their load and expense structures. The Class B graph assumes
an initial investment of $10,000 made on 12/31/88. Returns shown do not
reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply to
the period shown. The Class C graph assumes an initial investment of $10,000
made on 12/31/88 and includes the historical performance of Class B shares
for periods 12/31/88 through 8/31/98. Performance data for the two classes
vary after this date based on differences in their load. Returns shown do not
reflect the 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. It is not possible to make an investment directly into an
index.
(+)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> 694
Portfolio Management Discussion and Analysis
As years go, 1998 was one of the most volatile in recent memory. Despite its
ups and downs, however, the S&P 500(*) Index closed the year with a 28.58%
gain, making 1998 the fourth year in a row domestic stocks in general have
returned more than 20%. About two-thirds of the market's gains, however,
occurred in the 25 largest issues. Severe corrections among
smaller-capitalization stocks were largely overshadowed by tremendous gains in
large technology and pharmaceutical stocks.
As the Asian crisis unfolded, low inflation, declining interest rates, and
falling commodity prices helped focus the attention of many investors on growth
stocks and had a negative impact on economically sensitive value sectors.
Extreme market volatility surrounding problems in Russia and Latin America
caused a general flight to quality, with many investors seeking a "safe haven"
in long-term U.S. government bonds and many of the stock market's largest and
most familiar names.
Throughout the year, many investors seemed to ignore traditional value measures,
preferring a "bigger is better" approach, regardless of cost or price-to-
earnings ratios. As a result, value stocks, which traditionally outperform in
declining markets, severely underperformed when the market tumbled almost 20% at
the end of August. Many smaller deep-value stocks experienced their worst
relative performance since the decade began.
In addition to ignoring traditional valuation criteria, many investors showed
enthusiasm for Internet stocks. Many of these issues had little history and
virtually no earnings, yet soared to record high prices, attracting a level of
attention that was reminiscent of biotechnology stocks in the early 1990s.
HOW DID THE MAINSTAY VALUE FUND PERFORM IN THIS MARKET ENVIRONMENT?
The MainStay Value Fund returned -7.41% for Class A shares and -8.09% for Class
B and Class C shares(+) for the year ended 12/31/98, excluding all sales
charges. All share classes underperformed the average Lipper(++) growth & income
fund, which returned 15.61% for the year.
WHY DID THE FUND UNDERPERFORM ITS PEERS?
There were a variety of reasons, but the most significant ones have to do with
our value disciplines and the category with which the Fund was compared. By
virtually every measure, 1998 was a year for large-capitalization growth stocks.
Our value disciplines usually lead us to invest in smaller-capitalization value
names, which were among the worst-performing stocks in 1998. Because of the
Fund's pure value orientation, it generally underperformed funds that were
growth oriented in 1998. As a result, the Fund underperformed its peer group
which includes growth and income funds that pursue growth disciplines as well as
funds that pursue value disciplines.
Yet even within the narrower, value stock universe, our deep-value approach
seemed to run contrary to the market's preference for large, familiar names,
regardless of cost or underlying value. We continued to seek stocks with low
price-to-earnings ratios and low price to cash flow ratios, even
VOLATILITY
- --------------------
Fluctuations in the price of securities or markets, up or down, over a short
period of time.
CORRECTION
- --------------------
A shift in security prices, bringing them more in line with historically
appropriate levels.
INFLATION
- --------------------
An increase in the cost of goods and services over time. As prices rise, the
purchasing power of the dollar declines.
COMMODITIES
- --------------------
Bulk goods, such as grains, precious metals, industrial metals, and foods traded
on a commodities exchange.
- -------
* See footnote on page 4 for more information on the S&P 500.
(+) Performance for Class C shares includes the historical performance of Class
B shares from 1/1/98 through 8/31/98.
(++) See footnote and table on page 12 for more information on Lipper Inc.
5
-
<PAGE> 695
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.
PRICE-TO-EARNINGS RATIO
- --------------------
The price of a stock divided by its earnings per share.
PRICE TO CASH FLOW RATIO
- --------------------
The relationship between the price of a stock and the amount of free cash flow
the company is able to generate.
YEAR-BY-YEAR PERFORMANCE
CLASS A SHARES
[BAR CHART]
<TABLE>
<CAPTION>
CLASS A SHARES
--------------
<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
12/98 -7.41
</TABLE>
Returns reflect the historical performance of the Class B shares for the
periods 12/86 through 12/94. See footnote 8 on page 12 for more information on
performance.
CLASS B & CLASS C SHARES
[BAR CHART]
<TABLE>
<CAPTION>
CLASS B AND CLASS C SHARES
--------------------------
<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
12/98 -8.09
</TABLE>
Class C share returns reflect the historical performance of the Class B shares
for periods 12/86 through 8/98. See footnote* on page 12 for more information
on performance.
though in some cases the market seemed to reward stocks with high prices and
high price-to-earnings ratios. Finally, our concentration in traditional value
sectors, such as energy and basic materials, contributed to the Fund's
underperformance as financial problems in Asia, Russia, and Latin America
unfolded, bringing lower prices for oil and other major commodities.
Fortunately, the declines in traditional deep-value sector stock prices helped
us add to many of the Fund's positions at what we believe to be very attractive
prices. So while the Fund underperformed its peers in 1998, we believe that the
Fund is positioned to lead its peers once investors recognize the attractiveness
of value stocks.
6
<PAGE> 696
DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/98
[PIE CHART]
<TABLE>
<CAPTION>
Financial-
Oil & Gas Services Insurance Banks Miscellaneous Electric Power Companies All Others
- ------------------ --------- ----- ------------- ------------------------ ----------
<S> <C> <C> <C> <C> <C>
14.0% 11.2% 7.7% 6.7% 6.5% 53.9%
</TABLE>
Actual percentages will vary over time.
