329915 - 22739 - MAINSTAY FUNDS - 3-7-1997 - 811-04550 - Note 1--Organization and Business - 329915-311963-331430.pdf

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Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay Convertible Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's investment objective is to seek capital appreciation together with current income. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising common and preferred stocks which are traded on the New York Stock Exchange at the last sale price on that day or, if no sale occurs, at the mean between the closing bid and asked prices, (b) by appraising common and preferred stocks traded on other United States national securities exchanges or foreign securities exchanges as nearly as possible in the manner described in (a) by reference to their principal exchange, including the National Association of Securities Dealers National Market System, (c) by appraising over-the-counter securities quoted on the National Association of Securities Dealers NASDAQ system (but not listed on the National Market System) at the bid price supplied through such system, (d) by appraising over-the-counter securities not quoted on the NASDAQ system at prices supplied by the pricing agent or brokers selected by the Adviser, if these prices are deemed to be representative of market values at the regular close of business of the New York Stock Exchange, (e) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange, (f) by appraising options and futures contracts at the last sale price 25 MainStay Convertible Fund on the market where such options or futures are principally traded, and (g) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value at maturity date if their original term to maturity at purchase exceeded 60 days. Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities (foreign markets and over-the-counter markets) and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Forward Currency Contracts. A forward currency contract is an agreement to buy or sell currencies of different countries on a specified future date at a specified rate. During the period the forward currency contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. When the forward currency contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into forward currency contracts in order to hedge its foreign currency denominated investments, receivables and payables against adverse movements in future foreign currency exchange rates. The use of forward currency contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract or notional amounts reflect the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. The unrealized appreciation/depreciation on forward contracts reflects the Fund's exposure at year end to credit loss in the event of a counterparty's failure to perform its obligations. Forward foreign currency contracts open at December 31, 1996: (Y) Japanese Yen. 26 Contracts In Delivery Gross Unrealized to Deliver Exchange for Date Appreciation ---------- ------------ -------- ---------------- (Y)318,960,000 $3,000,000 3/20/97 $216,389 (Y)551,450,000 $5,000,000 6/6/97 133,370 (Y)219,600,000 $2,000,000 6/6/97 61,997 -------- Net Appreciation $411,756 ======== Notes to Financial Statements continued Securities Sold Short. The Fund may engage in short sales as a method of hedging declines in the value of securities owned. When the Fund enters into a short sale, it must segregate the security sold short, or securities equivalent in kind and amount to the securities sold, as collateral for its obligation to deliver the security upon conclusion of the sale. A gain, limited to the price at which the Fund sold the security short, or a loss, unlimited as to dollar amount, will be recognized upon termination of a short sale if the market price on the date the short position is closed out is less or greater, respectively, than the proceeds originally received. Any such gain or loss may be offset, completely or in part, by the change in the value of the hedged investments. Restricted Securities. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. Disposal of these securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult. The Fund may not invest more than 10% of its net assets in illiquid securities. At December 31, 1996 the Fund held no restricted securities. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required.Permanent book-tax differences of $85,101 and $94,034 have been reclassified from accumulated distribution in excess of net investment income and accumulated net realized gain on investments, respectively, to additional paid in capital. In addition, $581,217 has been reclassified from accumulated net realized gain on foreign currency transactions to accumulated distribution in excess of net investment income. Investment income received by a Fund from foreign sources may be subject to foreign income taxes withheld at the source. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends quarterly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued daily except when collection is not expected. Discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities or, if applicable, over the period to the first call date. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expense incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized 27 MainStay Convertible Fund and unrealized gains and losses are incurred. Dividends on short positions are recorded as expenses of the Fund on ex-dividend date. Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.36% of the average daily net assets of the Fund. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.75% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. 28 Notes to Financial Statements continued The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $903,782 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges on redemptions of Class B shares of $852,359 for the year ended December 31, 1996. Trustee Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $74,793. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $15,636 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $81,568. Note 4--Deposit with Broker: Cash deposited with broker in the amount of $122,377,088 is partially restricted as collateral for securities sold short. Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of U.S. Government securities were $271,953 and $270,794, respectively. Purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $1,394,393 and $1,058,801, respectively. 29 MainStay Convertible Fund Note 6--Capital Share Transactions (in 000's): 30 Year ende 1996 --------------------- Class A Class B ------- ------- Shares sold ................................................................ 2,602 27,714 Shares issued in reinvestment of dividends and distributions ............... 297 3,935 ----- ------ 2,899 31,649 Shares redeemed ............................................................ 793 5,658 ----- ------ Net increase ............................................................... 2,106 25,991 ===== ====== Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay Convertible Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 31 The MainStay Funds THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 32 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income CONVERTIBLE FUND graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 33 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities.(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY Convertible Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay Convertible Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. [GRAPHIC] MSAN06 (297) Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay Equity Index Fund Highlights 3 $10,000 Invested in the MainStay Equity Index Fund versus S&P 500 and Inflation 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by Industry--Top 5 7 Portfolio Composition 7 Returns & Lipper Rankings 8 Top 10 Equity Holdings 9 Portfolio of Investments 10 Financial Statements 20 Notes to Financial Statements 24 Report of Independent Accountants 29 The MainStay Funds 30 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 [GRAPHIC] MainStay Equity Index Fund Highlights 1996 MARKET HIGHLIGHTS o The year was an outstanding one for stocks, particularly large capitalization issues o The Dow Jones Industrial Average+ recorded a 28.91% gain for the year o Top performing sectors included oil & gas drilling, shoes, and electronic semiconductors o Worst performing sectors included truckers, broadcast/media, and machines 1996 FUND HIGHLIGHTS o One-year total return of 22.04% for Class A shares, excluding all sales charges, as of 12/31/96 o Best one-year performance of all MainStay Funds as of 12/31/96 o Fund returns closely tracked the S&P 500 Index++ + A price weighted average of 30 actively traded large capitalization stocks, mainly industrials but including some service oriented firms. ++ See footnote on page 4 for more information on the S&P 500. 3 $10,000 Invested in the MainStay Equity Index Fund versus S&P 500 and Inflation Class A Shares CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Equity Index Fund [GRAPHIC] S&P 500* [GRAPHIC] Inflation+ This graph assumes an initial investment of $10,000 made on 12/20/90 reflecting the effect of the current maximum sales charge of 3.0%, thereby reducing the amount of the investment to $9,700. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. Results assume the reinvestment of all income and capital gain distributions. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 MainStay Equity Date Index Fund S&P 500 Inflation - -------------------------------------------------------------------------------- 12/20/90 $ 9,000.00 $10,000 $10,000 12/91 $12,430.40 $13,040 $10,298 12/92 $13,200.20 $14,032 $10,603 12/93 $14,390.90 $15,441 $10,893 12/94 $14,462.80 $15,645 $11,177 12/95 $19,656.60 $21,518 $11,467 12/96 $23,988.20 $26,454 $11,847 Portfolio Management Discussion and Analysis [GRAPHIC] Photo Equity Index Fund Team EQUITY INDEX FUND TEAM Holly V. Cox, CFA and James A. Mehling, CFA To the surprise and delight of equity investors, 1996 was another stellar year for stocks. While this year's results didn't match the 37.53% returns earned in 1995, it would be hard to be disappointed with the S&P 500 Index's* return of 22.94% for the 12 months ended 12/31/96, which was more than twice the average annual total return of the Index over the previous 70 years.++ Large capitalization stocks led the way, with the Dow Jones Industrial Average(ss.) increasing 28.91% for the year. The average Lipper|| S&P 500 Index fund returned 22.30%, for the year ended 12/31/96. Given this context, how did the MainStay Equity Index Fund do in 1996? For the 12 months ended 12/31/96, the MainStay Equity Index Fund returned 22.04%. The Fund underperformed the average Lipper S&P 500 Index Fund for the same period, but outperformed the average Lipper diversified U.S. stock fund, which returned 17.72% for the year. Which stocks did best in 1996? The S&P 500 Index is composed primarily of large capitalization stocks, many of which did exceedingly well in 1996. Among the strongest performing stocks were Rowan Cos., up 135%#, Nike, up 74%, and Intel, up 131% in their respective industry sectors: oil and gas drilling, up 104%, shoes, up 65%, and electronic semiconductors, up 57%. Were these sectors equally weighted in the portfolio? No. Each sector is individually weighted in the S&P 500 by its perceived importance in Total return The performance of an investment with all income and capital gains reinvested. Capitalization The amount of outstanding equity a company has issued. Companies may vary greatly in the amount of equity capital they have raised, and their capitalization may change with new issues or stock repurchases. ++ Source: Ibbotson Associates, Chicago. ss. See footnote on page 3 for more information on the Dow Jones Industrial Average. || See footnote and table on page 8 for more information on Lipper Analytical Services, Inc. # Returns reflect performance during the period securities were held in the Fund. 5 Bull market/bear market A bull market is a prolonged period of rising prices, and a bear market is a prolonged period of falling prices. [GRAPHIC] YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL] See footnote * on page 8 for more information on performance. the economy. Because of this, oil and gas drilling, shoes, and electronic semi- conductors represented 0.06%, 0.36%, and 3.27%, respectively, of the Index. So each made a different level of contribution to the overall performance of the Index and the Fund. Which sectors were the worst performers? Truckers were the weakest sector in 1996, but represented only 0.01% of the Index. Broadcast/media and machine tools were also laggards, representing 0.47% and 0.02% of the Index, respectively. Why didn't the Fund outperform the Index? Unlike an index, the returns of which are based on hypothetical investments, the Fund is a real-world investment and incurs trading expenses and management fees. As a result, the Fund cannot fully replicate the performance of the Index and will usually trail it by at least a small margin. Investors should take this into account in evaluating the performance of any indexed fund. How does the Fund seek to track the Index? The Fund seeks to remain as fully invested as possible at all times. Doing so allows the Fund to participate in bull markets, like the one we had this year, as well as participate in declines during bear markets. Does indexing offer any advantages over other forms of investing? While past performance is no guarantee of future results, over the five years ended 6 Year-End Total Return % - ------------------------------------------------ 12/91 28.01 12/92 6.23 12/93 9.01 12/94 0.47 12/95 35.91 12/96 22.04 [GRAPHIC] 12/31/96, the average annual total return of the average Lipper U.S. diversified stock fund was 13.65%, compared to 14.71% for the average Lipper S&P 500 Index Fund. For the 10-year period ended 12/31/96, the numbers are 13.29% and 14.43%, respectively. While the Equity Index Fund's returns may be higher or lower than the S&P 500 and the Lipper averages over any given period, these figures suggest that indexing may be an appropriate strategy for inflation-conscious investors seeking higher equity returns over the long term. James A. Mehling, CFA Portfolio Manager DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] PORTFOLIO COMPOSITION AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. Inflation An increase in the supply of money relative to available goods and services, resulting in higher prices or a rising "cost of living." 7 Sector Percentage - -------------------------------------------------------- Oil - Integrated International 6.5% Major Regional Banks 4.8% Telephone 4.1% Drugs 4.1% Health Care - Diversified 3.9% All Other 76.6% Sector Percentage - -------------------------------------------------------- Common Stocks 98.4% Cash & Equivalents 1.6 [GRAPHIC] Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for applicable sales charge. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. The administrator and adviser have agreed to assume a portion of the expenses. The total return for this Fund would have been lower without this voluntary limitation. This voluntary expense limitation may be terminated or revised at any time. The MainStay Equity Index Fund, first offered to the public on 12/20/90, is offered as Class A shares only. As of 1/3/95 shares were subject to an initial sales charge of up to 3% and an annual 12b-1 fee of .25%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Life of Fund return is from the period 12/20/90 through 12/31/96. For the 12-month period ended 12/31/96, the Lipper equity category included 3,912 funds and the MainStay Equity Index Fund was ranked 911 out of 3,912; 447 out of 1,249; and 449 out of 1,056 funds for the 1-year, 5-year, and since-inception periods, respectively. 8 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 22.04% 14.05% 16.19% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 18.38% 13.36% 15.60% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Equity Index Fund 41 out of 16 out of 11 out of 48 funds 16 funds 13 funds Average Lipper S&P 500 Index objective fund 22.30% 14.71% 17.11% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset value & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $23.37 $0.5390 $0.8155 ================================================================================ [GRAPHIC] Top 10 Equity Holdings as of 12/31/96 Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed above. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. 9 HOLDING AMOUNT - -------------------------------------------------------------------------------- General Electric Co. $ 6,432,412 Coca-Cola Co. 5,160,092 Exxon Corp. 4,792,690 Intel Corp. 4,243,423 Microsoft Corp. 3,894,199 Merck & Co., Inc. 3,771,032 Philip Morris Cos., Inc. 3,630,580 Royal Dutch Petroleum Co. 3,605,215 International Business Machines Corp. 3,081,759 Procter & Gamble Co. 2,902,607 MainStay Equity Index Fund Shares Value ============================= COMMON STOCKS (98.4%)+ AEROSPACE/DEFENSE (2.1%) Boeing Co. .................................. 14,127 $ 1,502,760 General Dynamics Corp. ...................... 2,493 175,757 Lockheed Martin Corp. ....................... 7,823 715,804 McDonnell Douglas Corp. ..................... 8,420 538,880 Northrop Grumman Corp. ...................... 2,277 188,422 Raytheon Co. ................................ 9,407 452,712 Rockwell International Corp. ................ 8,540 519,872 United Technologies Corp. ................... 9,648 636,768 ----------- 4,730,975 ----------- AIRLINES (0.3%) AMR Corp. (a) ............................... 3,543 312,227 Delta Air Lines, Inc. ....................... 2,986 211,633 Southwest Airlines Co. ...................... 5,632 124,608 USAir Group, Inc. (a) ....................... 2,479 57,946 ----------- 706,414 ----------- ALUMINUM (0.4%) Alcan Aluminum Ltd. ......................... 8,863 298,018 Aluminum Co. of America ..................... 6,856 437,070 Reynolds Metals Co. ......................... 2,501 140,994 ----------- 876,082 ----------- AUTOMOBILES (1.8%) Chrysler Corp. .............................. 28,708 947,364 Ford Motor Co. .............................. 46,872 1,494,045 General Motors Corp. ........................ 29,698 1,655,663 ----------- 4,097,072 ----------- AUTOPARTS - AFTER MARKET (0.3%) Cooper Tire & Rubber Co. .................... 3,263 64,444 Echlin Inc. ................................. 2,467 78,019 Genuine Parts Co. ........................... 4,777 212,577 Goodyear Tire & Rubber Co. .................. 6,081 312,411 ----------- 667,451 ----------- BEVERAGES - ALCOHOLIC (0.7%) Anheuser-Busch Cos., Inc. ................... 19,531 781,240 Brown-Forman Corp. Class B .................. 2,663 121,832 Coors (Adolph) Co. Class B .................. 1,454 27,626 Seagram Co. Ltd. ............................ 14,654 567,843 ----------- 1,498,541 ----------- Shares Value ============================= BEVERAGES - SOFT DRINKS (3.1%) Coca-Cola Co. ............................... 98,054 $ 5,160,092 PepsiCo, Inc. ............................... 61,532 1,799,811 ---------- 6,959,903 + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 10 ---------- BROADCAST/MEDIA (0.5%) Comcast Corp. Class A ....................... 12,828 228,499 Tele-Communications TCI Group Series A (a) .............................. 26,221 342,512 U.S. West Media Group (a) ................... 24,441 452,158 ---------- 1,023,169 ---------- BUILDING MATERIALS (0.2%) Masco Corp. ................................. 6,275 225,900 Owens-Corning Corp. ......................... 1,987 84,696 Sherwin-Williams Co. ........................ 3,410 190,960 ---------- 501,556 ---------- CHEMICALS (2.3%) Air Products & Chemicals, Inc. .............. 4,367 301,869 Dow Chemical Co. ............................ 9,646 756,005 Du Pont (E.I.) De Nemours & Co. ............. 22,157 2,091,067 Eastman Chemical Co. ........................ 3,146 173,816 Goodrich (B.F.) Co. ......................... 2,029 82,175 Hercules, Inc. .............................. 4,201 181,693 Monsanto Co. ................................ 23,157 900,228 Praxair, Inc. ............................... 6,052 279,149 Rohm & Haas Co. ............................. 2,543 207,572 Union Carbide Corp. ......................... 5,226 213,613 ---------- 5,187,187 ---------- CHEMICALS - DIVERSIFIED (0.3%) Avery Dennison Corp. ........................ 4,100 145,037 Engelhard Corp. ............................. 5,657 108,190 FMC Corp. (a) ............................... 1,441 101,050 PPG Industries Inc. ......................... 7,389 414,708 ---------- 768,985 ---------- CHEMICALS - SPECIALTY (0.3%) Grace (W.R.) & Co. .......................... 3,442 178,124 Great Lakes Chemical Corp. .................. 2,566 119,960 Morton International, Inc. .................. 5,582 227,467 Nalco Chemical Co. .......................... 2,706 97,754 Sigma-Aldrich Corp. ......................... 2,002 125,000 ---------- 748,305 ---------- Portfolio of Investments December 31, 1996 Shares Value ============================= COMMON STOCKS (Continued) COMMUNICATION - EQUIPMENT MANUFACTURERS (2.2%) Andrew Corp. (a) ............................ 2,334 $ 123,848 Bay Networks, Inc. (a) ...................... 7,669 160,090 Cabletron Systems, Inc. (a) ................. 6,217 206,715 Cisco Systems, Inc. (a) ..................... 25,502 1,622,565 DSC Communications Corp. (a) ................ 4,579 81,850 General Instrument Corp. (a) ................ 5,424 117,294 Lucent Technologies Inc. .................... 25,062 1,159,118 Northern Telecom Ltd. ....................... 10,094 624,566 Scientific-Atlanta, Inc. .................... 3,016 45,240 Tellabs, Inc. (a) ........................... 7,104 267,288 3Com Corp. (a) .............................. 6,881 504,893 ---------- 4,913,467 ---------- COMPUTER - SOFTWARE & SERVICES (3.3%) Autodesk, Inc. .............................. 1,823 51,044 Automatic Data Processing, Inc. ............. 11,363 487,189 Ceridian Corp. (a) .......................... 2,625 106,312 Computer Associates International, Inc. ....................... 14,321 712,470 Computer Sciences Corp. (a) ................. 2,981 244,815 First Data Corp. ............................ 17,680 645,320 Microsoft Corp. (a) ......................... 47,131 3,894,199 Novell Inc. (a) ............................. 13,595 128,728 Oracle Corp. (a) ............................ 25,988 1,084,999 Shared Medical Systems Corp. ................ 913 44,965 ---------- 7,400,041 ---------- COMPUTER SYSTEMS (3.6%) Amdahl Corp. (a) ............................ 4,582 55,557 Apple Computer, Inc. (a) .................... 4,950 103,331 Compaq Computer Corp. (a) ................... 10,530 781,853 Data General Corp. (a) ...................... 1,559 22,606 Dell Computer Corp. (a) ..................... 7,162 380,481 Digital Equipment Corp. (a) ................. 6,027 219,232 EMC Corp. (a) ............................... 9,051 299,814 Hewlett-Packard Co. ......................... 40,255 2,022,814 Intergraph Corp. (a) ........................ 1,840 18,860 International Business Machines Corp. ............................ 20,409 3,081,759 Seagate Technology (a) ...................... 9,954 393,183 Silicon Graphics Inc. (a) ................... 6,845 174,547 Sun Microsystems (a) ........................ 14,442 370,979 Tandem Computers Inc. (a) ................... 4,545 62,494 Shares Value ============================= COMPUTER SYSTEMS (Continued) Unisys Corp. (a) ............................ 6,803 $ 45,920 ---------- 8,033,430 ---------- CONGLOMERATES (0.3%) Tenneco, Inc. ............................... 6,849 309,061 Textron Inc. ................................ 3,177 299,432 ---------- 608,493 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 11 ---------- CONTAINERS - METAL & GLASS (0.1%) Ball Corp. .................................. 1,222 31,772 Crown Cork & Seal Co., Inc. ................. 5,006 272,201 ---------- 303,973 ---------- CONTAINERS - PAPER (0.1%) Bemis Co., Inc. ............................. 2,023 74,598 Stone Container Corp. ....................... 3,875 57,641 Temple-Inland Inc. .......................... 2,174 117,668 ---------- 249,907 ---------- COSMETICS (0.9%) Alberto-Culver Co. Class B .................. 1,090 52,320 Avon Products, Inc. ......................... 5,310 303,334 Gillette Co. ................................ 17,511 1,361,480 International Flavors & Fragrances Inc. ........................... 4,327 194,715 ---------- 1,911,849 ---------- DRUGS (4.1%) Lilly (Eli) & Co. ........................... 21,574 1,574,902 Merck & Co., Inc. ........................... 47,584 3,771,032 Pfizer Inc. ................................. 25,317 2,098,146 Pharmacia & Upjohn, Inc. .................... 20,045 794,283 Schering-Plough Corp. ....................... 14,470 936,933 ---------- 9,175,296 ELECTRIC POWER COMPANIES (2.8%) American Electric Power Co., Inc. ........... 7,389 303,873 Baltimore Gas & Electric Co. ................ 5,822 155,739 Carolina Power & Light Co. .................. 6,007 219,256 Central & South West Corp. .................. 8,219 210,612 Cinergy Corp. ............................... 6,234 208,060 Consolidated Edison Co. of New York, Inc. ..................... 9,214 269,510 MainStay Equity Index Fund Shares Value ============================= COMMON STOCKS (Continued) ELECTRIC POWER COMPANIES (Continued) Dominion Resources, Inc. .................... 6,932 $ 266,882 DTE Energy Co. .............................. 5,748 186,092 Duke Power Co. .............................. 8,073 373,376 Edison International ........................ 17,069 339,246 Entergy Corp. ............................... 8,928 247,752 FPL Group, Inc. ............................. 7,202 331,292 General Public Utilities Corp. .............. 4,693 157,802 Houston Industries Inc. ..................... 9,290 210,186 Niagara Mohawk Power Corp. (a) ........................... 5,717 56,455 Northern States Power Co. ................... 2,677 122,807 Ohio Edison Co. ............................. 5,966 135,726 Pacific Gas & Electric Co. .................. 16,326 342,846 PacifiCorp .................................. 11,588 237,554 PECO Energy Co. ............................. 8,703 219,751 PP&L Resources, Inc. ........................ 6,254 143,842 Public Service Enterprise Group Inc. ................................ 9,554 260,346 Southern Co. (The) .......................... 26,646 602,866 Texas Utilities Co. ......................... 8,839 360,189 Unicom Corp. ................................ 8,484 230,128 Union Electric Co. .......................... 4,006 154,231 ----------- 6,346,419 ----------- ELECTRICAL EQUIPMENT (3.9%) AMP Inc. .................................... 8,523 327,070 Emerson Electric Co. ........................ 8,839 855,173 General Electric Co. ........................ 65,056 6,432,412 General Signal Corp. ........................ 1,959 83,747 Grainger (W.W.), Inc. ....................... 2,013 161,543 Honeywell, Inc. ............................. 4,969 326,712 Raychem Corp. ............................... 1,756 140,700 Thomas & Betts Corp. ........................ 2,078 92,211 Westinghouse Electric Corp. ................. 16,684 331,595 ----------- 8,751,163 ----------- ELECTRONIC - DEFENSE (0.0%) (b) EG&G, Inc. .................................. 1,866 37,553 ----------- ELECTRONIC - INSTRUMENTATION (0.1%) Perkin-Elmer Corp. .......................... 1,672 98,439 Tektronix, Inc. ............................. 1,263 64,729 ----------- 163,168 ----------- Shares Value ============================== ELECTRONIC - SEMICONDUCTORS (3.1%) Advanced Micro Devices, Inc. (a) ......................... 5,210 $ 134,157 Applied Materials, Inc. (a) ................. 7,023 252,389 Intel Corp. ................................. 32,408 4,243,423 LSI Logic Corp. (a) ......................... 5,107 136,612 Micron Technology, Inc. ..................... 8,225 239,553 Motorola, Inc. .............................. 23,236 1,426,110 National Semiconductor Corp. (a) ................................. 5,398 131,576 Texas Instruments, Inc. ..................... 7,449 474,874 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 ---------- 7,038,694 ---------- ENGINEERING & CONSTRUCTION (0.1%) Fluor Corp. ................................. 3,264 204,816 Foster Wheeler Corp. ........................ 1,587 58,917 ---------- 263,733 ---------- ENTERTAINMENT (1.4%) King World Productions, Inc. (a) ..................... 1,449 53,432 Time Warner Inc. ............................ 22,472 842,700 Viacom, Inc. Class B (a) .................... 14,037 489,540 Walt Disney Co. (The) ....................... 26,703 1,859,197 ---------- 3,244,869 ---------- FINANCIAL - MISCELLANEOUS (2.3%) American Express Co. ........................ 18,723 1,057,850 American General Corp. ...................... 8,166 333,785 Dean Witter, Discover & Co. ................. 6,512 431,420 Federal Home Loan Mortgage Corp. ............................ 7,031 774,289 Federal National Mortgage Association ...................... 42,918 1,598,696 Green Tree Financial Corp. .................. 5,426 209,579 MBIA Corp. .................................. 1,710 173,137 MBNA Corp. .................................. 8,722 361,963 Transamerica Corp. .......................... 2,629 207,691 ---------- 5,148,410 ---------- FOOD DISTRIBUTORS (0.1%) Fleming Cos., Inc. .......................... 1,449 24,995 Supervalu Inc. .............................. 2,712 76,953 Sysco Corp. ................................. 7,109 231,931 ---------- 333,879 ---------- Portfolio of Investments continued Shares Value ============================= COMMON STOCKS (Continued) FOODS (2.9%) Archer-Daniels-Midland Co. .................. 21,395 $ 470,690 Campbell Soup Co. ........................... 9,212 739,263 ConAgra, Inc. ............................... 9,530 474,117 CPC International Inc. ...................... 5,653 438,107 General Mills, Inc. ......................... 6,208 393,432 Heinz (H.J.) Co. ............................ 14,569 520,842 Hershey Foods Corp. ......................... 5,989 262,019 Kellogg Co. ................................. 8,331 546,722 Quaker Oats Co. ............................. 5,341 203,626 Ralston-Ralston Purina Group ................ 4,162 305,387 Sara Lee Corp. .............................. 18,986 707,228 Unilever, N.V ............................... 6,319 1,107,405 Wrigley (Wm.) Jr. Co. ....................... 4,538 255,262 ---------- 6,424,100 ---------- GOLD (0.5%) Barrick Gold Corp. .......................... 14,019 403,047 Battle Mountain Gold Co. .................... 8,871 60,988 Echo Bay Mines Ltd. ......................... 5,501 36,444 Homestake Mining Co. ........................ 5,744 81,852 Newmont Mining Corp. ........................ 3,951 176,807 Placer Dome Inc. ............................ 9,381 204,037 Santa Fe Pacific Gold Corp. ................. 5,203 79,996 ---------- 1,043,171 ---------- HARDWARE & TOOLS (0.1%) Black & Decker Corp. ........................ 3,424 103,148 Snap-On, Inc. ............................... 2,455 87,459 Stanley Works (The) ......................... 3,489 94,203 ---------- 284,810 ---------- HEALTH CARE - DIVERSIFIED (3.9%) Abbott Laboratories ......................... 30,755 1,560,816 Allergan, Inc. .............................. 2,537 90,381 American Home Products Corp. ............................ 25,100 1,471,488 Bristol-Myers Squibb Co. .................... 19,762 2,149,117 Johnson & Johnson ........................... 52,404 2,607,099 Mallinckrodt Group Inc. ..................... 2,919 128,801 Warner-Lambert Co. .......................... 10,672 800,400 ---------- 8,808,102 ---------- HEALTH CARE - HMOs (0.2%) Humana Inc. (a) ............................. 6,384 122,094 --------- Shares Value ============================= HEALTH CARE - HMOs (Continued) United Healthcare Corp. ..................... 7,171 $ 322,695 ---------- 444,789 ---------- HEALTH CARE - MISCELLANEOUS (0.3%) ALZA Corp. (a) .............................. 3,358 86,888 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 Amgen Inc. (a) .............................. 10,489 570,339 Beverly Enterprises, Inc. (a) ............... 3,974 50,669 Manor Care, Inc. ............................ 2,481 66,987 ---------- 774,883 HEAVY TRUCKS & PARTS (0.3%) Cummins Engine Co., Inc. .................... 1,607 73,922 Dana Corp. .................................. 3,975 129,684 Eaton Corp. ................................. 3,018 210,506 ITT Industries, Inc. ........................ 4,658 114,121 Navistar International Corp. (a) ................................. 2,939 26,818 PACCAR Inc. ................................. 1,550 105,400 ---------- 660,451 ---------- HOMEBUILDING (0.0%) (b) Centex Corp. ................................ 1,104 41,538 Kaufman & Broad Home Corp. .................. 1,561 20,098 Pulte Corp. ................................. 1,049 32,257 ---------- 93,893 HOSPITAL MANAGEMENT (0.6%) Columbia/HCA Healthcare Corp. ............................ 26,323 1,072,662 Tenet Healthcare Corp. (a) .................. 8,520 186,375 ---------- 1,259,037 ---------- HOTEL - MOTEL (0.4%) Harrah's Entertainment, Inc. (a) .................................. 4,046 80,414 Hilton Hotels Corp. ......................... 9,834 256,913 ITT Corp. (a) ............................... 4,645 201,477 Marriott International Inc. ................. 5,062 279,676 ---------- 818,480 ---------- HOUSEHOLD - FURNISHINGS & APPLIANCES (0.1%) Armstrong World Industries, Inc. .......................... 1,461 101,540 Maytag Corp. ................................ 3,935 77,716 MainStay Equity Index Fund Shares Value ============================= COMMON STOCKS (Continued) HOUSEHOLD - FURNISHINGS & APPLIANCES (Continued) Whirlpool Corp. ............................. 2,874 $ 134,000 ---------- 313,256 ---------- HOUSEHOLD PRODUCTS (2.1%) Clorox Co. (The) ............................ 2,021 202,858 Colgate-Palmolive Co. ....................... 5,831 537,910 Kimberly-Clark Corp. ........................ 11,084 1,055,751 Procter & Gamble Co. (The) .................. 27,001 2,902,607 ---------- 4,699,126 ---------- HOUSEWARES (0.2%) Newell Co. .................................. 6,194 195,111 Rubbermaid Inc. ............................. 5,992 136,318 Tupperware Corp. ............................ 2,385 127,896 ---------- 459,325 ---------- INSURANCE BROKERS (0.3%) Alexander & Alexander Services Inc. ............................. 1,857 32,265 Aon Corp. ................................... 4,223 262,354 Marsh & McLennan Cos., Inc. ................. 2,885 300,040 ---------- 594,659 ---------- INVESTMENT BANK/BROKERAGE (0.5%) Merrill Lynch & Co., Inc. ................... 6,620 539,530 Morgan Stanley Group Inc. ................... 6,046 345,378 Salomon Inc. ................................ 4,229 199,291 ---------- 1,084,199 ---------- LEISURE TIME (0.0%) (b) Brunswick Corp. ............................. 3,904 93,696 ---------- 93,696 ---------- LIFE INSURANCE (0.6%) Aetna Inc. .................................. 5,875 470,000 Jefferson-Pilot Corp. ....................... 2,827 160,079 Lincoln National Corp. ...................... 4,111 215,827 Providian Corp. ............................. 3,641 187,056 Torchmark Corp. ............................. 2,821 142,461 UNUM Corp. .................................. 2,828 204,323 USLIFE Corp. ................................ 1,360 45,220 ---------- 1,424,966 ---------- Shares Value ============================= MACHINE TOOLS (0.0%) (b) Cincinnati Milacron Inc. .................... 1,561 $ 34,147 Giings & Lewis, Inc. ........................ 1,284 16,531 ---------- 50,678 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 ---------- MACHINERY - DIVERSIFIED (0.8%) Briggs & Stratton Corp. ..................... 1,139 50,116 Case Corp. .................................. 2,823 153,854 Caterpillar Inc. ............................ 7,546 567,837 Cooper Industries Inc. ...................... 4,315 181,769 Deere & Co. ................................. 10,300 418,438 Harnischfeger Industries, Inc. .............. 1,868 89,898 Ingersoll-Rand Co. .......................... 4,311 191,839 NACCO Industries, Inc. Class A .............. 345 18,457 Thermo Electron Corp. (a) ................... 2,700 111,375 Timken Co. (The) ............................ 1,244 57,068 ---------- 1,840,651 ---------- MAJOR REGIONAL BANKS (4.8%) Banc One Corp. .............................. 17,086 734,698 Bank of Boston Corp. ........................ 5,974 383,829 Bank of New York Co., Inc. (The) ............ 15,289 516,004 Barnett Banks, Inc. ......................... 7,599 312,509 Boatmen's Bancshares, Inc. .................. 6,161 397,384 Comerica Inc. ............................... 4,195 219,713 CoreStates Financial Corp. .................. 8,723 452,506 Fifth Third Bancorp ......................... 4,054 254,642 First Bank System, Inc. ..................... 5,551 378,856 First Union Corp. ........................... 11,246 832,204 Fleet Financial Group, Inc. ................. 10,311 514,261 KeyCorp ..................................... 9,126 460,863 Mellon Bank Corp. ........................... 5,110 362,810 National City Corp. ......................... 8,710 390,861 NationsBank Corp. ........................... 11,422 1,116,501 Norwest Corp. ............................... 14,454 628,749 PNC Bank Corp. .............................. 13,394 503,949 Republic New York Corp. ..................... 2,181 178,024 SunTrust Banks, Inc. ........................ 8,923 439,458 U.S. Bancorp ................................ 6,079 273,175 Wachovia Corp. .............................. 6,656 376,064 Wells Fargo & Co. ........................... 3,687 994,568 ---------- 10,721,628 ---------- MANUFACTURED HOUSING (0.0%) (b) Fleetwood Enterprises Inc. .................. 1,416 38,940 ---------- MANUFACTURING - DIVERSIFIED (1.0%) AlliedSignal Inc. ........................... 11,065 741,355 Crane Co. ................................... 1,845 53,520 Portfolio of Investments continued Shares Value ============================= COMMON STOCKS (Continued) MANUFACTURING - DIVERSIFIED (Continued) Dover Corp. ................................. 4,494 $ 225,824 Illinois Tool Works Inc. .................... 4,790 382,601 Johnson Controls, Inc. ...................... 1,607 133,180 Millipore Corp. ............................. 1,715 70,958 Pall Corp. .................................. 4,485 114,367 Parker-Hannifin Corp. ....................... 2,961 114,739 TRINOVA Corp. ............................... 1,097 39,903 Tyco International Ltd. ..................... 6,013 317,937 ----------- 2,194,384 ----------- MEDICAL PRODUCTS (1.0%) Bard (C.R.), Inc. ........................... 2,291 64,148 Bausch & Lomb Inc. .......................... 2,197 76,895 Baxter International Inc. ................... 10,704 438,864 Becton, Dickinson & Co. ..................... 4,935 214,056 Biomet, Inc. ................................ 4,625 69,953 Boston Scientific Corp. (a) ................. 7,000 420,000 Guidant Corp. ............................... 2,912 165,984 Medtronic, Inc. ............................. 9,441 641,988 St. Jude Medical, Inc. (a) .................. 3,194 136,144 United States Surgical Corp. ................ 2,466 97,099 ----------- 2,325,131 ----------- METALS - MISCELLANEOUS (0.3%) ASARCO Inc. ................................. 1,631 40,571 Cyprus Amax Minerals Co. .................... 3,636 84,992 Freeport-McMoRan Copper & Gold Inc. Class B ................ 7,631 227,976 Inco Ltd. ................................... 6,605 210,534 Phelps Dodge Corp. .......................... 2,587 174,623 ----------- 738,696 ----------- MISCELLANEOUS (1.4%) Airtouch Communications, Inc. (a) ........... 19,620 495,405 American Greetings Corp. Class A ............ 2,986 84,728 Corning Inc. ................................ 9,120 421,800 Harcourt General, Inc. ...................... 2,798 129,058 Harris Corp. ................................ 1,572 107,879 Jostens, Inc. ............................... 1,515 32,004 Minnesota Mining & Manufacturing Co. ......................... 16,526 1,369,592 Pioneer Hi-Bred International, Inc. ....................... 3,265 228,550 TRW, Inc. ................................... 5,045 249,727 Whitman Corp. ............................... 4,156 95,069 ----------- 3,213,812 ----------- Shares Value ============================= MONEY CENTER BANKS (2.9%) BankAmerica Corp. ........................... 14,137 $ 1,410,166 Bankers Trust New York Corp. ................ 3,121 269,186 Chase Manhattan Corp. ....................... 17,232 1,537,956 Citicorp .................................... 18,536 1,909,208 First Chicago Corp. ......................... 12,484 671,015 Morgan (J.P.) & Co., Inc. ................... 7,311 713,736 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 ----------- 6,511,267 ----------- MULTI-LINE INSURANCE (1.7%) American International Group, Inc. ............................... 18,462 1,998,511 CIGNA Corp. ................................. 3,035 414,657 ITT Hartford Group, Inc. .................... 4,651 313,943 Travelers Group Inc. ........................ 25,226 1,144,630 ----------- 3,871,741 ----------- NATURAL GAS DISTRIBUTORS & PIPELINES (0.9%) Coastal Corp. ............................... 4,155 203,076 Columbia Gas System, Inc. ................... 2,159 137,366 Consolidated Natural Gas Co. ................ 3,637 200,944 Eastern Enterprises ......................... 770 27,239 Enron Corp. ................................. 9,853 424,911 ENSERCH Corp. ............................... 2,690 61,870 NICOR Inc. .................................. 1,998 71,429 NorAm Energy Corp. .......................... 5,325 81,872 ONEOK Inc. .................................. 1,077 32,310 Pacific Enterprises ......................... 3,251 98,749 PanEnergy Corp. ............................. 5,912 266,040 Peoples Energy Corp. ........................ 1,406 47,628 Sonat, Inc. ................................. 3,343 172,164 Williams Cos., Inc. (The) ................... 6,184 231,919 ----------- 2,057,517 ----------- OFFICE EQUIPMENT & SUPPLIES (0.6%) Alco Standard Corp. ......................... 5,056 261,016 Moore Corp. Ltd. ............................ 4,027 82,050 Pitney Bowes Inc. ........................... 5,861 319,425 Xerox Corp. ................................. 12,730 669,916 ----------- 1,332,407 ----------- OIL & GAS DRILLING (0.1%) Helmerich & Payne, Inc. ..................... 940 48,998 Rowan Cos., Inc. (a) ........................ 3,274 74,074 ----------- 123,072 ----------- MainStay Equity Index Fund Shares Value ============================= COMMON STOCKS (Continued) OIL - EXPLORATION & PRODUCTION (0.3%) Burlington Resources Inc. ................... 4,970 $ 250,364 Oryx Energy Co. (a) ......................... 3,996 98,901 Santa Fe Energy Resources, Inc. (a) ....................... 3,481 48,299 Union Pacific Resources Group, Inc. ..................... 9,866 288,580 ---------- 686,144 ---------- OIL - INTEGRATED DOMESTIC (1.3%) Amerada Hess Corp. .......................... 3,622 209,623 Ashland Inc. ................................ 2,505 109,907 Atlantic Richfield Co. ...................... 6,327 838,328 Kerr-McGee Corp. ............................ 1,974 142,128 Louisiana Land & Exploration Co. (The) ................................. 1,378 73,895 Occidental Petroleum Corp. .................. 13,004 303,968 Pennzoil Co. ................................ 1,780 100,570 Phillips Petroleum Co. ...................... 10,295 455,554 Sun Co., Inc. ............................... 2,914 71,029 Unocal Corp. ................................ 9,748 396,012 USX-Marathon Group .......................... 11,336 270,647 ---------- 2,971,661 ---------- OIL - INTEGRATED INTERNATIONAL (6.5%) Amoco Corp. ................................. 19,633 1,580,457 Chevron Corp. ............................... 25,632 1,666,080 Exxon Corp. ................................. 48,905 4,792,690 Mobil Corp. ................................. 15,534 1,899,032 Royal Dutch Petroleum Co. ................... 21,114 3,605,215 Texaco Inc. ................................. 10,416 1,022,070 ---------- 14,565,544 ---------- OIL - WELL EQUIPMENT & SERVICES (0.8%) Baker Hughes Inc. ........................... 5,603 193,303 Dresser Industries, Inc. .................... 7,105 220,255 Halliburton Co. ............................. 4,952 298,358 McDermott International, Inc. ............... 2,154 35,810 Schlumberger Ltd. ........................... 9,691 967,889 Western Atlas Inc. (a) ...................... 2,082 147,562 ---------- 1,863,177 ---------- Shares Value ============================= PAPER & FOREST PRODUCTS (1.0%) Boise Cascade Corp. ......................... 1,901 $ 60,357 Champion International Corp. ................ 3,760 162,620 Georgia-Pacific Corp. ....................... 3,588 258,336 International Paper Co. ..................... 11,740 474,003 James River Corp. of Virginia ............... 3,388 112,228 Louisiana-Pacific Corp. ..................... 4,211 88,957 Mead Corp. .................................. 2,042 118,691 Potlatch Corp. .............................. 1,108 47,644 Union Camp Corp. ............................ 2,702 129,020 Westvaco Corp. .............................. 4,011 115,316 Weyerhaeuser Co. ............................ 7,798 369,430 Willamette Industries, Inc. ................. 2,177 151,574 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 16 ---------- 2,088,176 ---------- PERSONAL LOANS (0.2%) Beneficial Corp. ............................ 2,137 135,432 Household International, Inc. ............... 3,804 350,919 ---------- 486,351 ---------- PHOTOGRAPHY/IMAGING (0.5%) Eastman Kodak Co. ........................... 13,257 1,063,874 Polaroid Corp. .............................. 1,817 79,040 ---------- 1,142,914 ---------- POLLUTION CONTROL (0.4%) Browning-Ferris Industries Inc. ............. 8,380 219,975 Laidlaw Inc. Class B ........................ 12,412 142,738 WMX Technologies, Inc. ...................... 19,407 633,153 ---------- 995,866 ---------- PROPERTY - CASUALTY INSURANCE (1.3%) Allstate Corp. .............................. 17,488 1,012,118 Chubb Corp. ................................. 6,867 369,101 General Re Corp. ............................ 3,244 511,741 Loews Corp. ................................. 4,542 428,083 MGIC Investment Corp. ....................... 2,342 177,992 SAFECO Corp. ................................ 4,998 197,109 St. Paul Cos., Inc. (The) ................... 3,338 195,690 USF&G Corp. ................................. 4,556 95,107 ---------- 2,986,941 ---------- PUBLISHING (0.1%) McGraw-Hill Cos., Inc. (The) ................ 3,968 183,024 Meredith Corp. .............................. 1,122 59,186 ---------- 242,210 ---------- Portfolio of Investments continued Shares Value ============================= COMMON STOCKS (Continued) PUBLISHING - NEWSPAPER (0.5%) Dow Jones & Co., Inc. ....................... 3,831 $ 129,775 Gannett Co., Inc. ........................... 5,583 418,027 Knight-Rier Inc. ............................ 3,742 143,132 New York Times Co. (The) Class A ............ 3,850 146,300 Times Mirror Co. (The) Class A .............. 4,108 204,373 Tribune Co. ................................. 2,385 188,117 ---------- 1,229,724 ---------- RAILROADS (1.0%) Burlington Northern Santa Fe Corp. .......... 6,051 522,655 Conrail Inc. ................................ 3,137 312,524 CSX Corp. ................................... 8,344 352,534 Norfolk Southern Corp. ...................... 4,971 434,962 Union Pacific Corp. ......................... 9,654 580,447 ---------- 2,203,122 ---------- RESTAURANTS (0.6%) Darden Restaurants, Inc. .................... 6,213 54,364 McDonald's Corp. ............................ 27,474 1,243,198 Wendy's International, Inc. ................. 4,957 101,619 ---------- 1,399,181 ---------- RETAIL STORES - APPAREL (0.3%) Charming Shoppes, Inc. (a) .................. 4,130 20,908 Gap, Inc. (The) ............................. 11,333 341,407 Limited, Inc. (The) ......................... 10,681 196,263 TJX Cos., Inc. (The) ........................ 2,908 137,767 ---------- 696,345 ---------- RETAIL STORES - DEPARTMENT (0.7%) Dillard Department Stores, Inc. Class A ................................... 