WHAT WERE SOME OF THE DECISIONS THAT HELPED THE FUND IN 1998?
Although the Fund is generally underweighted in technology stocks, one of our
most successful decisions was to purchase Adaptec, a major supplier in hardware
and software to speed data to the user. We purchased the stock for the Fund in
the second quarter, and when the Asian crisis caused a correction in the
technology sector, the stock dropped about 50%. At that time, we were even more
convinced that the stock was undervalued, so we doubled the Fund's position when
it fell to $10. By the end of 1998, Adaptec stock was trading well above the
Fund's average purchase price for the stock, which provided a significant gain
for the portfolio. The story reflects exactly what we try to do in the Fund--buy
at low prices and profit as value is realized.
Another significant decision for the Fund involved its investment in Philip
Morris. The Fund has bought and sold the stock many times over the years, but we
made a significant purchase for the Fund in the second quarter after the bulk of
the negative publicity about tobacco litigation had already driven down the
stock price. At the time, Philip Morris was one of the worst-performing stocks,
but we recognized that even discounting what we believed to be the risk to
investors as a result of existing and potential lawsuits, the company's assets
were worth more than the stock's value. Apparently the market finally realized
what we saw in the stock, which recovered substantially and was one of the
Fund's best-performing stocks in 1998.
A third positive decision was to add to the Fund's holdings of electric
utilities in the first half of the year, with stocks like Texas Utilities, FPL
Group, OGE Energy, Niagara Mohawk, and Energy East. The Fund's utility stocks
performed very well during the market correction in the third quarter, actually
increasing in value as the stock market declined nearly 20%. Later in the year,
we sold some of the Fund's utility holdings to take profits. One significant
sale was FPL Group, a Florida utility, which the Fund sold at a market high,
with a positive impact on the Fund's performance.
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.
7
-
<PAGE> 697
RESTRUCTURING
- --------------------
Any action designed to improve the overall financial structure, labor relations,
or productivity of a company. Restructuring may include such steps as changing
management, investing in new plant and equipment, engaging in mergers and
acquisitions, or taking other action to increase output or lower costs.
We reinvested the proceeds of the Fund's utility stock sales in financial
services stocks, including SLM Holding, Washington Mutual, MGIC Investments, and
Conseco, all of which appeared to be very undervalued on a relative basis. All
of these stocks were trading in the range of 10 to 11 times earnings, when the
price of stocks in general was nearing 25 times earnings. Each of these
financial services stocks had a positive impact on the Fund for the year.
WERE THERE MAJOR DECISIONS THAT HAD A NEGATIVE IMPACT?
Yes there were. As the price of oil declined, we purchased stocks of several
midsized energy companies, including Unocal, Union Pacific Resources, Noble
Affiliates, and Oryx for the Fund, believing that they were attractively priced.
The Asian financial crisis reduced manufacturing output, which had a negative
impact on the demand for oil and contributed to declining oil prices. We
continued to purchase more energy stocks for the Fund at successively lower
prices throughout the year. In retrospect, we believe our purchasing decisions
were premature, and the overall effect was negative in 1998. As industry
fundamentals shift and Asian economies begin to stabilize, we believe the Fund's
strong commitment to energy stocks should be rewarded.
WHAT OTHER SIGNIFICANT PURCHASES DID YOU MAKE FOR THE FUND IN 1998?
In the third quarter of 1998, we increased the Fund's HMO stock exposure with
the initial purchase of United Healthcare stock at what we believed to be
bargain basement prices, considering excellent management, strong financial
characteristics, and stock repurchases by the company. We bought the stock for
the Fund in the mid-$30 range and it has been up ever since, so we believe both
the selection and timing were positive for the portfolio.
A stock we bought that didn't work out as well was Toys "R" Us. Although the
company met all of our deep-value disciplines, management of the company failed
to deliver on its promises. Earnings have been disappointing and a promised
restructuring has not been successful to date. Although the Fund still holds the
stock, we're watching the situation closely.
WHAT OTHER SECURITIES DID YOU SELL DURING THE YEAR?
One of the Fund's successful sales was its position in Ford Motor Company. We
purchased the stock for the Fund at an attractive price and sold it in July at a
substantial profit. At the time, we believed the auto sector was fully valued,
and the stock did decline after we sold it. So we believe the sale was positive
for the portfolio.
A less successful sale was the stock of Coltec Industries, an aerospace and
industrial manufacturing company. When we purchased the stock for the Fund, we
thought the company was an excellent value and might be a takeover target.
Although we were right on both counts, offers from two potential acquirers
failed to come close to our original cost. In December, since we no longer
believed that the management of the company was acting in the best interests of
its shareholders, we decided to cut the Fund's losses by selling the shares.
This had a negative impact on the Fund's performance.
8
<PAGE> 698
On a more positive note, the Fund sold two deep-value stocks, Lexmark (a laser
printer company) and Allegiance (a health care provider), when they reached the
Fund's target values. The Fund sold Lexmark in the third quarter for a 69% gain
and Allegiance in July for a gain of 50%. These were two of the best performers
in the portfolio, and although both stocks rose after the Fund sold them, they
performed more like growth stocks than value candidates and were no longer
appropriate holdings for the Fund's portfolio.
WERE THERE OTHER SIGNIFICANT SALES DURING THE YEAR?
Yes, we sold the Fund's position in Tenneco, an automotive parts and packaging
company, as part of our decision to cut back on economically sensitive sectors.
This was a positive move for the portfolio as these sectors generally performed
poorly, even though the Fund took a small loss on the stock. In September, the
Fund sold its holdings in Crown Cork & Seal, a paper, glass, and plastic
container company that was suffering from its exposure to Asia and South
America. The company had lowered its earnings forecasts earlier in the year, and
the Fund sold based on fears that the company would do so again. Although the
Fund sold at a loss, the stock has continued to underperform.