4,487 138,536 Federated Department Stores, Inc. (a) .................................. 8,117 276,993 May Department Stores Co. ................... 9,862 461,048 Mercantile Stores Co., Inc. ................. 1,437 70,952 Nordstrom, Inc. ............................. 3,231 114,499 Penney (J.C.) Co. Inc. ...................... 8,899 433,826 ---------- 1,495,854 ---------- RETAIL STORES - DRUG (0.3%) Longs Drug Stores Corp. ..................... 759 37,286 Rite-Aid Corp. .............................. 4,872 193,662 Shares Value ============================= RETAIL STORES - DRUG (Continued) Walgreen Co. ................................ 9,699 $ 387,960 ---------- 618,908 ---------- The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 17 RETAIL STORES - FOOD CHAIN (0.5%) Albertson's, Inc. ........................... 9,879 351,939 American Stores Co. ......................... 5,714 233,560 Giant Food, Inc. Class A .................... 2,345 80,903 Great Atlantic & Pacific Tea Co., Inc. (The) ....................... 1,659 52,881 Kroger Co. (a) .............................. 4,926 229,059 Winn-Dixie Stores, Inc. ..................... 5,988 189,370 ---------- 1,137,712 ---------- RETAIL STORES - GENERAL MERCHANDISE (1.5%) Dayton-Hudson Corp. ......................... 8,634 338,884 Kmart Corp. (a) ............................. 18,914 196,233 Sears, Roebuck & Co. ........................ 15,414 710,971 Wal-Mart Stores, Inc. ....................... 90,609 2,072,681 ---------- 3,318,769 ---------- RETAIL STORES - SPECIALTY (1.0%) Autozone, Inc. (a) .......................... 2,800 77,000 Circuit City Stores, Inc. ................... 3,893 117,277 CVS Corp. ................................... 4,157 171,996 Home Depot, Inc. (The) ...................... 18,753 939,994 Lowe's Cos., Inc. ........................... 6,808 241,684 Pep Boys-Manny, Moe & Jack .................. 2,483 76,352 Price/Costco, Inc. (a) ...................... 7,715 193,839 Tandy Corp. ................................. 2,354 103,576 Toys "R" Us, Inc. (a) ....................... 10,759 322,770 Woolworth Corp. (a) ......................... 5,243 114,691 ---------- 2,359,179 ---------- SAVINGS & LOANS (0.2%) Ahmanson (H.F.) & Co. ....................... 4,179 135,818 Golden West Financial Corp. ................. 2,336 147,460 Great Western Financial Corp. ............... 5,401 156,629 ---------- 439,907 ---------- SHOES (0.3%) Nike Inc. Class B ........................... 11,336 677,326 Reebok International Ltd. ................... 2,179 91,518 Stride Rite Corp. ........................... 1,881 18,810 ---------- 787,654 ---------- SPECIALIZED SERVICES (0.8%) Block (H&R), Inc. ........................... 4,137 119,973 Cognizant Corp. ............................. 6,708 221,364 MainStay Equity Index Fund Shares Value ============================= COMMON STOCKS (Continued) SPECIALIZED SERVICES (Continued) CUC International Inc. (a) .................. 15,505 $ 368,244 Dun & Bradstreet Corp. (The) ................ 6,704 159,220 Ecolab Inc. ................................. 2,519 94,777 HFS Inc. (a) ................................ 4,851 289,847 Interpublic Group of Cos., Inc. ............. 3,096 147,060 National Service Industries, Inc. ........... 1,855 69,331 Safety-Kleen Corp. .......................... 2,215 36,271 Service Corp. International ................. 9,186 257,208 ---------- 1,763,295 ---------- SPECIALTY PRINTING (0.1%) Deluxe Corp. ................................ 3,254 106,569 Donnelley (R.R.) & Sons Co. ................. 6,009 188,532 Harland (John H.) Co. ....................... 1,246 41,118 ---------- 336,219 ---------- STEEL (0.3%) Allegheny Teledyne Inc. ..................... 6,815 156,745 Armco Inc. (a) .............................. 4,271 17,618 Bethlehem Steel Corp. (a) ................... 4,473 40,257 Inland Steel Industries Inc. ................ 1,902 38,040 Nucor Corp. ................................. 3,466 176,766 USX-U.S. Steel Group ........................ 3,270 102,596 Worthington Industries, Inc. ................ 3,511 63,637 ---------- 595,659 ---------- TELECOMMUNICATIONS - LONG DISTANCE (2.2%) AT&T Corp. .................................. 64,014 2,784,609 MCI Communications Corp. .................... 27,102 885,897 Sprint Corp. ................................ 17,091 681,504 WorldCom, Inc. (a) .......................... 23,257 606,135 ---------- 4,958,145 ---------- TELEPHONE (4.1%) ALLTEL Corp. ................................ 7,463 234,152 Ameritech Corp. ............................. 21,794 1,321,261 Bell Atlantic Corp. ......................... 17,260 1,117,585 BellSouth Corp. ............................. 39,045 1,576,442 Frontier Corp. .............................. 3,500 79,188 GTE Corp. ................................... 38,103 1,733,687 NYNEX Corp. ................................. 17,176 826,595 Pacific Telesis Group ....................... 16,827 618,392 SBC Communications Inc. ..................... 23,959 1,239,878 US West, Inc. ............................... 18,641 601,172 ---------- 9,348,352 ---------- Shares Value ============================= TEXTILES - APPAREL MANUFACTURERS (0.2%) Fruit of the Loom, Inc. Class A (a) ......... 2,973 $ 112,602 Liz Claiborne, Inc. ......................... 2,913 112,515 Russell Corp. ............................... 1,573 46,797 Springs Industries, Inc. Class A ............ 757 32,551 VF Corp. .................................... 2,507 169,222 ----------- 473,687 ----------- TOBACCO (1.9%) American Brands, Inc. ....................... 6,765 335,713 Philip Morris Cos., Inc. .................... 32,236 3,630,580 UST Inc. .................................... 7,425 240,384 ----------- 4,206,677 ----------- TOYS (0.2%) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 18 Hasbro Inc. ................................. 3,422 133,030 Mattel, Inc. ................................ 10,867 301,560 ----------- 434,590 ----------- TRANSPORTATION - MISCELLANEOUS (0.1%) Federal Express Corp. (a) ................... 4,483 199,493 Ryder System, Inc. .......................... 3,100 87,188 ----------- 286,681 ----------- TRUCKERS (0.0%) (b) Caliber System, Inc. ........................ 1,575 30,319 ----------- Total Common Stocks (Cost $168,760,654) ....................... 222,139,814(c) ----------- Principal Amount ============== SHORT-TERM INVESTMENT (1.2%) U.S. GOVERNMENT (1.2%) United States Treasury Bill 4.85%, due 02/06/97 (d) ................... $ 2,700,000 2,686,953 ----------- Portfolio of Investments continued (a) Non-income producing securities. (b) Less than one tenth of a percent. (c) The combined market value of common stocks and settlement value of Standard & Poor's 500 Index futures contracts represents 99.6% of net assets. (d) Segregated as collateral for futures contracts. (e) The cost for Federal income tax purposes is $171,510,534. (f) At December 31, 1996 net unrealized appreciation was $53,316,233, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $55,129,220 and aggregate gross unrealized depreciation for all investments on which there was an excess of cost over market value of $1,812,987. (g) Represents the difference between the value of the contracts at the time they were opened and the value at December 31, 1996. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 19 Value ================= Total Short-Term Investment (Cost $2,686,953) ......................... $ 2,686,953 ------------- Total Investments (Cost $171,447,607) (e) ................... 99.6 224,826,767(f) Cash and Other Assets, Less Liabilities .......................... 0.4 922,844 ------- ------------- Net Assets .................................. 100.0% $ 225,749,611 ===== ============= Contracts Unrealized Long Depreciation ================================= FUTURES CONTRACTS (0.0%)(b) Standard & Poor's 500 March 1997 ................................ 7 $ (27,059) ------------- Total Futures Contracts (Settlement Value $2,605,750) ............. $ (27,059)(g) ============= Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 20 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $171,447,607) ............................. $224,826,767 Cash ........................................................ 95,895 Receivables: Fund shares sold .......................................... 942,802 Investment securities sold ................................ 564,593 Dividends and interest .................................... 357,370 Unamortized organization expense ............................ 49,511 Other assets ................................................ 89 ------------ Total assets ............................................. 226,837,027 ------------ LIABILITIES: Payables: Investment securities purchased ........................... 468,936 Fund shares redeemed ...................................... 295,943 NYLIFE Distributors ....................................... 80,070 NYLIFE Inc. ............................................... 33,000 Transfer agent ............................................ 20,000 Management ................................................ 18,994 Custodian ................................................. 10,355 Accrued expenses ............................................ 109,018 Variation margin payable on futures contracts ............... 51,100 ------------ Total liabilities ........................................ 1,087,416 ------------ Net Assets .................................................. $225,749,611 ============ COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized ...................... $ 96,592 Additional paid-in capital .................................. 171,093,963 Accumulated undistributed net realized gain on investments ............................... 1,206,955 Net unrealized appreciation on investments .................. 53,352,101 ------------ Net assets applicable to outstanding shares ................. $225,749,611 ============ Shares of beneficial interest outstanding ................... 9,659,232 ============ Net asset value per share outstanding ....................... $ 23.37 Maximum sales charge (3.00% of offering price) .............. 0.72 ------------ Maximum offering price per share outstanding ................ $ 24.09 ============ Statement of Operations (a) Dividends recorded net of foreign withholding taxes of $29,396. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 21 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Dividends (a) ............................................. $ 3,202,159 Interest .................................................. 988,955 ------------ Total income ............................................. 4,191,114 Expenses: Administration ............................................ 655,140 Distribution .............................................. 409,463 Management ................................................ 163,785 Transfer agent ............................................ 134,464 Shareholder communication ................................. 78,197 Registration .............................................. 57,847 Custodian ................................................. 53,572 Professional .............................................. 22,086 Amortization of organization costs ........................ 12,514 Trustees .................................................. 5,556 Miscellaneous ............................................. 7,679 ------------ Total expenses before reimbursement ...................... 1,600,303 Expense reimbursement from Administrator .................... (290,022) ------------ Net expenses ............................................. 1,310,281 ------------ Net investment income ....................................... 2,880,833 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain from: Security transactions ..................................... 1,714,160 Futures transactions ...................................... 3,791,136 ------------ Net realized gain on investments ............................ 5,505,296 ------------ Net change in unrealized appreciation on investments: Security transactions ..................................... 25,949,065 Futures transactions ...................................... (316,584) ------------ Net unrealized gain on investments .......................... 25,632,481 ------------ Net realized and unrealized gain on investments ............. 31,137,777 ------------ Net increase in net assets resulting from operations ........ $ 34,018,610 ============ Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 22 Year ended Year ended December 31, December 31, 1996 1995 ------------- ------------- INCREASE IN NET ASSETS: Operations: Net investment income ......................... $ 2,880,833 $ 1,367,940 Net realized gain on investments .............. 5,505,296 2,374,186 Net change in unrealized appreciation on investments ............................... 25,632,481 20,397,129 ------------- ------------- Net increase in net assets resulting from operations ............................. 34,018,610 24,139,255 ------------- ------------- Dividends and distributions to shareholders: From net investment income .................... (4,255,511) (1,179,184) From net realized gain on investments ......... (6,641,480) (1,183,983) ------------- ------------- Total dividends and distributions to shareholders (10,896,991) (2,363,167) ------------- ------------- Capital share transactions: Net proceeds from sale of shares .............. 99,873,971 31,920,582 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions .................. 10,618,632 2,322,832 ------------- ------------- 110,492,603 34,243,414 Cost of shares redeemed ....................... (17,172,280) (8,272,732) ------------- ------------- Increase in net assets derived from capital share transactions ................ 93,320,323 25,970,682 ------------- ------------- Net increase in net assets ................... 116,441,942 47,746,770 NET ASSETS: Beginning of year ............................... 109,307,669 61,560,899 ------------- ------------- End of year ..................................... $ 225,749,611 $ 109,307,669 ============= ============= Accumulated undistributed net investment income ............................. $ -- $ 1,369,359 ============= ============= Financial Highlights selected per share data and ratios * The Fund changed its fiscal year end from August 31 to December 31. + Annualized. (a) Commencement of operations. (b) Total return is calculated exclusive of sales charge and is not annualized. (c) Disclosure of amount required for fiscal years beginning on or after September 1, 1995. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 23 September 1 Year ended Year ended through Year ended August December 31, December 31, December 31 ----------------------- 1996 1995 1994* 1994 1993 -------- -------- ------- ------- ------- - Net asset value at beginning of period . $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ -------- -------- ------- ------- ------- - Net investment income .................. 0.30 0.24 0.09 0.27 0.22 Net realized and unrealized gain (loss) on investments ....................... 3.92 4.82 (0.48) 0.37 1.47 -------- -------- ------- ------- ------- - Total from investment operations ....... 4.22 5.06 (0.39) 0.64 1.69 -------- -------- ------- ------- ------- - Less dividends and distributions: From net investment income ............. (0.54) (0.27) -- (0.25) (0.18) From net realized gain on investments .. (0.82) (0.27) -- (0.18) (0.02) -------- -------- ------- ------- ------- - Total dividends and distributions ...... (1.36) (0.54) -- (0.43) (0.20) -------- -------- ------- ------- ------- - Reverse Share Split .................... 1.36 0.54 -- 0.43 0.20 -------- -------- ------- ------- ------- - Net asset value at end of period ....... $ 23.37 $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ ======== ======== ======= ======= ======= = Total investment return (b) ............ 22.04% 35.91% (2.68%) 4.59% 13.91% Ratios (to average net assets) /Supplemental Data: Net investment income ................ 1.8% 1.7% 2.0%+ 1.9% 1.9% Expenses ............................. 0.8% 1.1% 0.9%+ 0.9% 0.9% Expenses (before reimbursement) ...... 1.0% 1.1% 0.9%+ 0.9% 0.9% Portfolio turnover rate ................ 3% 4% 2% 12% 4% Average commission rate paid ........... $ 0.0465 (c) (c) (c) (c) Net assets at end of period (in 000's) . $225,750 $109,308 $61,561 $62,828 $62,921 $ MainStay Equity Index Fund Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay Equity Index Fund (the "Fund"). The Fund's objective is to provide investment results that correspond to the total return performance of publicly traded common stocks represented by the Standard & Poor's 500 Composite Stock Price Index. Note 2--Significant Account Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of close of regular trading on the Exchange. The net asset value per share is determined by taking the assets attributable to the shares, subtracting the liabilities attributable to the shares, and dividing the result by the outstanding shares. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising common and preferred stocks which are traded on the New York Stock Exchange at the last sale price on that day or, if no sale occurs, at the mean between the closing bid and asked prices, (b) by appraising common and preferred stocks traded on other United States national securities exchanges as nearly as possible in the manner described in (a) by reference to their principal exchange, including the National Association of Securities Dealers National Market System, (c) by appraising over-the-counter securities quoted on the National Association of Securities Dealers NASDAQ system (but not listed on the National Market System) at the bid price supplied through such system, (d) by appraising over-the-counter securities not quoted on the NASDAQ system at prices supplied by the pricing agent or brokers selected by the Adviser, if these prices are deemed to be representative of market values at the regular close of business of the New York Stock Exchange. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value on maturity date if their original term to maturity at purchase exceeded 60 days. Futures Contracts. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date, or to make or receive a cash payment based on the value of a securities index. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin". When the futures contract is closed, the Fund records a realized gain or loss 24 Notes to Financial Statements equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund invests in stock index futures contracts to gain full exposure to changes in stock market prices to fulfill its investment objective. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund's involvement in long futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts are conducted through regulated exchanges which minimize counterparty credit risks. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Permanent book- tax differences of $5,319 and $31,047 have been reclassified from accumulated distribution in excess of net investment income and accumulated net realized gain on investments, respectively, to additional paid-in capital. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends annually. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. The Fund went ex-dividend on January 2, 1996 and December 27, 1996 and also underwent a reverse share split on those days. The reverse share split rates were 0.9715 and 0.9663, respectively, per share outstanding, calculated on fund shares outstanding immediately after reinvestment of dividends. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued daily. Organization costs. Costs incurred in connection with the Fund's initial organization and registration totalled $124,798. Such costs are being amortized over ten years beginning at the commencement of operations of the Fund. This period corresponds to the guarantee period of the original offering (See Note 6). In the event NYLIFE Securities Inc. redeems any of the shares initially purchased, the proceeds of such redemption will be reduced by the proportionate amount of the unamortized deferred organizational expenses which the number of shares redeemed by it bears to the total number of initial shares purchased by it. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. 25 MainStay Equity Index Fund Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Management and Administration Fees. Monitor Capital Advisors, Inc. ("Monitor") acts as investment manager to the Fund under an Investment Management Agreement. Monitor is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.10% and 0.40%, respectively, of the average daily net assets of the Fund. Effective January 1, 1996, in the event the total expenses of the Fund (including 12b-1 fees) for any fiscal year exceed 0.80% of the value of the Fund's average annual net assets, the Administrator will reduce its fee payable by the Fund by the difference between the Fund's total expenses and 0.80%. This reduction amounted to $290,022 for the year ended December 31, 1996. This fee waiver is voluntary and may be terminated at any time. The Investment Management and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees of the Adviser and the Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the limits set by any state that regulates mutual fund expenses, the Adviser and Administrator each will reduce their fee payable by the Fund by 20% and 80%, respectively, of such excess. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors (the "Distributor"). The Fund has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's shares, which is an expense of the Fund for distribution or service activities as designated by the Distributor. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. 26 Notes to Financial Statements continued NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charge. The Fund was advised that the amount of sales charge retained by NYLIFE Distributors was $1,968,993 for the year ended December 31, 1996. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Capital. At December 31, 1996, NYLIFE Securities owned shares of the Fund with a net asset value of $233,700, which represents 0.10% of the Fund's net assets at year end. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $16,383. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $3,866 for the year ended December 31, 1996. Note 4--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $102,913 and $4,535, respectively. Note 5--Capital Share Transactions (in 000's): 27 Year Ended December 31 1996 1995 ----- ----- Shares sold ........................................ 4,773 1,845 Shares issued in reinvestment of dividends and distributions .................... 491 171 ----- ----- 5,264 2,016 Shares redeemed .................................... 810 502 Reduction of shares due to reverse share split ............................... 503 174 ----- ----- Net increase ....................................... 3,951 1,340 ===== ===== MainStay Equity Index Fund Note 6--Guarantee: NYLIFE provides a guarantee to the effect that if, 10 years from the date of purchase (the "Guarantee Date"), the net asset value of a unit equal to the net asset value of a Fund share purchased, plus the value of all cumulative reinvested dividends and distributions attributable to such share paid during that 10-year period ("Guaranteed Share"), is less than the public offering price initially paid for the share ("Guaranteed Amount"), NYLIFE will pay to the transfer agent for disbursement to shareholders an amount equal to the difference between the net asset value of each such Guaranteed Share outstanding and held by shareholders as of the close of business on the Guarantee Date and the Guaranteed Amount for each such share. The Fund is not a party to the guarantee. 28 Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay Equity Index Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 29 THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 30 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons EQUITY INDEX FUND graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating internation stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income Convertible Fund graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 31 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities.(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY Equity Index Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] New York Life This report is provided for the information of shareholders of the MainStay Equity Index Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. MSAN07 (297) [GRAPHIC] Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay Government Fund Highlights 3 $10,000 Invested in the MainStay Government Fund versus Lehman Brothers Government Bond Index and Inflation-- Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Portfolio Composition 7 Returns & Lipper Rankings 9 Portfolio of Investments 10 Financial Statements 12 Notes to Financial Statements 16 Report of Independent Accountants 21 The MainStay Funds 22 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 MainStay Government Fund Highlights 1996 MARKET HIGHLIGHTS o The total return of the government market was slightly positive for 1996, with performance mostly determined by rising interest rates and supply dynamics o The mortgage market was a strong relative performer during 1996, outperforming the Treasury market o The addition of two 10-year Treasury auctions and one 30-year Treasury auction affected supply, pricing, and demand within the government market 1996 FUND HIGHLIGHTS o One-year total returns of 1.97% and 1.25% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o Class A shares outperformed the average Lipper+ general U.S. government fund, while the Class B shares underperformed the average Lipper general U.S. government fund o Security selection in Treasuries and mortgage-backed securities helped add value throughout the year o Seasoned mortgage-backed securities, particularly those issued in earlier years, helped contribute positively to performance of the Fund o The Fund closed the year with approximately 37% in mortgage pass-throughs and about 6% invested in commercial mortgages and manufactured housing mortgages o Fund track record exceeded 10 years + See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested In The MainStay Government Fund Versus Lehman Brothers Government Bond Index And Inflation CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Government Fund [GRAPHIC] Lehman Brothers Government Bond Index* [GRAPHIC] Inflation+ CLASS B SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Government Fund [GRAPHIC] Lehman Brothers Government Bond Index* [GRAPHIC] Inflation+ Lehman Brothers Government MainStay Year-end Bond Index* Government Fund Inflation+ - -------------------------------------------------------------------------------- 05/1/86 $10,000 $ 9,550 $10,000 12/86 $10,567 $10,115 $10,193 12/87 $10,799 $10,471.8 $10,644 12/88 $11,559 $11,142.3 $11,113 12/89 $13,203 $12,498.7 $11,629 12/90 $14,355 $13,363.8 $12,355 12/91 $16,554 $15,154.7 $12,724 12/92 $17,751 $15,733.2 $13,100 12/93 $19,643 $16,658.1 $13,459 12/94 $18,979 $16,183.7 $13,809 12/95 $22,460 $18,834.5 $14,168 12/96 $23,082 $19,205 $14,637 Lehman Brothers Government MainStay Year-end Bond Index* Government Fund Inflation+ - -------------------------------------------------------------------------------- 05/1/86 $10,000 $10,000 $10,000 12/86 $10,567 $10,591.6 $10,193 12/87 $10,799 $10,965.2 $10,644 12/88 $11,559 $11,667.3 $11,113 12/89 $13,203 $13,087.6 $11,629 12/90 $14,355 $13,993.5 $12,355 12/91 $16,554 $15,868.8 $12,724 12/92 $17,751 $16,474.6 $13,100 12/93 $19,643 $17,443 $13,459 12/94 $18,979 $16,946.3 $13,809 12/95 $22,460 $19,605.7 $14,168 12/96 $23,082 $19,851.7 $14,637 The Class A graph assumes an initial investment of $10,000 made on 5/1/86 reflecting the effect of the 4.5% maximum up-front sales charge, thereby reducing the amount of the investment to $9,550 and includes the historical performance of the Class B shares for periods from inception (5/1/86) through 12/31/94. The Class B graph assumes an initial investment of $10,000 made on 5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply for the period shown. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * The Lehman Brothers Government Bond Index includes issues of the U.S. government and agencies thereof, as well as fixed-rate debt issues that are rated investment-grade by Moody's, Standard & Poor's, or Fitch, in that order, with at least one year to maturity. The Index is unmanaged and results assume the reinvestment of all income and capital gain distributions. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 Portfolio Management Discussion and Analysis [GRAPHIC] Photo of Government Fund Team GOVERNMENT FUND TEAM Christopher Harms, Edward Munshower, and Ravi Akhoury After a spectacular year in 1995, the market had high expectations for government bonds in 1996. Moderate interest rates, controlled inflation, and hopes for a balanced budget amendment provided a promising backdrop-- but also the potential for considerable volatility if any one of these factors failed to materialize. Despite a slight interest rate reduction of 25 basis points by the Federal Reserve (Fed) early in the year, interest rates began to rise due to stalled budget talks and a strengthening economy. By midyear, 30-year Treasury yields had risen 95 basis points, cutting prices by 11%. Through the second half of the year, Treasury yields declined somewhat, allowing investors to end the year with modest, but positive returns. The introduction of additional auctions for 10- and 30-year Treasuries redefined supply dynamics within the U.S. government bond market and created opportunities for selective movements among newer and older issues. Mortgage-backed securities provided strong performance relative to Treasuries throughout the year and offered attractive investment opportunities. For the 12 months ended December 31, 1996, the average Lipper++ general U.S. government fund returned 1.72%. Given this context, how did the MainStay Government Fund do in 1996? For the one-year period ended December 31, 1996, the MainStay Government Fund provided total returns of 1.97% and 1.25% for Class A and Class B shares, respectively. This respectively ranked our Class A shares and Class B shares in the second and third quartiles against all Lipper government funds. What factors were the primary influence on the bond market during the year? Rising interest rates were the most influential factor in the market. After the Fed eased rates slightly on January 31, 1996, signs of a strengthening economy led to rising rates throughout the first half. Interest rates declined through much of the third quarter, resulting in a bond rally during the election season. In December, however, rates [GRAPHIC] Basis point One hundredth of one percent in the yield of an investment, i.e., 100 basis points equals 1%. Auction The competitive bidding process through which Treasury securities are sold. Mortgage-backed securities Securities representing interests in "pools" of mortgages in which principal and interest payments by the holders of underlying fixed- or adjustable-rate mortgages are, in effect, "passed through" to investors (net of fees paid to the issuer or guarantor of the securities). ++ See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 5 [GRAPHIC] Easing/Tightening When the Federal Reserve lowers interest rates on benchmark securities it is said to be "easing" or making borrowing more affordable. When it raises interest rates, it is said to be "tightening" or making borrowing more expensive. Duration A measure of price sensitivity, which adjusts for the time value of the payments investors will receive and which takes into account interest payments as well as principal payments. Duration is a better gauge of interest-rate sensitivity than average maturity alone. [GRAPHIC] YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL] Returns are for Class B shares unless otherwise noted. See footnote* on page 9 for more information on performance. climbed again, ending the year 80 basis points higher than where they began. How did you respond to this mixed interest rate scenario? With rates rising in the first half and falling in the second, we kept the Fund's duration adjustments relatively modest. Duration adjustments in the second and fourth quarters added value, but were offset in the first and third quarters. Overall, the Fund's duration strategy was relatively conservative, ranging between 4 3/4 and 5 1/4 years. What else affected the performance of the Government Fund? The change in the Treasury's auction cycle created new supply dynamics in the government market during the last half of the year. We started the year heavily invested in new issues, which helped to add value. In the second quarter, we moved to older issues, recognizing that greater supply of new securities could reduce demand. This move also had a positive effect on the Fund's performance. In the fourth quarter, the Treasury announced that inflation-indexed bonds would be introduced in January 1997. While this hasn't yet had an impact on government bonds, we anticipate that it may be an important factor in the coming year. Total Return Year-end % - --------------------------------------------- 12/86 5.92 12/87 3.53 12/88 6.40 12/89 12.17 12/90 6.92 12/91 13.40 12/92 3.81 12/93 5.88 12/94 -2.85 12/95 16.38 Class A 12/95 15.69 Class B 12/96 1.97 Class A 12/96 1.25 Class B Given the weakness of Treasuries, what did you do to help enhance yields? We used a variety of strategies to help enhance yields throughout the year. We reduced the Fund's commitment to Treasuries from about 72% of the portfolio in January to just 39% at year-end. Concurrently, we increased the Fund's holdings among mortgage-backed securities, which outperformed Treasuries every month. In particular, we concentrated on older issues, which had lower 6 [GRAPHIC] PORTFOLIO COMPOSTION AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. volatility, tamer prepayments, and in most cases, attractive yield advantages. This strategy had a positive influence on performance throughout the year. Were there other steps that you took? Yes. The year of origination was an underlying theme in our mortgage-backed security selection. Within the seasoned mortgage market, we purchased securities that were issued specifically in certain years. This strategy added considerable value as spreads narrowed and market participants changed their purchasing strategies from general to specific years. We believe that many seasoned mortgages continue to offer attractive relative value. Were you only in traditional mortgage-backed securities? In terms of issuance, nontraditional mortgage products of 1994 and 1995 are now the traditional products. In the fourth quarter, we added modest positions in AAA-rated home-equity loans and low-balance loans, which contributed positively to performance. Toward the end of the year, we purchased Fannie Mae multifamily project loans and Ginnie Mae adjustable-rate mortgages. We closed the year with 37% in mortgage pass-throughs and 6% of the portfolio in pools of commercial mortgages and manufactured housing mortgages. Why are you moving into these areas? These AAA-rated securities offer attractive yields and liquidity versus governments. We seek to identify ways to help enhance yield, consistent with our strict risk-management disciplines. What do you see ahead for 1997? We believe that the 30-year Treasury bond is likely to trade in a range from 6.5% to [GRAPHIC] 7 Percentage - -------------------------------------------------------- U.S. Treasury Notes 24.0% Federal National Mortgage Association 26.4% U.S. Treasury Bonds 23.1% Government National Mortgage Association 13.7% Asset-Backed Securities 8.2% Federal Home Loan Mortage Corporation 3.2% All Other 1.4% 7.5%. We will continue to monitor the economy and inflation expectations as potential catalysts to determine a change in the direction of interest rates. Whatever develops, we'll continue to seek investment-grade securities, and manage the Government Fund to pursue current income, consistent with safety of principal for our shareholders. Ravi Akhoury Edward Munshower Portfolio Managers [GRAPHIC] 8 Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Class A shares, first offered to the public on 1/3/95, are sold with a maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%. Performance figures for this class include the historical performance of the Class B shares for periods from inception (5/1/86) up to 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class B shares of the Fund are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to 1%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 5/1/86. [GRAPHIC] 9 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 1.97% 4.85% 6.62% 6.76% Class B 1.25% 4.58% 6.48% 6.63% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A -2.62% 3.89% 6.13% 6.30% Class B -3.75% 4.24% 6.48% 6.63% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 80 out of n/a n/a n/a 170 funds Class B 114 out of 65 out of 30 out of 28 out of 170 funds 71 funds 40 funds 35 funds Average Lipper U.S. government bond fund 1.72% 5.88% 6.92% 7.32% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $8.06 $0.5007 $0.0000 Class B $8.04 $0.4642 $0.0000 ================================================================================ MainStay Government Fund Principal Amount Value =================================== LONG-TERM INVESTMENTS (98.6%)+ ASSET-BACKED SECURITIES (8.2%) AUTO LEASE (1.7%) World Omni Automobile Lease Securitization Trust Series 1996-A Class A1 6.30%, due 6/25/02 .................... $ 13,300,000 $ 13,345,752 ------------ COMMERCIAL MORTGAGES (1.7%) Asset Securitization Corp. Series 1996-MD6 Class A1-B 6.88%, due 11/13/26 .................... 13,295,000 13,348,978 ------------ FIRST MORTGAGE LOAN (0.7%) Independent National Mortgage Corp. Series 1996-D Class A2 7.00%, due 5/25/26 .................... 6,000,000 5,978,460 ------------ MANUFACTURED HOUSING LOANS (4.1%) Green Tree Financial Corp. Series 1996-10 Class A6 7.30%, due 11/15/28 ................... 23,000,000 22,590,370 Series 1996-8 Class A7 8.05%, due 10/15/27 ................... 10,000,000 10,281,300 ------------ 32,871,670 ------------ Total Asset-Backed Securities (Cost $66,340,898) .................... 65,544,860 ------------ U.S. GOVERNMENT & FEDERAL AGENCIES (90.4%) FEDERAL HOME LOAN MORTGAGE ASSOCIATION GOLD (MORTGAGE PASS- THROUGH SECURITY) (0.6%) 7.00%, due 12/1/01 .................... 4,800,000 4,849,488 ------------ FEDERAL HOME LOAN MORTGAGE CORPORATION (COLLATERALIZED MORTGAGE OBLIGATIONS) (2.6%) Series 1858 Class B 6.00%, due 12/15/05 ................... 11,905,000 11,774,759 Series 1783-A Class A 8.00%, due 2/15/00 .................... 8,628,497 8,819,963 ------------ 20,594,722 ------------ Principal Amount Value ================================== FEDERAL NATIONAL MORTGAGE ASSOCIATION (COLLATERALIZED MORTGAGE OBLIGATIONS) (4.0%) Series 1993-224 Class PD 5.25%, due 8/25/15 .................... $ 15,667,000 $ 15,534,770 Series 1993-93 Class C 5.50%, due 2/25/06 .................... 16,982,078 16,775,067 ------------ + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 10 32,309,837 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS- THROUGH SECURITIES) (22.4%) 6.00%, due 11/1/23 .................... 14,537,059 13,573,979 6.00%, due 11/21/26 ARM COFI TBA (a)(c)(d) ................ 17,565,000 17,477,175 6.605%, due 2/25/07 TBA (a) ........... 9,465,000 9,283,461 6.52%, due 12/1/03 .................... 5,725,000 5,662,826 7.00%, due 8/1/11-1/1/24 .............. 56,251,570 55,959,808 6.595%, due 1/31/03 TBA (a) ........... 5,650,000 5,611,410 6.765%, due 1/1/07 .................... 12,824,000 12,717,561 6.80%, due 1/31/04 TBA (a) ............ 8,820,000 8,855,721 6.83%, due 1/1/07 TBA (a) ............. 11,425,000 11,380,671 6.835%, due 1/22/07 TBA (a) ........... 11,610,000 11,568,901 9.00%, due 1/1/05-6/1/25 .............. 25,507,924 26,910,100 ------------ 179,001,613 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION I (MORTGAGE PASS- THROUGH SECURITIES) (11.3%) 6.50%, due 10/15/23-12/15/23 .......... 8,111,724 7,777,115 8.00%, due 12/15/23 ................... 35,503,711 36,430,003 9.50%, due 12/15/17 ................... 9,420,694 10,277,411 9.50%, due 1/23/27 TBA (a) ............ 33,000,000 35,877,270 ------------ 90,361,799 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (MORTGAGE PASS- THROUGH SECURITIES) (2.4%) 6.50%, due 1/20/23 ARM (c) ............ 5,720,906 5,829,947 6.50%, due 2/20/23 ARM (c) ............ 6,429,157 6,559,733 7.00%, due 11/20/21 ARM (c) ........... 2,843,416 2,908,275 7.00%, due 11/20/22 ARM (c) ........... 3,871,819 3,948,055 ------------ 19,246,010 ------------ Portfolio of Investments December 31, 1996 Principal Amount Value ================================== U.S. GOVERNMENT & FEDERAL AGENCIES (Continued) UNITED STATES TREASURY BONDS (23.1%) 6.25%, due 8/15/23 (b) ................ $ 33,261,000 $ 31,182,187 6.50%, due 11/15/26 ................... 58,850,000 57,755,979 8.875%, due 8/15/17 ................... 44,807,000 55,343,814 11.25%, due 2/15/15 ................... 27,295,000 40,307,072 ------------ 184,589,052 ------------ UNITED STATES TREASURY NOTES (24.0%) 5.50%, due 11/15/98 ................... 23,490,000 23,332,147 5.625%, due 11/30/00 .................. 16,000,000 15,709,920 6.375%, due 3/31/01-8/15/02 ........... 87,565,000 88,147,985 6.50%, due 5/15/05 (b) ................ 8,065,000 8,119,197 8.125%, due 2/15/98 ................... 55,160,000 56,590,850 ------------ 191,900,099 ------------ Total U.S. Government & Federal Agencies (Cost $718,934,611) .................... 722,852,620 ------------ Total Long-Term Investments (Cost $785,275,509) .................... 788,397,480 ------------ SHORT-TERM INVESTMENTS (12.2%) COMMERCIAL PAPER (3.4%) American Express Credit Corp. 6.552%, due 1/2/97 .................... 27,555,000 27,555,000 ------------ Total Commercial Paper (Cost $27,555,000) .................... 27,555,000 ------------ U.S. GOVERNMENT & FEDERAL AGENCY (8.8%) FEDERAL HOME LOAN BANK (8.7%) 6.82%, due 1/14/97 (b) ................ 69,900,000 69,731,541 ------------ Principal Amount Value ================================== UNITED STATES TREASURY NOTE (0.1%) 8.75%, due 10/15/97 ................... $ 500,000 $ 511,955 ------------ Total U.S. Government & Federal Agency (Cost $70,323,191) ..................... 70,243,496 ------------ Total Short-Term Investments (Cost $97,878,191) ..................... 97,798,496 ------------ Total Investments (Cost $883,153,700) (e) ............... 110.8% 886,195,976(f) ------------- ------------ (a) TBA: Securities purchased on a forward commitment basis with an approximate principal amount and maturity date. The actual principal amount and the maturity will be determined upon settlement. (b) Segregated or partially segregated as collateral for TBA's. (c) ARM--Adjustable Rate Mortgage. Resets Monthly. (d) COFI--Cost of Funds Indexed. (e) The cost for Federal income tax purposes is $888,606,818. (f) At December 31, 1996 net unrealized depreciation was $2,410,842, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $1,827,530 and aggregate gross unrealized depreciation of all investments on which there was an excess of cost over market value of $4,238,372. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 11 Liabilities in Excess of Cash and Other Assets ...................... (10.8) (86,812,633) ------------- ------------ Net Assets .............................. 100.0% $799,383,343 ============= ============ Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $883,153,700) ........................... $ 886,195,976 Cash ...................................................... 2,746 Receivables: Interest ................................................ 9,249,449 Investment securities sold .............................. 6,951,255 Fund shares sold ........................................ 466,129 Other Assets .............................................. 566 ------------- Total assets ........................................... 902,866,121 ------------- LIABILITIES: Payables: Investment securities purchased ......................... 100,461,553 Fund shares redeemed .................................... 1,715,971 NYLIFE Distributors ..................................... 758,681 Adviser ................................................. 206,639 Transfer agent .......................................... 135,800 Custodian ............................................... 13,564 Trustees ................................................ 6,076 Accrued expenses .......................................... 184,494 ------------- Total liabilities ...................................... 103,482,778 ------------- Net assets ................................................ $ 799,383,343 ============= COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A ................................................. $ 20,375 Class B ................................................. 973,900 Addtional paid-in capital ................................. 937,341,211 Accumulated net realized loss on investments .............. (141,994,419) Net unrealized appreciation on investments ................ 3,042,276 ------------- Net assets ................................................ $ 799,383,343 ============= CLASS A Net assets applicable to outstanding shares ............... $ 16,413,372 ============= Shares of beneficial interest outstanding ................. 2,037,511 ============= Net asset value per share outstanding ..................... $ 8.06 Maximum sales charge (4.50% of offering price) ............ 0.38 ------------- Maximum offering price per share outstanding .............. $ 8.44 ============= CLASS B Net assets applicable to outstanding shares ............... $ 782,969,971 ============= Shares of beneficial interest outstanding ................. 97,390,018 ============= Net asset value per share outstanding ..................... $ 8.04 ============= Statement of Operations The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Interest .................................................. $ 64,478,404 ------------ Expenses: Distribution--Class B ..................................... 5,042,552 Administration ............................................ 2,643,801 Advisory .................................................. 2,643,801 Service ................................................... 2,203,176 Transfer agent ............................................ 955,044 Shareholder communication ................................. 332,925 Recordkeeping ............................................. 114,622 Professional .............................................. 103,936 Custodian ................................................. 88,747 Registration .............................................. 46,418 Trustees .................................................. 20,577 Miscellaneous ............................................. 30,271 ------------ Total expenses .......................................... 14,225,870 ------------ Net investment income ....................................... 50,252,534 ------------ REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments ............................ (18,412,508) Net change in unrealized appreciation on investments ........ (24,606,272) ------------ Net realized and unrealized loss on investments ............. (43,018,780) ------------ Net increase in net assets resulting from operations ........ $ 7,233,754 ============ Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 Year ended Year ended December 31, December 31, 1996 1995 --------------- --------------- DECREASE IN NET ASSETS: Operations: Net investment income ..................... $ 50,252,534 $ 67,902,081 Net realized gain (loss) on investments ... (18,412,508) 30,263,895 Net change in unrealized appreciation (depreciation) on investments ........... (24,606,272) 50,910,905 --------------- --------------- Net increase in net assets resulting from operations ......................... 7,233,754 149,076,881 --------------- --------------- Dividends to shareholders: From net investment income: Class A .................................. (979,480) (587,166) Class B .................................. (49,047,447) (65,467,814) In excess of net investment income: Class A .................................. -- (4,714) Class B .................................. -- (525,566) --------------- --------------- Total dividends to shareholders ........ (50,026,927) (66,585,260) --------------- --------------- Capital share transactions: Net proceeds from sale of shares: Class A .................................. 10,249,736 18,152,317 Class B .................................. 69,491,869 68,492,581 Net asset value of shares issued to shareholders in reinvestment of dividends: Class A .................................. 672,638 395,104 Class B .................................. 36,261,617 46,973,420 --------------- --------------- 116,675,860 134,013,422 Cost of shares redeemed: Class A .................................. (6,715,743) (6,301,705) Class B .................................. (270,751,384 (231,727,262) --------------- --------------- Decrease in net assets derived from capital share transactions ........... (160,791,267) (104,015,545) --------------- --------------- Net decrease in net assets ............. (203,584,440) (21,523,924) NET ASSETS: Beginning of year ........................... 1,002,967,783 1,024,491,707 --------------- --------------- End of year ................................. $ 799,383,343 $ 1,002,967,783 =============== =============== Accumulated distribution in excess of net investment income ................... $ -- $ (530,280) =============== =============== Financial Highlights selected per share data and ratios * The Fund changed its fiscal year end from August 31 to December 31. + Annualized. (a) Total return is calculated exclusive of sales charges and is not annualized. (b) Less than one cent per share. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 C ----------------------- Class A Class B Class A Class B September 1 ------- ------- ------- ------- through Ye Year ended Year ended December 31 --------- December 31, 1996 December 31, 1995 1994* 1994 ------------------ ------------------- ------------ --------- Net asset value at beginning of period ........... $ 8.41 $ 8.41 $ 7.76 $ 7.76 $ 8.04 $ 8.7 ------- -------- ------- -------- ---------- --------- Net investment income ........... 0.50 0.46 0.58 0.54 0.19 0.5 Net realized and unrealized gain (loss) on investments ......... (0.35) (0.37) 0.65 0.65 (0.29) (0.7 ------- -------- ------- -------- ---------- --------- Total from investment operations 0.15 0.09 1.23 1.19 (0.10) (0.1 ------- -------- ------- -------- ---------- --------- Less dividends and distributions: From net investment income ...... (0.50) (0.46) (0.58) (0.54) (0.18) (0.5 In excess of net investment income ............. -- -- (0.00)(b) (0.00)(b) -- (0.0 Return of capital ............... -- -- -- -- -- (0.0 ------- -------- ------- -------- ---------- --------- Total dividends and distributions (0.50) (0.46) (0.58) (0.54) (0.18) (0.5 ------- -------- ------- -------- ---------- --------- Net asset value at end of period $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 8.0 ======= ======== ======= ======== ========== ========= Total investment return (a) ..... 1.97% 1.25% 16.38% 15.69% (1.24%) (1.6 Ratios (to average net assets)/ Supplemental Data: Net investment income ........ 6.3% 5.7% 7.3% 6.7% 7.1%+ 7. Expenses ..................... 1.0% 1.6% 1.0% 1.7% 1.7%+ 1. Portfolio turnover rate ......... 307% 307% 540% 540% 143% 49 Net assets at end of period (in 000's) ............. $16,413 $782,970 $12,784 $990,184 $1,024,492 $1,119,58 MainStay Government Fund Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay Government Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's investment objective is to seek a high level of current income, consistent with safety of principal, by investing primarily in U.S. Government securities. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange, (b) by appraising options and futures contracts at the last sale price on the market where such options or futures are principally traded, and (c) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value on maturity date if their original term to maturity at purchase exceeded 60 days. 16 Notes to Financial Statements Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Mortgage Dollar Rolls. The Fund enters into mortgage dollar roll transactions ("MDRs") in which it sells mortgage backed securities ("MBS") from its portfolio to a counterparty from whom it simultaneously agrees to buy a similar security on a delayed delivery basis. The MDR transactions of the Fund are classified as purchase and sale transactions. The securities sold in connection with the MDR are removed from the portfolio and a realized gain or loss is recognized. The securities the Fund has agreed to acquire are included at market value in the portfolio of investments and liability for such purchase commitments is included as payables for investments purchased. The Fund maintains a segregated account with its custodian containing securities from its portfolio having a value not less than the repurchase price, including accrued interest. MDR transactions involve certain risks, including the risk that the MBS returned to the Fund at the end of the roll, while substantially similar, could be inferior to what was initially sold to the counterparty. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Permanent book- tax differences of $304,673 and $9,473,477 have been reclassified from accumulated distribution in excess of net investment income and accumulated net realized loss on investments, respectively, to additional paid-in capital due to paydown reclasses and expiration of capital loss carryover. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends monthly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method and include gains and losses from repayments of principal on mortgage backed securities. Interest income is accrued daily except when collection is not expected. Discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expenses incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. 17 MainStay Government Fund Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.30% of the average daily net assets of the Fund. The Administrator and Adviser have voluntarily agreed to reduce their combined fees on assets exceeding $1 billion to 0.55%. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.75% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. 18 Notes to Financial Statements continued The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $96,545 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges for redemption of Class B shares of $952,234 for the year ended December 31, 1996. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $27,700. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $29,582 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $114,622. Note 4--Federal Income Tax: At December 31, 1996, for Federal income tax purposes, capital loss carryforwards of $135,741,502, net of losses of $799,797 which have been deferred for Federal income tax purposes, are available, as shown in the table below, to the extent provided by regulations to offset future realized gains of the Fund through 2004. To the extent that these carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. 19 MainStay Government Fund Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of U.S. Government securities were $2,684,917 and $2,921,754, respectively. Purchases and sales of securities other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $66,341 and $0, respectively. Note 6--Capital Share Transactions (in 000's): 20 Capital Loss Amount Available Through (000's) ----------------- -------- 1998 ......................... $ 11,617 2000 ......................... 4,831 2001 ......................... 9,349 2002 ......................... 96,653 2004 ......................... 13,292 -------- $135,742 ======== Year ended December 31 1996 1995 ----------------- ----------------- Class A Class B Class A Class B ------- ------- ------- ------- Shares sold .......................... 1,262 8,590 2,246 8,414 Shares issued in reinvestment of dividends ....................... 84 4,497 48 5,761 ----- ------- ----- ------ 1,346 13,087 2,294 14,175 Shares redeemed ...................... 828 33,474 774 28,453 ----- ------- ----- ------- Net increase (decrease) .............. 518 (20,387) 1,520 (14,278) ===== ======= ===== ======= Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay Government Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 21 THE MAINSTAY FUNDS GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 22 [Horizontal bar Invests in a portfolio that tracks You seek a con Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating internation stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a combin Total Return Fund graph indicating opportunities by investing in stocks, growth potential risk/reward of Fund] bonds, and money market instruments risk through dive - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to maxi Value Fund graph indicating attractive dividends and a stimulus securities which risk/reward of Fund] for positive change tial than the ma - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income f Convertible Fund graph indicating a special blend of long-term growth may offer growth risk/reward of Fund] potential and dividend income into common stock - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 23 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking GOVERNMENT FUND [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities.(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY Government Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay Government Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. MSAN08 (297) [GRAPHIC] Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay High Yield Corporate Bond Fund Highlights 3 $10,000 Invested in the MainStay High Yield Corporate Bond Fund versus S&P 500 and Inflation--Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by Industry--Top 5 7 Quality Breakdown 8 Returns & Lipper Rankings 9 Top 10 Holdings 10 10 Largest Purchases 11 10 Largest Sales 11 Portfolio of Investments 12 Financial Statements 21 Notes to Financial Statements 25 Report of Independent Accountants 32 The MainStay Funds 34 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 MainStay High Yield Corporate Bond Fund Highlights 1996 MARKET HIGHLIGHTS o High-yield bonds had a relatively strong year, with returns in the low teens o The strength of the equity market helped many high-yield issuers improve credit quality through initial public offerings and other stock offerings to pay down debt o Both lower-tier and higher-quality credits showed strengths throughout the year o During 1996, defaults in the high-yield sector remained below 1% 1996 FUND HIGHLIGHTS o One-year total returns of 16.33% and 15.58% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o Both share classes outperformed the average Lipper+ high current yield fund for the 12 months ended 12/31/96 o Class A shares and Class B shares ranked in the top 13% and 18%, respectively, of 148 funds in their Lipper universe for the 12 months ended 12/31/96 o Strong performers included companies that raised equity capital or benefited from takeovers o For defensive purposes, the Fund held from 15% to 20% in cash and cash equivalents throughout the year o During 1996, the Fund's track record exceeded 10 years + See footnote and table on page 9 for additional information on Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested in the MainStay High Yield Corporate Bond Fund versus S&P 500 and Inflation CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay High Yield Corporate Bond Fund [GRAPHIC] S&P 500* [GRAPHIC] Inflation+ CLASS B SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay High Yield Corporate Bond Fund [GRAPHIC] S&P 500* [GRAPHIC] Inflation+ The Class A graph assumes an initial investment of $10,000 made on 5/1/86 reflecting the effect of the 4.5% MainStay High Yield Year-end S&P 500 Corporate Bond Fund Inflation - -------------------------------------------------------------------------------- 5/1/86 $ 10,000 $ 9,550.00 $ 10,000 12/86 $ 10,518 $ 10,027.80 $ 10,193 12/87 $ 11,070 $ 10,046.70 $ 10,644 12/88 $ 12,903 $ 11,743.20 $ 11,113 12/89 $ 16,983 $ 11,151.10 $ 11,629 12/90 $ 16,457 $ 10,276.20 $ 12,355 12/91 $ 21,460 $ 13,592.60 $ 12,724 12/92 $ 23,093 $ 16,534.90 $ 13,100 12/93 $ 25,412 $ 20,115.00 $ 13,459 12/94 $ 15,747 $ 20,416.10 $ 13,809 12/95 $ 35,412 $ 24,556.80 $ 14,168 12/96 $ 43,536 $ 28,567.00 $ 14,637 MainStay High Yield Year-end S&P 500 Corporate Bond Fund Inflation - -------------------------------------------------------------------------------- 5/1/86 $ 10,000 $ 10,000.00 $ 10,000 12/86 $ 10,518 $ 10,500.30 $ 10,193 12/87 $ 11,070 $ 10,520.70 $ 10,644 12/88 $ 12,903 $ 12,296.60 $ 11,113 12/89 $ 16,983 $ 11,676.60 $ 11,629 12/90 $ 16,457 $ 10,760.40 $ 12,355 12/91 $ 21,460 $ 14,233.10 $ 12,724 12/92 $ 23,093 $ 14,233.10 $ 13,100 12/93 $ 25,412 $ 17,314.00 $ 13,459 12/94 $ 15,747 $ 21,062.80 $ 13,809 12/95 $ 35,412 $ 25,592.20 $ 14,168 12/96 $ 43,536 $ 29,579.00 $ 14,637 maximum up-front sales charge, thereby reducing the amount of the investment to $9,550 and includes the historical performance of the Class B shares for periods from inception (5/1/86) through 12/31/94. The Class B graph assumes an initial investment of $10,000 made on 5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply for the period shown. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. Results assume the reinvestment of all income and capital gain distributions. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 Portfolio Management Discussion and Analysis [GRAPHIC] Photo High Yield Corporate Bond Fund Team HIGH YIELD CORPORATE BOND FUND TEAM Denis Laplaige, Steve Tananbaum, and Matt Philo Generally speaking, 1996 was a strong year for stocks, but a mixed year for bonds. Government securities ended the first half with negative returns, and despite a recovery in the second half, underperformed money market instruments for the year. While mortgage-backed and corporate bonds did somewhat better, high yield securities appeared to thrive on the strength of the economy, with strong returns both in the higher-risk and higher-quality ends of the market. The strength of the equity market was particularly favorable to high yield bonds, as many companies issued stock to pay down debt. The subsequent increase in credit quality strengthened a number of issuers and underscored the theme that "the good tend to get better." Default rates, which have typically ranged just below 3%, were surprisingly low in 1996. Following a trend established in 1995, defaults remained under 1%. Over the course of 1996, the average Lipper++ high current yield fund returned 13.67%. How did the MainStay High Yield Corporate Bond Fund do in this context? Very well. The MainStay High Yield Corporate Bond Fund provided total returns of 16.33% and 15.58% for Class A and Class B shares, respectively, for the year ended December 31, 1996, excluding sales charges. These returns outpaced the average Lipper peer fund and placed Class A shares among the top 13% of 148 funds, and Class B shares in the top 18% of 148 funds, in the Lipper universe. How did you manage the Fund to achieve those results? The primary contributors to performance were careful security selection, seeking issues with improving credit quality or a stimulus for positive change, and knowing when to sell. During the first quarter, we concentrated on special situations, based on short-term events, such as refinancings, including Mesa Petroleum and GPA Preferred, both of which contributed positively to performance. We also sold issues such as Waxman Industries and Liggett Group. After Liggett Group tried to break ranks with other tobacco companies in its litigation proceedings, we saw that things were not going well for them. We sold the Fund's holdings at more than 90 cents on the dollar, and the securities ended the year in the mid-60s. This helped protect investors against potential losses. [GRAPHIC] Credit quality A measure of an individual issuer's ability to repay principal and interest on its fixed-income securities--or a measure of the general credit risk of securities in a fixed-income portfolio. ++ See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 5 [GRAPHIC] YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL] Returns are for Class B shares unless otherwise noted. See footnote* on page 9 for more information on performance. Were there other special events that affected the portfolio? Yes, we bought Park Communications in the spring of 1996. The company is a leading broadcaster and runs a number of regional newspapers, which made it an attractive fit for a number of potential buyers. We bought the bonds based on the valuation, management strength, and industry fundamentals. Media General ended up taking over the company, which gave a boost to the Fund's performance. We sold a number of the acquired securities later in the year with returns ranging from 20%* to 40%. With low default rates, was credit quality really a concern? While few bonds default, it's important to recognize that credit quality is always a concern in the high yield market. We believe the strong tend to get stronger and the weak tend to get weaker. So we look primarily for credits that have a way of improving. In 1996, several mature leveraged buyout values were able to be realized, including issues such as Newflow and Monarch Marking. In addition, Selmer, a musical instrument company that's part of the Steinway Group, and Hosiery Corp. both went public, using the proceeds of their initial public offerings to pay down outstanding debt. The result was an improvement in credit quality, which was ultimately good for the portfolio. Were there more refinancings in 1996 than in previous years? With the tremendous inflow of money into equities, the market was very receptive to new stock issues in 1996. Naturally, that made it easier for companies to go in that direction. American Standard was another company that announced an equity offering to pay down debt. The result was positive for the portfolio, in terms of credit quality and total return. Did you concentrate primarily in issues that were improving their credit quality? Actually, we split the portfolio into four groups of securities, depending on quality and other factors. While we tried to focus on improving credits, the lower-quality issues also did extremely well in 1996. Lower-tier issues such as GPA Preferred, Spanish [GRAPHIC] Year-End Total Return % - ------------------------------------------------ 12/86 5.01 12/87 0.20 12/88 16.89 12/89 -5.04 12/90 -7.85 12/91 32.27 12/92 21.63 12/93 21.65 12/94 1.50 12/95 20.28 Class A 12/95 19.71 Class B 12/96 16.33 Class A 12/96 15.58 Class B * Returns reflect performance during the period securities were held in the Fund. 6 [GRAPHIC] DIVERSIFICATION BY INDUSTRY - TOP 5 AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. Excludes U.S. government & agency issues. Broadcasting, and Microcell provided returns between 35% and 50% for the year. We sold Microcell when it reached our target price and now the Fund is largely out of that position. The Fund also did well with improving credits. Le Groupe Videotron, for example, announced the sale of its U.K. subsidiary. This BB-rated credit was initially trading at a yield spread of about 300 basis points over Treasuries, but we believed that after the sale, it could become an investment-grade credit. In fact, that's just what happened. Now the bonds are trading at a 150 basis point spread to Treasuries and providing total returns in the mid-to-upper teens. Can you explain what the spread over Treasuries has to do with credit quality? High yield bonds, by their very nature, have lower credit quality and higher risk. To compensate investors for the higher risk, issuers need to pay higher yields than Treasury bonds, which are generally considered "riskless" credits. In general, the larger the yield spread over Treasuries, the higher the perceived risk. So when a company reduces its spread, it's generally because the quality has improved. But investors who own the bonds along the way may also benefit from price appreciation. Were there other credit improvement stories during the year? Owens-Illinois also tightened its spread over Treasuries significantly over the year. Another case was Trizec, a large real estate company specializing in commercial and retail properties. Its parent company, Horsham, proposed a merger, seeking to buy the 52% of Trizec stock it didn't own. The result was a substantial infusion of cash, which allowed Trizec to improve its credit rating resulting in a positive return for the Fund. Were there any industry events that affected the portfolio? Well, there was an expansion in radio and TV, which benefited Park Communications, Allbritton Communications, and Spanish Broadcasting. There was also a contraction in the cable industry that didn't affect the portfolio too much, since we were underweighted in domestic cable. It's important to remember, however, that we don't select industries and then pick [GRAPHIC] Yield spread The difference in yield between securities in different market sectors, such as high yield securities and Treasury issues--or between different securities in a single sector, such as short-term and intermediate-term Treasury issues. Basis point One hundredth of one percent in the yield of an investment, i.e., 100 basis points equals 1%. Sector Percentage - -------------------------------------------------------- Media 13.9% Casinos 6.1% Cable 5.6% Cellular Telephone 4.4% Telecommunications Services 4.5% All Other 65.5% Weighting The proportion of a portfolio allocated to a specific security or sector, i.e., a fund is said to be underweight in a sector when that portion of the portfolio is smaller than the sector's share of the market as a whole. 7 [GRAPHIC] Bottom-up investing Security selection based on the specific fundamental merits of individual issues. The opposite of "top-down" investing, which starts with general economic trends, compares market sectors, and uses relative security values to narrow the range of issues to examine. Cash position The portion of a portfolio held in highly liquid securities (often referred to as "cash"), either for defensive purposes or to take advantage of investment opportunities as they may arise. Certain of the Fund's investments may be speculative. companies within them. Instead, we're bottom-up investors, selecting each security based on its individual merits. As a result of our security selection process, we happened to be overweighted in media and underweighted in domestic cable, but that resulted entirely from the individual merits of the particular issues. It sounds like the Fund had an outstanding year. Did you have any disappointments? We didn't have any major losses in the portfolio. Probably our biggest disappointment was having too large a cash position--between 15% and 20%--throughout the year. We follow strict investment disciplines, and unfortunately, the number of issues that met our criteria was limited, so we couldn't replace our winners fast enough. Of course, in hindsight, it's easy to say we could have done better by having more of our cash invested. But along the way, it wasn't clear that things would go so well. Nevertheless, our strong security selection more than compensated for any setbacks caused by our defensive positioning. Looking ahead, what do you see? We're going to remain cautious, since we believe defaults have been very low for an unusually long time. While we may invest a higher percentage of our cash as opportunities arise, we do not anticipate changing our criteria. Since high-yield securities are much less liquid than equities, any dislocations could lead to a correction. So we're going to concentrate on the higher tiers of the high-yield market, seeking companies that are likely to benefit from initial public offerings or other infusions of capital that can help them improve their balance sheets. Naturally, we'll continue to seek maximum current income through diversified high-yield investments, with our focus on what we deem to be an appropriate balance of risk and reward. Denis Laplaige Steve Tananbaum Portfolio Managers QUALITY BREAKDOWN AS OF 12/31/96 [GRAPHIC] [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Rating Percentage - -------------------------------------------------------- BBB 2.0% BB 12.4% B 41.5% CCC 7.8% D 0.1% Other 10.3% U.S. Government Agency 24.3% Cash & Equivalents 1.6% Note: Actual percentages will vary over time. Bond quality ratings provided by Standard &Poor's. See the prospectus for details. 8 Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Class A shares, first offered to the public on 1/3/95, are sold with a maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%. Performance figures for this class include the historical performance of the Class B shares for periods from inception (5/1/86) up to 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class B shares of the Fund are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to 1%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. For the 5-year and 10-year periods ended 12/31/96, the Fund's Class B shares placed among the top 1.6% and 14.0%, respectively, of Lipper high current yield funds. Class A shares were not in existence for these periods. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 5/1/86. [GRAPHIC] 9 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 16.33% 16.01% 11.04% 10.80% Class B 15.58% 15.75% 10.91% 10.69% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 11.09% 14.95% 10.53% 10.33% Class B 10.58% 15.53% 10.91% 10.69% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 19 out of n/a n/a n/a 148 funds Class B 26 out of 1 out of 6 out of 6 out of 148 funds 63 funds 43 funds 36 funds Average Lipper high current yield fund 13.67% 12.10% 9.38% 9.29% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $8.27 $0.7105 $0.1786 Class B $8.26 $0.6663 $0.1786 ================================================================================ [GRAPHIC] Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. Dollar amount represents the aggregate value of the Fund's long positions and does not include the value of the Fund's short positions, if any. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed. Short-term securities and U.S. Government and federal agency issues are excluded. See Portfolio of Investments for specific type of security held. Top 10 Holdings as of 12/31/96 10 HOLDING AMOUNT - ---------------------------------------------------------------------------------------- Le Groupe Videotron Ltee, 10.625%, DUE 2/15/05 $48,633,200 Owens-Illinois, Inc., 11.00%,due 12/1/03 44,055,000 Trizec Finance LTD., 10.875%,due 10/15/05 41,821,470 United International Holdings, Inc., (zero coupon),due 11/15/99 39,139,200 U.S. Cellular Corp., (zero coupon), due 6/15/15 37,918,692 Affinity Group, Inc., 11.50%,due 10/15/03 37,767,600 Casino America, Inc., 12.50%,due 8/1/03 33,084,805 Thermadyne Holdings Corp., 10.75%, due 11/1/03 32,210,160 TeleWest, PLC, (zero coupon), due 10/1/07 31,606,515 General Media, Inc., 10.625, due 12/31/00 31,593,105 10 Largest Purchases for the 12 months ended 12/31/96 [GRAPHIC] Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. Dollar amount represents the aggregate value of the Fund's long positions and does not include the value of the Fund's short positions, if any. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed. Short-term securities and U.S. Government and federal agency issues are excluded. See Portfolio of Investments for specific type of security held. 11 - ------------------------------------------------------------------------------------------- SECURITY AMOUNT OF PURCHASE - ------------------------------------------------------------------------------------------- TeleWest, PLC, (zero coupon),due 10/1/07 $61,857,360 Casino America, Inc., 11.50%, due 6/1/01 and 12.50%, due 8/1/03 60,021,343 Spanish Broadcasting System, Inc., 7.50%,due 6/15/02, 12.25%,due 6/1/01 Series A Preferred Stock and Warrants expiration 6/29/99, 6/30/99 52,784,375 Cablevision Systems Corp., 10.50%,due 5/15/16, 11.75%, Series H Preferred Stock and 11.125%, Series M Preferred Stock 51,825,671 Le Groupe Videotron Ltee, 10.625%,due 2/15/05 and Common Stock 48,080,999 Comcast Cellular Corp., Series A, (zero coupon),due 3/5/00, Series B (zero coupon), due 3/5/00 and Class A Common Stock 46,280,952 Time Warner, Inc., 10.25%, Series K Preferred Stock 46,200,000 Owens-Illinois, Inc., 11.00%,due 12/1/03 43,400,000 Microcell Telecommunications, Inc., (zero coupon),due 6/1/06, 14.00% beginning 12/1/01 42,298,650 Unisys Corp., 8.875%,due 7/15/97, 10.625%, due 10/1/99, 11.75% due 10/15/04, and 15.00%, due 7/1/97 39,415,299 10 Largest Sales for the 12 months ended 12/31/96 - ------------------------------------------------------------------------------------------- SECURITY AMOUNT OF PURCHASE - ------------------------------------------------------------------------------------------- Cablevision Systems Corp., 10.50%,due 5/15/16, 11.75%, Series H Preferred Stock and 11.125%, Series M Preferred Stock $58,093,589 Time Warner, Inc., 10.25%, Series K Preferred Stock 46,776,806 TeleWest, PLC, (zero coupon),due 10/1/07 37,194,078 Microcell Telecommunications, Inc., (zero coupon),due 6/1/06, 14.00% beginning 12/1/01 32,504,388 Continental Cablevision, Inc., 11.00%,due 6/1/07 31,616,223 Nextel Communications, Inc., (zero coupon), due 8/15/04 and Class A Common Stock 30,174,063 Grupo Televisa, S.A., (zero coupon), due 5/15/08 and Series A 11.375%, due 5/15/03 26,298,281 Horseshoe Gaming LLC, Series B, 12.75%,due 9/30/00 25,651,688 Spanish Broadcasting System, Inc., 7.50%,due 6/15/02 24,922,000 Envirodyne Industries, Inc., 10.25%, due 12/1/01 and 12.00%, due 6/15/00 24,391,661 MainStay High Yield Corporate Bond Fund Principal Amount Value ===================================== LONG-TERM BONDS (71.9%)+ CONVERTIBLE BONDS (3.9%) CELLULAR TELEPHONE (1.7%) Cellular Communications, Inc. (zero coupon), due 7/27/99 ........................... $ 6,800,000 $ 5,601,500 United States Cellular Corp. (zero coupon), due 6/15/15 ........................... 113,400,000 37,918,692 --------------- 43,520,192 --------------- PUBLISHING (1.2%) Hollinger, Inc. Series U.S. (zero coupon), due 10/5/13 (o) ...................... 88,525,000 31,315,719 --------------- TELECOMMUNICATION SERVICES (1.0%) PLD Telekom, Inc. 9.00%, due 6/1/06 (c) ............................... 3,020,000 3,020,000 Rogers Communications, Inc. (zero coupon), due 5/20/13 (o) ...................... 37,000,000 14,430,000 Tele-Communications International, Inc. 4.50%, due 2/15/06 .................................. 10,000,000 7,475,000 --------------- 24,925,000 --------------- Total Convertible Bonds (Cost $98,734,712) 99,760,911 --------------- CORPORATE BONDS (47.4%) AEROSPACE (0.9%) K&F Industries, Inc. 11.875%, due 12/1/03 ................................ 7,175,000 7,731,063 Sequa Corp. 8.75%, due 12/15/01 ................................. 1,742,000 1,742,000 9.375%, due 12/15/03 ................................ 12,100,000 12,342,000 9.625%, due 10/15/99 ................................ 1,000,000 1,030,000 --------------- 22,845,063 --------------- AUTO PARTS (1.3% CSK Auto, Inc. 11.00%, due 11/1/06 (c) ............................. 19,920,000 20,916,000 Great Dane Holdings, Inc. 12.75%, due 8/1/01 .................................. 13,270,000 13,170,475 --------------- 34,086,475 --------------- Principal Amount Value ===================================== BUILDING MATERIALS (1.1%) American Standard, Inc. (zero coupon), due 6/1/05 10.50%, beginning 6/1/98 ............................ $ 12,950,000 $ 12,043,500 Associated Materials, Inc. 11.50%, due 8/15/03 ................................. 13,250,000 13,581,250 Miles Homes Services, Inc. 12.00%, due 4/1/01 .................................. 1,000,000 830,000 Triangle Pacific Corp. + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 10.50%, due 8/1/03 .................................. 1,500,000 1,582,500 --------------- 28,037,250 --------------- BUILDINGS (1.7%) Greystone Homes, Inc. 10.75%, due 3/1/04 .................................. 20,424,000 20,883,540 NVR, Inc. 11.00%, due 4/15/03 ................................. 20,606,000 21,636,300 UDC Homes, Inc. Series C (zero coupon) due 11/1/00 (a)(e)(h)(i) ............................ 108,500 27,125 --------------- 42,546,965 --------------- CABLE (2.5%) Heartland Wireless Communications, Inc. 14.00%, due 10/15/04 (c) ............................ 18,845,000 19,551,688 United International Holdings, Inc. (zero coupon), due 11/15/99 ......................... 54,360,000 39,139,200 Series B (zero coupon), due 11/15/99 ......................... 8,080,000 5,817,600 --------------- 64,508,488 --------------- CASINOS (5.4%) Argosy Gaming Co. 13.25%, due 6/1/04 .................................. 21,755,000 20,286,537 Casino America, Inc. 11.50%, due 6/1/01 (p) .............................. 10,000,000 8,900,000 12.50%, due 8/1/03 .................................. 34,918,000 33,084,805 Casino Magic Finance Corp. 11.50%, due 10/15/01 ................................ 26,683,000 24,148,115 El Comandante Capital Corp. 11.75%, due 12/15/03 ................................ 14,025,000 13,604,250 Horseshoe Gaming LLC, Series B 12.75%, due 9/30/00 ................................. 13,954,000 15,140,090 President Riverboat Casinos, Inc. 13.00%, due 9/15/01 ................................. 23,866,000 19,928,110 Treasure Bay Gaming & Resorts Class A (zero coupon) due 1/1/50 (a)(e)(h)(i) ............................. 9,886,075 2,534,888 Portfolio of Investments December 31, 1996 Principal Amount Value ===================================== CORPORATE BONDS (Continued) CASINOS (Continued) Trump Castle Funding, Inc. 13.875%, due 11/15/05 (g) ........................... $ 216 $ 215 --------------- 137,627,010 --------------- CELLULAR TELEPHONE (1.6%) Celcaribe, S.A (zero coupon), due 3/15/04 13.50%, beginning 3/15/98 ........................... 2,700,000 2,308,500 (zero coupon), due 3/15/04 13.50%, beginning 3/15/98 (a)(c)(y1) .......................................... 192 2,265,600 Centennial Cellular Corp. 8.875%, due 11/1/01 ................................. 18,618,000 17,966,370 10.125%, due 5/15/05 ................................ 10,350,000 10,427,625 PriCellular Wireless Corp. Series B (zero coupon), due 11/15/01 14.00%, beginning 11/15/97 .......................... 9,355,000 9,167,900 --------------- 42,135,995 --------------- CHEMICALS (0.6%) Uniroyal Chemical Co., Inc. 9.00%, due 9/1/00 ................................... 14,450,000 14,775,125 --------------- CHILD CARE SERVICES (0.8%) La Petite Holdings Corp. 9.625%, due 8/1/01 .................................. 20,292,000 20,494,920 --------------- COMPUTERS & OFFICE EQUIPMENT (0.5%) Unisys Corp. 10.625%, due 10/1/99 ................................ 3,500,000 3,626,875 11.75%, due 10/15/04 ................................ 5,250,000 5,604,375 15.00%, due 7/1/97 .................................. 2,500,000 2,612,500 --------------- 11,843,750 --------------- CONGLOMERATES (0.5%) Figgie International, Inc. 9.875%, due 10/1/99 ................................. 11,750,000 12,043,750 --------------- CONSUMER DURABLES (0.6%) Selmer Co., Inc. 11.00%, due 5/15/05 ................................. 13,355,000 14,523,562 11.00%, due 5/15/05 (c) ............................. 1,500,000 1,601,250 --------------- 16,124,812 --------------- Principal Amount Value ===================================== CONTAINERS (2.1%) Owens-Illinois, Inc. 11.00%, due 12/1/03 ................................. $ 39,600,000 $ 44,055,000 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 Silgan Holdings, Inc. 13.25%, due 12/15/02 ................................ 5,377,000 5,410,606 Stone Container Corp. 11.875%, due 12/1/98 ................................ 1,900,000 2,002,125 12.625%, due 7/15/98 ................................ 3,000,000 3,172,500 --------------- 54,640,231 --------------- ELECTRIC UTILITIES (0.5%) Midland Funding Corp. I Series C-94 10.33%, due 7/23/02 ................................. 5,508,309 5,866,349 Panda Funding Corp. 11.625%, due 8/20/12 (c) ............................ 7,660,000 7,928,100 --------------- 13,794,449 --------------- ENERGY (0.4%) Nuevo Energy Co. 12.50%, due 6/15/02 ................................. 10,000,000 10,750,000 --------------- EQUIPMENT FINANCING (1.6%) Atlas Air, Inc. 12.25%, due 12/1/02 ................................. 11,112,000 12,389,880 GPA Delaware, Inc. 8.75%, due 12/15/98 ................................. 27,110,000 27,652,200 --------------- 40,042,080 --------------- FOOD, BEVERAGES & TOBACCO (2.1%) All-American Bottling Corp. 13.00%, due 8/15/01 ................................. 15,915,000 15,539,406 Curtice-Burns Foods, Inc. 12.25%, due 2/1/05 .................................. 6,400,000 6,720,000 Great American Cookie Co. Series B 10.875%, due 1/15/01 ................................ 4,633,000 4,239,195 National Tobacco Holding, LLC 13.50%, due 5/17/03 16.50%, beginning 6/1/01 (e)(m)(p) ........................................... 12,563,468 10,446,524 Penn Traffic Co. 8.625%, due 12/15/03 ................................ 10,733,000 8,827,893 11.50%, due 4/15/06 ................................. 10,377,000 9,131,760 --------------- 54,904,778 --------------- MainStay High Yield Corporate Bond Fund Principal Amount Value ===================================== CORPORATE BONDS (Continued) INDUSTRIAL (2.5%) Interlake Corp. 12.00%, due 11/15/01 ................................ $ 3,500,000 $ 3,745,000 Monarch Marking Systems, Inc. . 12.50%, due 7/1/03 .................................. 7,887,000 9,227,790 Newflo Corp. Series B 13.25%, due 11/15/02 ................................ 16,285,000 18,015,281 Thermadyne Holdings Corp. 10.75%, due 11/1/03 ................................. 31,272,000 32,210,160 --------------- 63,198,231 --------------- INSURANCE (0.2%) Life Partners Group, Inc. 12.75%, due 7/15/02 ................................. 4,380,000 4,774,200 --------------- LEISURE (0.6%) Bally's Health & Tennis Corp. 13.00%, due 1/15/03 ................................. 16,960,000 16,281,600 --------------- MACHINERY (0.1%) Specialty Equipment Cos., Inc. 11.375%, due 12/1/03 ................................ 1,900,000 2,075,750 --------------- MEDIA (7.4%) Affiliated Newspaper Investments, Inc. (zero coupon), due 7/1/06 13.25%, beginning 7/1/99 ............................ 18,422,000 15,106,040 Allbritton Communications Co. Series B 9.75%, due 11/30/07 ................................. 23,466,000 22,762,020 American Media, Inc. Series XW (zero coupon), due 5/15/97 .......................... 750,000 727,500 Comcast Cellular Corp. Series A (zero coupon), due 3/5/00 ........................... 25,301,000 18,216,720 Series B (zero coupon), due 3/5/00 ........................... 9,233,000 6,647,760 Garden State Newspapers, Inc. 12.00%, due 7/1/04 .................................. 9,065,000 9,880,850 General Media, Inc. 10.625%, due 12/31/00 ............................... 36,951,000 31,593,105 Maxwell Communications Corp., PLC Facility A (a)(h)(i)(j) ............................. 9,973,584 847,755 Park Communications, Inc. Series B 13.75%, due 5/15/04 (m) ............................. 22,010,000 24,761,250 Principal Amount Value ===================================== MEDIA (Continued) Park Newspapers, Inc. Series B 11.875%, due 5/15/04 ................................ $ 16,380,000 $ 19,246,500 Spanish Broadcasting System, Inc. 7.50%, due 6/15/02 12.50%, beginning 6/15/97 ........................... 2,210,000 2,331,550 12.75%, due 6/1/01 (c)(d)(g) ........................ 25,498,502 25,498,502 Telemundo Group, Inc. 7.00%, due 2/15/06 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 10.50%, beginning 2/15/99 ........................... 12,500,000 12,062,500 --------------- 189,682,052 --------------- PAPER & FOREST PRODUCTS (0.8%) Gaylord Container Corp. 11.50%, due 5/15/01 ................................. 18,348,000 19,815,840 --------------- POLLUTION & RELATED (0.7%) ICF Kaiser International, Inc. 13.00%, due 12/31/03 ................................ 10,174,000 9,690,735 13.00%, due 12/31/03 (c)(y2) ........................ 4,000 3,920,000 13.00%, due 12/31/03 (y3) ........................... 5,044 4,817,020 --------------- 18,427,755 --------------- REAL ESTATE (0.0%) (b) Olympia & York Maiden Lane Finance Corp. .................................. 10.375%, due 12/31/95 (a)(h)(i)(n) ........................................ 4,000 1,560 --------------- RECREATION & ENTERTAINMENT (3.0%) Affinity Group, Inc. 11.50%, due 10/15/03 ................................ 36,315,000 37,767,600 Alliance Entertainment Corp. Series B 11.25%, due 7/15/05 ................................. 23,312,000 17,105,180 Icon Fitness Corp. (zero coupon), due 11/15/06 14.00%, beginning 11/15/01 (c) ...................... 7,000,000 3,675,000 LodgeNet Entertainment Corp. 10.25%, due 12/15/06 (c) ............................ 2,000,000 2,005,000 Marvel Holdings, Inc. Series B (zero coupon), due 4/15/98 (a)(h)(i) ................ 24,544,000 3,681,600 Six Flags Theme Parks, Series A (zero coupon), due 6/15/05 12.25%, beginning 6/15/98 ........................... 5,000,000 4,700,000 Videotron Holdings, PLC (zero coupon), due 7/1/04 11.125%, beginning 7/1/97 ........................... 9,250,000 8,047,500 --------------- 76,981,880 --------------- Portfolio of Investments continued Principal Amount Value ===================================== CORPORATE BONDS (Continued) RESTAURANTS & LODGING (2.3%) American Restaurant Group, Inc. 12.00%, due 9/15/98 (bb) ............................ $ 2,731,517 $ 2,512,995 Series 92 13.00%, due 9/15/98 ................................. 5,479,412 5,041,059 Series 93 13.00%, due 9/15/98 ................................. 4,812,676 4,427,662 AmeriKing, Inc. 10.75%, due 12/1/06 ................................. 10,153,000 10,508,355 Family Restaurant, Inc. 9.75%, due 2/1/02 ................................... 28,218,000 20,458,050 Flagstar Corp. 10.75%, due 9/15/01 ................................. 7,000,000 6,335,000 10.875%, due 12/1/02 ................................ 3,883,000 3,543,238 FRD Acquisition Co. Series B 12.50%, due 7/15/04 ................................. 5,000,000 5,100,000 --------------- 57,926,359 --------------- RETAIL (2.3%) Brylane L.P., Series B 10.00%, due 9/1/03 .................................. 3,685,000 3,795,550 Guitar Center Management Co. 11.00%, due 7/1/06 (c) .............................. 3,605,000 3,821,300 IHF Holdings, Inc. Series B (zero coupon), due 11/15/04 15.00%, beginning 11/15/99 .......................... 32,670,000 25,809,300 Petro PSC Properties L.P. 12.50%, due 6/1/02 .................................. 10,905,000 11,068,575 Waban, Inc. 11.00%, due 5/15/04 ................................. 13,250,000 14,707,500 --------------- 59,202,225 --------------- STEEL, ALUMINUM & OTHER METALS (0.4%) Easco Corp. Series B 10.00%, due 3/15/01 ................................. 7,550,000 7,682,125 UCAR Global Enterprises, Inc. Series B 12.00%, due 1/15/05 ................................. 3,000,000 3,457,500 --------------- 11,139,625 --------------- TELECOMMUNICATION EQUIPMENT (0.4%) Telex Communications, Inc. 12.00%, due 7/15/04 ................................. 8,250,000 9,116,250 --------------- Principal Amount Value ===================================== TELECOMMUNICATION SERVICES (1.2%) Microcell Telecommunications, Inc. Series B (zero coupon), due 6/1/06 14.00%, beginning 12/1/01 ........................... $ 27,700,000 $ 15,442,750 Paging Network, Inc. 11.75%, due 5/15/02 ................................. 5,020,000 5,409,050 ProNet, Inc. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 11.875%, due 6/15/05 ................................ 11,775,000 11,097,937 --------------- 31,949,737 --------------- TEXTILE & APPAREL (0.8%) Hosiery Corp. of America, Inc. 13.75%, due 8/1/02 .................................. 18,400,000 20,332,000 --------------- UTILITIES (0.5%) Consolidated Hydro, Inc. Series B (zero coupon), due 7/15/03 12.00%, beginning 7/15/98 ........................... 33,789,000 11,826,150 --------------- Total Corporate Bonds (Cost $1,148,407,876) ............................... 1,213,932,355 --------------- FOREIGN BONDS (0.1%) MEDIA (0.0%) (b) Maxwell Communications Corp., PLC Facility B (a)(h)(i)(j) .............................(pound) 1,131,066 164,526 --------------- RETAIL (0.1%) Isosceles Bank debt 12.219%, due 6/30/98 (d) ............................ 1,051,124 242,837 Bank debt, Series B 12.219%, due 4/25/01 (d) ............................ 4,249,169 981,668 --------------- 1,224,505 --------------- Total Foreign Bonds (Cost $4,344,621) ................................... 1,389,031 --------------- U.S. GOVERNMENT & FEDERAL AGENCY (9.3%) Federal National Mortgage Association (4.2%) Series B 12.00%, due 6/26/98 ................................. $ 100,000,000 108,453,000 --------------- MainStay High Yield Corporate Bond Fund Principal Amount Value ===================================== U.S. GOVERNMENT & FEDERAL AGENCY (Continued) United States Treasury Bonds (4.6%) 13.375%, due 8/15/01 ................................ $ 25,000,000 $ 32,105,500 15.75%, due 11/15/01 ................................ 61,000,000 85,113,910 --------------- 117,219,410 --------------- United States Treasury Note (0.5%) 9.125%, due 5/15/99 ................................. 10,900,000 11,647,631 --------------- Total U.S. Government & Federal Agency (Cost $249,069,766) ................................. 237,320,041 --------------- YANKEE BONDS (11.2%) CABLE (2.0%) Australis Holdings Property Ltd. (zero coupon), due 11/1/02 15.00%, beginning 11/1/00 (c)(y4) ................... 18,067 10,388,525 CF Cable TV, Inc. 11.625%, due 2/15/05 ................................ 6,750,000 7,830,000 TeleWest, PLC (zero coupon), due 10/1/07 11.00%, beginning 10/1/00 ........................... 45,314,000 31,606,515 --------------- 49,825,040 --------------- CELLULAR TELEPHONE (1.1%) Millicom International Cellular, S.A. (zero coupon), due 6/1/06 13.50%, beginning 6/1/01 ............................ 17,550,000 10,881,000 Occidente y Caribe Celular, S.A (zero coupon), due 3/15/04 14.00%, beginning 3/15/01 (c) ....................... 30,000,000 17,850,000 --------------- 28,731,000 --------------- COMPUTERS & OFFICE EQUIPMENT (1.1%) International Semi-Technology Microelectronics, Inc. (zero coupon), due 8/15/03 11.50%, beginning 8/15/00 ........................... 44,213,000 28,959,515 --------------- CONTAINERS (0.2%) Stone Container Finance Corp. 11.50%, due 8/15/06 (c) ............................. 5,630,000 5,784,825 --------------- MEDIA (3.0%) Grupo Televisa, S.A . (zero coupon), due 5/15/08 13.25%, beginning 5/15/01 ........................... 12,650,000 8,349,000 Principal Amount Value ===================================== MEDIA (continued) Kabelmedia Holding GmbH (zero coupon), due 8/1/06 13.625%, beginning 8/1/01 ........................... $ 35,664,000 $ 20,061,000 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 16 Le Groupe Videotron Ltee 10.625%, due 2/15/05 ................................ 44,212,000 48,633,200 --------------- 77,043,200 --------------- PAPER & FOREST PRODUCTS (0.8%) FSW International Finance Co. 12.50%, due 11/1/06 (c) ............................. 20,020,000 21,221,200 --------------- REAL ESTATE (1.7%) Trizec Finance Ltd. 10.875%, due 10/15/05 ............................... 37,677,000 41,821,470 --------------- RECREATION & ENTERTAINMENT (0.7%) Plitt Theaters, Inc. 10.875%, due 6/15/04 ................................ 17,000,000 17,127,500 --------------- TELECOMMUNICATION SERVICES (0.2%) Clearnet Communications, Inc. (zero coupon), due 12/15/05 14.75%, beginning 12/15/00 .......................... 7,350,000 4,593,750 --------------- TESTING SERVICES (0.2%) Intertek Finance, PLC 10.25%, due 11/1/06 (c) ............................. 1,500,000 1,563,750 Intertek Testing Services Ltd. 12.00%, due 11/8/07 (p) ............................. 4,000,000 3,920,000 --------------- 5,483,750 --------------- TRANSPORTATION (0.2%) TNT Transport, PLC 11.50%, due 4/15/04 ................................. 4,500,000 5,197,500 --------------- Total Yankee Bonds (Cost $266,536,759) ................................. 285,788,750 --------------- Total Long-Term Bonds (Cost $1,767,093,734) ................................. 