The Fund also sold its position in American Airlines, which was positive not
only because the Fund made a profit, but also because the price fell after we
sold it. In the fourth quarter, the Fund sold its position in Columbia/HCA, a
health care provider that was suffering from continued disappointing earnings
and the inability to effectively restructure its operations. The stock was sold
at a loss and has continued to underperform.
The Fund also sold its position in Georgia Gulf, a commodity chemicals company
and Goodyear, the tire and rubber products company, because of their Asian
exposure. Both stocks had a negative impact on performance.
BESIDES LEXMARK AND ALLEGIANCE, WHAT WERE THE FUND'S BEST-PERFORMING STOCKS?
We already mentioned that the Fund sold Ford shares at a substantial profit,
which made it the Fund's third-best performer. The Fund also profited from the
sale of its holdings in Echlin, an auto parts company, whose stock advanced
dramatically when the company was acquired by Dana Corporation, one of the
world's largest suppliers of automotive parts.
The Fund also earned a 49% return on US West, as it benefited from the
reappraisal of the telecommunications group. Finally, the Fund's investment in
the insurance giant CIGNA provided a 37%(sec.) return, which contributed
positively to the Fund's overall performance.
WHAT ABOUT NEGATIVE PERFORMERS?
In a difficult market for value stocks, the Fund had more losers than winners.
Perhaps the worst cases were two stocks that the Fund purchased on their
restructuring potential. One was Venator, formerly known as Woolworth. We
believe the name change confused the market, and the company shifted into
athletic footwear, which is primarily manufactured in the Far East, when the
Asian market collapsed. The ensuing earnings disappointment was poorly received
by investors, and Venator stock lost over half of its value in 1998.
- -------
(sec.) Return reflects performance for the one-year period ended
12/31/98.
9
-
<PAGE> 699
Another failed restructuring candidate was Callaway Golf, a manufacturer of golf
equipment, that simply failed to perform up to our expectations. The stock was
purchased at a very cheap relative price, but continued to decline throughout
the year as Asian conditions worsened.
Union Pacific Resources is a leveraged oil company whose stock the Fund bought
too early. The price declined 50% over the course of the year, and we have added
to the Fund's position, believing the market will see the company's value when
oil prices begin to stabilize.
Finally, Northwest Airlines, which is the principal air link between the United
States and the Far East, had a dismal year because the Asian crisis hurt its
sales and a labor strike reduced its profits. The Fund continues to hold the
stock, believing its long-term potential will be realized as Asia stabilizes and
the strike fades from recent memory.
AT YEAR END, WHERE WAS THE FUND OVERWEIGHTED AND UNDERWEIGHTED?
As of 12/31/98, the Fund was overweighted in financial services, energy,
electric utilities, basic materials, and HMOs. We believe that the disparity
between the prices of these stocks and their earnings potential gives them
better prospects than the market as a whole. Since stocks in technology,
pharmaceuticals, and consumer staples tend to have high prices and high
price-to-earnings ratios, they don't fit our value disciplines and were
underweighted in the Fund's investment portfolio at the end of 1998. The Fund
has not participated in the rise of Internet stocks, since they represent the
exact opposite of what we look for in long-range investments.
WHAT IS YOUR OUTLOOK FOR VALUE STOCKS?
In 1998, the Federal Reserve Board Chairman described the stock market's
performance as "irrational exuberance." When investors seem to ignore basic
fundamentals such as the relationships between price, company worth, cash flow,
and earnings, we tend to agree with his assessment. Ultimately, however, we
believe many investors will have to ask themselves if what they're buying is
worth the cost. At that point, we believe value stocks will once again become
PORTFOLIO COMPOSITION AS OF 12/31/98
[PIE CHART]
Common Stock 98.3%
Cash Equivalents &
Other Assets, less
Liabilities 1.4%
Preferred Stock 0.3%
Actual percentages will vary over time.
10
- -
<PAGE> 700
desirable investments and that the Fund's deep-value portfolio may provide
attractive returns.
We believe we have already seen the beginnings of a global recession, with
problems throughout Asia, Russia, and Latin America. We have already seen some
stabilization in Asia and may see improvements in Latin America over time. We
believe that as signs of economic strength return, more investors will begin to
focus on stocks which represent value over time. It is important to remember
that value stocks have traditionally outperformed growth stocks over full market
cycles. Whatever changes the markets may bring, the Fund will continue to seek
to realize maximum long-term total return from a combination of capital growth
and income.
Denis Laplaige
Portfolio Manager
MacKay Shields Financial Corporation
Past performance is
no guarantee of
future results.
11
-
<PAGE> 701
Returns & Lipper Rankings as of 12/31/98
FUND AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A -7.41% 12.05% 14.47% 11.45%
Class B -8.09% 11.51% 14.19% 11.24%
Class C -8.09% 11.51% 14.19% 11.24%
</TABLE>
FUND SEC RETURNS*
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A -12.50% 10.79% 13.82% 10.95%
Class B -12.69% 11.25% 14.19% 11.24%
Class C -9.01% 11.51% 14.19% 11.24%
</TABLE>
FUND LIPPER+ RANKINGS & LIPPER CATEGORY RETURNS AS OF 12/31/98
<TABLE>
<CAPTION>
LIFE OF FUND
1 YEAR 5 YEARS 10 YEARS THROUGH 12/31/98
<S> <C> <C> <C> <C>
Class A 750 out of n/a n/a 370 out of
768 funds 387 funds
Class B 754 out of 303 out of 116 out of 100 out of
768 funds 310 funds 148 funds 112 funds
Class C n/a n/a n/a n/a
Average Lipper
growth &
income fund 15.61% 18.35% 15.53% 13.53%
</TABLE>
FUND PER SHARE NET ASSET VALUES & DISTRIBUTIONS FOR THE PERIOD ENDED 12/31/98
<TABLE>
<CAPTION>
NAV 12/31/98 INCOME CAPITAL GAINS
<S> <C> <C> <C>
Class A $17.16 $0.2270 $2.6774
Class B $17.15 $0.0643 $2.6774
Class C $17.15 $0.0330 $2.6774
</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 load and 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%. Class C shares, first offered to
the public on 9/1/98, are sold with no initial sales charge, but are
subject to a CDSC of 1% if redeemed within one year of purchase and an
annual 12b-1 fee of 1%. Performance figures for this class include the
historical performance of the Class B shares for periods from inception
(5/1/86) up to 8/31/98. Performance data for the two classes after this
date vary based on differences in their load.