1,838,191,088 --------------- Shares ================ COMMON STOCKS (5.7%) BUILDINGS (0.2%) NVR, Inc. (a) ......................................... 379,300 4,930,900 --------------- Portfolio of Investments continued Shares Value ===================================== COMMON STOCKS (Continued) CABLE (0.5%) United International Holdings Inc., Class A (a) ................................... 988,200 $ 12,105,450 --------------- CASINOS (0.5%) Aztar Corp. (a) ....................................... 100,000 700,000 Casino America, Inc. (a) .............................. 207,925 662,761 Colorado Gaming & Entertainment Co. (a) ............................... 368,128 1,840,640 Grand Casinos, Inc. (a) ............................... 699,600 9,444,600 --------------- 12,648,001 --------------- CELLULAR TELEPHONE (0.0%) (b) Celcaribe, S.A. (a)(c) ................................ 439,020 878,040 --------------- CHEMICALS (0.0%) (b) Millennium Chemicals, Inc. (a) ........................ 43,856 778,444 --------------- CONGLOMERATES (0.2%) Hanson, PLC ADR (k) ................................... 614,000 4,144,500 --------------- FOOD, BEVERAGES & TOBACCO (0.7%) Dr. Pepper Bottling Holdings, Inc. Class A (a) ......................................... 200,000 2,600,000 Imperial Tobacco Group, PLC ADR (a)(k) .......................................... 153,500 1,980,641 RJR Nabisco Holdings Corp. ............................ 388,000 13,192,000 TLC Beatrice International Holdings Inc., Class A (a) ................................... 25,000 678,125 --------------- 18,450,766 --------------- GAS UTILITIES (0.1%) UGI Corp. ............................................. 158,800 3,553,150 United Gas Holdings Corp. (a)(e)(h) ................... 98,050 166,685 --------------- 3,719,835 --------------- INDUSTRIAL (0.2%) Thermadyne Holdings Corp. (a) ......................... 199,350 5,681,475 --------------- MEDIA (1.2%) Affiliated Newspaper Investments, Inc. (a) ............................... 28,000 1,120,000 Shares Value ===================================== MEDIA (Continued) Comcast Corp. Class A ............................................. 955,000 $ 16,831,875 Le Groupe Videotron Ltee (aa) ......................... 46,800 392,646 Lin Television Corp. (a) .............................. 7,000 295,750 Matav-Cable Systems Media Ltd. ADR (a)(k) ..................................... 254,400 3,975,000 Metromedia International Group The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 17 Inc. (a) ............................................ 725,200 7,161,350 --------------- 29,776,621 --------------- REAL ESTATE (0.2%) American Health Properties, Inc. ...................... 26,300 627,912 American Health Properties, Inc. (l) .................. 5,130 81,439 Metropolis Realty Trust, Inc. (a) ..................... 126,278 3,283,228 --------------- 3,992,579 --------------- RESTAURANTS & LODGING (0.4%) Bob Evans Farms, Inc. ................................. 190,000 2,565,000 Lone Star Steakhouse & Saloon Inc. (a) ............................................ 257,300 6,882,775 --------------- 9,447,775 --------------- RETAIL (0.1%) Claire's Stores, Inc. ................................. 204,300 2,681,438 CVS Corp. ............................................. 21,400 885,425 Loehmann's Holdings, Inc. Class B (a) ......................................... 43,750 43,750 --------------- 3,610,613 --------------- STEEL, ALUMINUM & OTHER METALS (0.2%) Ryerson Tull, Inc., Class A (a) ....................... 348,300 4,702,050 --------------- SUPERMARKETS (0.0%) (b) Grand Union Co. (a) ................................... 51,999 259,995 --------------- TELECOMMUNICATION EQUIPMENT (0.0%) (b) PageMart Wireless, Inc., Class A (a) .................. 45,500 301,438 --------------- TELECOMMUNICATION SERVICES (1.2%) AirTouch Communications, Inc. (a) ..................... 624,000 15,756,000 Clearnet Communications, Inc. Class A (a) ......................................... 169,500 1,864,500 Paging Network, Inc. (a) .............................. 346,350 5,281,838 Rogers Cantel Mobile Communications, Inc., Class B (a) ................... 60,000 1,162,500 MainStay High Yield Corporate Bond Fund Shares Value ===================================== COMMON STOCKS (Continued) TELECOMMUNICATION SERVICES (Continued) Rogers Communications, Inc. ........................... Class B (a)(aa) ..................................... 989,375 $ 7,218,027 --------------- 31,282,865 --------------- TEXTILE & APPAREL (0.0%) (b) Hosiery Corp. of America, Inc. (a) .................... 17,400 104,400 --------------- Total Common Stocks (Cost $148,718,237) ................................. 146,815,747 --------------- PREFERRED STOCKS (4.1%) BANKS (0.0%) (b) River Bank America, N.Y . 15.00%, Series A .................................... 30,000 742,500 --------------- CABLE (0.6%) Cablevision Systems Corp. 8.50%, Series I (v) ................................. 8,000 164,000 11.75%, Series H (m) ................................ 71,901 6,740,719 TCI Pacific Communications, Inc. 5.00% (v) ........................................... 90,900 8,305,988 --------------- 15,210,707 --------------- CASINOS (0.2%) Station Casinos, Inc. 7.00% (v) ........................................... 125,600 6,013,100 --------------- DOMESTIC OIL & GAS (0.0%) (b) Mesa, Inc. 8.00%, Series A (g)(v) .............................. 500 3,186 TransAmerican Energy Corp. $19.00, Series A .................................... 150 15,000 --------------- 18,186 --------------- DRUGS (0.3%) ICN Pharmaceuticals, Inc. Series B (c)(m)(v) .................................. 8,500 8,500,000 --------------- EQUIPMENT FINANCING (0.5%) GPA Group, PLC (a)(p) ................................. 30,000,000 13,200,000 --------------- Shares Value ===================================== FOOD, BEVERAGES & TOBACCO (0.1%) National Tobacco Holding, LLC 14.50% (e)(g)(p)(q) ................................. 1,676,030 $ 953,829 Seven Up Holdings Co. 16.00% (a) .......................................... 4,491 129,542 --------------- 1,083,371 --------------- The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 18 MEDIA (1.6%) Paxson Communications Corp. 12.50% (g) .......................................... 13,550 12,804,750 Spanish Broadcasting System, Inc. Series A (c)(g) .................................... 27,418 27,143,820 --------------- 39,948,570 --------------- RETAIL (0.0%) (b) Loehmann's Holdings, Inc. $0.056, Series A (g) ................................ 2,297 1,148 --------------- TELECOMMUNICATION SERVICES (0.8%) AirTouch Communications, Inc. 6.00%, Series B (v) ................................. 100,000 2,725,000 K-III Communications Corp. 10.00%, Series D .................................... 174,000 17,052,000 --------------- 19,777,000 --------------- Total Preferred Stocks (Cost $98,748,421) .................................. 104,494,582 --------------- WARRANTS (1.1%) APPLIANCES & FURNITURE (0.0%) (b) Central Rents, Inc. expire 2003 (a) ..................................... 10,500 630,000 --------------- BUILDING MATERIALS (0.0%) (b) Degeorge Financial Corp. expire 4/1/97 (a) ................................... 12,000 1,200 --------------- CABLE (0.0%) (b) United International Holdings Inc. (a) ............................................ 20,834 354,178 --------------- CASINOS (0.0%) (b) Belle Casino, Inc. (a)(c) ............................. 5,500 55 Portfolio of Investments continued Shares Value ===================================== WARRANTS (Continued) CASINOS (Continued) Boomtown, Inc. expire 11/1/98 (a)(c) ............................... 7,350 $ 7,350 Casino America, Inc. expire 5/3/01 (a) ................................... 36,808 36,808 HDA Management Corp. expire 12/15/98 (a)(c) .............................. 6,450 322,500 Louisiana Casino, Inc. expire 12/1/98 (a) .................................. 12,000 60,000 --------------- 426,713 --------------- CELLULAR TELEPHONE (0.0%) (b) Occidente y Caribe Celular, S.A. expire 3/15/04 (a)(c) ............................... 120,000 1,200 --------------- CONGLOMERATES (0.0%) (b) IFA Capital, Inc. Series H expire 11/14/99 (a)(c) .............................. 8,000 800,000 --------------- DOMESTIC OIL & GAS (0.1%) TransAmerican Refining Corp. expire 2/15/02 (a) .................................. 774,665 1,936,662 --------------- FOOD, BEVERAGES & TOBACCO (0.2%) Browne Bottling Co. expire 8/15/03 (a) .................................. 1,426 7,130 Cookies USA, Inc. expire 1/15/01 (a)(c) ............................... 834 8,340 National Tobacco Holding, LLC Class A expire 5/17/06 (a)(e)(p)(r)(t) ...................... 4,259,246 4,259,246 expire 5/17/06 (a)(e)(p)(s) ......................... 547,970 0(z) --------------- 4,274,716 --------------- GAS UTILITIES (0.0%) (b) UGI Corp. expire 3/31/98 (a) .................................. 34,580 5,187 --------------- HOUSEHOLD PRODUCTS (0.0%) (b) Chattem, Inc. expire 6/17/99 (a)(c) ............................... 9,500 190,000 --------------- MEDIA (0.7%) General Media, Inc. expire 12/21/00 (a) ................................. 34,486 172,430 Shares Value ===================================== MEDIA (Continued) Park Communications, Inc. (a) ......................... 220,100 $ 4,512,050 Spanish Broadcasting System, Inc. expire 6/29/99 (a)(c) ............................... 30,262 5,447,160 expire 6/30/99 (a)(c) ............................... 44,650 8,037,000 --------------- 18,168,640 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 19 --------------- POLLUTION & RELATED (0.0%) (b) ICF Kaiser International, Inc. expire 12/31/98 (a) ................................. 48,835 18,313 --------------- RETAIL (0.0%) (b) Petro PSC Properties L.P. expire 6/1/97 (a) ................................... 14,010 714,510 --------------- TELECOMMUNICATION SERVICES (0.1% Microcell Telecommunications, Inc. expire 6/1/06 (a)(c)(u) ............................. 110,800 27,700 expire 6/1/06 (a)(c) ................................ 110,800 775,600 Nextel Communications, Inc. Series A expire 12/15/98 (a) ................................. 3,087 15,435 Series C expire 1999 (a) ..................................... 3,500 17,500 --------------- 836,235 --------------- TESTING SERVICES (0.0%) (b) Intertek Testing Services Ltd. expire 12/31/99 (a)(c)(p) ........................... 691 220,000 --------------- Total Warrants (Cost $19,317,964) .................................. 28,577,554 --------------- Notional Principal Amount =============== PURCHASED PUT OPTION (0.0%) (b) FOOD, BEVERAGES & TOBACCO (0.0%) (b) Underlying security, RJR Nabisco, Inc. 8.75%, due 8/15/05 expire 10/6/97 (f) .................................. $ 25,000,000 150,000 --------------- Total Purchased Put Option (Cost $500,000) ..................................... 150,000 --------------- MainStay High Yield Corporate Bond Fund (a) Non-income producing securities. (b) Less than one tenth of a percent. (c) May be sold to institutional investors only. (d) Floating rate. Rate shown is the rate in effect at December 31, 1996. (e) Fair valued securities. Aggregate at 0.72% of net assets. (f) Purchased put option is based on spread between the risk/duration of RJR Nabisco, Inc., Note 8.75%, due 8/15/05, multiplied by the yield on the RJR Nabisco Note less the yield on the U.S. Treasury Bond 6.50%, due 8/15/05, less 3.50%, multiplied by the notional principal. (g) PIK ("Payment in Kind")--interest or dividend payment is made with additional securities. (h) Issuer in bankruptcy. (i) Issue in default. (j) Multiple tranche facilities. (k) ADR--American Depository Receipt. (l) Depository Shares--each share represents one-tenth of a share of Psychiatric Group preferred stock. (m) CIK ("Cash in Kind")--interest or dividend payment is made with cash or additional securities. (n) The company defaulted on the payment of principal to its creditors on maturity date. (o) Yankee bond. (p) Restricted securities. (q) The 61.33% preferred membership interest entitles the Fund to a Payment in Kind dividend of 14.50% for the first five years beginning June 30, 1996 and 17.50% for the sixth and seventh year. (r) The warrants entitle the Fund to 9.8919% of the total voting rights and 13.9441% non-voting rights with dividend payments. (s) The redeemable warrants can be redeemed by National Tobacco Corp. for nominal consideration during the first five years, only on a pro-rata basis with prepayment of the subordinated notes. (t) Investment in noncontrolled affiliate (cost $2,960,051). (u) Conditional warrants. (v) Convertible preferred stock. (w) The cost for Federal income tax purposes is $2,437,023,118. (x) At December 31, 1996, net unrealized appreciation was $80,877,791 based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $125,353,506 and aggregate gross unrealized depreciation for all Principal Amount Value ===================================== SHORT-TERM INVESTMENTS (15.6%) RETAIL (0.6%) Cosmar Corp. 11.50%, due 12/4/97 (c)(d)(m)(p) ........................................ $ 16,700,000 $ 16,700,000 --------------- U.S. GOVERNMENT (15.0%) United States Treasury Note 8.50%, due 4/15/97 .................................. 379,650,000 382,971,938 --------------- Total Short-Term Investments (Cost $400,761,315) ................................. 399,671,938 --------------- Total Investments (Cost $2,435,139,671) (w) ........................... 98.4% 2,517,900,909(x) Cash and Other Assets, Less Liabilities .................................... 1.6 40,084,261 =============== =============== Net Assets ............................................ 100.0% $ 2,557,985,170 =============== =============== investments on which there was an excess of cost over market value of $44,475,715. (y1) 192 Units--each unit reflects $10,000 principal amount of 0%/13.50% Senior Secured Note Trust Certificates, plus 1,626 Ordinary Share Trust Certificates. (y2) 4,000 Units--each unit reflects $1,000 principal amount of 13.00% Senior Notes, plus 7 warrants to buy 1 share of common stock at $2.30 per share at a future date. (y3) 5,044 Units--each unit reflects $1,000 principal amount of 13.00% Senior Subordinated Notes, plus 4.8 warrants to acquire 1 share of common stock at $5.00 per share at a future date. (y4) 18,067 Units--each unit reflects $1,000 principal amount of 15.00% Senior Discounted Notes, plus 1 warrant to acquire 186.527 shares of Australis Media common stock at $0.20 per share at a future date. (z) Security has no value. (aa) Canadian security. (bb) Exchangeable into American Restaurant Group, Inc. 13.00% Senior Notes, due 9/15/98. (pound) Security denominated in British Pound Sterling. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 20 Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 21 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $2,435,139,671) ................................... $ 2,517,900,909 Cash ................................................................ 440,211 Receivables: Dividends and interest ............................................ 39,683,906 Fund shares sold .................................................. 8,871,312 Investment securities sold ........................................ 4,944,386 Other assets ........................................................ 29,858 --------------- Total assets ..................................................... 2,571,870,582 --------------- LIABILITIES: Payables: Investment securities purchased ................................... 8,503,539 NYLIFE Distributors ............................................... 2,322,646 Fund shares redeemed .............................................. 1,581,082 Adviser ........................................................... 597,265 Transfer agent .................................................... 160,981 Custodian ......................................................... 40,436 Trustees .......................................................... 16,684 Accrued expenses .................................................... 516,698 Unrealized depreciation on forward foreign currency contracts ....... 146,081 --------------- Total liabilities ................................................ 13,885,412 --------------- Net assets .......................................................... $ 2,557,985,170 =============== COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A ........................................................... $ 141,291 Class B ........................................................... 2,956,489 Additional paid-in capital .......................................... 2,459,498,843 Accumulated undistributed net investment income ..................... 823,169 Accumulated undistributed net realized gain on investments .......... 11,950,221 Net unrealized appreciation on investments .......................... 82,761,238 Net unrealized depreciation on forward foreign currency contracts ... (146,081) --------------- Net assets .......................................................... $ 2,557,985,170 =============== CLASS A Net assets applicable to outstanding shares ......................... $ 116,805,387 =============== Shares of beneficial interest outstanding ........................... 14,129,093 =============== Net asset value per share outstanding ............................... $ 8.27 Maximum sales charge (4.50% of offering price) ...................... 0.39 --------------- Maximum offering price per share outstanding ........................ $ 8.66 =============== CLASS B Net assets applicable to outstanding shares ......................... $ 2,441,179,783 =============== Shares of beneficial interest outstanding ........................... 295,648,907 =============== Net asset value per share outstanding ............................... $ 8.26 =============== Statement of Operations FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Dividends (a) ............................................. $ 7,971,051 Interest .................................................. 198,749,051 ------------- Total income ............................................. 206,720,102 ------------- Expenses: Distribution--Class B ..................................... 11,527,597 Administration ............................................ 5,816,110 Advisory .................................................. 5,816,110 Service ................................................... 5,173,736 Transfer agent ............................................ 1,582,485 Professional .............................................. 538,650 Shareholder communication ................................. 474,934 Registration .............................................. 420,895 Custodian ................................................. 235,461 Recordkeeping ............................................. 233,333 Trustees .................................................. 64,455 Miscellaneous ............................................. 49,161 ------------- Total expenses ........................................... 31,932,927 ------------- Net investment income ....................................... 174,787,175 ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: (a) Dividends recorded net of foreign withholding taxes of $212,825. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 22 Net realized gain (loss) from: Security transactions ..................................... 70,039,639 Securities sold short ..................................... (508,346) Foreign currency transactions ............................. (912,219) ------------- Net realized gain on investments and foreign currency transactions .............................. 68,619,074 ------------- Net change in unrealized appreciation (depreciation) on investments: Security transactions ..................................... 58,603,932 Securities sold short ..................................... 375,243 Forward foreign currency contracts ........................ 42,977 ------------- Net unrealized gain on investments and foreign currency ................................................. 59,022,152 ------------- Net realized and unrealized gain on investments and foreign currency transactions ............................................. 127,641,226 ------------- Net increase in net assets resulting from operations ........ $ 302,428,401 ============= Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 23 Year ended December 31, 1996 --------------- INCREASE IN NET ASSETS: Operations: Net investment income ......................................................... $ 174,787,175 Net realized gain on investments .............................................. 70,039,639 Net realized loss on securities sold short .................................... (508,346) Net realized gain (loss) on foreign currency transactions ..................... (912,219) Net change in unrealized appreciation (depreciation) on securities transactions 58,603,932 Net change in unrealized depreciation on securities sold short ................ 375,243 Net change in unrealized depreciation on forward foreign currency contracts ... 42,977 --------------- Net increase in net assets resulting from operations .......................... 302,428,401 --------------- Dividends and distributions to shareholders: From net investment income: Class A ...................................................................... (6,713,725) Class B ...................................................................... (164,209,186 From net realized gain on investments and foreign currency transactions: Class A ...................................................................... (2,453,906) Class B ...................................................................... (51,503,367) In excess of net investment income: Class A ...................................................................... -- Class B ...................................................................... -- In excess of net realized gain on investments and foreign currency transactions: Class A ...................................................................... -- Class B ...................................................................... -- --------------- Total dividends and distributions to shareholders .......................... (224,880,184) --------------- Capital share transactions: Net proceeds from sale of shares: Class A ...................................................................... 101,308,968 Class B ...................................................................... 913,192,615 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A ...................................................................... 7,136,763 Class B ...................................................................... 152,975,773 --------------- 1,174,614,119 Cost of shares redeemed: Class A ...................................................................... (37,057,233) Class B ...................................................................... (301,207,596) --------------- Increase in net assets derived from capital share transactions ............. 836,349,290 --------------- Net increase in net assets ...................................................... 913,897,507 NET ASSETS: Beginning of year ............................................................... 1,644,087,663 --------------- End of year ..................................................................... $ 2,557,985,170 =============== Accumulated undistributed net investment income/(excess distribution) ........... $ 823,169 =============== Financial Highlights selected per share data and ratios * The Fund changed its fiscal year end from August 31 to December 31. + Annualized. (a) Total return is calculated exclusive of sales charges and is not annualized. (b) Less than one cent per share. (c) Disclosure of amount required for fiscal years beginning on or after September 1, 1995. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 24 C ---------------------- Class A Class B Class A Class B September 1 ------- ------- ------- ------- through Year ended Year ended December 31 ---- December 31, 1996 December 31, 1995 1994* ---------------------- --------------------- ------------ ---- Net asset value at beginning of period ........... $ 7.92 $ 7.92 $ 7.44 $ 7.44 $ 7.70 $ -------- ---------- ------- ---------- ---------- ----- Net investment income ........... 0.72 0.67 0.84 0.81 0.23 Net realized and unrealized gain (loss) on investments ......... 0.52 0.52 0.61 0.61 (0.27) Net realized and unrealized gain (loss) on foreign currency transactions .................. (0.00)(b) (0.00)(b) (0.00)(b) (0.00)(b) -- -------- ---------- ------- ---------- ---------- ----- Total from investment operations 1.24 1.19 1.45 1.42 (0.04) -------- ---------- ------- ---------- ---------- ----- Less dividends and distributions: From net investment income ...... (0.71) (0.67) (0.84) (0.81) (0.22) In excess of net investment income ............. -- -- (0.01) (0.01) -- From net realized gain on investments ................ (0.18) (0.18) (0.10) (0.10) -- In excess of net realized gain on investments ........... -- -- (0.02) (0.02) -- -------- ---------- ------- ---------- ---------- ----- Total dividends and distributions (0.89) (0.85) (0.97) (0.94) (0.22) -------- ---------- ------- ---------- ---------- ----- Net asset value at end of period $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ ======== ========== ======= ========== ========== ===== Total investment return (a) ..... 16.33% 15.58% 20.28% 19.71% (0.48%) Ratios (to average net assets)/ Supplemental Data: Net investment income ........ 9.0% 8.4% 10.2% 9.5% 9.1%+ Expenses ..................... 1.0% 1.6% 1.0% 1.6% 1.6%+ Portfolio turnover rate ......... 118% 118% 137% 137% 45% Average commission rate paid .... $ 0.0630 $ 0.0630 (c) (c) (c) Net assets at end of period (in 000's) ............. $116,805 $2,441,180 $42,850 $1,601,238 $1,128,913 $1,09 Notes to Financial Statements Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay High Yield Corporate Bond Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's primary objective is to maximize current income through investment in a diversified portfolio of high yield debt securities which are ordinarily rated in the lower rating categories of recognized rating agencies. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising common and preferred stocks which are traded on the New York Stock Exchange at the last sale price on that day or, if no sale occurs, at the mean between the closing bid and asked prices, (b) by appraising common and preferred stocks traded on other United States national securities exchanges or foreign securities exchanges as nearly as possible in the manner described in (a) by reference to their principal exchange, including the National Association of Securities Dealers National Market System, (c) by appraising over-the-counter securities quoted on the National Association of Securities Dealers NASDAQ system (but not listed on the National Market System) at the bid price supplied through such system, (d) by appraising over-the-counter securities not quoted on the NASDAQ system at prices supplied by the pricing agent or brokers selected by the Adviser, if these prices are deemed to be representative of market values at the regular close of business of the New York Stock Exchange, (e) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing tech- 25 MainStayHigh Yield Corporate Bond Fund niques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange (f) by appraising options and futures contracts at the last sale price on the market where such options or futures are principally traded, and (g) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and market value on maturity date if their original term to maturity at purchase exceeded 60 days. Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities (foreign markets and over-the-counter markets) and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Forward Currency Contracts. A forward currency contract is an agreement to buy or sell currencies of different countries on a specified future date at a specified rate. During the period the forward currency contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. When the forward currency contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into forward currency contracts in order to protect against adverse changes in the level of foreign currency exchange rates. This practice is known as hedging. The use of forward currency contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract or notional amounts reflect the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. The unrealized appreciation/depreciation on forward contracts reflects the Fund's exposure at year end to credit loss in the event of a counterparty's failure to perform its obligations. 26 Notes to Financial Statements continued Forward foreign currency contracts open at December 31, 1996: C$ Canadian Dollars. Securities Sold Short. The Fund may engage in short sales as a method of hedging declines in the value of securities owned. When the Fund enters into a short sale, it must segregate the security sold short, or securities equivalent in kind and amount to the securities sold, as collateral for its obligation to deliver the security upon conclusion of the sale. A gain, limited to the price at which the Fund sold the security short, or a loss, unlimited as to dollar amount, will be recognized upon termination of a short sale if the market price on the date the short position is closed out is less or greater, respectively, than the proceeds originally received. Any such gain or loss may be offset, completely or in part, by the change in the value of the hedged investments. At December 31, 1996 there were no open short sales. Restricted Securities. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. The issuers of the securities will bear the costs involved in registration under the Securities Act of 1933 and in connection with the disposition of such securities. The Fund does not have the right to demand that such securities be registered. The Fund may not invest more than 10% of its net assets in illiquid securities. 27 Contracts In Delivery Appreciation/ to Deliver Exchange For Date (Depreciation - -------------- ------------- -------- ---------------- $11,466,348 C$15,350,000 1/22/97 $(251,190) $ 2,700,000 C$ 3,680,370 1/22/97 (11,014) C$27,435,000 $20,160,935 1/22/97 116,123 --------- Net Depreciation $(146,081) ========= MainStay High Yield Corporate Bond Fund Restricted securities held at December 31, 1996: (a) Security has no value. (b) Less than one tenth of a percent. Financial Instruments with Concentration of Credit Risk. The Fund invests in Loan Participations. When the Fund purchases a Participation, the Fund typically enters into a contractual relationship with the lender or third party selling such Participation ("Selling Participant"), but not with the Borrower. As a result, the Fund assumes the credit risk of the Borrower, the Selling Participant and any other persons interpositioned between the Fund and the Borrower ("Intermediate Participants"). The Fund may not directly benefit from the collateral supporting the Senior Loan in which it has purchased the Participation. The Fund may be considered to have a concentration of credit risk in the banking industry, since the Fund will only acquire Participations if the Selling Participant and each Intermediate Participant is a financial institution. The Fund held no Loan Participations at December 31, 1996. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Permanent book- tax differences of $33,161, $222,520 and $723,161 have been reclassified from accumulated undistributed net investment income, accumulated undistributed net realized gain on investments and accumulated net realized loss on foreign currency transactions to additional paid-in capital. 28 Principal Percent Acquisition Amount/ 12/31/96 of Security Date Shares Cost Value Net Assets - -------- -------- ----------- ----------- ----------- ---------- Casino America, Inc. 11.50%, due 6/1/01 10/28/96 $10,000,000 $ 9,400,000 $ 8,900,000 0.3% Cosmar Corp. 11.50%, due 12/4/97 12/4/96 16,700,000 16,700,000 16,700,000 0.6 GPA Group, PLC Preferred Stock 3/6/96 30,000,000 9,862,500 13,200,000 0.5 Intertek Testing Services Ltd. 12.00%, due 11/8/07 11/8/96 4,000,000 3,776,560 3,920,000 0.2 Warrants, expire 12/31/99 11/8/96 691 223,440 220,000 0.0(b) National Tobacco Holding, LLC 13.50%, due 5/17/03 16.50%, beginning 6/1/01 5/17/96 12,563,468 9,603,417 10,446,524 0.4 Preferred Interest 5/17/96 1,676,030 1,650,766 953,829 0.1 Redeemable Warrants expire 5/17/06 5/17/96 547,970 0(a) 0(a) 0.0 Warrants, expire 5/17/06 5/17/96 4,259,246 2,960,051 4,259,246 0.2 ----------- ----------- --- $54,176,734 $58,599,599 2.3% =========== =========== === Notes to Financial Statements continued Investment income received by a Fund from foreign sources may be subject to foreign income taxes withheld at the source. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends monthly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued daily except when collection is not expected. Discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities or, if applicable, over the period to the first call date. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. The Fund invests primarily in high yield bonds. These bonds may involve special risks not commonly associated with investment in higher rated debt securities. High yield bonds may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher grade bonds. Also, the secondary market on which high yield bonds are traded may be less liquid than the market for higher grade bonds. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expenses incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. Dividends on short positions are recorded as an expense of the Fund on ex- dividend date. Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. 29 MainStay High Yield Corporate Bond Fund The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.30% the average daily net assets of the Fund. The Administrator and Adviser have voluntarily agreed to reduce their combined fees to 0.55% on assets exceeding $500 million. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator will each reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.75% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years, its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $1,413,313 for the year ended December 31, 1996. The Fund was also 30 Notes to Financial Statements continued advised that NYLIFE Distributors retained contingent deferred sales charges for redemption of Class B shares of $1,482,294 for the year ended December 31, 1996. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $112,347. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $54,555 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $233,333. Note 4--Affiliated Issuers: Issuers in which the Fund held 5% or more of the outstanding voting securities are defined as "Affiliated" in the Investment Company Act of 1940. As of December 31, 1996, the Fund owned 9.89% of the outstanding voting shares of National Tobacco Holding, LLC ("NTH"). Included in investment income are $117,432 and $1,060,301 of dividends and interest, respectively, earned on the Fund's investments in NTH. Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of U.S. Government securities were $389,402 and $101,954, respectively. Purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $2,416,718 and $1,994,351, respectively. Note 6--Capital Share Transactions (in 000's): 31 Year ended December 31 1996 1995 ----------------- ---------------- Class A Class B Class A Class B ------- ------- ------- ------- Shares sold ........................ 12,344 111,564 6,348 61,789 Shares issued in reinvestment of dividends and distributions .... 869 18,686 334 14,700 ------ ------- ----- ------ 13,213 130,250 6,682 76,489 Shares redeemed .................... 4,492 36,876 1,274 25,907 ------ ------- ----- ------ Net increase ....................... 8,721 93,374 5,408 50,582 ====== ======= ===== ====== Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay High Yield Corporate Bond Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 32 This page intentionally left blank 33 THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 34 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income Convertible Fund graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 35 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities (ss.) - ------------------------------------------------------------------------------------------------------- HIGH YIELD [Horizontal bar An aggressive high yield bond You want to max CORPORATE BOND FUND graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY High Yield Corporate Bond Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay High Yield Corporate Bond Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. MSAN09 (297) [GRAPHIC] Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay International Bond Fund Highlights 3 $10,000 Invested in the MainStay International Bond Fund versus Salomon Brothers Non-U.S. Dollar World Government Bond Index--Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by Country--Top 5 7 Quality Breakdown 8 Returns & Lipper Rankings 9 Top 10 Holdings 10 10 Largest Purchases 10 10 Largest Sales 10 Portfolio of Investments 11 Financial Statements 13 Notes to Financial Statements 17 Report of Independent Accountants 24 The MainStay Funds 26 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: The philosophy, the strategies, the education, and the communication between the mutual fund company, the registered representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified Prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as navigating through the Star ratings and what is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your registered representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your registered representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 MainStay International Bond Fund Highlights 1996 MARKET HIGHLIGHTS o The strength of the U.S. dollar relative to other currencies increased the risk of unhedged international bond investments o European monetary union requirements forced governments to reduce their deficits, which led to lower European interest rates and a European bond market rally o Emerging markets offered outstanding performance throughout the year o Overall, international bonds outperformed U.S. debt securities, and on a hedged basis, the results were even more dramatic 1996 FUND HIGHLIGHTS o One-year total returns of 13.90% and 13.13% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o Both share classes outperformed the average Lipper+ international income fund for the 12 months ended 12/31/96 o Risk management strategies included hedging European currencies seeking to minimize unfavorable currency exposure o The Fund had favorable results from country allocations, especially in Spain, Italy, Sweden, and Canada + See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested in the MainStay International Bond Fund versus Salomon Brothers Non-U.S. Dollar World Government Bond Index CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay International Bond Fund [GRAPHIC] Salomon Brothers Non-U.S. Dollar World Government Bond Index CLASS B SHARES [GRAPHIC] [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay International Bond Fund [GRAPHIC] Salomon Brothers Non-U.S. Dollar World Government Bond Index The Class A graph assumes an initial investment of $10,000 made on 9/13/94 reflecting the effect of the 4.5% maximum up-front sales charge, thereby reducing the amount of the investment to $9,550 and includes the historical performance of the Class B shares for periods from inception (9/13/94) through 12/31/94. The Class B graph assumes an initial investment of $10,000 made on 9/13/94. Returns reflect the Contingent Deferred Sales Charge (CDSC) of 3.0%, as it would apply for the period shown. (The $10,000 invested in the Salomon Brothers Non-U.S. Dollar World Government Bond Index begins on 8/31/94.) All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an unmanaged index generally considered to be representative of the world bond market. 4 Salomon Brothers MainStay Non-U.S. Dollar International World Government Year-end Bond Fund Bond Index - --------------------------------------------------- 9/13/94 $ 9,550.00 $10,000 12/94 $ 9,569.01 $10,256 12/95 $11,356.50 $12,261 12/96 $12,934.60 $12,761 Salomon Brothers MainStay Non-U.S. Dollar International World Government Year-end Bond Fund Bond Index - --------------------------------------------------- 9/13/94 $10,000.00 $10,000 12/94 $10,020.00 $10,256 12/95 $11,819.40 $12,261 12/96 $13,371.40 $12,761 Portfolio Management Discussion and Analysis [GRAPHIC] Photo of International Bond Fund Manager INTERNATIONAL BOND FUND MANAGER Joseph Portera The international bond market had a strong year in 1996. While some provided minimal returns, emerging markets provided spectacular results of 35%.+ Other major developed markets also turned in excellent results, with Italy and Spain up 22%, Sweden up 18%, and Canada up 12%, in local terms. Although the Canadian market wasn't the top performer, it picked up substantially at the end of the year, providing a 5% return in the fourth quarter alone. Signs of economic recovery in Japan gave the bond markets a scare in the first quarter. With the suggestion that short-term rates had bottomed out in Japan, investors started selling bonds on fears that rates would rise. While the phenomenon was short-lived, it had an impact around the world. In Europe, economic reform and fiscal consolidation led to dramatically lower interest rates, which fueled a European bond market rally. The U.S. dollar's strengthening relative to most major currencies posed a risk for international bond investors. While international bond returns were attractive on a local basis, they were particularly strong when the currency was hedged back into U.S. dollars. Given this background, how did the MainStay International Bond Fund do in 1996? For the 12 months ended December 31, 1996, the MainStay International Bond Fund provided total returns of 13.90% and 13.13% for Class A and Class B shares, respectively, excluding all sales charges. These results placed the Fund well ahead of the average Lipper++ international income fund, which returned 8.75% over the same period. What were the major contributors to this positive performance? There were several factors that helped our portfolio. First, the Fund entirely avoided the Japanese market, where returns were much too low to compensate for the risk. Second, we made selective use of currency hedging against European currencies, which gave the Fund's performance a considerable boost. Third, we selected [GRAPHIC] Currency management/hedging The process of managing or "hedging" the risks associated with owning securities denominated in different currencies, the relative values of which may change at any time. There can be no assurance that currency hedging will be beneficial to investors. + Source: Salomon Brothers Brady Bond Index ++ See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 5 [GRAPHIC] Weighting . The proportion of a portfolio allocated to a specific market sector or country, i.e., a fund is said to be overweighted in a country when that portion of the portfolio is larger than the country's total bonds relative to international bond markets as a whole. International diversification . Purchasing securities in several international markets, which may react differently to economic, monetary, and market trends. Diversification may help reduce investment risk. YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL] See footnote * on page 9 for more information on performance. strong markets and overweighted the portfolio where we felt returns would be highest. And fourth, we adjusted the Fund's duration throughout the year in ways that helped benefit the portfolio. Why was hedging so important this year? The U.S. dollar was strengthening most of the year against many major currencies. Hedging is a risk management strategy that helped us avoid giving back the gains we made in the local markets when the returns were translated back to U.S. dollars. In some cases, the Fund benefited from remaining unhedged, as with Australian bonds during the first half of the year. But most of the Fund's investments were hedged for most of the year, which enhanced the performance of the portfolio. Can you give an example of a currency used to hedge the Fund? We used the Deutsche mark as a hedging vehicle for the Fund's Italian, Spanish, and Swedish government bond positions. That allowed us to help protect the Fund's foreign bond returns from dollar strength and to benefit from most or all the capital gains and interest income from them without having to take currency losses when we translated the returns back into dollars. Which countries did you concentrate in during 1996? While the Fund invests in a diversified array of markets, we concentrated on those which we thought would potentially be stellar performers. We invested in Canada because it's already been through the pain of fiscal consolidation and currency weakness that Europe is just now going through. It's an export giant and has huge surpluses with the United States, which is its largest trading partner. We felt their bonds represented excellent value and would provide attractive yields. We're also 6 Year-End Total Return % - -------- -------------- 12/94 0.20 12/95 18.68 Class A 12/95 17.96 Class B 12/96 13.90 Class A 12/96 13.13 Class B [GRAPHIC] DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/96 [THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. bullish on the Canadian currency right now. So there's a lot to like there. Where else did you focus the Fund's investments? In Europe we focused on Italy, Sweden, and Spain. Several European currencies have rallied in 1996, with the Italian lira up 12% versus the Deutsche mark, the Swedish krona up 5%, and the Spanish peseta unchanged. But each of these countries provided much higher yields than German bonds, so we're picking countries with positive returns such as Italy and Spain, with 22%, and Sweden, with 18% as well as earning positive returns on key currencies. We believe that the vast majority of an international bond portfolio's return will come from its country and currency selections. And they both paid off for the Fund during the year. How and why did you adjust the duration of the portfolio in 1996? With the Japanese bond scare, fears of U.S. rate hikes, and the threat of a bond sell-off, we lowered our duration in Belgium, Germany, and Denmark. In the first quarter, the dollar block worked well for the Fund by helping us avoid losses. In the middle of the second quarter and throughout the rest of the year, we increased the Fund's duration in Spain, Italy, and Sweden, which also had a positive effect as those bond markets rallied. The Fund's duration stance, coupled with the Fund's country and currency weightings placed us in the right place at the right time and helped the Fund outperform its peers. What was the Fund's position in other European countries? The Fund wasn't heavily invested in the U.K., which was a laggard in 1996. The British market suffered political and [GRAPHIC] Duration . Equals the weighted average time until bond investors recover their investment. It is a measurement of interest rate risk. 7 - ------------------------------- Italy 14.0% France 8.7% Canada 8.6% Germany 7.8% U.K. 7.5% All other 53.4% [GRAPHIC] Yield curve When interest rates available from various short-, intermediate-, and long-term securities are plotted on a graph, the resulting line is known as a "yield curve." The "front-end" of the yield curve, then, would consist of short- to intermediate-term bonds which generally offer lower interest rates than longer term investments. Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. economic setbacks, which may get worse if the U.K. doesn't converge with other European nations in its monetary policies. France traded very much like Germany, and the Fund's underweighted position in French bonds resulted in an overall positive. Where did you position the Fund on the yield curve throughout the year? The Fund stayed largely at the front end of the yield curve, or in shorter-term paper with maturities from two to ten years. We didn't find the added yield of longer-term bonds was worth the risks we'd have to take. Our yield curve decisions also contributed to our positive performance in 1996. Were there any disappointments during the year? Looking back, the Fund might have benefited if it did not entirely avoid emerging markets. The rise in oil prices helped a lot of emerging market economies, most notably Venezuela and Mexico. I think we missed some important opportunities by not taking advantage of these markets at least to some degree. What do you see ahead for 1997? We will probably continue to be overweighted in shorter-term bonds, unless the direction of the European market changes. We're continuing to look at Italy, which tends to be very volatile from a political standpoint. We're considering adding limited exposure in emerging markets. And naturally, we'll continue to seek out promising countries, currencies, and securities that have the potential to maximize current income for our shareholders, with a reasonable level of risk. Joseph Portera Portfolio Manager QUALITY BREAKDOWN AS OF 12/31/96 [GRAPHIC] [THE FOLLOWING DATA WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. Bond quality ratings provided by Standard & Poor's. See the prospectus for details. Percent ------- AAA 55.2% AA 19.7% A 1.7% Cash & Equivalents 23.4% 8 Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Performance figures reflect the assumption of certain Fund expenses by the Fund's administrator and adviser. Had these expenses not been assumed, total return figures would have been lower. This expense limitation may be terminated or revised at any time. Class A shares, first offered to the public on 1/3/95, are sold with a maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%. Performance figures for this class include the historical performance of the Class B shares for periods from inception (9/13/94) up to 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class B shares of the Fund are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to 1%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 9/13/94. [GRAPHIC] - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 13.90% n/a 14.07% Class B 13.13% n/a 13.46% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 8.77% n/a 11.82% Class B 8.13% n/a 12.34% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 10 out of n/a n/a 44 funds Class B 11 out of n/a 9 out of 44 funds 28 funds Average Lipper international income fund 8.75% 8.54% 11.90% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $10.95 $0.7325 $0.1515 Class B $10.98 $0.6531 $0.1515 ================================================================================ 9 [GRAPHIC] Note: This breakdown is provided for infor-mational purposes only. The Fund's holdings may change daily. All purchases and sales are aggregated by issuer. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. Top 10 Holdings as of 12/31/96 10 - ----------------------------------------------------------------------------------------- HOLDING COUNTRY AMOUNT ========================================================================================= Buoni Poliennali del Tesoro, 8.50%, due 1/1/04 Italy $1,044,924 Buoni Poliennali del Tesoro, 8.50%, due 8/1/97 Italy 1,011,269 Buoni Poliennali del Tesoro, 8.50%, due 4/1/99 Italy 927,382 United Kingdom Treasury Bond, 8.50%, due 7/16/07 United Kingdom 906,919 Province of Ontario, 7.25%, due 9/27/05 Canada 827,186 Australian Government, 10.00%, due 2/15/06 Australia 781,414 Buoni Poliennali del Tesoro, 9.50%,due 2/1/01 Italy 780,354 United Kingdom Treasury Bond, 10.00%,due 9/8/03 United Kingdom 718,265 France Obligations Assimilables du Tresor, 8.50%, due 11/25/02 France 656,283 International Bank of Reconstruction & Development, 7.125%,due 4/12/05 Germany 633,634 ========================================================================================= 10 Largest Purchases for the 12 months ended 12/31/96 - ----------------------------------------------------------------------------------------- AMOUNT SECURITY COUNTRY OF PURCHASE ========================================================================================= Buoni Poliennali Del Tesoro, Due 8/1/9711/1/23 Italy $3,444,328 Australian Government, due 7/15/0010/15/07 Australia 2,874,402 United Kingdom Treasury Bonds,due 7/14/007/16/07 United Kingdom 2,705,747 Canadian Government, due 9/1/006/1/08 Canada 1,369,675 Kingdom of Denmark, due 11/15/0012/15/04 Denmark 942,963 Queensland Treasury Corp., due 6/14/059/14/07 Australia 770,982 Province of Ontario, due 9/27/05 Canada 745,868 New South Wales Treasury Corp., due 5/1/06 Australia 602,789 German Unity Fund, due 2/20/01 Germany 526,862 Swedish Government, due 5/5/032/9/05 Sweden 480,581 ========================================================================================= 10 Largest Sales for the 12 months ended 12/31/96 - ----------------------------------------------------------------------------------------- AMOUNT SECURITY COUNTRY OF SALE ========================================================================================= Australian Government, due 7/15/008/15/08 Australia $2,461,622 Buoni Poliennali del Tesoro, due 8/1/9711/1/23 Italy 2,118,381 Canadian Government, due 9/1/006/1/25 Canada 1,026,373 Treuhand-Obligationen, due 9/24/9811/25/99 Germany 975,063 New South Wales Treasury Corp., due 2/1/985/1/06 Australia 972,823 Bundesschatzanweisungen, due 2/20/971/4/24 Germany 830,321 Province of Ontario, due 1/10/0112/8/03 Canada 770,920 Queensland Treasury Corp., due 6/14/059/14/07 Australia 696,766 United Kingdom Treasury Bonds,due 7/14/007/16/07 United Kingdom 694,381 France Obligations Assimilables du Tresor, due 11/12/9710/25/25 France 557,398 ========================================================================================= Portfolio of Investments December 31, 1996 Principal Amount Value ====================== LONG-TERM GOVERNMENT BONDS (76.6%)+ AUSTRALIA (6.1%) Australian Government Series 803 9.50%, due 8/15/03 ......................... A $ 310,000 $ 275,365 Series 302 9.75%, due 3/15/02 ......................... 455,000 403,235 Series 206 10.00%, due 2/15/06 ........................ 840,000 781,414 New South Wales Treasury Corp. Series 98 7.50%, due 2/1/98 .......................... 400,000 322,098 Queensland Treasury Corp. Series 7 8.00%, due 9/14/07 ......................... 125,000 101,812 ---------- 1,883,924 ---------- AUSTRIA (3.5%) Republic of Austria Series 94-3 5.75%, due 3/22/99 ......................... AS 2,100,000 201,582 Series 93-1 7.00%, due 1/20/03 ......................... 3,110,000 310,440 Series 95-1 7.50%, due 1/24/05 ......................... 5,440,000 557,574 ---------- 1,069,596 ---------- BELGIUM (0.5%) Kingdom of Belgium Series 15 6.75%, due 5/25/97 ......................... BF 5,000,000 159,818 ---------- CANADA (8.6%) Canadian Government Series A76 9.00%, due 6/1/25 .......................... C $ 25,000 22,458 9.75%, due 6/1/01 .......................... 645,000 549,508 Series H74 10.00%, due 6/1/08 ......................... 160,000 148,484 Series A33 11.50%, due 9/1/00 ......................... 550,000 484,845 Province of British Columbia Series BCCD 8.00%, due 8/23/05 ......................... 640,000 513,862 Series EC-8 10.75%, due 2/19/01 ........................ 135,000 117,511 Province of Ontario 7.25%, due 9/27/05 ......................... 1,085,000 827,186 ---------- 2,663,854 ---------- Principal Amount Value ====================== DENMARK (6.7%) Kingdom of Denmark 7.00%, due 12/15/04 ........................ DK 2,750,000 $ 485,908 7.00%, due 11/10/24 ........................ 835,000 134,191 8.00%, due 11/15/01 ........................ 2,220,000 417,739 9.00%, due 11/15/98 ........................ 2,480,000 457,834 9.00%, due 11/15/00 ........................ 2,940,000 567,924 ---------- + 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 2,063,596 ---------- FRANCE (8.7%) France Bons du Tresor Negociables 5.75%, due 11/12/98 ........................ FF 1,220,000 244,035 France Obligations Assimilables du Tresor 7.50%, due 4/25/05 ......................... 2,700,000 586,627 8.25%, due 2/27/04 ......................... 2,262,000 509,943 8.50%, due 3/28/00 ......................... 2,790,000 607,776 8.50%, due 11/25/02 ........................ 2,900,000 656,283 8.50%, due 12/26/12 ........................ 420,000 99,466 ---------- 2,704,130 ---------- GERMANY (7.8%) German Unity Fund 8.50%, due 2/20/01 ......................... DM 690,000 513,366 International Bank of Reconstruction & Development 7.125%, due 4/12/05 (a) .................... 900,000 633,634 Republic of Deutschland Series 94 6.25%, due 1/4/24 (a) ...................... 420,000 258,659 Treuhandanstalt 6.50%, due 4/23/03 ......................... 625,000 431,467 7.375%, due 12/2/02 (a) .................... 800,000 576,779 ---------- 2,413,905 ---------- IRELAND (2.8%) Irish Government 6.25%, due 4/1/99 (a) ...................... IP 95,000 161,673 8.25%, due 8/18/15 (a) ..................... 58,000 111,025 8.75%, due 7/27/97 (a) ..................... 95,000 163,185 8.75%, due 9/30/12 (a) ..................... 95,000 189,731 9.25%, due 7/11/03 (a) ..................... 125,000 245,097 ---------- 870,711 ---------- ITALY (14.0%) Buoni Poliennali del Tesoro 8.50%, due 8/1/97 .......................... IL 1,530,000,000 1,011,269 8.50%, due 4/1/99 .......................... 1,350,000,000 927,382 8.50%, due 1/1/04 .......................... 1,480,000,000 1,044,924 MainStay International Bond Fund Principal Amount Value ========================= LONG-TERM GOVERNMENT BONDS (Continued) ITALY (Continued) 9.50%, due 2/1/01 ........................ IL 1,080,000,000 $ 780,354 10.00%, due 8/1/03 ....................... 760,000,000 572,592 ---------- 4,336,521 ---------- NETHERLANDS (0.1%) Netherlands Government 6.25%, due 2/15/97 ....................... NG 55,000 31,899 ---------- SPAIN (4.5%) Spanish Government 8.30%, due 12/15/98 ...................... SP 4,000,000 32,216 10.50%, due 10/30/03 ..................... 66,300,000 619,660 11.30%, due 1/15/02 ...................... 41,490,000 389,150 12.25%, due 3/25/00 ...................... 40,000,000 364,872 ---------- 1,405,898 ---------- SWEDEN (5.8%) Banque Nationale de Paris Series EMTN 11.00%, due 11/4/99 ...................... SK 3,050,000 509,898 Swedish Government Series 1035 6.00%, due 2/9/05 ........................ 800,000 113,541 Series 1034 9.00%, due 4/20/09 ....................... 2,700,000 465,071 Series 1033 10.25%, due 5/5/03 ....................... 3,000,000 534,699 Series 1030 13.00%, due 6/15/01 ...................... 900,000 169,943 ---------- 1,793,152 ---------- UNITED KINGDOM (7.5%) United Kingdom Treasury Bonds 8.50%, due 7/16/07 (a) ................... (POUND) 495,000 906,919 9.50%, due 4/18/05 (a) ................... 175,000 335,883 10.00%, due 2/26/01 (a) .................. 195,000 366,240 10.00%, due 9/8/03 (a) ................... 370,000 718,265 ---------- 2,327,307 ---------- Total Long-Term Government Bonds (Cost $21,968,036) ....................... 23,724,311 ---------- Principal Amount Value ======================== SHORT-TERM INVESTMENT (4.5%) COMMERCIAL PAPER (4.5%) UNITED STATES (4.5%) Ameritech Corp. 6.25%, due 1/2/97 ........................ $1,380,000 $ 1,379,760 ----------- Total Short-Term Investment (a) Segregated as collateral for options and forward foreign currency contracts. (b) The cost for Federal income tax purposes is $23,382,142. (c) At December 31, 1996 net unrealized appreciation for securities was $1,764,364, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $1,835,789 and aggregate gross unrealized depreciation for all investments on which there was an excess of cost over market value of $71,425. (d) The following abbreviations are used in the above portfolio: A$-Australian Dollar AS-Austrian Schilling BF-Belgian Franc C$-Canadian Dollar DK-Danish Krone DM-Deutsche Mark FF-French Franc IP-Irish Punt IL-Italian Lira NG-Netherland Guilder (POUND)-Pound Sterling SP-Spanish Peseta SK-Swedish Krona $ -U.S. Dollar The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 (Cost $1,379,760) ........................ 1,379,760 ----------- OPTIONS (0.1%) UNITED STATES (0.1%) U.S. Dollar Put/Deutsche Mark Call Strike price DM 1.5150 Expires 5/16/97 .......................... $2,300,000 42,435 ----------- Total Options (Cost $30,935) ........................... 42,435 ----------- Total Investments (Cost $23,378,731) (b) ................... 81.2% 25,146,506(c) Cash and Other Assets, Less Liabilities ......................... 18.8 5,838,628 ----------- Net Assets ................................. 100.0% $30,985,134 =========== Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $23,378,731) .......... $25,146,506 Cash denominated in foreign currencies (identified cost $4,788,435) ........ 4,707,235 Cash ....................................................................... 42,630 Receivables: Interest ................................................................. 816,707 Fund shares sold ......................................................... 158,880 Unrealized net appreciation on forward foreign currency contracts .......... 220,368 Unamortized organization expense ........................................... 26,910 Other assets ............................................................... 17 ----------- Total assets ............................................................ 31,119,253 ----------- LIABILITIES: Payables: Investment securities purchased .......................................... 30,935 NYLIFE Distributors ...................................................... 21,300 Fund shares redeemed ..................................................... 11,307 Transfer agent ........................................................... 7,019 Adviser .................................................................. 6,383 Custodian ................................................................ 4,416 Trustees ................................................................. 219 Accrued expenses ........................................................... 52,540 ----------- Total liabilities ....................................................... 134,119 ----------- Net assets ................................................................. $30,985,134 =========== COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A .................................................................. $ 10,930 Class B .................................................................. 17,330 Additional paid-in capital ................................................. 29,068,285 Accumulated distribution in excess of net investment income .............. (36,679) Accumulated undistributed net realized gain on investments ................. 20,261 Net unrealized appreciation on investments ................................. 1,767,775 Net unrealized appreciation on translation of assets and liabilities in foreign currencies and forward foreign currency contracts ................ 137,232 ----------- Net assets ................................................................. $30,985,134 =========== CLASS A Net assets applicable to outstanding shares ................................ $11,965,194 =========== Shares of beneficial interest outstanding .................................. 1,092,984 =========== Net asset value per share outstanding ...................................... $ 10.95 Maximum sales charge (4.50% of offering price) ............................. 0.52 ----------- Maximum offering price per share outstanding ............................... $ 11.47 =========== CLASS B Net assets applicable to outstanding shares ................................ $19,019,940 =========== Shares of beneficial interest outstanding .................................. 1,732,970 =========== Net asset value per share outstanding ...................................... $ 10.98 =========== Statement of Operations (a) Interest recorded net of foreign withholding taxes of $37,600. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Interest (a) ................................................................................ $ - Expenses: Advisory .................................................................................... Distribution--Class B ....................................................................... Shareholder communication ................................................................... Administration .............................................................................. Service ..................................................................................... Transfer agent .............................................................................. Custodian ................................................................................... Registration ................................................................................ Professional ................................................................................ Recordkeeping ............................................................................... Amortization of organization expense ........................................................ Trustees .................................................................................... Miscellaneous ............................................................................... - Total expenses before reimbursement ........................................................ Fees waived by Administrator and Adviser ...................................................... - Net expenses ............................................................................... - Net investment income ......................................................................... - REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain from: Security transactions ....................................................................... Foreign currency transactions ............................................................... - Net realized gain on investments and foreign currency transactions ............................ - Net change in unrealized appreciation (depreciation) on investments: Security transactions ....................................................................... Translation of assets and liabilities in foreign currencies and forward foreign currency contracts ................................................................................. - Net unrealized gain on investments and foreign currencies ..................................... - Net realized and unrealized gain on investments and foreign currency transactions ............. - Net increase in net assets resulting from operations .......................................... $ = Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 Year ended Ye December 31, Dec 1996 ----------- --- INCREASE IN NET ASSETS: Operations: Net investment income ............................................................ $ 1,378,963 $ 1 Net realized gain on investments ................................................. 467,595 Net realized gain on foreign currency transactions ............................... 1,128,390 Net change in unrealized appreciation on investments ............................. 358,520 1 Net change in unrealized appreciation on translation of assets and liabilities in foreign currencies and forward foreign currency contracts .................... 160,131 ----------- --- Net increase in net assets resulting from operations ............................. 3,493,599 3 ----------- --- Dividends and distributions to shareholders: From net investment income: Class A ......................................................................... (794,237) Class B ......................................................................... (984,527) From net realized gain on investments and foreign currency transactions: Class A ......................................................................... (162,643) Class B ......................................................................... (253,849) In excess of net realized gain on investments and foreign currency transactions: Class A ......................................................................... -- Class B ......................................................................... -- ----------- --- Total dividends and distributions to shareholders ............................. (2,195,256) (2 ----------- --- Capital share transactions: Net proceeds from sale of shares: Class A ......................................................................... 2,149,516 10 Class B ......................................................................... 7,816,122 6 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A ......................................................................... 251,550 Class B ......................................................................... 1,098,725 1 ----------- --- 11,315,913 18 Cost of shares redeemed: Class A ......................................................................... (2,500,800) Class B ......................................................................... (3,834,311) (11 ----------- --- Increase in net assets derived from capital share transactions ................ 4,980,802 6 ----------- --- Net increase in net assets .................................................... 6,279,145 7 NET ASSETS: Beginning of year .................................................................. 24,705,989 17 ----------- --- End of year ........................................................................ $30,985,134 $24 =========== === Accumulated distribution in excess of net investment income ........................ $ (36,679) $ =========== === Financial Highlights selected per share data and ratios * Commencement of Operations. + Annualized. (a) Total return is calculated exclusive of sales charges and is not annualized. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 16 Class A Class B Class A ------- ------- ------- Year ended Yea December 31, 1996 Decemb ------------------- ------- Net asset value at beginning of period ................................. $ 10.43 $ 10.45 $ 9.90 ------- ------- ------- Net investment income .................................................. 0.72 0.64 1.15 Net realized and unrealized gain (loss) on investments ................. 0.27 0.27 0.59 Net realized and unrealized gain (loss) on foreign currency transactions 0.41 0.42 0.07 ------- ------- ------- Total from investment operations ....................................... 1.40 1.33 1.81 ------- ------- ------- Less dividends and distributions: From net investment income ............................................. (0.73) (0.65) (0.61 From net realized gain on investments and foreign currency transactions (0.15) (0.15) (0.28 In excess of net realized gain on investments and foreign currency transactions ......................................................... -- -- (0.39 ------- ------- ------- Total dividends and distributions ...................................... (0.88) (0.80) (1.28 ------- ------- ------- Net asset value at end of period ....................................... $ 10.95 $ 10.98 $ 10.43 ======= ======= ======= Total investment return (a) ............................................ 13.90% 13.13% 18.68 Ratios (to average net assets)/Supplemental Data: Net investment income ................................................ 5.4% 4.8% 5.6 Net expenses ......................................................... 1.5% 2.1% 1.5 Expenses (before waiver) ............................................. 1.8% 2.4% 1.8 Portfolio turnover rate ................................................ 59% 59% 103 Net assets at end of period (in 000's) ................................. $11,965 $19,020 $11,494 Notes to Financial Statements Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay International Bond Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's investment objective is to seek competitive overall return commensurate with an acceptable level of risk by investing primarily in a portfolio of non-U.S. (primarily government) debt securities. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange, and (b) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value on maturity date if their original term to maturity at purchase exceeded 60 days. 17 MainStay International Bond Fund Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities (foreign exchanges and over-the-counter markets) and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Forward Currency Contracts. A forward currency contract is an agreement to buy or sell currencies of different countries on a specified future date at a specified rate. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into forward foreign currency exchange contracts in order to hedge its foreign currency denominated investments and receivables and payables against adverse movements in future foreign exchange rates. The use of forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. The unrealized appreciation on forward contracts reflects the Fund's exposure at year end to credit loss in the event of a counterparty's failure to perform its obligations. Forward foreign currency contracts open at December 31, 1996: 18 Value on Contract Trade Current A Amount Date Value (D Foreign Currency Sale Contracts ------ ---- ----- -- Australian Dollar, expiring 2/24/973/3/97 ......... A$ 1,410,000 $ 1,136,903 $1,119,163 Canadian Dollar, expiring 6/16/97 ................. C$ 980,000 730,253 722,165 Danish Krone, expiring 2/12/97 .................... DK 8,405,000 1,447,657 1,428,102 Deutsche Mark, expiring 1/6/976/20/97 ............. DM 24,832,355 16,489,697 16,211,715 French Franc, expiring 2/4/97 ..................... FF 1,350,000 263,987 260,219 Irish Punt, expiring 1/7/97 ....................... IP 480,000 768,589 812,362 Italian Lira, expiring 1/23/97 .................... IL 1,200,000,000 773,353 788,400 Pound Sterling, expiring 1/7/972/14/97 ........(pound) 438,000 683,678 749,391 Spanish Peseta, expiring 1/22/97 .................. SP 55,500,000 422,972 426,407 Notes to Financial Statements continued Organization Costs. Costs incurred in connection with the Fund's initial organization and registration totalled approximately $54,000 and are being amortized over 60 months beginning at the commencement of operations. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Permanent book- tax differences of $363,122 and $2,620 have been reclassified from accumulated undistributed net realized gain on foreign currency transactions to accumulated distribution in excess of net investment income and accumulated undistributed net realized gain on investments, respectively, due to the tax treatment of foreign currency gains. Investment income received by the Fund from foreign sources may be subject to foreign income taxes withheld at the source. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends monthly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued daily except when collection is not expected. Discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities, or, if applicable, over the period to the first call date. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expenses incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to 19 Value on Contract Trade Current A Foreign Currency Buy Contracts Amount Date Value (D - ------------------------------ ------ ---- ----- Australian Dollar, expiring 1/7/97 ................ A$ 970,000 $ 767,270 $ 770,391 Deutsche Mark, expiring 1/7/972/24/97 ............. DM 6,753,628 4,445,435 4,391,332 Pound Sterling, expiring 1/7/97 ...............(pound) 491,520 768,588 841,010 Swedish Krona, expiring 1/27/97 ................... SK 50,000 7,568 7,331 Net Appreciation .................................. MainStay International Bond Fund separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. Foreign Currency Investing. The books and records of the Fund are recorded in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities of the Fund are presented at the exchange rates and market values at the close of the year. The changes in net assets arising from fluctuations in exchange rates and the changes in net assets resulting from changes in market prices are not separately presented. However, gains and losses from certain foreign currency transactions are treated as ordinary income for Federal income tax purposes. Net realized gain (loss) on foreign currency transactions represents net gains and losses on forward currency contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities at year end exchange rates are reflected in unrealized foreign exchange gains. There are certain risks involved in investing in foreign securities that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. 20 Notes to Financial Statements continued Foreign cash held at December 31, 1996: Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.25% and 0.15%, respectively, of the average daily net assets of the Fund. The Adviser and Administrator each agreed that a portion of its fees, $54,933 and $27,467, respectively, for the year ended December 31, 1996, would not be imposed, pursuant to the applicable contracts, until such time as the Fund reaches $50 million in net assets. Had the net assets reached $50 million, the Adviser and Administrator would have been paid 0.45% and 0.25%, respectively. 21 Currency Cost Value - ----------------------------------------------------- ---------- ---------- Australian Dollar A$ 417,915 $ 327,480 $ 331,950 Austrian Schilling AS 2,865,732 287,487 264,378 Belgian Franc BF 12,285,637 392,058 386,777 Canadian Dollar C$ 484,366 355,490 353,371 Danish Krone DK 1,153,026 197,889 195,464 Deutsche Mark DM 2,255,497 1,522,597 1,463,563 French Franc FF 1,130,655 219,719 217,484 Irish Punt IP 39,753 63,263 67,283 Italian Lira IL 364,311,769 239,447 239,717 Netherland Guilder NG 321,547 189,505 185,887 Pound Sterling (pound) 129,007 201,200 220,770 Spanish Peseta SP 51,505,996 405,205 395,978 Swedish Krona SK 2,626,133 387,095 384,613 ---------- ---------- $4,788,435 $4,707,235 ========== ========== MainStay International Bond Fund The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.75% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $54,586 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges on redemptions of Class B shares of $27,332 for the year ended December 31, 1996. 22 Notes to Financial Statement continued Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Capital. At December 31, 1996 NYLIFE Distributors held shares of Class A of the Fund with a net asset value of $9,233,704, which represents 77.2% of the net assets of Class A shares at year end. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $2,593. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $771 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $12,511. Note 4--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $15,710 and $13,062, respectively. Note 5--Capital Share Transactions (in 000's): 23 Year ended December 31 1996 1995 ================= =========== Class A Class B Class A C ======= ======= ======= = Shares sold ....................................................... 196 725 1,084 Shares issued in reinvestment of dividends and distributions ...... 23 101 20 --- --- ----- 219 826 1,104 Shares redeemed ................................................... 228 357 2 --- --- ----- Net increase (decrease) ........................................... (9) 469 1,102 === === ===== Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay International Bond Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 24 This page intentionally left blank 25 THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 26 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income Convertible Fund graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 27 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the INTERNATIONAL BOND FUND [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY International Bond Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay International Bond Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. [GRAPHIC] MSAN10 (297) Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay International Equity Fund Highlights 3 $10,000 Invested in the MainStay International Equity Fund versus Morgan Stanley Capital International EAFE Index--Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by Country--Top 5 7 Portfolio Composition 8 Returns & Lipper Rankings 9 Top 10 Equity Holdings 10 10 Largest Purchases 10 10 Largest Sales 10 Portfolio of Investments 11 Financial Statements 18 Notes to Financial Statements 22 Report of Independent Accountants 29 The MainStay Funds 30 overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received /s/ Alice T. Kane Alice T. Kane January 1997 MainStay International Equity Fund Highlights 1996 MARKET HIGHLIGHTS o International equity markets generally had positive performance, with The Morgan Stanley Capital International EAFE Index+ returning 6.05% for the 12 months ended December 31, 1996 o An accommodative interest rate environment worldwide was good for international corporate growth, and particularly good for interest-rate sensitive stocks o While Japan showed improving fundamentals, it provided the worst returns of any major world market, losing about 5% for the year o Spain, Norway, and the Netherlands provided excellent overall performance, with Italy, France, Germany, and Hong Kong also providing positive returns o A market reversal in June and July, led by declines in U.S. equities, left returns in the second half of the year at more modest levels 1996 FUND HIGHLIGHTS o One-year total returns of 9.78% and 9.05% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o The Fund outpaced The Morgan Stanley Capital International EAFE Index for the 12 months ended 12/31/96 o The Fund underperformed the average Lipper++ international fund for the 12 months ended 12/31/96 o The portfolio benefited from investments in Spain and Italy, and energy investments in Norway and the Netherlands, but was hurt by holdings in Japan o Selective currency hedging worked to the advantage of investors in the Fund throughout the year + See footnote on page 4 for more information on The Morgan Stanley Capital International EAFE Index. ++ See footnote and table on page 9 for more information about Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested in the MainStay International Equity Fund versus Morgan Stanley Capital International EAFE Index CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay International Equity Fund [GRAPHIC] Morgan Stanley EAFE Index* CLASS B SHARES [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay International Equity Fund [GRAPHIC] Morgan Stanley EAFE Index* The Class A graph assumes an initial investment of $10,000 made on 9/13/94 reflecting the effect of the 5.5% maximum up-front sales charge, thereby reducing the amount of the investment to $9,450 and includes the historical performance of the Class B shares for periods from inception (9/13/94) through 12/31/94. The Class B graph assumes an initial investment of $10,000 made on 9/13/94. Returns reflect the Contingent Deferred Sales Charge (CDSC) of 3.0%, as it would apply for the period shown. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * The Morgan Stanley Capital International Europe, Australia, Far East (Free) Index--The EAFE Index--is an unmanaged, capitalization-weighted index containing approximately 1,000 equity securities of companies located outside the U.S. 4 MainStay International Morgan Stanley Date Equity Fund EAFE Index - -------------------------------------------------------------------------------- 09/13/94 $ 9,450.00 $10,000 12/94 $ 9,232.65 $ 9,595 12/95 $ 9,717.81 $10,703 12/96 $10,668.60 $11,306 MainStay International Morgan Stanley Date Equity Fund EAFE Index - -------------------------------------------------------------------------------- 09/13/94 $10,000.00 $10,000 12/94 $ 9,770.00 $ 9,595 12/95 $10,187.10 $10,703 12/96 $10,775.70 $11,306 Portfolio Management Discussion and Analysis [GRAPHIC] Photo of Shigemi Takagi INTERNATIONAL EQUITY FUND MANAGER Shigemi Takagi Throughout 1996, the international equity markets benefited from accommodative interest rate policies in most major markets around the world. The low interest rate environment helped act as a stimulus for corporate growth and had a positive impact on interest-rate sensitive industries such as banking and finance. The strengthening of economic fundamentals also led to gains in energy stocks, which benefited from greater demand for fuel around the world. In Europe, massive restructuring has begun, offering potential opportunities for companies to increase their profitability and reduce their labor costs. A law recently passed in Germany will allow employers to substantially reduce their benefit costs, which could improve corporate earnings prospects there. In France, corporate profit growth continues to be promising due to the lack of wage cost increases caused by high unemployment rates and generally lower production costs. All of this is good for industry in France and Germany and may bode well for the future of European industry. Although Asian markets faltered in July when the U.S. technology industry had a severe setback, later in the year the situation stabilized and growth trends are once again emerging. Japan appears as a notable exception. Despite improving economic fundamentals, investors have remained bearish, resulting in an overall market decline of about 5% for the year. While some banks closed during the year, others did relatively well. Retailers were hurt by low returns on savings and reduced consumer confidence. However, autos were good performers within the weak Japanese market. How did the MainStay International Equity Fund perform in this context? For the 12 months ended December 31, 1996, the MainStay International Equity Fund had total returns of 9.78% and 9.05% for Class A shares and Class B shares, respectively, excluding all sales charges. These results lagged the average Lipper+ international fund, which returned 11.78% for the same period, but were well ahead of The Morgan Stanley Capital International EAFE Index,* which returned only 6.05%. [GRAPHIC] Accommodative interest rates When countries maintain low interest rates that allow businesses to borrow at lower cost, they are said to be "accommodating" business in this regard. Low interest rates tend to allow companies to raise more affordable capital for expansion, and may stimulate corporate and economic growth. Restructuring Any action designed to improve the overall financial structure, labor relations, or productivity of a company. Restructuring may include such steps as changing management, investing in new plants and equipment, engaging in mergers and acquisitions, or taking other action to increase output or lower costs. Bullish/Bearish A bull market occurs when stock prices are rising, a bear market occurs when stock prices decline. A bullish attitude therefore suggests a positive outlook, while a bearish attitude represents a negative view of the market or the opportunities it may present. + See footnote and table on page 9 for more information about Lipper Analytical Services, Inc. 5 [GRAPHIC] YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL] See footnote * on page 9 for more information on performance. What were the Fund's strongest investments during the year? The Fund uses a country-first approach, seeking out the most promising markets and then investing in a wide range of established companies in the markets we feel may have positive prospects. In 1996, the Fund saw strong returns in Spain and France, up about 50% and 29%, respectively, in local terms. A contributing factor to France's strong returns were its interest rates which had a positive impact on agriculture-related businesses that feed most of Europe. The Fund also gained in the Netherlands (+38%) and Norway (+30%), where the Fund concentrated in oil and energy-related issues. Were those successes the result of strategic investing? We believe strategy was ultimately responsible. We have held energy-related positions in the Netherlands and Norway for some time, and recognized that the improving economic fundamentals would increase demand for fuels. Oil prices started the year at about $16 per barrel and ended around $23 per barrel, and the rising prices were good for the Fund. In Spain, we increased the Fund's holdings among utilities and banks, which profited from the accommodative interest rate environment. All of these positions have made positive contributions to the Fund throughout the year. Were there any major market opportunities that you missed? The Fund wasn't invested in Sweden, which was up 41% for the year--or Finland, which was up 42%. Given how these markets had performed in 1995, we felt they were fully valued. We were surprised at their growth this year and certainly missed some opportunities in these markets. What about the Far East? The big story in the Far East was Japan. All the fundamentals were in place for a market improvement. Interest rates were low and the environment was friendly for business. But investors remained bearish. Since Japan was the weakest major market, down about 5% in 1996, our position there definitely hurt Fund performance. There were, however, some redeeming factors. While [GRAPHIC] Weighting The proportion of a portfolio allocated to a specific market sector or country, i.e., a fund is said to be overweighted in a country when that portion of the portfolio is larger than the country's total equities relative to the international equity markets as a whole. 6 Total Return Year-End % - --------------------------------------------------- 12/94 -2.30 Class B 12/95 5.25 Class A 12/95 4.27 Class B 12/96 9.78 Class A 12/96 9.05 Class B DIVERSIFICATION BY COUNTRY--TOP 5 AS OF 12/31/96 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. some Japanese banks closed during the year, we were invested in stronger banks that survived the crisis. We also held auto stocks which did well on a relative basis. In the fourth quarter, when we realized the market was not going to respond to positive fundamentals, we reduced our weighting in Japan, which was already lower than the overall weighting in the EAFE Index. This helped the portfolio reduce risk and avoid some losses. We're continuing to reduce our holdings in Japan, waiting for investor sentiment to turn more positive. Were there other stories in the Far East? Yes. In Hong Kong we increased the Fund's holdings in the second half of the year when we saw opportunities to profit from this gateway for Chinese exports. The result was positive for the Fund. Singapore, which is a major exporter of electronic components and computer products, faced a downturn in midyear when U.S. technology stocks faltered. While that had a negative impact on the Fund's performance, we continued to hold the Fund's Singapore equities, which represent a relatively small portion of the Fund's holdings. In the fourth quarter, orders began to flow back to Singapore, so the situation appears to be improving. We're pleased that our decision to hold these securities is bearing positive results and look forward to improved prospects in 1997. How has the portfolio responded to restructuring in Europe? Restructuring is a positive factor for virtually any economy. We see it as a force that could improve balance sheets, enhance productivity, and lower labor costs through outsourcing to Eastern Europe and Asia. By adding to the Fund's German and Dutch holdings in the fourth quarter, we sought to capitalize on the restructuring trend and this has had a positive impact on the Fund's performance. What happened in the U.K.? The stock market was up about 15%, which is good, but was modest in light of markets like Spain, Finland, and Sweden that advanced more than 40% in 1996. Since the Fund was underweighted in the U.K., its performance had a generally positive, but not a substantial, impact on the Fund. [GRAPHIC] 7 Country Percentage - ------------------------------------------------- Japan 29.1% France 10.5% Germany 8.8% United Kingdom 8.1% Italy 6.6% All Other 36.9% [GRAPHIC] How did you manage currency risk throughout the year? Generally speaking, we used selective hedging to manage currency risk. Throughout the year, this had a positive impact on performance. Looking forward what do you see? From a currency perspective, we continue to see the dollar strengthening against other currencies over time. However, the dollar's protracted upward move might have temporary setbacks. So we're carefully watching the situation. Which markets do you like for 1997? We anticipate that we'll be moving more into the core markets, such as Germany, France, and the Netherlands, where we believe restructuring is likely to have the greatest impact in the shortest amount of time. We believe exporting markets are likely to continue to do well, but we are likely to place more emphasis in Europe than in Asia, at least for the foreseeable future. As far as Japan is concerned, until we see signs of a turnaround, we will continue to reduce the Fund's positions. Overall, we'll continue to focus on developed markets and established companies, seeking long-term growth of capital with an acceptable level of risk. Shigemi Takagi Portfolio Manager Currency management/hedging The process of managing or "hedging" the risks associated with owning securities denominated in different currencies, the relative values of which may change at any time. There can be no assurance that currency hedging will be beneficial to investors. Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign t ax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. PORTFOLIO COMPOSITION AS OF 12/31/96 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. 8 Percentage - ------------------------------------------------------ Common Stocks 93.2% Preferred Stocks 0.1% Cash & Equivalents 6.7% Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Class A shares, first offered to the public on 1/3/95, are sold with a maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%. Performance figures for this class include the historical performance of the Class B shares for periods from inception (9/13/94) up to 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class B shares of the Fund are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to 1%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 9/13/94. [GRAPHIC] 9 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 9.78% n/a 5.40% Class B 9.05% n/a 4.67% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 3.75% n/a 2.85% Class B 4.05% n/a 3.43% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 194 out of n/a n/a 331 funds Class B 209 out of n/a 155 out of 331 funds 222 funds Average Lipper international fund 11.78% 10.09% 6.51% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $10.48 $0.5206 $0.0280 Class B $10.38 $0.4600 $0.0280 ================================================================================ [GRAPHIC] Top 10 Equity Holdings as of 12/31/96 Note: This breakdown is provided for infor-mational purposes only. The Fund's holdings may change daily. All purchases and sales are aggregated by issuer. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. 10 - -------------------------------------------------------------------------------- HOLDING COUNTRY AMOUNT ================================================================================ Toyota Motor Corp. Japan $1,463,085 Ente Nazionale Idrocarburi S.p.A Italy 1,301,123 Singapore Telecommunications, Ltd. Singapore 1,108,793 Siemens AG Germany 1,096,126 Norsk Hydro ASA Norway 961,730 Allianz AG Holding Germany 908,436 Mitsubishi Heavy Industries, Ltd. Japan 895,615 Deutsche Telekom AG Germany 818,035 Hitachi Corp., Ltd. Japan 772,249 Bayer AG Germany 753,872 ================================================================================ 10 Largest Purchases for the 12 months ended 12/31/96 - -------------------------------------------------------------------------------- SECURITY COUNTRY AMOUNT OF PURCHASE ================================================================================ Singapore Telecommunications, Ltd. Singapore $1,138,620 Ente Nazionale Idrocarburi S.p.A Italy 1,122,504 Bank of Tokyo--Mitsubishi, Ltd. Japan 1,079,552 Siemens AG Germany 984,538 Kao Corp. Japan 860,833 Deutsche Telekom AG Germany 802,200 Allianz AG Holding Germany 712,999 Teijin, Ltd. Japan 687,838 Bayer AG Germany 614,415 Hitachi Corp., Ltd. Japan 564,628 ================================================================================ 10 Largest Sales for the 12 months ended 12/31/96 - -------------------------------------------------------------------------------- SECURITY COUNTRY AMOUNT OF SALE ================================================================================ BANK OF TOKYO--MITSUBISHI, LTD Japan $1,085,122 Dai--Ichi Kangyo Bank, Ltd. Japan 699,083 Kao Corp. Japan 519,306 Sun Hung Kai Properties, Ltd. Hong Kong 326,439 Seven--Eleven of Japan Co., Ltd. Japan 321,916 Hong Kong Telecommunications, Ltd. Hong Kong 309,997 Teijin, Ltd. Japan 306,645 Telecom Corp. of New Zealand Ltd. New Zealand 288,410 Reed International PLC United Kingdom 276,765 Tele Danmark AS Class B Denmark 271,465 ================================================================================ Portfolio of Investments December 31, 1996 Shares Value =================== COMMON STOCKS (93.2%)+ AUSTRALIA (4.8%) Amcor, Ltd. (forest products & paper) ........................................... 