12
- -
<PAGE> 702
(+) Lipper Inc. is an independent monitor of mutual fund performance. Its
rankings are based on total returns with capital gains and dividends
reinvested. Results do not reflect any deduction of sales charges. Lipper
averages listed above are not class specific. Life of fund return is from
the period of the Class B shares' initial offering through 12/31/98. The
Fund's Class A shares were first offered to the public on 1/3/95; Class B
shares on 5/1/86; Class C shares on 9/1/98.
13
-
<PAGE> 703
- -------
This breakdown is provided for informational purposes only. The Fund's
holdings may change daily. All purchases and sales are aggregated by issuer. A
shareholder owns shares of the Fund but does not own a direct interest in any of
the specific securities listed. Short-term securities are excluded. See
Portfolio of Investments for specific type of security held.
Top 10 Equity Holdings as of 12/31/98
<TABLE>
<CAPTION>
HOLDING AMOUNT
<S> <C>
Philip Morris Cos. $43,348,910
US West Inc. 41,683,125
Texas Utilities Co. 35,711,269
Washington Mutual, Inc. 35,701,494
Citigroup Inc. 32,258,160
Allstate Corp. (The) 31,119,390
CIGNA Corp. 29,494,719
Bank One Corp. 29,258,659
SLM Holding Corp. 28,560,000
Tosco Corp. 26,910,000
</TABLE>
10 Largest Purchases for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF PURCHASE
<S> <C>
Union Pacific Resources Group Inc., 6.25% Common
Stock and Preferred Stock $47,918,555
Texas Utilities Co. 41,751,713
Browning-Ferris Industries Inc. 31,600,131
Washington Mutual, Inc. 31,366,700
US West Inc. 30,628,168
Oryx Energy Co. 30,431,434
Tosco Corp. 29,568,284
Raychem Corp. 28,318,351
Reynolds Metals Co. 28,054,237
Conseco, Inc. 27,850,914
</TABLE>
10 Largest Sales for the year ended 12/31/98
<TABLE>
<CAPTION>
SECURITY AMOUNT OF SALE
<S> <C>
Ford Motor Co. $40,450,464
FPL Group, Inc. 38,186,835
AT&T Corp. 36,737,315
Lexmark International Group, Inc. Class A 33,689,417
PG&E Corp. 31,938,164
Central & South West Corp. 31,796,871
Georgia-Pacific Corp. and Timber Group 28,177,255
Allegiance Corp. 26,462,074
Williams Cos., Inc. 25,696,170
Xerox Corp. 25,583,423
</TABLE>
14
- -
<PAGE> 704
Portfolio of Investments December 31, 1998
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.3%)+
AEROSPACE/DEFENSE (2.7%)
Northrop Grumman Corp. ....... 265,000 $ 19,378,125
Raytheon Co. Class A.......... 300,000 15,506,250
--------------
34,884,375
--------------
AIRLINES (1.3%)
Northwest Airlines Corp. Class
A (a)........................ 652,400 16,676,975
--------------
ALUMINUM (1.9%)
Reynolds Metals Co. .......... 468,000 24,657,750
--------------
AUTO PARTS & EQUIPMENT (1.7%)
LucasVarity PLC ADR (b)....... 661,400 22,156,900
--------------
BANKS (7.7%)
Bank One Corp. ............... 572,997 29,258,659
BankAmerica Corp. ............ 392,986 23,628,283
Washington Federal, Inc. ..... 397,200 10,600,275
Washington Mutual, Inc. ...... 934,900 35,701,494
--------------
99,188,711
--------------
BEVERAGES--ALCOHOLIC (2.0%)
Anheuser-Busch Cos., Inc. .... 386,500 25,364,062
--------------
BUILDING MATERIALS (0.4%)
Sherwin-Williams Co. (The).... 182,300 5,355,062
--------------
CHEMICALS (2.1%)
Agrium Inc. .................. 1,064,500 9,247,844
IMC Global Inc. .............. 855,910 18,295,076
--------------
27,542,920
--------------
COMPUTERS--NETWORKING (2.0%)
Adaptec Inc. (a).............. 1,456,700 25,583,294
--------------
CONSUMER FINANCE (0.6%)
Countrywide Credit
Industries, Inc. ............ 147,400 7,397,637
--------------
CONTAINERS--METAL & GLASS (1.7%)
Owens-Illinois Inc. (a)....... 715,510 21,912,494
--------------
</TABLE>
- --------------------------------------------------------------
+ Percentages indicated are based on Fund net assets.
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
ELECTRIC POWER COMPANIES (6.5%)
Energy East Corp. ............ 277,200 $ 15,661,800
Illinova Corp. ............... 628,200 15,705,000
Niagara Mohawk Power Corp.
(a).......................... 1,028,100 16,578,112
Texas Utilities Co. .......... 764,900 35,711,269
--------------
83,656,181
--------------
ELECTRONICS (1.5%)
Raychem Corp. ................ 604,300 19,526,444
--------------
FINANCIAL--MISCELLANEOUS (6.7%)
Citigroup Inc. ............... 651,680 32,258,160
Equitable Cos., Inc. (The).... 451,250 26,116,094
SLM Holding Corp. ............ 595,000 28,560,000
--------------
86,934,254
--------------
HEALTH CARE (1.9%)
United HealthCare Corp. ...... 567,000 24,416,438
--------------
HEAVY DUTY TRUCKS & PARTS (1.8%)
Dana Corp. ................... 561,510 22,951,721
--------------
HOTEL/MOTEL (1.7%)
Harrah's Entertainment, Inc.
(a).......................... 1,398,100 21,932,694
--------------
INSURANCE (11.2%)
Allstate Corp. (The).......... 805,680 31,119,390
Chubb Corp. .................. 328,945 21,340,307
CIGNA Corp. .................. 381,500 29,494,719
Conseco, Inc. ................ 842,600 25,751,962
MGIC Investment Corp. ........ 487,100 19,392,669
Transamerica Corp. ........... 146,260 16,893,030
--------------
143,992,077
--------------
LEISURE TIME (0.3%)
Callaway Golf Co. ............ 369,600 3,788,400
--------------
MACHINERY--DIVERSIFIED (2.0%)
American Standard Cos. Inc.
(a).......................... 721,200 25,918,125
--------------
METALS--MINING (0.5%)
Phelps Dodge Corp. ........... 116,900 5,947,288
--------------
NATURAL GAS DISTRIBUTORS & PIPELINES (4.6%)
Coastal Corp. (The)........... 714,900 24,976,819
Consolidated Natural Gas
Co. ......................... 381,000 20,574,000
Keyspan Energy Corp. ......... 453,728 14,065,568
--------------
59,616,387
--------------
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
15
-
<PAGE> 705
MainStay Value Fund
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL & GAS SERVICES (14.0%)
Apache Corp. ................. 689,100 $ 17,442,844
Noble Affiliates, Inc. ....... 633,000 15,587,625
Occidental Petroleum Corp. ... 981,028 16,554,848
Ocean Energy, Inc. (a)........ 1,950,000 12,309,375
Oryx Energy Co. (a)........... 1,250,300 16,800,906
Santa Fe Energy Resources,
Inc. (a)..................... 1,454,500 10,726,937
Texaco Inc. .................. 225,600 11,928,600
Tosco Corp. .................. 1,040,000 26,910,000
Union Pacific Resources
Group Inc. .................. 1,975,500 17,902,969
Unocal Corp. ................. 700,850 20,456,059
Valero Energy Corp. .......... 649,700 13,806,125
--------------
180,426,288
--------------
PAPER & FOREST PRODUCTS (1.1%)
Bowater Inc. ................. 342,035 14,173,075
--------------
POLLUTION CONTROL (1.8%)
Browning-Ferris Industries
Inc. ........................ 801,700 22,798,344
--------------
RAILROADS (1.1%)
CSX Corp. .................... 348,875 14,478,313
--------------
RETAIL (3.4%)
Federated Department Stores,
Inc. (a)..................... 546,870 23,823,024
Payless ShoeSource, Inc.
(a).......................... 163,500 7,745,813
Penney (J.C.) Co., Inc. ...... 106,500 4,992,188
Venator Group, Inc. (a)....... 1,142,300 7,353,556
--------------
43,914,581
--------------
STEEL (0.7%)
UCAR International Inc. (a)... 525,000 9,351,562
--------------
TELECOMMUNICATIONS--LONG DISTANCE (1.9%)
AT&T Corp. ................... 324,680 24,432,170
--------------
TELEPHONE (4.4%)
Nippon Telegraph & Telephone
Corp. ADR (b)(c)............. 410,700 15,401,250
US West Inc. ................. 645,000 41,683,125
--------------
57,084,375
--------------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
TEXTILES--APPAREL MANUFACTURERS (2.2%)
Jones Apparel Group, Inc.
(a).......................... 715,900 $ 15,794,544
Liz Claiborne, Inc. .......... 413,800 13,060,562
--------------
28,855,106
--------------
TOBACCO (4.9%)
Philip Morris Cos. ........... 810,260 43,348,910
RJR Nabisco Holdings Corp. ... 662,880 19,679,250
--------------
63,028,160
--------------
Total Common Stocks
(Cost $1,287,166,367)........ 1,267,942,163
--------------
PREFERRED STOCK (0.3%)
RAILROADS (0.3%)
Union Pacific Capital Trust
$6.25 (d).................... 90,000 4,072,500
--------------
Total Preferred Stock
(Cost $4,500,000)............ 4,072,500
--------------
Principal
Amount
- --------------------------------------------------------------
SHORT-TERM INVESTMENT (0.6%)
COMMERCIAL PAPER (0.6%)
Associates Corp. of North
America
5.08%, due 1/4/99............ $6,865,000 6,862,093
--------------
Total Short-Term Investment
(Cost $6,862,093)............ 6,862,093
--------------
Total Investments
(Cost $1,298,528,460) (e).... 99.2% 1,278,876,756(f)
Cash and Other Assets,
Less Liabilities............. 0.8 10,682,411
----- -----------
Net Assets.................... 100.0% $1,289,559,167
===== ==============
</TABLE>
- -------
(a) Non-income producing security.
(b) ADR-American Depository Receipt.
(c) Segregated as collateral for forward foreign currency contract.
(d) May be sold to institutional investors only.
(e) The cost for Federal income tax purposes is $1,300,688,148.