36,800 $ 236,459 Boral, Ltd. (building materials & components) ........................................ 35,600 101,226 Brambles Industries, Ltd. ............................ (business & public services) ....................... 10,700 208,639 Broken Hill Proprietary Co., Ltd. .................... (energy sources) ................................... 50,510 718,911 Coles Myer, Ltd. (merchandising) ..................... 35,468 145,924 CRA, Ltd. (metals-nonferrous) ........................ 9,568 150,089 CSR, Ltd. (multi-industry) ........................... 46,600 162,854 Foster's Brewing Group, Ltd. ......................... (beverages & tobacco) .............................. 74,080 150,038 Mount Isa Mines Holdings, Ltd. ....................... (metals-nonferrous) ................................ 52,300 73,110 National Australia Bank, Ltd. ........................ (banking) .......................................... 40,273 473,408 News Corp., Ltd. (broadcasting & publishing) ........................................ 44,712 235,805 Pacific Dunlop, Ltd. ................................. (multi-industry) ................................... 25,800 65,574 Santos, Ltd. (energy sources) ........................ 37,500 151,901 Westpac Banking Corp., Ltd. .......................... (banking) .......................................... 48,900 278,088 WMC, Ltd. (metals-nonferrous) ........................ 40,800 256,976 ---------- 3,409,002 ---------- AUSTRIA (3.3%) Austrian Airlines Oesterreichische Luftverkehrs AG (transportation- airlines) (a) ...................................... 450 68,499 Bank Austria AG (banking) ............................ 5,750 424,373 Creditanstalt-Bankverein Stamm AG (banking) ................................. 3,050 206,250 EA-Generali AG (insurance) ........................... 950 280,455 Flughafen Wien AG (transportation- airlines) .......................................... 2,200 112,034 Oesterreichische Brau- Beteiligungs AG (beverages & tobacco) ........................................... 1,950 132,225 OMV AG (energy sources) .............................. 2,850 321,034 Verbundgesellschaft- Oesterreichische Elektrizitatswirtschafts AG Class A (utilities-electrical & gas) ....................... 3,550 265,443 Voest-Alpine Technologie AG (machinery & engineering) .......................... 1,500 235,181 Shares Value =================== AUSTRIA (Continued) Wienerberger Baustoffindustrie AG (building materials & components) ........................................ 1,320 $ 255,731 ---------- 2,301,225 ---------- FRANCE (10.5%) Alcatel Alsthom, SA (electrical & electronics) ....................................... 3,527 282,771 AXA, SA (insurance) .................................. 5,228 331,857 Carrefour, SA (merchandising) ........................ 945 613,671 + 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 Compagnie de Saint Gobain, SA (miscellaneous-materials & commodities) ....................................... 2,363 333,627 Compagnie de Suez, SA (banking) ...................... 5,562 236,014 Compagnie Financiere de Paribas, SA Class A (banking) ............................... 2,916 196,821 Compagnie Generale des Eaux, SA (business & public services) ....................... 3,597 444,890 Elf Aquitaine, SA (energy sources) ................... 5,893 535,372 Eridania Beghin-Say, SA (food & household products) ................................ 1,030 165,434 Groupe Danone, SA (food & household products) ................................ 2,463 342,534 Havas, SA (business & public services) .......................................... 2,799 195,977 Lafarge, SA (building materials & components) ........................................ 2,250 134,730 L'Air Liquide, SA (chemicals) ........................ 3,731 581,315 L'Oreal, SA (health & personal care) ..................................... 1,947 731,799 LVMH (Moet Hennessy Louis Vuitton), SA (beverages & tobacco) ........................................... 1,890 526,783 Lyonnaise des Eaux, SA (multi-industry) ................................... 1,430 132,829 Michelin (CGDE), SA Class B (tire & rubber) .................................... 2,769 149,189 Pernod-Ricard, SA (beverages & tobacco) .............................. 980 54,101 Pinault-Printemps-Redoute, SA (building materials & components) ........................................ 570 225,643 PSA Peugeot, SA (automobiles) ........................ 520 58,414 Rhone-Poulenc, SA Class A (chemicals) ........................................ 3,813 129,747 Schneider, SA (machinery & engineering) ....................................... 2,987 137,837 Societe Generale, SA (banking) ....................... 2,970 320,494 Thomson CSF, SA (aerospace & military technology) ............................... 4,791 155,100 Total, SA Class B (energy sources) ................... 4,474 363,170 ---------- 7,380,119 ---------- MainStay International Equity Fund Shares Value =================== COMMON STOCKS (Continued) GERMANY (8.8%) Allianz AG Holding (insurance) ....................... 500 $ 908,436 BASF AG (chemicals) .................................. 17,550 675,074 Bayer AG (chemicals) ................................. 18,500 753,872 Daimler-Benz AG (automobiles)(a) ..................... 2,000 137,563 Deutsche Bank AG (banking) ........................... 4,950 230,941 Deutsche Telekom AG (telecommunications)(a) ............................ 38,850 818,035 Dresdner Bank AG (banking) ........................... 20,450 611,731 Karstadt AG (merchandising) .......................... 50 16,871 Linde AG (machinery & engineering) ....................................... 300 182,985 Mannesmann AG (machinery & engineering) ....................................... 150 64,921 Muenchener Rueckversicherungs- Gesellschaft AG (insurance) ........................ 54 134,727 Preussag AG (multi-industry) ......................... 50 11,307 RWE AG (utilities-electrical & gas) ............................................... 1,500 63,461 Siemens AG (electrical & electronics) ....................................... 23,300 1,096,126 Thyssen AG (metals-steel) ............................ 150 26,572 VEBA AG (utilities-electrical & gas) ................. 4,500 259,878 Viag AG (multi-industry) ............................. 300 117,578 Volkswagen AG (automobiles) .......................... 100 41,528 ---------- 6,151,606 ---------- HONG KONG (4.0%) Cheung Kong (Holdings), Ltd. (real estate) ...................................... 55,000 488,851 China Light & Power Co., Ltd. (utilities-electrical & gas) ....................... 51,000 226,814 Hang Seng Bank, Ltd. (banking) ....................... 32,800 398,605 Hong Kong Telecommunications, Ltd. (telecommunications) .......................... 222,000 357,325 Hutchison Whampoa, Ltd. (multi-industry) ................................... 63,000 494,799 Sun Hung Kai Properties, Ltd. (real estate) ...................................... 42,000 514,482 Swire Pacific, Ltd. Class A (multi-industry) ................................... 32,500 309,875 ---------- 2,790,751 ---------- ITALY (6.6%) Assicurazioni Generali S.p.A (insurance) ........................................ 31,515 596,185 Banca Commerciale Italiana S.p.A (banking) .......................................... 75,000 136,206 Shares Value =================== ITALY (Continued) Benetton Group S.p.A. (textiles & apparel) ........................................... 9,500 $ 119,957 Credito Italiano S.p.A. (banking) .................... 38,000 41,657 Edison S.p.A. (energy sources) ....................... 11,000 69,485 Ente Nazionale Idrocarburi S.p.A (energy sources) ................................... 254,000 1,301,123 Fiat S.p.A. (automobiles) ............................ 101,000 305,042 Fiat S.p.A. di Risp (automobiles) .................... 18,000 31,505 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 Istituto Bancario San Paolo di Torino S.p.A. (banking) ......................... 32,500 198,880 Istituto Nazionale delle Assicurazioni S.p.A. (insurance) ................... 89,000 115,718 Italgas S.p.A. (utilities- electrical & gas) .................................. 14,000 58,358 Mediobanca S.p.A. (financial services) .......................................... 23,500 126,565 Montedison S.p.A (multi-industry) (a) ............................... 68,080 46,320 Olivetti Group S.p.A. (data processing & reproduction) (a) ..................... 70,000 24,642 Parmalat Finanziaria S.p.A (food & household products) ........................ 94,000 143,497 Pirelli S.p.A. (industrial components) ........................................ 68,000 125,954 Riunione Adriatica di Sicurta S.p.A (insurance) ........................................ 14,325 133,376 Sirti S.p.A. (telecommunications) .................... 9,500 57,509 Telecom Italia S.p.A (telecommunications) ............................... 185,000 479,616 Telecom Italia S.p.A. di Risp (telecommunications) ............................... 27,000 52,587 Telecom Italia Mobile S.p.A (telecommunications) ............................... 178,000 449,171 Telecom Italia Mobile S.p.A di Risp (telecommunications) ....................... 20,000 28,491 ---------- 4,641,844 ---------- JAPAN (29.1%) Ajinomoto Co., Inc. (food & household products) (b) ............................ 10,000 101,657 Asahi Bank, Ltd. (banking) (b) ....................... 30,000 266,203 Asahi Chemical Industry Co., Ltd. (chemicals) (b) .................................... 51,000 288,223 Asahi Glass Co., Ltd. (miscellaneous-materials & components) (b) .................................... 27,000 253,539 Bank of Tokyo-Mitsubishi, Ltd. (banking) (b) ...................................... 1,000 18,522 Bridgestone Corp. (industrial components) (b) .................................... 7,000 132,671 MainStay International Equity Fund Shares Value =================== COMMON STOCKS (Continued) JAPAN (Continued) Canon, Inc. (recreation & other consumer goods) (b) ................................ 23,000 $ 507,251 Chiba Bank, Ltd. (banking) (b) ....................... 4,000 27,223 Dai Nippon Printing Co., Ltd. (business & public services) (b) ................... 14,000 244,838 Daiei, Inc. (merchandising) (b) ...................... 14,000 106,740 Daiwa House Industry Co., Ltd. (construction & housing) (b) ....................... 10,000 128,364 Denso Corp. (industrial components) ........................................ 3,000 72,108 Fanuc, Ltd. (electronic components & instruments) (b) ...................... 4,000 127,847 Fuji Bank, Ltd. (banking) (b) ........................ 36,000 524,137 Fuji Photo Film, Ltd. (recreation & other consumer goods) .............................. 4,000 131,637 Fujitsu, Ltd. (data processing & reproduction) ...................................... 27,000 251,213 Furukawa Electric Co. (industrial components) ............................ 33,000 156,078 Hankyu Corp. (transportation-road & rail) ....................... 16,000 79,258 Hitachi Corp., Ltd. (electrical & electronics) ......................... 83,000 772,249 Honda Motor Co., Ltd. (automobiles) ...................................... 9,000 256,641 Industrial Bank of Japan, Ltd. (banking) .......................................... 31,000 536,801 Ito-Yokado Co., Ltd. (merchandising) .................................... 5,000 217,098 Itochu Corp. (wholesale & international trade) ............................... 62,000 332,229 Japan Airlines Co. (transportation- airlines) (a) ...................................... 24,000 127,157 Japan Energy Corp. (energy sources) ................................... 52,000 141,114 Joyo Bank (banking) .................................. 8,000 48,106 Kajima Corp. (construction & housing) ........................................... 9,000 64,199 Kansai Electric Power Co., Inc. (utilities-electrical & gas) ....................... 7,000 144,732 Kao Corp. (food & household products) .......................................... 32,000 372,168 Kawasaki Steel Corp. (metals-steel) ..................................... 6,000 17,213 Kinki Nippon Railway Co., Ltd. (transportation-road & rail) ....................... 23,000 143,259 Kirin Brewery Co., Ltd. (beverages & tobacco) .............................. 30,000 294,633 Shares Value =================== JAPAN (Continued) Komatsu, Ltd. (machinery & engineering) ....................................... 27,000 $ 220,975 Kubota Corp. (machinery & engineering) ....................................... 60,000 288,947 Marubeni Corp. (wholesale & international trade) ............................... 58,000 248,836 Marui Co., Ltd. (merchandising) ...................... 10,000 180,053 Matsushita Electric Industrial Co., Ltd. (appliances & household durables) .......................................... 15,000 244,235 Mitsubishi Chemical Corp. (chemicals) ........................................ 34,000 109,841 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 Mitsubishi Corp. (multi-industry) .................... 24,000 248,112 Mitsubishi Electric Corp. (electrical & electronics) ......................... 56,000 332,884 Mitsubishi Estate Co., Ltd. (construction & housing) ........................... 9,000 92,267 Mitsubishi Heavy Industries, Ltd. (machinery & engineering) .......................... 113,000 895,615 Mitsubishi Trust & Banking Co. (financial services) ............................... 18,000 240,359 Mitsui Engineering & Shipbuilding Co., Ltd. (machinery & engineering) (a) ...................... 44,000 89,458 Mitsui Fudosan Co. (construction & housing) ........................................... 17,000 169,888 Mitsui Marine & Fire Insurance Co., Ltd. (insurance) ................................... 11,000 59,039 Mitsui Trust & Banking Co. (financial services) ............................... 7,000 54,576 Mitsukoshi, Ltd. (merchandising) ..................... 4,000 28,326 NEC Corp. (electrical & electronics) ................. 23,000 277,403 Nippon Express Co., Ltd. (transportation-road & rail) ....................... 40,000 273,612 Nippon Paper Industries Co. (forest products & paper) .......................... 13,000 60,477 Nippon Steel Corp. (metals-steel) .................... 145,000 427,218 Nippon Yusen Kabushiki Kaisha (transportation-shipping) .......................... 5,000 22,571 Nissan Motor Co., Ltd. (automobiles) ...................................... 54,000 312,621 NKK Corp. (metals-steel) (a) ......................... 96,000 215,857 Nomura Securities Co., Ltd. (financial services) ............................... 34,000 509,663 Obayashi Corp. (construction & housing) ........................................... 16,000 107,791 Oji Paper Co., Ltd. (forest products & paper) .................................. 11,000 69,463 Osaka Gas Co. (utilities- electrical & gas) .................................. 6,000 16,386 MainStay International Equity Fund Shares Value =================== COMMON STOCKS (Continued) JAPAN (Continued) Sakura Bank, Ltd. (banking) .......................... 41,000 $ 292,462 Sankyo Co., Ltd. (health & personal care) ..................................... 4,000 113,029 Sanyo Electric Co., Ltd. (appliances & household durables) ................................ 19,000 78,569 Sekisui Chemical Co. (building materials & components) ............................ 2,000 20,159 Sekisui House, Ltd. (construction & housing) ........................................... 2,000 20,331 Sharp Corp. (appliances & household durables) .......................................... 14,000 199,006 Shimizu Corp. (construction & housing) ........................................... 9,000 67,068 Shiseido Co., Ltd. (health & personal care) ..................................... 2,000 23,088 Shizuoka Bank, Ltd. (banking) ........................ 1,000 10,596 Sony Corp. (appliances & household durables) .......................................... 6,000 392,327 Sumitomo Bank, Ltd. (banking) ........................ 41,000 589,869 Sumitomo Chemical Co. (chemicals) ........................................ 6,000 23,726 Sumitomo Corp. (wholesale & international trade) ............................... 8,000 62,924 Sumitomo Electric Industries (industrial components) ............................ 17,000 237,257 Sumitomo Marine & Fire Insurance Co. (insurance) .......................... 19,000 117,853 Sumitomo Metal Industries, Ltd. (metals-steel) ..................................... 29,000 71,203 Sumitomo Metal Mining Co. (metals-nonferrous) ................................ 14,000 94,196 Taisei Corp. (construction & housing) ........................................... 47,000 242,943 Taisho Pharmaceutical Co. (health & personal care) ........................... 1,000 23,519 Takeda Chemical Industries, Ltd. (health & personal care) ........................... 19,000 397,755 Teijin, Ltd. (chemicals) ............................. 126,000 549,258 Tobu Railway Co., Ltd. (transportation-road & rail) ......................... 44,000 214,927 Tohoku Electric Power (utilities- electrical & gas) .................................. 2,000 39,629 Tokai Bank (banking) ................................. 24,000 250,180 Tokio Marine & Fire Insurance Co. (insurance) ........................................ 23,000 215,978 Tokyo Dome Corp. (leisure & tourism) ........................................... 7,000 121,816 Tokyo Electric Power Co., Inc. (utilities-electrical & gas) ....................... 28,000 612,699 Shares Value =================== JAPAN (Continued) Tokyo Gas Co., Ltd. (utilities- electrical & gas) .................................. 37,000 $ 100,089 Tokyu Corp. (transportation- road & rail) ....................................... 10,000 56,687 Toppan Printing Co., Ltd. (business & public services) ....................... 39,000 487,178 Tostem Corp. (building materials & components) ........................................ 3,000 82,704 Toto, Ltd. (building materials & components) ........................................ 1,000 11,372 Toyoda Automatic Loom Works, Ltd. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 (machinery & engineering) .......................... 1,000 18,695 Toyota Motor Corp. (automobiles) ..................... 51,000 1,463,085 Yamaichi Securities Co., Ltd. (financial services) ............................... 36,000 159,722 Yamanouchi Pharmaceutical Co., Ltd. (health & personal care) ........................... 5,000 102,519 Yamazaki Baking Co., Ltd. (food & household products) ........................ 1,000 15,938 Yasuda Trust & Banking (financial services) ............................... 42,000 177,659 ---------- 20,439,596 ---------- MALAYSIA (3.0%) AMMB Holdings Berhad (financial services) ............................... 10,000 83,944 DCB Holdings Berhad (financial services) ............................... 14,000 47,951 Edaran Otomobil Nasional Berhad (automobiles) ...................................... 4,000 39,992 Golden Hope Plantations Berhad (miscellaneous-materials & commodities) ....................................... 74,000 125,995 Hume Industries Berhad (building materials & components) ............................ 12,000 75,549 Malayan Banking Berhad (banking) .......................................... 23,000 254,998 Malaysia International Shipping Berhad Foreign Registered (transportation-shipping) .......................... 24,000 71,273 Malaysian Resources Corp. Berhad (real estate) ...................................... 19,000 74,856 Resorts World Berhad (leisure & tourism) ........................................... 41,000 186,695 Rothmans of Pall Mall Berhad (beverages & tobacco) .............................. 10,000 104,929 Sime Darby Berhad (multi-industry) ................................... 69,000 271,846 Portfolio of Investments continued Shares Value =================== COMMON STOCKS (Continued) MALAYSIA (Continued) Technology Resources Industries Berhad (multi-industry) (a) ........................ 19,000 $ 37,466 Telekom Malaysia Berhad (telecommunications) ............................... 28,000 249,455 Tenaga Nasional Berhad (utilities- electrical & gas) .................................. 43,000 206,018 United Engineers, Ltd. (machinery & engineering) ....................................... 25,000 225,697 YTL Corp. Berhad (multi-industry) .................... 7,000 37,695 ---------- 2,094,359 ---------- NETHERLANDS (2.0%) Elsevier NV (broadcasting & publishing) ........................................ 6,200 104,663 ING Groep NV (insurance) ............................. 5,307 190,836 Koninklijke PTT Nederland NV (forest products & paper) .......................... 3,465 132,011 Philips Electronics NV (appliances & household durables) ................................ 2,500 101,171 Royal Dutch Petroleum Co. (energy sources) ................................... 3,400 595,386 Unilever CVA NV (food & household products) .......................................... 1,200 212,009 Wolters Kluwer CVA NV (broadcasting & publishing) ........................ 503 66,738 ---------- 1,402,814 ---------- NORWAY (2.5%) Bergesen d.y. ASA Class A (transportation-shipping) .......................... 7,500 183,231 Bergesen d.y. ASA Class B (transportation-shipping) .......................... 1,400 33,326 Dyno Industrier ASA (chemicals) ...................... 1,200 30,445 Hafslund ASA Class A (energy sources) ................................... 2,700 19,874 Hafslund ASA Class B (energy sources) ................................... 1,700 11,634 Kvaerner ASA Class B (machinery & engineering) ....................................... 1,100 47,718 Norsk Hydro ASA (energy sources) ..................... 17,800 961,730 Norske Skogindustrier ASA Class A (forest products & paper) .......................... 3,400 113,416 Nycomed ASA Class A (health & personal care) (a) ................................. 2,700 41,227 Nycomed ASA Class B (health & personal care) (a) ................................. 1,700 26,091 Orkla ASA Class A (multi-industry) ................... 3,800 264,824 ---------- 1,733,516 ---------- Shares Value =================== SINGAPORE (5.1%) City Developments, Ltd. (real estate) ...................................... 30,000 $ 270,228 DBS Land, Ltd. (real estate) ......................... 44,000 161,994 Development Bank of Singapore, Ltd. Foreign Registered (banking) .................. 24,000 324,273 Fraser & Neave, Ltd. (beverages & The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 tobacco) ........................................... 17,200 177,064 Keppel Corp., Ltd. (machinery & engineering) ....................................... 23,000 179,223 Oversea-Chinese Banking Corp., Ltd. Foreign Registered (banking) ....................... 33,000 410,489 Singapore Airlines, Ltd. Foreign Registered (transportation- airlines) .......................................... 42,000 381,322 Singapore Press Holdings, Ltd. Foreign Registered (broadcasting & publishing) ...................................... 12,000 236,771 Singapore Telecommunications, Ltd. (telecommunications) ............................... 470,000 1,108,793 United Overseas Bank, Ltd. Foreign Registered (banking) ............................... 30,000 334,568 ---------- 3,584,725 ---------- SPAIN (5.4%) Acerinox, SA (metals-steel) .......................... 286 41,249 Autopistas Concesionares Espanola, SA (business & public services) ................................... 8,340 114,771 Banco de Bilbao Vizcaya, SA Registered (banking) ............................... 7,060 380,484 Banco de Central Hispanoamericano, SA (banking) ....................................... 1,810 46,408 Banco de Santander, SA (banking) ..................... 4,940 315,603 Corporacion Bancaria de Espana, SA (banking) ....................................... 3,870 172,862 Corporacion Mapfre, SA (insurance) ........................................ 590 35,879 Empresa Nacional de Electricidad, SA (utilities-electrical & gas) .................... 8,750 621,575 Fomento de Construcciones y Contratas, SA (construction & housing) ........................................... 1,140 106,048 Gas Natural SDG, SA (utilities- electrical & gas) .................................. 890 206,638 Iberdrola, SA (utilities- electrical & gas) .................................. 36,930 522,409 Repsol, SA (energy sources) .......................... 13,060 500,018 Telefonica de Espana, SA (telecommunications) ............................... 31,250 724,354 ---------- 3,788,298 ---------- MainStay International Equity Fund Shares Value =================== COMMON STOCKS (Continued) UNITED KINGDOM (8.1%) Abbey National PLC (banking) ......................... 12,970 $ 169,796 Barclays PLC (banking) ............................... 18,467 316,184 Bass PLC (beverages & tobacco) ....................... 2,350 33,017 B.A.T. Industries PLC (beverages & tobacco) .............................. 20,823 172,649 BOC Group PLC (chemicals) ............................ 1,850 27,654 Boots Co. PLC (merchandising) ........................ 2,603 26,838 British Airways PLC (transportation- airlines) .......................................... 2,032 21,055 British Gas PLC (energy sources) ..................... 35,310 135,656 British Petroleum Co. PLC (energy sources) ........................................... 44,047 528,020 British Telecommunications PLC (telecommunications) ............................... 37,780 255,056 BTR PLC (multi-industry) ............................. 44,550 216,517 Cable & Wireless PLC (telecommunications) ............................... 14,447 120,031 Commercial Union PLC (insurance) ..................... 2,046 23,932 EMI Group PLC (recreation & other consumer goods) .................................... 1,640 38,730 General Electric Co. PLC (electrical & electronics) ....................................... 27,656 180,792 GKN PLC (machinery & engineering) .................... 1,109 18,997 Glaxo Wellcome PLC (health & personal care) ..................................... 25,948 420,958 Granada Group PLC (leisure & tourism) ........................................... 6,370 93,912 Grand Metropolitan PLC (multi-industry) ................................... 22,212 174,472 Great Universal Stores PLC (The) (merchandising) .................................... 12,940 135,523 Guinness PLC (beverages & tobacco) ........................................... 20,050 156,975 Hanson PLC (multi-industry) .......................... 62,835 87,637 HSBC Holdings PLC (financial services) .......................................... 4,993 111,591 Imperial Chemical Industries PLC (chemicals) ........................................ 1,150 15,124 Imperial Tobacco Group PLC (beverages & tobacco) .............................. 6,283 40,535 Kingfisher PLC (merchandising) ....................... 1,597 17,259 Lloyds TSB Group PLC (banking) ....................... 41,236 303,792 Marks & Spencer PLC (merchandising) .................................... 39,026 327,915 MEPC PLC (real estate) ............................... 980 7,262 National Power PLC (utilities- electrical & gas) .................................. 11,860 99,248 Shares Value =================== UNITED KINGDOM (Continued) Peninsular & Oriental Steam Navigation Co. Deferred Stock (The) (transportation-shipping) .................... 8,611 $ 86,942 Prudential Corp. PLC (insurance) ..................... 18,880 158,800 Rank Group PLC (leisure & tourism) ........................................... 9,710 72,366 Redland PLC (building materials & components) ........................................ 1,915 12,011 Reed International PLC (broadcasting & publishing) ........................ 15,650 295,002 Reuters Holdings PLC (broadcasting & publishing) ........................ 10,840 139,407 RMC Group PLC (building The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 16 materials & components) ............................ 990 16,900 RTZ Corp. PLC Registered (metals-nonferrous) ................................ 9,140 146,481 Sainsbury (J.) PLC (merchandising) ................... 12,315 81,770 Scottish Power PLC (utilities- electrical & gas) .................................. 23,010 138,607 Thorn PLC (appliances & household durables) (a) ...................................... 1,640 7,058 Unilever PLC (food & household products) .......................................... 8,730 211,620 Vodafone Group PLC (multi-industry) ................................... 5,287 22,302 ---------- 5,666,393 ---------- Total Common Stocks (Cost $63,850,627) ................................. 65,384,248 ---------- PREFERRED STOCK (0.1%) AUSTRIA (0.1%) Creditanstalt-Bankverein Vorzug AG (banking) .......................................... 1,550 71,498 ---------- Total Preferred Stock (Cost $90,929) ................................. 71,498 ---------- Portfolio of Investments continued (a) Non-income producing securities. (b) Segregated as collateral for forward foreign currency contracts. (c) The cost for Federal income tax purposes is $66,007,634. (d) At December 31, 1996 net unrealized appreciation for securities was $1,417,769, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $6,901,143 and aggregate gross unrealized depreciation for all investments on which there was an excess of cost over market value of $5,483,374. The table below sets forth the diversification of International Equity Fund investments by industry. Principal Amount Value ============================== SHORT-TERM INVESTMENT (2.8%) COMMERCIAL PAPER (2.8%) UNITED STATES (2.8%) Ameritech Corp. 6.25%, due 1/2/97 ............................. $1,970,000 $1,969,657 ------------ Total Short-Term Investment (Cost $1,969,657) ............................. 1,969,657 ------------ Total Investments (Cost $65,911,213) (c) ........................ 96.1% 67,425,403(d) Cash and Other Assets, Less Liabilities .............................. 3.9 2,758,967 ------------ Net Assets ...................................... 100.0% $70,184,370 =========== ============ Value Percent + ================================================================================ COMMON STOCKS, PREFERRED STOCK & SHORT-TERM INVESTMENT Aerospace & Military Technology ...................... $ 155,100 0.2% Appliances & Household Durables ...................... 1,022,368 1.5 Automobiles .......................................... 2,646,392 3.8 Banking .............................................. 9,418,524 13.4 Beverages & Tobacco .................................. 1,842,949 2.6 Broadcasting & Publishing ............................ 1,078,386 1.5 Building Materials & Components ...................... 936,024 1.3 Business & Public Services ........................... 1,696,294 2.4 Chemicals ............................................ 3,184,279 4.5 Construction & Housing ............................... 998,898 1.4 Data Processing & Reproduction ....................... 275,856 0.4 Electrical & Electronics ............................. 2,942,223 4.2 Electronic Components & Instruments ........................................ 127,847 0.2 Energy Sources ....................................... 6,354,427 9.1 Financial Services ................................... 1,512,029 2.2 Food & Household Products ............................ 1,564,857 2.2 Forest Products & Paper .............................. 611,825 0.9 Health & Personal Care ............................... 1,879,983 2.7 Industrial Components ................................ 724,068 1.0 Insurance ............................................ 3,303,072 4.7 Leisure & Tourism .................................... 474,789 0.7 Machinery & Engineering .............................. 2,606,250 3.7 Merchandising ........................................ 1,897,988 2.7 Metals-Nonferrous .................................... 720,852 1.0 Metals-Steel ......................................... 799,312 1.1 Miscellaneous-Materials & Commodities ........................................ 459,621 0.7 Miscellaneous-Materials & + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 17 Components ......................................... 253,539 0.4 Multi-Industry ....................................... 2,702,007 3.8 Real Estate .......................................... 1,517,673 2.2 Recreation & Other Consumer Goods .................... 677,619 1.0 Telecommunications ................................... 6,670,081 9.5 Textiles & Apparel ................................... 119,957 0.2 Tire & Rubber ........................................ 149,189 0.2 Transportation-Airlines .............................. 710,068 1.0 Transportation-Road & Rail ........................... 767,743 1.1 Transportation-Shipping .............................. 397,344 0.6 Utilities-Electrical & Gas ........................... 3,581,982 5.1 Wholesale & International Trade ...................... 643,988 0.9 ----------- ----- 67,425,403 96.1 Cash and Other Assets, Less Liabilities ................................... 2,758,967 3.9 ----------- ----- Net Assets ........................................... $70,184,370 100.0% =========== ===== Statement of Assets and Liabilities AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $65,911,213) .......................... $67,425,403 Cash denominated in foreign currencies (identified cost $2,150,420) ........................... 2,327,459 Receivables: Investment securities sold ............................. 2,084,720 Fund shares sold ....................................... 164,592 Dividends and interest ................................. 136,479 Unrealized net appreciation on forward foreign currency contracts ..................................... 2,484,924 Unamortized organization expense ......................... 21,616 Other assets ............................................. 38,416 ----------- Total assets .......................................... 74,683,609 ----------- LIABILITIES: Payables: Investment securities purchased ........................ 3,927,776 Custodian .............................................. 315,072 NYLIFE Distributors .................................... 70,237 Fund shares redeemed ................................... 45,170 Adviser ................................................ 35,057 Transfer agent ......................................... 21,891 Trustees ............................................... 478 Accrued expenses ......................................... 83,558 ----------- Total liabilities ..................................... 4,499,239 ----------- Net assets ............................................... $70,184,370 =========== COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A ................................................ $ 16,680 Class B ................................................ 50,766 Additional paid-in capital ............................... 67,691,252 Accumulated distribution in excess of net investment income ...................................... (1,268,552) Accumulated distribution in excess of net realized gain on investments .................................... (462,187) Net unrealized appreciation on investments ............... 1,514,190 Net unrealized appreciation on translation of assets and liabilities in foreign currencies and forward foreign currency contracts ................. 2,642,221 ----------- Net assets ............................................... $70,184,370 =========== CLASS A Net assets applicable to outstanding shares .............. $17,475,074 =========== Shares of beneficial interest outstanding ................ 1,667,969 =========== Net asset value per share outstanding .................... $ 10.48 Maximum sales charge (5.50% of offering price) ........... 0.61 ----------- Maximum offering price per share outstanding ............. $ 11.09 =========== CLASS B Net assets applicable to outstanding shares .............. $52,709,296 =========== Shares of beneficial interest outstanding ................ 5,076,632 =========== Net asset value per share outstanding .................... $ 10.38 =========== The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 18 Statement of Operations (a) Dividends recorded net of foreign withholding taxes of $131,024. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 19 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Dividends (a) .......................................... $ 916,842 Interest ............................................... 168,056 ----------- Total income .......................................... 1,084,898 ----------- Expenses: Advisory ............................................... 342,100 Distribution--Class B .................................. 293,136 Administration ......................................... 228,066 Transfer agent ......................................... 142,931 Service ................................................ 142,541 Shareholder communication .............................. 120,116 Custodian .............................................. 68,023 Registration ........................................... 37,591 Recordkeeping .......................................... 22,075 Professional ........................................... 14,613 Amortization of organization expense ................... 11,211 Trustees ............................................... 1,623 Miscellaneous .......................................... 22,012 ----------- Total expenses ........................................ 1,446,038 ----------- Net investment loss ...................................... (361,140) ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) from: Security transactions .................................. (130,336) Foreign currency transactions .......................... 2,153,275 ----------- Net realized gain on investments and foreign currency transactions .................................. 2,022,939 ----------- Net change in unrealized appreciation on investments: Security transactions .................................. 656,008 Translation of assets and liabilities in foreign currencies and forward foreign currency contracts .... 2,501,469 ----------- Net unrealized gain on investments and foreign currencies .................................... 3,157,477 ----------- Net realized and unrealized gain on investments and foreign currency transactions .......................... 5,180,416 ----------- Net increase in net assets resulting from operations ..... $ 4,819,276 =========== Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 20 Year ended December 31, 1996 ----------- INCREASE IN NET ASSETS: Operations: Net investment loss ............................................................... $ (361,140) Net realized loss on investments ................................................... (130,336) Net realized gain on foreign currency transactions ................................. 2,153,275 Net change in unrealized appreciation on investments ............................... 656,008 Net change in unrealized appreciation on translation of assets and liabilities in foreign currencies and forward foreign currency contracts .......... 2,501,469 ----------- Net increase in net assets resulting from operations ............................... 4,819,276 ----------- Dividends and distributions to shareholders: From net realized gain on foreign currency transactions: Class A ........................................................................... (844,610) Class B ........................................................................... (2,225,095) In excess of net realized gain on investments: Class A ........................................................................... (45,418) Class B ........................................................................... (135,451) ----------- Total dividends and distributions to shareholders ............................... (3,250,574) ----------- Capital share transactions: Net proceeds from sale of shares: Class A ........................................................................... 6,802,966 Class B ........................................................................... 33,209,658 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class A ........................................................................... 465,182 Class B ........................................................................... 2,239,545 ----------- 42,717,351 Cost of shares redeemed: Class A ........................................................................... (3,191,297) Class B ........................................................................... (9,106,589) ----------- Increase in net assets derived from capital share transactions .................. 30,419,465 ----------- Net increase in net assets ...................................................... 31,988,167 NET ASSETS: Beginning of year .................................................................... 38,196,203 ----------- End of year .......................................................................... $70,184,370 =========== Accumulated distribution in excess of net investment income/accumulated undistributed net investment income .............................................................. $(1,268,552) =========== Financial Highlights selected per share data and ratios * Commencement of Operations. + Annualized. (a) Total return is calculated exclusive of sales charges and is not annualized. (b) Disclosure of amount required for fiscal years beginning on or after September 1, 1995. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 21 Class A Class B Class A Cl ========= ======= ======== == Year ended Year end December 31, 1996 December 31, =================== ============== Net asset value at beginning of period ........................... $10.05 $ 9.97 $ 9.77 $ 9 Net investment income (loss) ..................................... 0.29 0.24 0.27 0 Net realized and unrealized gain (loss) on investments ........... 0.07 0.07 0.10 0 Net realized and unrealized gain (loss) on foreign currency transactions .......................................... 0.62 0.59 0.14 0 ------- ------- ------- --- Total from investment operations ................................. 0.98 0.90 0.51 0 ------- ------- ------- --- Less dividends and distributions: From net realized gain on foreign currency transactions .......... (0.52) (0.46) (0.15) (0 In excess of net realized gain on investments .................... (0.03) (0.03) (0.08) (0 ------- ------- ------- --- Total dividends and distributions ................................ (0.55) (0.49) (0.23) (0 ------- ------- ------- --- Net asset value at end of period ................................. $10.48 $10.38 $10.05 $ 9 ======= ======= ======= === Total investment return (a) ...................................... 9.78% 9.05% 5.25% 4 Ratios (to average net assets)/Supplemental Data: Net investment loss ............................................ (0.1%) (0.8%) (0.2%) ( Expenses ....................................................... 2.0% 2.7% 2.2% Portfolio turnover rate .......................................... 19% 19% 25% Average commission rate paid ..................................... $0.0374 $0.0374 (b) Net assets at end of period (in 000's) ........................... $17,475 $52,709 $12,856 $25 MainStay International Equity Fund Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay International Equity Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's investment objective is to seek long-term growth of capital commensurate with an acceptable level of risk by investing in a portfolio consisting primarily of non-U.S. equity securities. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising common and preferred stocks which are traded on the New York Stock Exchange at the last sale price on that day or, if no sale occurs, at the mean between the closing bid and asked prices, (b) by appraising common and preferred stocks traded on other United States national securities exchanges or foreign securities exchanges as nearly as possible in the manner described in (a) by reference to their principal exchange, including the National Association of Securities Dealers National Market System, (c) by appraising over-the-counter securities quoted on the National Association of Securities Dealers NASDAQ system (but not listed on the National Market System) at the bid price supplied through such system, (d) by appraising over-the-counter securities not quoted on the NASDAQ system at prices supplied by the pricing agent or brokers selected by the Adviser, if these prices are deemed to be representative of market values at the regular close of business of the New York Stock Exchange. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if 22 Notes to Financial Statements their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value on maturity date if their original term to maturity at purchase exceeded 60 days. Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities (foreign exchanges and over-the-counter markets) and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Forward Currency Contracts. A forward currency contract is an agreement to buy or sell currencies of different countries on a specified future date at a specified rate. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into forward foreign currency exchange contracts in order to hedge its foreign currency denominated investments and receivables and payables against adverse movements in future foreign exchange rates. The use of forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. The unrealized appreciation on forward contracts reflects the Fund's exposure at year end to credit loss in the event of a counterparty's failure to perform its obligations. Forward foreign currency contracts open at December 31, 1996: 23 Value on Contract Trade Current Amount Date Value ------ ---- ----- Foreign Currency Sale Contracts - ------------------------------- Australian Dollar, expiring 3/3/97 .............. A$ 655,000 $ 529,895 $ 519,891 Austrian Schilling, expiring 1/15/97 ............ AS 20,060,000 1,866,054 1,852,320 Deutsche Mark, expiring 1/6/97--6/20/97 ......... DM 27,663,680 18,363,894 18,047,146 French Franc, expiring 1/29/97--2/4/97 .......... FF 5,910,000 1,152,635 1,139,016 Italian Lira, expiring 1/23/97 .................. IL 4,386,000,000 2,826,605 2,881,602 Japanese Yen, expiring 1/6/97--7/7/97 ........... (Yen) 2,772,600,000 25,987,007 24,091,842 Spanish Peseta, expiring 1/22/97 ................ SP 170,500,000 1,302,067 1,309,952 MainStay International Equity Fund Organization Costs. Costs incurred in connection with the Fund's initial organization and registration totalled approximately $49,000 and are being amortized over 60 months beginning at the commencement of operations. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Permanent book- tax differences of $2,008,542 and $13,987 have been reclassified from accumulated undistributed net realized gain on foreign currency transactions and accumulated distribution in excess of net realized gain on investments, respectively, to accumulated distribution in excess of net investment income due to the tax treatment of foreign currency gains. Investment income received by the Fund from foreign sources may be subject to foreign income taxes withheld at the source. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends quarterly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued daily. Discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expenses incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. 24 Value on Contract Trade Current Amount Date Value ------ ---- ----- Foreign Currency Buy Contracts - ------------------------------ Australian Dollar, expiring 1/7/97 .............. A$ 913,651 $ 721,320 $ 725,638 Deutsche Mark, expiring 1/22/97--2/5/97 ......... DM 11,091,120 7,261,996 7,210,270 Japanese Yen, expiring 1/6/97--2/5/97 ........... (Yen) 1,288,386,370 11,193,763 11,137,169 Pound Sterling, expiring 1/7/97--1/15/97 ........ (Pound) 2,651,198 4,133,415 4,535,953 Net Appreciation ............................... Notes to Financial Statements continued Foreign Currency Investing. The books and records of the Fund are recorded in U.S. dollars. Foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities of the Fund are presented at the exchange rates and market values at the close of the year. The changes in net assets arising from fluctuations in exchange rates and the changes in net assets resulting from changes in market prices are not separately presented. However, gains and losses from certain foreign currency transactions are treated as ordinary income for Federal income tax purposes. Net realized gain (loss) on foreign currency transactions represents net gains and losses on forward currency contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities at year-end exchange rates are reflected in unrealized foreign exchange gains. There are certain risks involved in investing in foreign securities that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. 25 Mainstay International Equity Fund Foreign cash held at December 31, 1996: Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.60% and 0.40%, respectively, of the average daily net assets of the Fund. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the 26 Currency Cost Value ============================================ ========== ============= Australian Dollar A$ 531,393 $ 418,812 $ 422,085 Austrian Schilling AS 1,188 112 109 Belgian Franc BF 11,383 363 358 Danish Krone DK 2,509 425 425 Deutsche Mark DM 6,237 4,094 4,047 French Franc FF 9,821 1,888 1,889 Hong Kong Dollar HK 168,336 21,763 21,763 Italian Lira IL 9,562,080 6,306 6,292 Japanese Yen (Yen) 7,366,978 65,389 63,466 Malaysian Ringgit MK 31,702 12,647 12,553 Netherland Guilder NG 2,280 1,307 1,318 Norwegian Krone NK 6,490 1,014 1,016 Pound Sterling (Pound) 1,034,507 1,594,674 1,770,355 Singapore Dollar S$ 24,442 17,308 17,474 Spanish Peseta SP 560,463 4,318 4,309 ---------- ---------- $2,150,420 $2,327,459 ========= ========== Notes to Financial Statements continued Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.75% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $91,571 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges on redemptions of Class B shares of $48,979 for the year ended December 31, 1996. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. 27 MainStay International Equity Fund Capital. At December 31, 1996 NYLIFE Distributors held shares of Class A of the Fund with a net asset value of $8,543,337, which represents 48.9% of the net assets of Class A shares at year end. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $10,618. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $1,338 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $22,075. Note 4--Federal Income Tax: The Fund intends to elect, to the extent provided by the regulations, to treat $409,805 of qualifying capital losses that arose during the year as if they arose on January 1, 1997. Additionally, the Fund utilized $28,036 of capital loss carryforward during the current year. Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $39,530 and $9,714, respectively. Note 6--Capital Share Transactions (in 000's): 28 Year ended December 31 1996 1995 ===================================== Class A Class B Class A Class B ======= ======= ======= ======= Shares sold ............................ 644 3,197 1,304 1,761 Shares issued in reinvestment of dividends and distributions .......... 45 217 6 52 ------ ------ ------ ------ 689 3,414 1,310 1,813 Shares redeemed ........................ 301 878 30 1,376 ------ ------ ------ ------ Net increase ........................... 388 2,536 1,280 437 ====== ====== ====== ====== Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay International Equity Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 29 THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 30 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a con Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the INTERNATIONAL EQUITY FUND graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a combin Total Return Fund graph indicating opportunities by investing in stocks, growth potential risk/reward of Fund] bonds, and money market instruments risk through dive - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to maxi Value Fund graph indicating attractive dividends and a stimulus securities which risk/reward of Fund] for positive change tial than the ma - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income f Convertible Fund graph indicating a special blend of long-term growth may offer growth risk/reward of Fund] potential and dividend income into common stock - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 31 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks a high level of current income You are seeking Government Fund graph indicating consistent with safety of principal current income risk/reward of Fund] primarily from U.S. government securities.(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current yields and You prefer the International Bond Fund graph indicating competitive total return from non- of internationa risk/reward of Fund] U.S. bonds with an emphasis on diversification risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY International Equity Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay International Equity Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. [GRAPHIC] MSAN11 (297) Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay Money Market Fund Highlights 3 Portfolio Management Discussion and Analysis 4 Yields & Lipper Rankings 6 Portfolio of Investments 7 Financial Statements 9 Notes to Financial Statements 13 Report of Independent Accountants 16 The MainStay Funds 18 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 MainStay Money Market Fund Highlights 1996 MARKET HIGHLIGHTS o The money market experienced a fair amount of volatility during the year, with alternating weak and strong quarters o The Federal Reserve eased rates early in the year after which economic forces caused rates to climb o Overall, the money markets outperformed government bonds, mortgage-backed securities, and high-grade corporate bonds during the year 1996 FUND HIGHLIGHTS o For the 7-day period ended 12/31/96, the MainStay Money Market Fund provided an effective yield of 5.01% and a current yield of 4.89% for both Class A and Class B shares o Class A shares outperformed the average Lipper+ peer fund over 1-year and since-inception periods ended 12/31/96 o Class B shares outperformed the average Lipper peer fund over 1-, 5-, 10-year, and since-inception periods ended 12/31/96 o Strategic security selection and the use of innovative money market instruments contributed to the Fund's strong performance in 1996 o During 1996, the Fund's track record exceeded 10 years + See footnote and table on page 6 for more information on Lipper Analytical Services, Inc. 3 [GRAPHIC] Short-end of the market The maturities on fixed-income securities may range from as short as overnight to as long as 30-years or more. Money market funds generally invest in the "short-end" of the market, which includes securities that mature within 13 months. Easing/Tightening When the Federal Reserve lowers interest rates on benchmark securities it is said to be "easing" or making borrowing more affordable. When it raises interest rates, it is said to be "tightening" or making borrowing more expensive. Yield The income per share (or current value of a security) paid to investors over a specified period of time as a percentage of the cost of the security. Mutual fund yields are expressed as a percent of the fund's current price per share. * See footnote and table on page 6 for additional information on Lipper Analytical Services, Inc. Portfolio Management Discussion and Analysis [GRAPHIC] Photo of Money Market Team MONEY MARKET FUND TEAM Ravi Akhoury, Frank Salem, and Jessica Terc In the short-end of the markets, 1996 was a fairly volatile year. Shortly after the Federal Reserve eased rates on January 31, 1996 economic forces caused rates to climb. The strength of the money markets alternated between weak and strong throughout the year. While alternating strengths and weaknesses are nothing new, the shifts are becoming more frequent, increasing volatility and investor risk. Despite these concerns, however, the money markets managed to outperform other major asset classes in 1996, including government bonds, mortgage-backed securities, and high-grade corporate bonds. As a result, money market instruments were able to make a positive contribution to diversified portfolios during the year. Given this context, how did the MainStay Money Market Fund do in 1996? For the seven-day period ended December 31, 1996, the MainStay Money Market Fund provided an effective yield of 5.01% and a current yield of 4.89% for both Class A and Class B shares. For the 1-year and since- inception periods, Class A shares outperformed the average Lipper* money market fund. Class B shares outperformed the average Lipper peer fund over 1-, 5-, 10-year, and since-inception periods ended 12/31/96. How did you manage the Fund in 1996? We have always sought as high a level of current income as is considered consistent with the preservation of capital and liquidity. We try to add value to the Fund by carefully managing the portfolio's average maturity in line with where we feel the market is headed. In 1996, this was a helpful strategy, allowing us to stay invested in short-term securities as rates were going up and then capitalize on higher interest rates. What has the average maturity of the Fund been in 1996? The Fund has maintained an average maturity in a range from about 37 to 67 days to maturity throughout the year. At times, we were positioned closely with the market, and at times we were around ten to fifteen days longer than the average money market fund. That was particularly 4 true in the second and third quarters, when many funds were short, expecting interest rates to rise. Since we didn't believe that would happen, the Fund benefited by being longer than the market when rates stayed fairly constant. How else did you seek to maximize yield for the Fund? Some managers buy securities with lower credit quality to increase yield. But in 1996, we only purchased first- tier securities, or those in the highest rating category, A1/P1, by major credit-rating agencies such as Moody's and Standard & Poor's. Instead of purchasing or continuing to hold lower-quality securities, our yield- enhancement strategy relied on finding nonstandard securities that sometimes added 10 or 20 basis points to our yield. During 1996, we purchased secured pooled receivables and floating-rate notes, which tended to do better than standard commercial paper. Were there other interesting securities in the portfolio? We also bought some regular and callable Certificates of Deposit.+ While CDs generally require a longer commitment, issuers are willing to pay a bit more for the option to call them periodically. So these securities afforded the Fund opportunities to provide attractive yields. How can you tell if these securities can add value? We do our homework. We have a quantitative research group that takes these securities apart and looks at their volatility and where they trade in the market. They analyze them for credit quality and structure and tell us whether they may represent genuine value. Our extra research may put us ahead of some of our competitors, who tend to be more comfortable with traditional commercial paper. Can the Fund's price fluctuate? Investments in the Fund are neither insured nor guaranteed by the U.S. government. While we seek to maintain a stable net asset value (NAV) of $1 per share, there can be no assurance that we will succeed in doing so. Although past performance is no guarantee of future results, the Fund has maintained a stable net asset value for over 10 years. What's your outlook for 1997? In 1997, we believe inflation, the overall economic outlook, and Federal Reserve action will continue to be the primary forces influencing the money market securities. Of course, no one can predict the future. So we'll continue to emphasize high quality, use these securities where appropriate, and carefully manage maturities to seek the highest possible yield consistent with liquidity and stability of principal. Ravi Akhoury Frank Salem Jessica Terc Portfolio Managers + While CDs may be insured by the Federal Deposit Insurance Corporation, Fund shares are not insured and their price and returns may fluctuate with market conditions. [GRAPHIC] Average maturity Maturity is the termination date of an obligation or the length of time a fixed-income security is required to pay interest. Average maturity reflects the average of the maturities of all fixed-income securities in a portfolio. Credit quality A measure of an individual issuer's ability to repay principal and interest on its fixed-income securities--or a measure of the general credit risk of securities in a fixed-income portfolio. Basis points One hundredth of one percent in the yield of an investment, i.e., 100 basis points equals 1%. Liquidity The ability of a security to be readily traded or exchanged for cash. Generally speaking, the larger an issuer's capitalization, the more liquid its securities are likely to be. 5 [GRAPHIC] Yields & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investments in the MainStay Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share. Investment return and principal value may fluctuate so that upon redemption, shares may be worth more or less than their original cost. The administrator and adviser have agreed to assume a portion of the expenses for the Money Market Fund; had these expenses not been assumed, the average 7-day yield would have been 3.63%. Yield is based on the latest 7-day period ending 12/31/96. This expense limitation may be terminated or revised at any time. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 5/1/86. 6 Fund SEC Yields* - -------------------------------------------------------------------------------- 7-day effective yield 7-day current yield Class A 5.01% 4.89% Class B 5.01% 4.89% - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 - -------------------------------------------------------------------------------- 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 113 out of n/a n/a n/a 288 funds Class B 113 out of 67 out of 53 out of 47 out of 288 funds 175 funds 106 funds 101 funds Average Lipper money market fund 4.80% 3.96% 5.52% 5.52% - -------------------------------------------------------------------------------- Portfolio of Investments December 31, 1996 Principal Amortized Amount Cost ============================= SHORT-TERM INVESTMENTS (100.1%)+ BANK NOTES (8.5%) American Express Centurion Bank 5.57%, due 9/12/97 (b)(c) ................... $ 2,000,000 $ 1,999,855 Bank of America-Illinois 5.82%, due 3/24/97 (c) ...................... 2,500,000 2,500,000 Boatmens Credit Card Bank 5.54%, due 8/8/97 (b)(c) .................... 11,000,000 10,998,733 First National Bank of Maryland 5.13%, due 2/26/97 (c) ...................... 4,000,000 4,000,148 Greenwood Trust Co. 5.45%, due 1/6/97 (c) ....................... 8,000,000 7,999,988 PNC Bank N.A.-Pittsburgh, Pennsylvania 5.25%, due 2/6/97 (b)(c) .................... 4,000,000 3,999,751 ------------- 31,498,475 ------------- CERTIFICATES OF DEPOSIT (9.3%) Deutsche Bank 5.85%, due 11/19/97 (call date 2/19/97) (c) ..................... 10,000,000 10,000,000 Industrial Bank of Japan 5.61%, due 1/7/97 (c) ....................... 7,500,000 7,500,012 Sanwa Bank Ltd. 5.56%, due 2/11/97 (c) ...................... 6,000,000 6,000,067 5.85%, due 1/17/97 (c) ...................... 11,000,000 11,000,243 ------------- 34,500,322 ------------- COMMERCIAL PAPER (71.1%) Air Products & Chemicals Inc. 5.32%, due 1/17/97 .......................... 2,900,000 2,893,143 Banca CRT Financial Corp. 5.35%, due 1/7/97 ........................... 3,000,000 2,997,325 5.35%, due 1/14/97 .......................... 3,700,000 3,692,852 5.35%, due 1/21/97 .......................... 4,000,000 3,988,111 5.40%, due 2/18/97 .......................... 1,500,000 1,489,200 5.70%, due 3/3/97 ........................... 5,800,000 5,743,982 Bex America Finance Inc. 5.32%, due 2/3/97 ........................... 7,100,000 7,065,376 BIL North America Inc. 5.34%, due 1/24/97 .......................... 5,000,000 4,982,942 Block Financial Corp. 7.00%, due 1/2/97 ........................... 4,500,000 4,499,125 Caisse Centrale des Banques Populaires 5.33%, due 1/10/97 (a) ...................... 12,100,000 12,083,877 China International Marine Containers (Group) Ltd. 5.57%, due 1/9/97 ........................... 5,500,000 5,493,192 Principal Amortized Amount Cost ============================= COMMERCIAL PAPER (Continued) Compagnie Bancaire USA Finance Corp. 5.33%, due 1/10/97 .......................... $17,300,000 $ 17,276,948 Corporacion Andina de Fomento 5.38%, due 1/23/97 .......................... 10,000,000 9,967,122 Credito Italiano (DE) Inc. 5.39%, due 4/15/97 .......................... 8,000,000 7,875,431 + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 7 Galicia Funding Corp. 5.59%, due 3/5/97 (a) ....................... 5,500,000 5,446,196 Garanti Funding Corp. II 5.40%, due 2/4/97 ........................... 5,000,000 4,974,500 Gotham Funding Corp. 5.40%, due 1/9/97 (a) ....................... 10,000,000 9,988,000 5.45%, due 2/27/97 (a) ...................... 6,000,000 5,948,225 International Securitization Corp. 6.00%, due 1/14/97 (a) ...................... 10,100,000 10,078,117 Kamehameha Schools-Bishop Estate 5.38%, due 1/15/97 (a) ...................... 9,000,000 8,981,170 Kingdom of Sweden 5.65%, due 2/4/97 ........................... 12,000,000 11,935,967 Mayne Nickless Ltd. 5.35%, due 1/27/97 .......................... 2,000,000 1,992,272 Mid-States Corporate Federal Credit Union 5.55%, due 1/16/97 .......................... 3,500,000 3,491,906 Minmetals Capital & Securities Inc. 5.39%, due 4/3/97 ........................... 13,000,000 12,820,932 Nationwide Building Society 5.33%, due 2/24/97 .......................... 13,100,000 12,995,266 Petroleo Brasileiro S.A.-Petrobras 5.42%, due 1/14/97 .......................... 8,000,000 7,984,342 Portland General Electric Co. 5.33%, due 2/5/97 ........................... 7,100,000 7,063,208 Preferred Receivables Funding Corp. 5.33%, due 1/16/97 .......................... 6,290,000 6,276,031 Premium Funding Inc., Series E 5.50%, due 1/16/97 (a) ...................... 7,197,000 7,180,507 5.50%, due 1/17/97 (a) ...................... 4,150,000 4,139,856 San Paolo U.S. Financial Co. 5.41%, due 2/4/97 ........................... 2,900,000 2,885,183 5.42%, due 3/19/97 .......................... 13,500,000 13,343,497 Shell Deer Park Cogeneration Trust 5.52%, due 1/3/97 (a) ....................... 10,100,000 10,096,903 Societe Generale (Canada) 5.62%, due 1/22/97 .......................... 2,000,000 1,993,443 Toshiba Capital (Asia) Ltd. 5.50%, due 1/13/97 .......................... 4,200,000 4,192,300 Tri-Lateral Capital (USA) Inc. 5.55%, due 1/2/97 (a) ....................... 4,500,000 4,499,306 MainStay Money Market Fund (a) May be sold to institutional investors only. (b) Floating rate. Rate shown is the rate in effect at December 31, 1996. (c) Coupon interest bearing security. (d) The cost stated also represents the aggregate cost for Federal income tax purposes. The table below sets forth the diversification of Money Market Fund investments by industry. Principal Amortized Amount Cost ============================= SHORT-TERM INVESTMENTS (Continued) COMMERCIAL PAPER (Continued) UNIfunding Inc. 5.37%, due 2/12/97 .......................... $ 1,000,000 $ 993,735 5.44%, due 2/12/97 .......................... 3,000,000 2,980,960 5.65%, due 2/12/97 .......................... 3,100,000 3,079,566 Working Capital Management Co. L.P. 5.65%, due 1/15/97 .......................... 6,000,000 5,986,817 Xerox Corp. 6.75%, due 1/2/97 ........................... 2,600,000 2,599,680 ------------- 263,996,511 ------------- FEDERAL AGENCY (2.0%) Federal Home Loan Bank 5.84%, due 11/24/97 (c) ..................... 7,500,000 7,500,000 ------------- MEDIUM-TERM NOTES (9.2%) Abbey National Treasury Services PLC 5.05%, due 3/3/97 (c) ....................... 9,200,000 9,198,596 Bankers Trust Corp.-New York 5.74%, due 2/14/97 (b)(c) ................... 3,500,000 3,500,000 Ford Motor Credit Corp. 5.81%, due 1/5/97 (b)(c) .................... 4,000,000 4,000,093 Household Bank FSB 5.72%, due 6/10/97 (b)(c) ................... 5,000,000 5,000,000 Huntington Bancshares 5.70%, due 3/14/97 (c) ...................... 4,000,000 4,000,199 Sony Capital Corp. 5.47%, due 8/29/97 (a)(b)(c) ................ 3,000,000 3,000,000 Southern California Edison Co. 5.90%, due 1/15/97 (c) ...................... 5,625,000 5,626,497 ------------- 34,325,385 ------------- Total Short-Term Investments (Amortized Cost $371,820,693) (d) ........... 100.1% 371,820,693 Liabilities in Excess of Cash and Other Assets ....................... (0.1) (447,211) ----------- ------------- Net Assets 100.0% $371,373,482 =========== ============= Amortized Cost Percent + ================================ SHORT-TERM INVESTMENTS Banks # .................................. $259,606,353 69.9% Chemicals ................................ 2,893,143 0.8 Computers & Office Equipment ............. 2,599,680 0.7 + Percentages indicated are based on Fund net assets. # The Fund will invest more than 25% of the market value of its total assets in the securities of banks and bank holding companies, including certificates of deposit, bankers' acceptances and securities guaranteed by banks and bank holding companies. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 8 Conglomerates ............................ 4,992,272 1.4 Consumer Financial Services .............. 4,000,093 1.1 Education ................................ 8,981,170 2.4 Electrical Equipment ..................... 4,192,300 1.1 Federal Agency ........................... 7,500,000 2.0 Finance .................................. 42,333,107 11.4 Foreign Government ....................... 11,935,967 3.2 Utilities ................................ 10,096,903 2.7 Utilities-Electrical ..................... 7,063,208 1.9 Utilities-Telephone ...................... 5,626,497 1.5 ------------ ----- 371,820,693 100.1 Liabilities in Excess of Cash and Other Assets .................. (447,211) (0.1) ------------ ----- Net Assets ............................... $371,373,482 100.0% ============ ===== Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 9 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (amortized cost $371,820,693) ....................... $ 371,820,693 Cash ................................................................................... 115,433 Receivables: Interest ............................................................................. 1,278,382 Fund shares sold ..................................................................... 534,655 Adviser .............................................................................. 15,158 NYLIFE Distributors .................................................................. 9,813 Other assets ........................................................................... 224 ------------- Total assets ........................................................................ 373,774,358 ------------- LIABILITIES: Payables: Fund shares redeemed ................................................................. 533,018 Transfer agent ....................................................................... 170,000 Custodian ............................................................................ 6,989 Trustees ............................................................................. 2,722 Accrued expenses ....................................................................... 135,602 Dividend payable ....................................................................... 1,552,545 ------------- Total liabilities ................................................................... 2,400,876 ------------- Net assets ............................................................................. $ 371,373,482 ============= COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A .............................................................................. $ 538,903 Class B .............................................................................. 3,174,977 Additional paid-in capital ............................................................. 367,674,103 Accumulated net realized loss on investments ........................................... (14,501) ------------- Net assets ............................................................................. $ 371,373,482 ============= CLASS A Net assets applicable to outstanding shares ............................................ $ 53,890,270 ============= Shares of beneficial interest outstanding .............................................. 53,890,270 ============= Net asset value per share outstanding .................................................. $ 1.00 ============= CLASS B Net assets applicable to outstanding shares ............................................ $ 317,483,212 ============= Shares of beneficial interest outstanding .............................................. 317,497,716 ============= Net asset value per share outstanding .................................................. $ 1.00 ============= Statement of Operations The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 10 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Interest .................................................. $ 19,510,896 ------------ Expenses: Transfer agent ............................................ 1,084,379 Administration ............................................ 870,226 Advisory .................................................. 870,226 Shareholder communication ................................. 312,098 Registration .............................................. 102,359 Recordkeeping ............................................. 62,593 Professional .............................................. 56,181 Custodian ................................................. 42,511 Trustees .................................................. 10,981 Miscellaneous ............................................. 8,793 ------------ Total expenses before reimbursement ...................... 3,420,347 Expense reimbursement from Administrator and Adviser ........ (946,310) ------------ Net expenses ............................................. 2,474,037 ------------ Net investment income ....................................... 17,036,859 ------------ REALIZED LOSS ON INVESTMENTS: Net realized loss on investments ............................ (1,158) ------------ Net increase in net assets resulting from operations ........ $ 17,035,701 ============ Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 11 Year e Decembe 1996 -------- INCREASE IN NET ASSETS: Operations: Net investment income .................................................................. $ 17,03 Net realized loss on investments ....................................................... ( -------- Net increase in net assets resulting from operations ................................... 17,03 -------- Dividends to shareholders: From net investment income: Class A ............................................................................... (2,34 Class B ............................................................................... (14,69 -------- Total dividends to shareholders ..................................................... (17,03 -------- Capital share transactions: Net proceeds from sale of shares: Class A ............................................................................... 119,89 Class B ............................................................................... 512,21 Net asset value of shares issued to shareholders in reinvestment of dividends: Class A ............................................................................... 2,18 Class B ............................................................................... 13,78 -------- 648,08 Cost of shares redeemed: Class A ............................................................................... (103,07 Class B ............................................................................... (488,36 -------- Increase in net assets derived from capital share transactions ...................... 56,65 -------- Net increase in net assets .......................................................... 56,65 NET ASSETS: Beginning of year ........................................................................ 314,72 -------- End of year .............................................................................. $ 371,37 ======== Financial Highlights selected per share data and ratios * The Fund changed its fiscal year end from August 31 to December 31. + Annualized. (a) Total return is not annualized. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 Cl ---------------------- Class A Class B Class A Class B September 1 ------- ------- ------- ------- through Y Year ended Year ended December 31 ------- December 31, 1996 December 31, 1995 1994* 1994 ------------------- ------------------- ----------- ------- Net asset value at beginning of period ........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.0 ------- -------- ------- -------- -------- ------- Net investment income ........... 0.05 0.05 0.05 0.05 0.02 0.0 ------- -------- ------- -------- -------- ------- Less dividends from net investment income ......... (0.05) (0.05) (0.05) (0.05) (0.02) (0.0 ------- -------- ------- -------- -------- ------- Net asset value at end of period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.0 ======= ======== ======= ======== ======== ======= Total investment return (a) ..... 4.91% 4.91% 5.51% 5.51% 1.54% 3.0 Ratios (to average net assets)/ Supplemental Data: Net investment income ......... 4.8% 4.8% 5.4% 5.4% 4.6%+ 3. Net expenses .................. 0.7% 0.7% 0.7% 0.7% 0.7%+ 0. Expenses (before reimbursement) 1.0% 1.0% 0.9% 0.9% 0.9%+ 1. Net assets at end of period (in 000's) ............. $53,890 $317,483 $34,880 $279,843 $221,912 $192,47 Notes to Financial Statements Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay Money Market Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, and Class B shares each bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The Fund seeks to maintain a net asset value of $1.00 per share, although there is no assurance that it will be able to do so on a continuous basis, and it has adopted certain investment, portfolio and dividend and distribution policies designed to enable it to do so. Securities Valuation. Securities are valued at amortized cost, which approximates market value. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between such cost and the value on maturity date. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Dividends and Distributions to Shareholders. Dividends are recorded on the ex-dividend date. Dividends are declared daily and paid monthly. Income dividends are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Interest income is accrued daily and discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. 13 MainStay Money Market Fund Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of the average daily net assets of 0.25% up to $300 million, 0.225% on assets from $300 million to $700 million, 0.20% on assets from $700 million to $1.0 billion and 0.175% on assets in excess of $1.0 billion. The Adviser and Administrator have voluntarily agreed to assume the expenses of the Fund to the extent that such expenses would exceed on an annualized basis 0.70% of the average daily net assets of the Fund. Such excess assumed for the year ended December 31, 1996 was $946,310. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Contingent Deferred Sales Charge. Even though the Fund does not assess a contingent deferred sales charge upon redemption of Class B shares of the Fund, the applicable contingent deferred sales charge will be assessed when shares are redeemed from the Fund if the shareholder previously exchanged his or her investment into the Fund from another Fund in the Trust. The Fund was advised that NYLIFE Distributors received from shareholders the proceeds from contingent deferred sales charges for the year ended December 31, 1996 in the amount of $640,623. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. 14 Notes to Financial Statements continued Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $45,556. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $9,948 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $62,593. Note 4--Capital Share Transactions (in 000's): 15 Year ended December 31 1996 1995 ----------------- ----------------- Class A Class B Class A Class B ------- ------- ------- ------- Shares sold .............................. 119,893 512,218 88,180 421,596 Shares issued in reinvestment of dividends ........................... 2,189 13,788 1,157 12,087 ------- ------- ------ ------- 122,082 526,006 89,337 433,683 Shares redeemed .......................... 103,072 488,364 54,457 375,749 ------- ------- ------ ------- Net increase ............................. 19,010 37,642 34,880 57,934 ======= ======= ====== ======= Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay Money Market Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 16 This page intentionally left blank 17 The MainStay Funds * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 18 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating internation stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income Convertible Fund graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 19 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities.(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse MONEY MARKET FUND graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY Money Market Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay Money Market Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. [GRAPHIC] MSAN12 (297) Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A.Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay New York Tax Free Fund Highlights 3 $10,000 Invested in the MainStay New York Tax Free Fund versus Lehman Brothers Municipal Bond Index and Inflation-- Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification of Holdings--Top 5 7 Quality Breakdown 8 Returns & Lipper Rankings 9 Portfolio of Investments 10 Financial Statements 12 Notes to Financial Statements 16 Report of Independent Accountants 21 The MainStay Funds 22 overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 [GRAPHIC] Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received /s/ Alice T. Kane Alice T. Kane January 1997 MainStay New York Tax Free Fund Highlights 1996 MARKET HIGHLIGHTS o The New York municipal market had a comparatively uneventful year, with no strong trends or clear direction o The state's administration demonstrated greater fiscal prudence than the previous administration, providing a positive backdrop for New York municipal bonds o Anticipation of Federal Reserve policies resulted in market turbulence during the first half of 1996, with a modest recovery io the second half of the year o Strong performance in the equity markets drew money away from munoicipal securities, weakening demand, while supply remained moderately higher than in 1995 o Controversy over flat tax proposals receded into the background during this election year, reducing investor concerns about the future prospects for tax-exempt securities 1996 FUND HIGHLIGHTS o One-year total returns of 3.06% aod 2.86% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o Both share classes underperformed the average Lipper+ New York municipal debt fund for the 12 monoths ended 12/31/96 o A neutral duration helped the Fund perform generally in line with the market, while geographic and sector diversification helped manage risk o Disciplined security selection assisted performance + See footnote and table on page 9 for more information about Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested in the MainStay New York Tax Free Fund versus Lehman Brothers Municipal Bond Index and Inflation Class A Shares [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay New York Tax Free Fund [GRAPHIC] Lehman Brothers Municipal Bond Index* [GRAPHIC] Inflation+ CLASS B SHARES [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay New York Tax Free Fund [GRAPHIC] Lehman Brothers Municipal Bond Index* [GRAPHIC] Inflation+ The Class A graph assumes an initial investment of $10,000 made on 10/1/91 reflecting the effect of the 4.5% maximum up-front sales charge, thereby reducing the amount of the investment to $9,550. The Class B graph assumes an initial investment of $10,000 made on 10/1/91 and includes the historical performance of the Class A shares for periods from inception (10/1/91) through 12/31/94. Returns shown reflect the Contingent Deferred Sales Charge (CDSC) of 1%, as it would apply for the period shown. (The $10,000 invested in the Lehman Brothers Municipal Bond Index begins on 9/30/91.) All results include reinvestment of distributions at net asset MainStay Lehman Brothers New York Tax Municipal Bond Year-end Free Fund Index* Inflation+ - -------- --------- -------------- ---------- 10/1/91 $ 9,550.00 $10,000 $10,000 12/91 $ 9,748.80 $10,335 $10,051 12/92 $10,627.60 $11,247 $10,349 12/93 $11,915.50 $12,628 $10,632 12/94 $11,353.20 $11,975 $10,908 12/95 $13,166.80 $14,066 $11,192 12/96 $13,569.30 $14,689 $11,563 MainStay Lehman Brothers New York Tax Municipal Bond Year-end Free Fund Index* Inflation+ - -------- --------- -------------- ---------- 10/1/91 $10,000.00 $10,000 $10,000 12/91 $10,208.20 $10,335 $10,051 12/92 $11,128.40 $11,247 $10,349 12/93 $12,477.00 $12,628 $10,632 12/94 $11,888.20 $11,975 $10,908 12/95 $13,750.90 $14,066 $11,192 12/96 $14,003.40 $14,689 $11,563 value and the change in share price for the stated period. Past performance is no guarantee of future results. * The Lehman Brothers Municipal Bond Index (which does not have a sales charge) includes approximately 15,000 municipal bonds, rated Baa or better by Moody's, with a maturity of at least two years. Bonds subject to the Alternative Minimum Tax or with floating or zero coupons are excluded. The Index is unmanaged and results assume the reinvestment of all income and capital gain distributions. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 Portfolio Management Discussion and Analysis [GRAPHIC] Photo of James Flood and Ravi Akhoury NEW YORK TAX FREE FUND TEAM James Flood and Ravi Akhoury Generally speaking, 1996 was an uneventful year in the New York municipal bond markets. The fiscal prudence demonstrated by the state's administration provided a positive backdrop for municipal bonds in the state, and there were no major blow-ups, defaults, or political events to which municipal investors needed to respond. As a result, general economic trends and supply and demand factors were the primary forces driving the New York municipal market throughout the year. During the first half of 1996, New York municipal securities were less affected by Federal Reserve policies than by the market's anticipation of how those policies might change. As it happened, over the course of the year, the Fed only adjusted rates once, and then by only 25 basis points. As the economy began to pick up in the second and third quarters, interest rates started to rise, which took a toll on municipal securities. On average, New York municipal funds closed the first half with negative returns. Early in the fourth quarter, however, the municipal market rallied as the economy showed signs of slowing. The result was positive for most municipal investors, with the average Lipper++ New York municipal debt fund providing a positive 3.15% total return for the 12 months ended December 31, 1996. In this context, how did the MainStay New York Tax Free Fund perform? For the 12 months ended December 31, 1996, the MainStay New York Tax Free Fund posted total returns of 3.06% and 2.86% for Class A and Class B shares, respectively, excluding all sales charges. While the Fund generally attempts to perform in line with the market, its results were below the total return of the average Lipper New York municipal debt fund over the same period. What factors primarily contributed to the Fund's underperformance? We believe that duration is the single most important factor affecting the performance of a municipal portfolio. Throughout the year, we tried to maintain a relatively neutral duration for the Fund to keep from being blindsided by changes in interest rates and market sentiment. While a longer duration can offer more opportunity when the markets are favorable, it also presents greater risk if the market declines. [GRAPHIC] Basis point One hundredth of one percent in the yield of an investment, i.e., 100 basis points equals 1%. Duration A measure of average maturity, which adjusts for the time value of the payments investors will receive, and which takes into account interest payments as well as principal payments. Duration is a better gauge of interest-rate sensitivity than average maturity alone. ++ See footnote and chart on page 9 for more information on Lipper Analytical Services, Inc. 5 [GRAPHIC] YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL] Returns are for Class A shares unless otherwise noted. See footnote * on page 9 for more information on performance. How did your duration strategy affect the Fund's performance? We had mixed results over the course of the year. In the second quarter, we extended the Fund's duration a bit beyond neutral and it had a negative impact. But we made a prompt and disciplined return to a neutral duration when we saw the strategy wasn't paying off. Later in the year, we extended the Fund's duration once again, and when the market rallied in October and November, that move had a positive impact on the Fund's performance. In fact, the Fund achieved most of its gains during the fourth quarter. What other strategic moves have you made in 1996? The Fund seeks to provide a high level of current income free from regular federal income tax and New York State and City personal income tax, consistent with the preservation of capital. So our management strategies must take both performance and quality into account. As the number of insured credits continues to grow, opportunities to provide performance enhancements are becoming increasingly scarce. As a result, we've tried to find uninsured issues with attractive price, value, and quality characteristics. Can you give us some examples? With about half the portfolio in insured paper, the other half can be invested in securities at various quality levels that may offer opportunities for a yield advantage or capital appreciation. We bought some Battery Park City bonds in a down market and the Fund benefited as the market picked up and perception of the credit improved. We also bought New York City Industrial Development Agency bonds for the Rockefeller Foundation. They were rated AAA--not because of credit enhancement, but on their own merits. As it happened, demand for this type of bond was strong and the bonds performed well for the Fund. Were there other strong performers? The Fund also benefited from the timing of certain purchases, which was a positive side effect of the volatility that was experienced [GRAPHIC] Year-end Total Return % - -------- -------------- 12/91 2.08 12/92 8.98 12/93 12.11 12/94 -4.71 12/95 15.97 Class A 12/95 15.67 Class B 12/96 3.06 Class A 12/96 2.86 Class B Insured credits Bonds that carry insurance or other guarantees that interest and principal payments will be met. Although such insurance may increase the cost of the bond, it also reduces the risk of default, regardless of the issuer's credit quality. 6 DIVERSIFICATION OF HOLDINGS--TOP 5 AS OF 12/31/96 [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. during the year. We bought Nassau County General Obligation bonds at a good time and saw some capital appreciation there, along with appropriate returns and duration characteristics for the portfolio. What else contributed to the Fund's performance? Prerefundings can contribute to performance and we look for issues with characteristics that may make them attractive prerefunding candidates. We held New York City General Obligation bonds with various coupons and maturities that were prerefunded. We also had a prerefunding in Local Government Assistance Corporation bonds. Since prerefundings can shorten maturities and improve quality, their overall impact is usually positive. How do you seek to protect investors against risk in New York municipal bonds? While state tax free bond funds in general tend to have natural constraints on diversification, we seek to spread risk across a variety of municipal issuers, sectors, geographic regions, maturities, coupons, and types of securities. That way, if problems arise in any particular sector or if any particular coupon goes out of favor, investors may have a measure of protection. In New York, diversification is particularly difficult to achieve, since a smaller number of issuers tend to occupy a larger share of the market. In fact, during 1996, the Fund reduced its holdings of New York City bonds. Why did you do that? We didn't want too heavy an exposure in a single geographic area and we felt the bonds were fully priced. The decision balanced price and risk management considerations. How did supply and demand affect the portfolio in 1996? While the supply of New York municipal bonds was moderate, demand decreased as investors poured money into the equity markets. The effect was negative for the Fund and the municipal markets in general. [GRAPHIC] Prerefunding Returning principal prior to the initial date at which a bond can be called or "refunded" (usually 10 years after issuance). In order to prerefund, the issuer must return the par value of the bond and provide or guarantee interest payments through the initial call date. Supply and demand In the bond market, supply is influenced by the amount of new securities issued and the amount of bonds investors wish to sell. Demand reflects the amount of bonds investors wish to buy, which may decrease when other markets offer greater opportunities. Percentage Health 22.0% Transportation 20.0% Municipal Revenue/ Urban Development 16.7% Education 8.6% General Obligation - City 7.8% All Other 24.9% 7 [GRAPHIC] A small portion of income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. Another difficulty for the market as a whole has been a reduction in the number of municipal bond dealers, which has reduced the liquidity of municipal bonds overall. What's your outlook for 1997? We think New York municipal bonds still represent value, particularly for New York residents in high tax brackets. Barring any major upsets in 1997, we believe interest rate movements, economic trends, and inflation concerns will continue to be the major determinants of value. We'll continue to search for opportunities and manage the Fund's duration and quality to seek attractive current yields while preserving capital for the Fund's shareholders. Ravi Akhoury James Flood Portfolio Managers QUALITY BREAKDOWN AS OF 12/31/96 [GRAPHIC] [THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. Bond quality ratings provided by Standard & Poor's. See the prospectus for details. 