(f) At December 31, 1998, net unrealized depreciation was $21,811,392, 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 $141,031,981 and aggregate gross unrealized
depreciation for all investments on which there was an excess of cost over
market value of $162,843,373.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
16
- -
<PAGE> 706
Statement of Assets and Liabilities as of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investment in securities, at value (identified cost
$1,298,528,460)........................................... $1,278,876,756
Cash........................................................ 4,966
Receivables:
Investment securities sold................................ 10,713,167
Fund shares sold.......................................... 2,595,665
Dividends and interest.................................... 3,077,211
--------------
Total assets........................................ 1,295,267,765
--------------
LIABILITIES:
Payables:
Fund shares redeemed...................................... 3,262,835
NYLIFE Distributors....................................... 1,016,733
MainStay Management....................................... 633,343
Transfer agent............................................ 267,449
Custodian................................................. 12,625
Trustees.................................................. 10,487
Accrued expenses............................................ 182,656
Unrealized depreciation on forward foreign currency
contract.................................................. 322,470
--------------
Total liabilities................................... 5,708,598
--------------
Net assets.................................................. $1,289,559,167
==============
COMPOSITION OF NET ASSETS:
Shares of beneficial interest outstanding (par value of $.01
per share) unlimited number of shares authorized:
Class A................................................... $ 66,979
Class B................................................... 684,773
Class C................................................... 47
Additional paid-in capital.................................. 1,302,724,413
Accumulated undistributed net investment income............. 35,686
Accumulated undistributed net realized gain on
investments............................................... 6,021,443
Net unrealized depreciation on investments.................. (19,651,704)
Net unrealized depreciation on forward foreign currency
contract.................................................. (322,470)
--------------
Net assets.................................................. $1,289,559,167
==============
CLASS A
Net assets applicable to outstanding shares................. $ 114,925,257
==============
Shares of beneficial interest outstanding................... 6,697,933
==============
Net asset value per share outstanding....................... $ 17.16
Maximum sales charge (5.50% of offering price).............. 1.00
--------------
Maximum offering price per share outstanding................ $ 18.16
==============
CLASS B
Net assets applicable to outstanding shares................. $1,174,553,683
==============
Shares of beneficial interest outstanding................... 68,477,265
==============
Net asset value and offering price per share outstanding.... $ 17.15
==============
CLASS C
Net assets applicable to outstanding shares................. $ 80,227
==============
Shares of beneficial interest outstanding................... 4,677
==============
Net asset value and offering price per share outstanding.... $ 17.15
==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
17
-
<PAGE> 707
Statement of Operations for the year ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends (a)............................................. $ 27,858,592
Interest.................................................. 3,972,872
-------------
Total income............................................ 31,831,464
-------------
Expenses:
Distribution--Class B..................................... 10,241,200
Distribution--Class C..................................... 126
Management................................................ 8,378,478
Service--Class A.......................................... 330,584
Service--Class B.......................................... 3,413,612
Service--Class C.......................................... 44
Transfer agent............................................ 3,252,067
Shareholder communication................................. 339,982
Recordkeeping............................................. 176,604
Custodian................................................. 142,473
Registration.............................................. 124,098
Professional.............................................. 98,900
Trustees.................................................. 44,775
Miscellaneous............................................. 56,850
-------------
Total expenses.......................................... 26,599,793
-------------
Net investment income....................................... 5,231,671
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTION:
Net realized gain on investments............................ 145,578,486
Net change in unrealized appreciation on investments:
Security transactions..................................... (275,500,485)
Forward foreign currency transaction...................... (322,470)
-------------
Net unrealized loss on investments and forward foreign
currency transaction...................................... (275,822,955)
-------------
Net realized and unrealized loss on investments............. (130,244,469)
-------------
Net decrease in net assets resulting from operations........ $(125,012,798)
=============
</TABLE>
- -------
(a) Dividends recorded net of foreign withholding taxes of $171,683.
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
18
- -
<PAGE> 708
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income..................................... $ 5,231,671 $ 9,591,228
Net realized gain on investments.......................... 145,578,486 181,024,677
Net change in unrealized appreciation on investments...... (275,500,485) 61,934,892
Net change in unrealized depreciation on forward foreign
currency transaction.................................... (322,470) --
-------------- --------------
Net increase (decrease) in net assets resulting from
operations.............................................. (125,012,798) 252,550,797
-------------- --------------
Dividends and distributions to shareholders:
From net investment income:
Class A................................................. (1,398,114) (1,202,485)
Class B................................................. (4,044,247) (8,257,288)
Class C................................................. (99) --
From net realized gain on investments:
Class A................................................. (15,558,746) (13,228,344)
Class B................................................. (159,288,098) (152,902,098)
Class C................................................. (10,773) --
-------------- --------------
Total dividends and distributions to shareholders..... (180,300,077) (175,590,215)
-------------- --------------
Capital share transactions:
Net proceeds from sale of shares:
Class A................................................. 53,394,132 55,171,252
Class B................................................. 224,286,153 316,208,814
Class C................................................. 78,500 --
Net asset value of shares issued to shareholders in
reinvestment of dividends and distributions:
Class A................................................. 16,141,993 14,100,085
Class B................................................. 159,214,986 157,601,498
Class C................................................. 10,864 --
-------------- --------------
453,126,628 543,081,649
Cost of shares redeemed:
Class A................................................. (51,885,082) (23,231,392)
Class B................................................. (329,969,309) (165,777,574)
Class C................................................. (2) --
-------------- --------------
Increase in net assets derived from capital share
transactions......................................... 71,272,235 354,072,683
-------------- --------------
Net increase (decrease) in net assets................. (234,040,640) 431,033,265
NET ASSETS:
Beginning of year........................................... 1,523,599,807 1,092,566,542
-------------- --------------
End of year................................................. $1,289,559,167 $1,523,599,807
============== ==============
Accumulated undistributed net investment income at end of
year...................................................... $ 35,686 $ 246,475
============== ==============
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
19
-
<PAGE> 709
Financial Highlights selected per share data and ratios
<TABLE>
<CAPTION>
Class A
------------------------------------------------
Year ended December 31,
------------------------------------------------
1998 1997 1996 1995
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 21.76 $ 20.34 $ 18.25 $ 14.66
-------- -------- ------- -------
Net investment income....................................... 0.23 0.27 0.30 0.29
Net realized and unrealized gain (loss) on investments...... (1.92) 4.10 3.66 3.91
-------- -------- ------- -------
Total from investment operations............................ (1.69) 4.37 3.96 4.20
-------- -------- ------- -------
Less dividends and distributions:
From net investment income................................ (0.23) (0.27) (0.30) (0.29)
From net realized gain on investments..................... (2.68) (2.68) (1.57) (0.32)
-------- -------- ------- -------
Total dividends and distributions........................... (2.91) (2.95) (1.87) (0.61)
-------- -------- ------- -------
Net asset value at end of period............................ $ 17.16 $ 21.76 $ 20.34 $ 18.25
======== ======== ======= =======
Total investment return (a)................................. (7.41%) 21.88% 21.84% 28.74%
Ratios (to average net assets)/
Supplemental Data:
Net investment income................................... 1.03% 1.22% 1.6% 1.5%
Expenses................................................ 1.09% 1.11% 1.1% 1.2%
Portfolio turnover rate..................................... 83% 61% 47% 48%
Net assets at end of period (in 000's)...................... $114,925 $124,011 $73,259 $25,258
</TABLE>
- -------
<TABLE>
<S> <C>
* The Fund changed its fiscal year end from August 31 to
December 31.
** Class C shares were first offered on September 1, 1998.
+ Annualized.
(a) Total return is calculated exclusive of sales charges and is
not annualized.
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
20
- -
<PAGE> 710
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------------------------------- ---------------
September 1 September 1,**
Year ended December 31, through Year Ended through
----------------------------------------------- December 31, August 31, December 31,
1998 1997 1996 1995 1994* 1994 1998
---------- ---------- ---------- -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 21.74 $ 20.32 $ 18.25 $ 14.66 $ 16.30 $ 15.90 $18.16
---------- ---------- ---------- -------- -------- -------- ------
0.06 0.15 0.20 0.19 0.04 0.06 0.03
(1.91) 4.10 3.64 3.91 (1.03) 1.04 1.67
---------- ---------- ---------- -------- -------- -------- ------
(1.85) 4.25 3.84 4.10 (0.99) 1.10 1.70
---------- ---------- ---------- -------- -------- -------- ------
(0.06) (0.15) (.20) (0.19) (0.03) (0.06) (0.03)
(2.68) (2.68) (1.57) (0.32) (0.62) (0.64) (2.68)
---------- ---------- ---------- -------- -------- -------- ------
(2.74) (2.83) (1.77) (0.51) (0.65) (0.70) (2.71)
---------- ---------- ---------- -------- -------- -------- ------
$ 17.15 $ 21.74 $ 20.32 $ 18.25 $ 14.66 $ 16.30 $17.15
========== ========== ========== ======== ======== ======== ======
(8.09%) 21.29% 21.11% 28.01% (6.03%) 7.26% 9.88%
0.28% 0.70% 1.1% 0.9% 0.8%+ 0.5% 0.28%+
1.84% 1.63% 1.6% 1.8% 1.8%+ 1.9% 1.84%+
83% 61% 47% 48% 11% 53% 83%
$1,174,554 $1,399,589 $1,019,307 $708,840 $472,365 $449,789 $ 80
</TABLE>
The notes to the financial statements are an integral part of, and should be
read in conjunction with, the financial statements.
21
-
<PAGE> 711
MainStay Value Fund
NOTE 1--ORGANIZATION AND BUSINESS:
The MainStay Funds (the "Trust") was organized on January 9, 1986 as a
Massachusetts business trust. The Trust is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is comprised of 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 three 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 and Class C 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 of Class B shares and within one year of purchase of Class C shares.
Distribution of Class B shares and Class C shares commenced on May 1, 1986 and
September 1, 1998, respectively. Class A shares, Class B shares and Class C
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 and Class C 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
22
- -
<PAGE> 712
Notes to Financial Statements
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 the 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 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.
The use of forward currency contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets and
liabilities. The contract or notional amounts reflect the extent of the Fund's
involvement in these financial instruments. Risks arise from the possible
movements in the foreign exchange rates underlying these instruments. The
unrealized appreciation/depreciation on forward contracts reflects the Fund's
exposure at year end to credit loss in the event of a counterparty's failure to
perform its obligations.
Forward foreign currency contracts open at December 31, 1998:
<TABLE>
<CAPTION>
Contract Contract
Amount Amount Unrealized
Sold Purchased Depreciation
-------------- ----------- ------------
<S> <C> <C> <C>
Foreign Currency Sale Contract
Japanese Yen vs. U.S. Dollar, expiring 3/16/99.......... 1,722,381,500 yen $15,100,000 $ (322,470)
</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.
Investment income received by the Fund from foreign sources may be subject to
foreign income taxes withheld at the source.
23
-
<PAGE> 713
MainStay Value Fund
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are
recorded on the ex-dividend date. The Fund intends to declare and pay dividends
quarterly. Income dividends and capital gain distributions are determined in
accordance with federal income tax regulations which may differ from generally
accepted accounting principles.
SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security
transactions on the trade date. Realized gains and losses on security
transactions are determined using the identified cost method. Dividend income is
recognized on the ex-dividend date and interest income is accrued daily.
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 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 year ended December 31, 1998 the Manager earned $8,378,478.
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
24
- -
<PAGE> 714
Notes to Financial Statements (continued)
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 and Class C Plans, the Fund pays the
Distributor a monthly fee, which is an expense of the Class B and Class C shares
of the Fund, at the annual rate of 0.75% of the average daily net assets of the
Fund's Class B and Class C shares. The Distribution Plan provides that the Class
B and Class C 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 or Class C 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 the Distributor for
distribution of the Fund's shares and service activities.
SALES CHARGES. The Fund was advised by the Distributor that the amount of sales
charge retained on sales of Class A Fund shares was $90,483 for the year ended
December 31, 1998. The Fund was also advised that the Distributor retained
contingent deferred sales charges on redemptions of Class B shares of $1,412,491
for the year ended December 31, 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 accrued for the year ended December 31, 1998
amounted to $3,252,067.
TRUSTEES' FEES. Trustees, other than those affiliated with New York Life,
MacKay-Shields, MainStay Management or the NYLIFE Distributors, are paid an
annual fee of $45,000, $2,000 for each Board meeting and $1,000 for each
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 $40,365 for the year ended
December 31, 1998.
Fees for recordkeeping services provided to the Fund by the Manager amounted to
$176,604 for the year ended December 31, 1998.
NOTE 4--FEDERAL INCOME TAX:
The Fund intends to elect, to the extent provided by the regulations, to treat
$322,470 of qualifying capital losses that arose during the year as if they
arose on January 1, 1999.
25
-
<PAGE> 715
MainStay Value Fund
NOTE 5--PURCHASES AND SALES OF SECURITIES (IN 000'S):
During the year ended December 31, 1998, purchases and sales of securities,
other than U.S. Government securities, securities subject to repurchase
transactions and short-term securities, were $1,177,572 and $1,186,878,
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. The funds pay a
commitment fee, at an annual rate of 0.065% of the average commitment amount,
regardless of usage. Such commitment fees are allocated amongst the funds based
upon net assets and other factors. Interest on revolving credit loans is charged
based upon the Federal Funds Advances rate. There were no borrowings on the line
of credit at December 31, 1998.
NOTE 7--CAPITAL SHARE TRANSACTIONS (IN 000'S):
<TABLE>
<CAPTION>
Period ended Year ended
December 31, 1998 December 31, 1997
---------------------------- ------------------
Class A Class B Class C* Class A Class B
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Shares sold................................... 2,517 10,295 4 2,485 14,271
Shares issued in reinvestment of dividends and
distributions............................... 959 9,561 1 661 7,405
------ ------- -- ------ ------
3,476 19,856 5 3,146 21,676
Shares redeemed............................... (2,478) (15,747) -- (1,049) (7,460)
------ ------- -- ------ ------
Net increase.................................. 998 4,109 5 2,097 14,216
====== ======= == ====== ======
</TABLE>
- -------
* First offered on September 1, 1998.
26
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<PAGE> 716
Report of Independent Accountants
To the Board of Trustees and Shareholders of
The MainStay Funds
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MainStay Value Fund (one of the
portfolios constituting The MainStay Funds, hereafter referred to as the "Fund")
at December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 19, 1999
27
-
<PAGE> 717
The MainStay(R) Funds
AGGRESSIVE GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
SMALL CAP GROWTH FUND(1) Seeks long-term capital appreciation by investing MacKay Shields
primarily in securities of small-cap companies. Financial 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.
</TABLE>
GROWTH FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 MacKay Shields
income, if any, is an incidental consideration. Financial Corporation(2)
BLUE CHIP GROWTH FUND To seek capital appreciation by investing primarily Gabelli Asset
in securities of large-capitalization companies. Management Company
Current income is a secondary investment objective.
EQUITY INDEX FUND To provide investment results that correspond to Monitor Capital
the total return performance (and reflect Advisors, Inc.(2)
reinvestment of 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)
</TABLE>
GROWTH & INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GROWTH OPPORTUNITIES FUND To seek long-term growth of capital, with income as Madison Square
a 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.,
primarily in securities of large-capitalization Inc.
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.
28
- -
<PAGE> 718
GROWTH & INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
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 Financial Corporation(2)
securities, 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 MacKay Shields
reasonable opportunity for future growth of capital Financial Corporation(2)
and income.
</TABLE>
INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
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 by Financial Corporation(2)
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 Financial Corporation(2)
securities. 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 Financial Corporation(2)
foreign debt securities.
</TABLE>
4 "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use 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. An investment may
not be made directly into the S&P 500 Index.
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.
29
-
<PAGE> 719
INCOME FUNDS (CONTINUED)
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
GOVERNMENT FUND(7) To seek a high level of current income, consistent MacKay Shields
with 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 Financial Corporation(2)
capital and liquidity. Investments in the Fund are
neither insured nor guaranteed by the Federal
Deposit Insurance Corporation or any other
government agency. Although the Fund seeks to
preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in
the Fund.
</TABLE>
TAX-FREE INCOME FUNDS
<TABLE>
<CAPTION>
FUND OBJECTIVE SUBADVISOR
<S> <C> <C>
CALIFORNIA TAX FREE FUND(8) To seek to provide a high level of current income MacKay Shields
exempt from regular federal income tax and Financial Corporation(2)
California 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.
30
- -
<PAGE> 720
OFFICERS & TRUSTEES*
<TABLE>
<S> <C>
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
</TABLE>
DECHERT PRICE & RHOADS
Legal Counsel
* As of December 31, 1998.
[MAINSTAY LOGO]
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.
(C)1999. All rights reserved. MSAN16-02/99
[RECYCLE LOGO]
MAINSTAY VALUE FUND
ANNUAL REPORT
DECEMBER 31, 1998
[BACKCOVER LOGO]