8 Percentage AAA 52.4% AA 5.3% A 22.5% BBB 16.9% Cash & Equivalents 2.9% Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Performance figures reflect the assumption of certain Fund expenses by the Fund's Administrator and Adviser. Had these expenses not been assumed, total return figures would have been lower. This expense limitation may be terminated or revised at any time. Class B shares, first offered on 1/3/95, are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to .50%. Performance figures for this class include the historical performance of the respective Class A shares from inception (10/1/91) through 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class A shares are sold with a maximum initial sales charge of 4.5% and a 12b-1 fee of .25%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class A shares' initial offering through 12/31/96. Class B shares were first offered to the public on 1/3/95; Class A shares on 10/1/91. [GRAPHIC] 9 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 3.06% 6.84% 6.91% Class B 2.86% 6.74% 6.82% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A -1.58% 5.86% 5.98% Class B -2.14% 6.43% 6.67% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 58 out of 22 out of 26 out of 96 funds 44 funds 43 funds Class B 70 out of n/a n/a 96 funds Average Lipper NY municipal debt fund 3.15% 6.73% 6.97% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $9.91 $0.5036 $0.0000 Class B $9.84 $0.4523 $0.0000 ================================================================================ MainStay New York Tax Free Fund Principal Amount Value =========================== LONG-TERM MUNICIPAL BONDS (97.1%)+ NEW YORK (86.7%) Battery Park City Authority Revenue Series A 5.50%, due 11/1/26 ........................... $ 900,000 $ 883,125 Metropolitan Transportation Authority Service Contract Commuter Facilities Revenue Series L 7.50%, due 7/1/17 ............................ 1,385,000 1,473,294 Monroe County Airport Authority Greater Rochester International Airport Revenue 7.25%, due 1/1/19 (a) ........................ 750,000 814,687 Municipal Assistance Corp. New York City, Series 67 7.625%, due 7/1/08 (b) ....................... 800,000 874,000 Nassau County General Obligation Series T 5.20%, due 9/1/15 ............................ 650,000 623,187 New York City Educational Construction Fund Revenue 5.50%, due 4/1/26 ............................ 800,000 786,000 New York City General Obligation Series C 7.20%, due 8/15/15 ........................... 355,000 378,075 7.50%, due 8/1/20 ............................ 300,000 336,375 Series F 8.20%, due 11/15/04 .......................... 170,000 192,312 New York City Industrial Development Agency Civil Facility Revenue, Rockefeller Foundation Project 5.375%, due 7/1/23 (b) ....................... 1,000,000 973,750 New York City Trust Cultural Resources Revenue Botanical Garden 5.80%, due 7/1/26 ............................ 1,000,000 1,011,250 New York State Dormitory Authority Revenue, Manhattanville (zero coupon), due 7/1/19 .................... 2,175,000 614,437 (zero coupon), due 7/1/21 .................... 1,175,000 296,688 Park Ridge Housing Income Project 7.85%, due 2/1/29 (b) ........................ 800,000 858,000 New York State Energy Research & Development Authority, Electric Co. Facilities Revenue, Con Edison Series A 7.75%, due 1/1/24 (a) ........................ 500,000 521,735 Project B 9.25% due 9/15/22 (a) ........................ 45,000 47,221 Principal Amount Value =========================== NEW YORK (Continued) New York State Environmental Facilities Corp. Pollution Control Revenue State Water Series A 4.65%, due 6/15/07 ........................... $ 395,000 $ 384,138 New York State Housing Finance Agency Service Contract Obligation Revenue, Series A 7.65%, due 3/15/05 ........................... 60,000 66,675 + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 10 New York State Medical Care Facilities Finance Agency Revenue 7.50%, due 2/15/21 ........................... 755,000 833,331 7.875%, due 8/15/20 .......................... 800,000 883,000 8.875%, due 8/15/07 .......................... 605,000 632,092 New York State Medical Care Facilities Finance Agency Revenue St. Francis Hospital of Roslyn Project A 7.625%, due 11/1/21 .......................... 1,035,000 1,112,625 New York State Urban Development Corp. Revenue 5.50%, due 7/1/22 ............................ 900,000 855,000 Port Authority of New York & New Jersey Consolidated Bonds Series 104 5.125%, due 7/15/14 .......................... 500,000 484,375 Series 52 9.00%, due 11/1/24 ........................... 150,000 167,250 Triborough Bridge & Tunnel Authority of New York, General Purpose Revenue Series L 8.00%, due 1/1/07 ............................ 50,000 52,806 8.125%, due 1/1/12 ........................... 850,000 896,674 ----------- 17,052,102 ----------- PUERTO RICO (10.4%) Puerto Rico Commonwealth Aqueduct & Sewer Authority Revenue 5.00%, due 7/1/15 ............................ 700,000 647,500 Puerto Rico Commonwealth Highway & Transportation Authority Revenue Series Y 5.50%, due 7/1/26 ............................ 900,000 868,500 Puerto Rico Municipal Financing Agency Series A 8.25%, due 7/1/08 ............................ 500,000 536,875 ----------- 2,052,875 ----------- Total Investments (Cost $18,844,004) (c) ....................... 97.1% 19,104,977(d) Cash and Other Assets, Less Liabilities ........ 2.9 566,865 ----------- ----------- Net Assets ..................................... 100.0% $19,671,842 =========== =========== Portfolio of Investments December 31, 1996 (a) Interest on these securities is subject to alternative minimum tax. (b) Segregated or partially segregated as collateral for futures contracts. (c) The cost stated also represents the aggregate cost for Federal income tax purposes. (d) At December 31, 1996 net unrealized appreciation was $260,973, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $406,042 and aggregate gross unrealized depreciation for all investments on which there was an excess of cost over market value of $145,069. (e) Less than one tenth of a percent. (f) Represents the difference between the value of the contracts at the time they were opened and the value at December 31, 1996. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 11 Contracts Unrealized Long Appreciation ====================== FUTURES CONTRACTS (0.0%) (e) Municipal Bond March 1997 (30 year) ......................... 4 $ 1,125 ---------- Total Futures Contracts (Settlement Value $464,250) .................. $ 1,125(f) ========== Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $18,844,004) .................. $ 19,104,977 Cash .............................................................................. 61,144 Receivables: Investment securities sold ...................................................... 607,169 Interest ........................................................................ 485,225 Fund shares sold ................................................................ 13,007 Other assets ...................................................................... 12 ------------ Total assets ................................................................... 20,271,534 ------------ LIABILITIES: Payables: Investment securities purchased ................................................. 440,307 Fund shares redeemed ............................................................ 89,619 NYLIFE Distributors ............................................................. 9,886 Transfer agent .................................................................. 4,894 Adviser ......................................................................... 4,217 Custodian ....................................................................... 1,988 Trustees ........................................................................ 153 Accrued expenses .................................................................. 40,990 Variation margin payable on futures contracts ..................................... 7,638 ------------ Total liabilities .............................................................. 599,692 ------------ Net assets ........................................................................ $ 19,671,842 ============ COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A ......................................................................... $ 15,706 Class B ......................................................................... 4,167 Additional paid-in capital ........................................................ 19,535,830 Accumulated undistributed net investment income ................................... 3,279 Accumulated net realized loss on investments ...................................... (149,238) Unrealized appreciation on investments ............................................ 262,098 ------------ Net assets ........................................................................ $ 19,671,842 ============ CLASS A Net assets applicable to outstanding shares ....................................... $ 15,571,948 ============ Shares of beneficial interest outstanding ......................................... 1,570,554 ============ Net asset value per share outstanding ............................................. $ 9.91 Maximum sales charge (4.50% of offering price) .................................... 0.47 ------------ Maximum offering price per share outstanding ...................................... $ 10.38 ============ CLASS B Net assets applicable to outstanding shares ....................................... $ 4,099,894 ============ Shares of beneficial interest outstanding ......................................... 416,659 ============ Net asset value per share outstanding ............................................. $ 9.84 ============ Statement of Operations The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Interest ............................................ $ 1,230,853 ----------- Expenses: Administration ...................................... 49,368 Advisory ............................................ 49,368 Service ............................................. 49,368 Shareholder communication ........................... 47,912 Transfer agent ...................................... 32,735 Professional ........................................ 19,689 Custodian ........................................... 18,588 Distribution--Class B ............................... 7,037 Amortization of organization expense ................ 6,404 Registration ........................................ 2,232 Trustees ............................................ 513 Miscellaneous ....................................... 9,203 ----------- Total expenses before reimbursement ................ 292,417 Expense reimbursement from Adviser and Administrator .. (39,823) ----------- Net expenses ....................................... 252,594 ----------- Net investment income ................................. 978,259 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Security transactions ............................... 216,312 Futures transactions ................................ (38,283) ----------- Net realized gain on investments ...................... 178,029 ----------- Net change in unrealized appreciation on investments: Security transactions ............................... (554,466) Futures transactions ................................ 1,125 ----------- Net unrealized loss on investments .................... (553,341) ----------- Net realized and unrealized loss on investments ....... (375,312) ----------- Net increase in net assets resulting from operations .. $ 602,947 =========== Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 Year ended Year ended December 31, December 31 1996 1995 ------------ ----------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income .................................................... $ 978,259 $ 981,80 Net realized gain on investments ......................................... 178,029 426,13 Net change in unrealized appreciation (depreciation) on investments .......................................... (553,341) 1,308,57 ------------ ----------- Net increase in net assets resulting from operations ......................................................... 602,947 2,716,50 ------------ ----------- Dividends to shareholders: From net investment income: Class A ................................................................. (860,400) (936,55 Class B ................................................................. (132,523) (46,48 ------------ ----------- Total dividends to shareholders ....................................... (992,923) (983,03 ------------ ----------- Capital share transactions: Net proceeds from sale of shares: Class A ................................................................. 714,259 933,63 Class B ................................................................. 2,775,763 1,529,47 Net asset value of shares issued to shareholders in reinvestment of dividends: Class A ................................................................. 326,939 363,72 Class B ................................................................. 87,529 29,49 ------------ ----------- 3,904,490 2,856,33 Cost of shares redeemed: Class A ................................................................. (3,316,131) (1,843,25 Class B ................................................................. (362,803) (15,99 ------------ ----------- Increase in net assets derived from capital share transactions ........................................... 225,556 997,09 ------------ ----------- Net increase (decrease) in net assets ................................. (164,420) 2,730,56 NET ASSETS: Beginning of year .......................................................... 19,836,262 17,105,69 ------------ ----------- End of year ................................................................ $ 19,671,842 $ 19,836,26 ============ =========== Accumulated undistributed net investment income ............................ $ 3,279 $ 17,94 ============ =========== Financial Highlights selected per share data and ratios * The Fund changed its fiscal year end from August 31 to December 31. + Annualized. (a) Commencement of operations. (b) Total return is calculated exclusive of sales charges and is not annualized. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 Clas ========================= Class A Class B Class A Class B September 1 Year ------- ------- ------- ------- through Aug Year ended Year ended December 31 --------- December 31, 1996 December 31, 1995 1994* 1994 ===================== ===================== ========== ======= Net asset value at beginning of period .. $10.12 $10.02 $9.20 $9.20 $9.58 $10.43 ------- ------ ------- ------ ------- ------- Net investment income .. 0.50 0.45 0.52 0.59 0.19 0.56 Net realized and unrealized gain (loss) on investments ....... (0.21) (0.18) 0.91 0.82 (0.39) (0.59) ------- ------ ------- ------ ------- ------- Total from investment operations ........... 0.29 0.27 1.43 1.41 (0.20) (0.03) ------- ------ ------- ------ ------- ------- Less dividends and distributions: From net investment income ............... (0.50) (0.45) (0.51) (0.59) (0.18) (0.57) From net realized gain on investments ....... -- -- -- -- -- (0.25) ------- ------ ------- ------ ------- ------- Total dividends and distributions ........ (0.50) (0.45) (0.51) (0.59) (0.18) (0.82) ------- ------ ------- ------ ------- ------- Net asset value at end of period ........ $9.91 $9.84 $10.12 $10.02 $9.20 $9.58 ======= ====== ======= ====== ======= ======= Total investment return (b) ........... 3.06% 2.86% 15.97% 15.67% (2.11%) (0.35%) Ratios (to average net assets)/Supplemental Data: Net investment income 5.0% 4.7% 5.4% 5.1% 6.1%+ 5.7% Net expenses ......... 1.24% 1.49% 1.24% 1.49% 0.99%+ 0.99% Expenses (before reimbursement) ...... 1.4% 1.6% 1.4% 1.6% 1.2%+ 1.1% Portfolio turnover rate 114% 114% 114% 114% 39% 169% Net assets at end of period (in 000's) .... $15,572 $4,100 $18,248 $1,588 $17,106 $17,862 MainStay New York Tax Free Fund Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay New York Tax Free Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares are offered at net asset value per share plus an initial sales charge. Class B shares whose distribution commenced on January 3, 1995, are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange, (b) by appraising options and futures contracts at the last sale price on the market where such options or futures are principally traded, and (c) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value on maturity date if their original term to maturity at purchase exceeded 60 days. 16 Notes to Financial Statements Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Futures Contracts. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date, or to make or receive a cash payment based on the value of a securities index. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin". When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund has entered into contracts for the future delivery of debt securities in order to attempt to protect against the effects of adverse changes in interest rates or to lengthen or shorten the average maturity or duration of the Fund's portfolio. The use of futures contracts involves, to varying degrees, elements of market risk. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts are conducted through regulated exchanges which minimize counterparty credit risks. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends monthly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued daily except when collection is not expected. Premiums on securities purchased by the Fund are amortized on the constant yield method over the life of the respective securities or, if applicable, over the period to the first call date. Discounts are accreted when required by Federal tax regulations. 17 MainStay New York Tax Free Fund Organization Costs. Costs incurred in connection with the Fund's initial organization and registration amounted to $43,769 for the Fund. Such costs were amortized over 60 months beginning at the commencement of operations of the Fund. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expenses incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Concentration of Credit Risk. The Fund invests substantially all of its assets in debt obligations issued by political subdivisions and authorities in the State of New York and the Commonwealth of Puerto Rico. The issuer's ability to meet its obligations may be affected by economic and political developments within the State of New York and the Commonwealth of Puerto Rico. Note 3--Fees and Related Party Policies: Investment Advisory And Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.25% of the average daily net assets of the Fund. The Adviser and the Administrator have voluntarily agreed to reimburse the expenses for the Fund to the extent that operating expenses would exceed on an annualized basis 1.24% and 1.49% for the Class A and Class B, shares respectively, of the average daily net assets. The expense reimbursement to the Fund for the year ended December 31, 1996 was $39,823. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to 18 Notes to Financial Statements continued the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.25% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $22,774 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges on redemptions of Class B shares of $2,810 for the year ended December 31, 1996. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. 19 MainStay New York Tax Free Fund Capital. At December 31, 1996, NYLIFE Securities and NYLIFE Distributors held shares of Class A with a net asset value of $99,100 and $5,949,930, respectively, which represents 0.6% and 38.2%, respectively, of the Class A net assets at year end. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $458. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $605 for the year ended December 31, 1996. Note 4--Federal Income Tax: At December 31, 1996, for Federal income tax purposes, capital loss carryforwards of $148,114 are available to the extent provided by regulations to offset future realized gains of the Fund through 2002. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. The Fund utilized $179,154 of capital loss carryforward during the current year. Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $22,127 and $22,096, respectively. Note 6--Capital Share Transactions (in 000's): 20 Year ended December 31 1996 1995 ---------------------------------------- Class A Class B Class A Class B ------- ------- ------- ------- Shares sold ..................................... 73 286 97 157 Shares issued in reinvestment of dividends ...... 33 9 38 3 --- --- --- --- 106 295 135 160 Shares redeemed ................................. 338 37 191 2 --- --- --- --- Net increase (decrease) ......................... (232) 258 (56) 158 === === === === Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay New York Tax Free Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 21 The Mainstay Funds * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 22 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income Convertible Fund graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 23 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo NEW YORK TAX FREE FUND [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY New York Tax Free Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc. is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay New York Tax Free Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. MSAN13 (297) [GRAPHIC] Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay Tax Free Bond Fund Highlights 3 $10,000 Invested in the MainStay Tax Free Bond Fund versus Lehman Brothers Municipal Bond Index and Inflation-- Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by State--Top 5 7 Quality Breakdown 8 Returns & Lipper Rankings 9 Top 10 Holdings 10 Portfolio of Investments 11 Financial Statements 16 Notes to Financial Statements 20 Report of Independent Accountants 25 The MainStay Funds 26 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 MainStay Tax Free Bond Fund Highlights 1996 MARKET HIGHLIGHTS o The year was comparatively uneventful, with no strong trends or clear direction in the municipal bond markets o Anticipation of Federal Reserve policies resulted in market turbulence during the first half of 1996, with a modest recovery in the second half of the year o Strong performance in the equity markets drew money away from municipal securities, weakening demand, while supply remained moderately higher than in 1995 o Controversy over flat tax proposals receded into the background during this election year, reducing investor concerns about the future prospects for tax-exempt securities 1996 FUND HIGHLIGHTS o One-year total returns of 3.63% and 3.33% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o Both share classes modestly outperformed the average Lipper+ general municipal debt fund for the 12 months ended 12/31/96 o A neutral portfolio duration helped the Fund perform in line with the market, while geographic and sector diversification helped manage risk o During 1996, the Fund's track record exceeded 10 years + See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested in the MainStay Tax Free Bond Fund versus Lehman Brothers Municipal Bond Index and Inflation CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Tax Free Bond Fund [GRAPHIC] Lehman Brothers Municipal Bond Index* [GRAPHIC] Inflation+ CLASS B SHARES [THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Tax Free Bond Fund [GRAPHIC] Lehman Brothers Municipal Bond Index* [GRAPHIC] Inflation+ The Class A graph assumes an initial investment of $10,000 made on 5/1/86 reflecting the effect of the 4.5% maximum up-front sales charge, thereby reducing the amount of the investment to $9,550 and includes the Lehman Brothers Mainstay Tax Free Municipal Bond Index* Bond Fund Inflation+ - -------------------------------------------------------------------------------- 5/1/86 $10,000 $ 9,550 $10,000 12/86 $10,826 $10,123.4 $10,193 12/87 $10,989 $10,181.9 $10,644 12/88 $12,106 $11,074.3 $11,113 12/89 $13,412 $11,891.3 $11,629 12/90 $14,390 $12,447.6 $12,355 12/91 $16,137 $13,803.2 $12,724 12/92 $17,560 $14,965 $13,100 12/93 $19,717 $16,520.5 $13,459 12/94 $18,697 $15,525.4 $13,809 12/95 $21,962 $17,854.7 $14,168 12/96 $22,935 $18,503.1 $14,637 Lehman Brothers Mainstay Tax Free Municipal Bond Index* Bond Fund Inflation+ - -------------------------------------------------------------------------------- 5/1/86 $10,000 $10,000 $10,000 12/86 $10,826 $10,600.4 $10,193 12/87 $10,989 $10,661.7 $10,644 12/88 $12,106 $11,596.1 $11,113 12/89 $13,412 $12,451.6 $11,629 12/90 $14,390 $13,034.1 $12,355 12/91 $16,137 $14,453.6 $12,724 12/92 $17,560 $15,670.1 $13,100 12/93 $19,717 $17,298.9 $13,459 12/94 $18,697 $16,257 $13,809 12/95 $21,962 $18,673.2 $14,168 12/96 $22,935 $19,295.8 $14,637 historical performance of the Class B shares for periods from inception (5/1/86) through 12/31/94. The Class B graph assumes an initial investment of $10,000 made on 5/1/86. Returns shown do not reflect the Contingent Deferred Sales Charge (CDSC), as it would not apply for the period shown. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * The Lehman Brothers Municipal Bond Index (which does not have a sales charge) includes approximately 15,000 municipal bonds, rated Baa or better by Moody's, with a maturity of at least two years. Bonds subject to the Alternative Minimum Tax or with floating or zero coupons are excluded. The Index is unmanaged and results assume the reinvestment of all income and capital gain distributions. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 Portfolio Management Discussion and Analysis [GRAPHIC] Photo of Tax Free Bond Fund Team TAX FREE BOND FUND TEAM James Flood and Ravi Akhoury Generally speaking, 1996 was an uneventful year in the municipal markets. There were no major blow-ups, defaults, or political events to which municipal investors needed to respond. As a result, general economic trends and supply and demand factors were the primary forces driving the municipal market throughout the year. During the first half of 1996, municipal securities were less affected by Federal Reserve (Fed) policies than by the market's anticipation of how those policies might change. As it happened, over the course of the year, the Fed only adjusted rates once, and then by only 25 basis points. As the economy began to pick up in the second and third quarters, interest rates started to rise, which took a toll on municipal securities. On average, municipal funds closed the first half with negative returns. Early in the fourth quarter, however, the municipal market rallied as the economy showed signs of slowing. The result was positive for most municipal investors, with the average Lipper++ general municipal debt fund providing a positive 3.30% total return for the 12 months ended December 31, 1996. In this context, how did the MainStay Tax Free Bond Fund perform? We think the Fund did well. For the 12 months ended December 31, 1996, the MainStay Tax Free Bond Fund posted total returns of 3.63% and 3.33% for Class A and Class B shares, respectively, excluding all sales charges. Both share classes outperformed their average Lipper peer fund over the same period. How did you seek to enhance the Fund's performance in an uneventful year? We believe that duration is the single most important factor affecting the performance of a municipal portfolio. Throughout the year, we tried to maintain a relatively neutral portfolio duration, to keep from being blindsided by changes in interest rates and market sentiment. While a longer duration offers more opportunity when the markets are favorable, it also presents greater risk if the market declines. How has your duration strategy affected the Fund's performance? Generally, the results were positive. In the second quarter, we extended the Fund's duration a bit beyond neutral and it had a [GRAPHIC] Basis point One hundredth of one percent in the yield of an investment, i.e., 100 basis points equals 1%. Duration A measure of average maturity, which adjusts for the time value of the payments investors will receive, and which takes into account interest payments as well as principal payments. Duration is a better gauge of interest-rate sensitivity than average maturity alone. ++ See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 5 [GRAPHIC] Insured credits Bonds that carry insurance or other guarantees that interest and principal payments will be met. Although such insurance may increase the cost of the bond, it also reduces the risk of default, regardless of the issuer's credit quality. Yield spread The difference in yield between securities in different market sectors, such as Treasury securities and municipal bonds--or between YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL] Returns are for Class B Shares unless otherwise noted. See footnote * on page 9 for more information on performance. negative impact. But we made a prompt and disciplined return to a neutral duration when we saw our strategy wasn't paying off. Later in the year, we extended the Fund's duration once again, and when the market rallied in October and November, that move had a positive impact on the Fund's performance. What other strategic moves did you make in 1996? The Fund seeks to provide a high level of current income free from regular federal income tax, consistent with the preservation of capital. So our management strategies must take both performance and quality into account. As the number of insured credits continues to grow, opportunities to provide performance enhancements are becoming increasingly scarce. As a result, we've tried to find uninsured issues with attractive price, value, and quality characteristics. Can you give us an example? We've identified potential opportunities among BBB-rated hospital issues, which we've selectively purchased over time. We feel many of these issues offer attractive risk/reward relationships. AAA-rated bonds may represent the highest quality, but typically provide the lowest yields. While A-rated bonds are not quite as strong from a quality standpoint, generally they offer higher yields. During the year, however, the difference in yield, also known as the spread between these securities dropped to as little as 10 to 15 basis points. The Fund's investments took advantage of the wider spreads, or more significant yield advantages, of BBB-rated issues. As a group, the Fund's BBB-rated hospital bonds have done very well and have helped contribute positively to performance. Year-end Total Return % - -------- -------------- 12/86 6.01 12/87 0.58 12/88 8.77 12/89 7.38 12/90 4.68 12/91 10.89 12/92 8.41 12/93 10.39 12/94 -6.02 12/95 15.00 Class A 12/95 14.86 Class B 12/96 3.63 Class A 12/96 3.33 Class B Year-end Why was that? As spreads between AAAs and A-rated bonds narrowed, more and more investors started looking for more yield among BBB issues, which made them more attractive in the market. We currently believe that the higher yields of these bonds more than compensates for their lower quality, and we're continuing to closely monitor their performance. 6 DIVERSIFICATION BY STATE--TOP 5 AS OF 12/31/96 [THE FOLLOWING WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. What was the strongest performing bond during the year? Interestingly, it was one of the Fund's BBB hospital issues--a Bay County Florida Medical Center bond that was prerefunded during the year. As a result, it went from being a 23-year BBB hospital issue to an 8-year bond, backed by government securities. The shorter maturity and higher quality definitely helped the portfolio. Were there other prerefundings in the portfolio? Yes. Various New York City General Obligation bonds were prerefunded, which helped performance. We also benefited when a New York Local Government Assistance Corporation bond was prerefunded. Are there other purchases that had a positive impact on the Fund's performance? Yes. In September, we purchased an insured Denver Airport issue that offered a high current coupon and a short duration. It has done well, performing closely in line with the market. We also purchased a Foothill-Eastern Transportation zero coupon bond for a California toll road that's under construction. The bond is rated BBB and provides an attractive yield. Not only did this issue help the Fund maintain an appropriate duration, we feel it may appreciate in price as the project nears completion. What other new purchases helped the portfolio? Another bond that's done well is an Arapahoe County Highway bond, a Colorado issue we bought in July and November. We felt it represented good value and its performance has had a positive impact on the portfolio. We also purchased some North Carolina Water and Sewer bonds when the market was near a low. We felt the bonds represented strong relative value, and when the market rose, they did very well. Would you say the Fund is diversified by state and by type of issuer? Yes we would. We bought bonds across the country in 1996, with issuers ranging from airports and education to urban development, and just about everything in [GRAPHIC] Prerefunding Returning principal prior to the initial date at which a bond can be called or "refunded" (usually 10 years after issuance). In order to prerefund, the issuer must return the par value of the bond and provide or guarantee interest payments through the initial call date. 7 Percent - --------------------------------------------- New York 18.4% California 14.0% Illinois 10.6% Texas 8.7% Colorado 6.8% All Other 41.5% - --------------------------------------------- [GRAPHIC] Supply and demand In the bond market, supply is influenced by the amount of new securities issued and the amount of bonds investors wish to sell. Demand reflects the amount of bonds investors wish to buy, which may decrease when other markets offer greater opportunities. A small portion of income may be subject to state and local taxes and the Alternative Minimum Tax Capital gains, if any, may also be taxed. between. We also try to diversify by coupon and maturity so that a weakness in any single segment of the market won't have an overwhelming effect on the portfolio. What securities did you sell during 1996? We had a number of municipal bonds with 4.75% coupons, but found they weren't performing the way we felt they should. Although these bonds generally perform well under different interest rate scenarios, we felt demand for this particular coupon was declining so we decided to reduce our exposure in that area. Even though the bonds had weakened a bit, we believe the decision was a positive one in terms of controlling risk. How did supply and demand affect the portfolio in 1996? While the supply of municipal bonds was moderate, demand decreased as investors poured money into the equity markets. The effect was negative for the Fund and the municipal markets in general. Another difficulty for the market as a whole has been a reduction in the number of municipal bond dealers, which has reduced the liquidity of municipal bonds overall. What's your outlook for 1997? We think municipal bonds still represent value, particularly for tax-conscious investors. Barring any major upsets in 1997, we believe interest rate movements, economic trends, and inflation concerns will continue to be the major determinants of value. We'll continue to search for opportunities and manage our duration and quality to seek attractive current yields while preserving capital for our shareholders. Ravi Akhoury James Flood Portfolio Managers QUALITY BREAKDOWN AS OF 12/31/96 [THE FOLLOWING WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. Bond quality ratings provided by Standard & Poor's. See the prospectus for details. 8 Percent - ----------------------------------------------- AAA 51.9% AA 5.9% A 10.8% BBB 29.6% Cash & Equivalents 1.8% - ----------------------------------------------- Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Class A shares, first offered to the public on 1/3/95, are sold with a maximum initial sales charge of 4.5% and an annual 12b-1 fee of .25%. Performance figures for this class include the historical performance of the Class B shares for periods from inception (5/1/86) up to 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class B shares of the Fund are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to .50%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 5/1/86. [GRAPHIC] 9 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 3.63% 6.04% 6.22% 6.39% Class B 3.33% 5.95% 6.17% 6.35% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ year 5 years 10 years Life of Fund through 12/31/96 Class A -1.03% 5.06% 5.73% 5.93% Class B -1.67% 5.63% 6.17% 6.35% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years 10 years Life of Fund through 12/31/96 Class A 87 out of n/a n/a n/a 225 funds Class B 119 out of 92 out of 60 out of 54 out of 225 funds 103 funds 64 funds 57 funds Average Lipper general municipal debt fund 3.30% 6.78% 7.18% 7.78% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $9.84 $0.5262 $0.0000 Class B $9.84 $0.5086 $0.0000 ================================================================================ [GRAPHIC] Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. Top 10 Holdings as of 12/31/96 10 - ----------------------------------------------------------------------------------- HOLDING AMOUNT =================================================================================== Denver Colorado City & County Airport Revenue, Series D, 7.75%, due 11/15/21 $17,422,256 Arapahoe County (Colorado) Capital Improvement Trust Fund Highway Revenue, 7.00%, due 8/31/26 17,344,688 Michigan State Hospital Finance Authority Revenue, Genesys Health Systems, Series A, 7.50%, due 10/1/27 16,437,262 Georgia Municipal Electric Authority Power Revenue, 8.00%, due 1/1/15 15,565,117 Los Angeles County (California) Metropolitan Transportation Authority Sales Tax Revenue, 5.00%, due 7/1/25 14,516,250 Texas Water Resources Finance Authority Revenue, 7.625%, due 8/15/08 12,812,756 Illinois Development Finance Authority, Pollution Control Revenue, Illinois Power Co., Series A, 8.30%, due 4/1/17 10,675,000 Detroit Michigan Sewer Disposal Revenue, Series A, 5.00%, due 7/1/25 9,864,281 Charlotte (North Carolina) General Obligation Water & Sewer, 5.60%, due 5/1/21 9,757,344 New York State Urban Development Corp. Revenue, Correctional Capital Facilities, Series A, 5.25%, due 1/1/21 9,037,500 =================================================================================== Portfolio of Investments December 31, 1996 Principal Amount Value ============================= LONG-TERM MUNICIPAL BONDS (98.0%)+ ALABAMA (0.8%) Birmingham Alabama Airport Authority Revenue, Series A 7.375%, due 7/1/10 (a) $ 3,600,000 $ 3,937,500 ----------- CALIFORNIA (14.0%) Clovis California Unified School District, Series D (zero coupon), due 8/1/10 4,700,000 2,244,250 (zero coupon), due 8/1/11 1,000,000 448,750 East Bay Municipal Utilities District, Water System Revenue 5.00%, due 6/1/26 6,000,000 5,505,000 Eden Township Hospital District Revenue 7.40%, due 11/1/19 5,300,000 5,571,625 Foothill-Eastern Transportation Corridor Agency, Toll Road Revenue, Series A (zero coupon), due 1/1/24 6,255,000 1,149,356 (zero coupon), due 1/1/27 56,105,000 8,415,750 (zero coupon), due 1/1/28 23,540,000 3,325,025 5.00%, due 1/1/35 4,150,000 3,522,312 Irvine California Unified School District Special Tax Community Facilities Series A 8.10%, due 11/15/13 250,000 272,813 Los Angeles County Metropolitan Transportation Authority Sales Tax Revenue, Series A 5.00%, due 7/1/25 15,800,000 14,516,250 Los Angeles County Transport Commission Sales Tax Revenue Series A 7.40%, due 7/1/15 600,000 646,500 8.00%, due 7/1/16 600,000 625,290 Northern California Power Agency Public Power Revenue Hydroelectric Project 1 7.15%, due 7/1/24 7,100,000 7,446,125 Oakland California Revenue, Series A 7.60%, due 8/1/21 5,500,000 5,885,000 Riverside California Hospital Revenue, Riverside Community Hospital, Series A 6.75%, due 11/1/15 1,000,000 1,007,500 Santa Cruz County Public Financing Authority Revenue Tax Allocation, Series B 7.625%, due 9/1/21 175,000 194,469 Principal Amount Value ============================= CALIFORNIA (Continued) South Coast Air Quality Management District Building Corp., California Revenue, Series B (zero coupon), due 8/1/06 $ 2,700,000 $ 1,663,875 (zero coupon), due 8/1/07 3,400,000 1,959,250 Southern California Public Power Authority Project Revenue Mead-Adelanto, Series A + Percentage indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statement 11 4.875%, due 7/1/20 5,000,000 4,462,500 Mead-Phoenix, Series A 4.875%, due 7/1/20 2,500,000 2,231,250 Walnut California Improvement Agency Tax Allocation 7.90%, due 9/1/09 385,000 412,913 ---------- 71,505,803 ---------- COLORADO (6.8%) Arapahoe County Capital Improvement Trust Fund Highway Revenue 7.00%, due 8/31/26 15,750,000 17,344,688 Denver Colorado City & County Airport Revenue, Series D 7.75%, due 11/15/21 15,435,000 17,422,256 ---------- 34,766,944 ---------- DISTRICT OF COLUMBIA (1.7%) District of Columbia Revenue Georgetown University, Series A 7.40%, due 4/1/18 5,380,000 5,763,325 7.40%, due 4/1/18 2,815,000 3,047,238 ---------- 8,810,563 ---------- FLORIDA (3.6%) Bay County Florida Hospital System Revenue, Bay Medical Center Project 8.00%, due 10/1/19 4,000,000 4,845,000 Dade County Florida 5.125%, due 10/1/21 3,500,000 3,307,500 Florida State Board of Education Capital Outlay Series A 5.00%, due 6/1/24 4,740,000 4,325,250 Orange County Health Facilities Authority Revenue, Pooled Hospital Loan Program, Series B 7.875%, due 12/1/25 5,965,000 6,172,761 ---------- 18,650,511 ---------- MainStay Tax Free Bond Fund Principal Amount Value ============================= LONG-TERM MUNICIPAL BONDS (Continued) GEORGIA (3.0%) Georgia Municipal Electric Authority Power Revenue, Series A 8.00%, due 1/1/15 (b) $14,745,000 $15,565,117 ----------- ILLINOIS (10.6%) Chicago Illinois Gas Supply Revenue Peoples Gas, Light & Coke Co. Series A 8.10%, due 5/1/20 (a) 2,000,000 2,212,500 Chicago Illinois General Obligation Series B 5.125%, due 1/1/25 7,000,000 6,370,000 Chicago Illinois Park District General Obligation 5.60%, due 1/1/21 1,400,000 1,358,000 Illinois Development Finance Authority Pollution Control Revenue, Illinois Power Co. Series C 7.625%, due 12/1/16 (a) 3,500,000 3,636,920 Series A 8.30%, due 4/1/17 (b) 10,000,000 10,675,000 Illinois Health Facilities Authority Revenue, Glenoaks Hospital Series E 9.50%, due 11/15/19 890,000 1,020,163 Hinsdale Hospital, Series A 9.00%, due 11/15/15 6,265,000 7,063,787 Series B 9.00%, due 11/15/15 1,870,000 2,110,762 Series C 9.50%, due 11/15/19 5,675,000 6,504,969 Proctor Community Hospital 7.375%, due 1/1/23 3,700,000 3,778,625 Sherman Hospital Project 6.75%, due 8/1/21 2,675,000 2,848,875 Illinois Health Facilities Authority Revenue, Methodist Medical Center 8.00%, due 10/1/14 1,000,000 1,005,960 Illinois Regional Transportation Authority, Series C 7.10%, due 6/1/25 1,500,000 1,691,250 Kankakee Illinois Sewer Revenue 7.00%, due 5/1/16 2,000,000 2,195,000 Southwestern Illinois Development Authority, Medical Facilities Revenue, Anderson Hospital Project, Series A 7.00%, due 8/15/12 2,000,000 2,070,000 ----------- 54,541,811 ----------- Principal Amount Value ============================= INDIANA (1.3%) Indiana Health Facility Financing Authority Hospital Revenue Clarion Health Partners Inc. Series A 6.00%, due 2/15/21 $ 4,000,000 $ 4,005,000 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statement 12 Jackson County Schneck Memorial Hospital 7.50%, due 2/15/12 2,600,000 2,762,500 ----------- 6,767,500 ----------- LOUISIANA (2.7%) Louisiana Public Facilities Authority Hospital Revenue Pendleton Memorial Methodist 6.75%, due 6/1/22 8,470,000 8,554,700 Louisiana State Offshore Terminal Authority, Deepwater Port Revenue Series E 7.60%, due 9/1/10 4,730,000 5,197,087 ----------- 13,751,787 ----------- MASSACHUSETTS (1.7%) Massachusetts State General Obligation, Series D 6.00%, due 7/1/12 315,000 320,119 Massachusetts State Health & Educational Facilities Authority Revenue Harvard University Series P 5.375%, due 11/1/32 3,190,000 3,046,450 Medical Center of Central Massachusetts 7.10%, due 7/1/21 2,500,000 2,740,625 University Hospital, Series C 7.25%, due 7/1/19 (b) 2,500,000 2,734,375 ----------- 8,841,569 ----------- MICHIGAN (6.3%) Brandon School District of Michigan 5.75%, due 5/1/20 1,350,000 1,365,188 Detroit Michigan Sewer Disposal Revenue, Series A 5.00%, due 7/1/25 10,825,000 9,864,281 Michigan State Hospital Finance Authority Revenue Genesys Health Systems, Series A 7.50%, due 10/1/27 15,255,000 16,437,262 Pontiac Osteopathic Hospital Series A 6.00%, due 2/1/24 5,000,000 4,768,750 ----------- 32,435,481 ----------- Portfolio of Investments continued Principal Amount Value ============================= LONG-TERM MUNICIPAL BONDS (Continued) MINNESOTA (0.6%) Minneapolis & Saint Paul Minnesota Metropolitan Airport Commission Series 7 7.80%, due 1/1/13 $2,750,000 $2,956,250 ---------- MISSISSIPPI (1.2%) Mississippi State General Obligation Series C 4.75%, due 12/01/15 6,355,000 5,886,319 ---------- NEVADA (1.4%) Clark County Airport Improvement Revenue 8.125%, due 7/01/18 6,500,000 6,971,250 ---------- NEW HAMPSHIRE (0.9%) New Hampshire Higher Educational & Health Facilities Authority Revenue Saint Anselm College 5.75%, due 7/1/26 4,560,000 4,548,600 ---------- NEW JERSEY (0.6%) New Jersey Health Care Facilities Financing Authority Revenue Zurbrugg Memorial Hospital Series C 8.50%, due 7/1/12 3,165,000 3,272,578 ---------- NEW YORK (18.4%) Battery Park City Authority Revenue, Series A 5.25%, due 11/1/17 1,000,000 926,250 5.50%, due 11/1/26 100,000 98,125 Metropolitan Transportation Authority, Service Contract Commuter Facilities Revenue Series 5 7.00%, due 7/1/12 2,265,000 2,434,875 Series L 7.50%, due 7/1/17 4,925,000 5,238,969 Monroe County Airport Authority Greater Rochester International Airport Revenue 7.25%, due 1/1/19 (a) (b) 5,800,000 6,300,250 Municipal Assistance Corp. New York City, Series 67 7.625%, due 7/1/08 3,660,000 3,998,550 Principal Amount Value ============================= NEW YORK (Continued) Nassau County General Obligation Series T 5.20%, due 9/1/15 $ 600,000 $ 575,250 New York City Educational Construction Fund Revenue 5.50%, due 4/1/26 3,200,000 3,144,000 New York City General Obligation Series B The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statement 13 7.00%, due 6/1/15 5,320,000 5,586,000 Series C 7.20%, due 8/15/15 1,065,000 1,134,225 Series A 7.75%, due 8/15/07 2,000,000 2,252,500 7.75%, due 8/15/15 180,000 200,250 7.75%, due 8/15/16 125,000 139,062 Series D 8.00%, due 8/1/04 1,170,000 1,323,668 Series F 8.20%, due 11/15/04 1,560,000 1,795,944 New York City Trust Cultural Resources Revenue Botanical Garden 5.80%, due 7/1/26 2,000,000 2,022,500 New York State Dormitory Authority Revenue, Cornell University Series A 7.375%, due 7/1/30 2,880,000 3,160,800 Park Ridge Housing Inc. Project 7.85%, due 2/1/29 1,400,000 1,501,500 State University Education Facilities Series A 7.50%, due 5/15/13 4,250,000 4,988,437 Series B 7.50%, due 5/15/11 4,250,000 4,967,188 New York State Energy Research & Development Authority Electric Co. Facilities Revenue Con Edison, Series A 7.75%, 1/1/24 (b) 8,425,000 8,791,235 New York State Environmental Facilities Corp. Pollution Control Revenue, State Water Series A 4.65%, due 6/15/07 1,400,000 1,361,500 7.50%, due 6/15/12 3,050,000 3,358,813 Series B 5.20%, due 5/15/14 3,000,000 2,917,500 New York State Local Government Assistance Corp. Series A 5.375%, due 4/1/19 1,000,000 961,250 MainStay Tax Free Bond Fund Principal Amount Value ============================= LONG-TERM MUNICIPAL BONDS (Continued) NEW YORK (Continued) New York State Medical Care Facilities Finance Agency Revenue 7.50%, due 2/15/21 $ 600,000 $ 662,250 7.875%, due 8/15/20 1,215,000 1,341,056 8.875%, 8/15/07 400,000 417,912 Hospital & Nursing Home Series A 8.00%, due 2/15/28 3,000,000 3,217,500 St. Francis Hospital of Roslyn Project A 7.625%, due 11/1/21 3,875,000 4,165,625 New York State Urban Development Corp. Revenue 5.50%, due 7/1/22 2,825,000 2,683,750 State Facilities 5.70%, due 4/1/20 3,000,000 2,940,000 New York State Urban Development Corp. Revenue Correctional Capital Facilities Series A 5.25%, due 1/1/21 10,000,000 9,037,500 Port Authority New York & New Jersey Consolidated Bonds Series 104 5.125%, 7/15/14 500,000 484,375 Triborough Bridge & Tunnel Authority of New York General Purpose Revenue Series B 5.20%, due 1/1/27 300,000 283,125 ---------- 94,411,734 ---------- NORTH CAROLINA (3.1%) Charlotte General Obligation Water & Sewer 5.60%, due 5/1/20 5,980,000 6,054,750 5.60%, due 5/1/21 9,625,000 9,757,344 ---------- 15,812,094 ---------- OHIO (0.9%) Ohio State Air Quality Development Authority Revenue, Pollution Control, Cleveland County Project 8.00%, due 12/1/13 2,000,000 2,332,500 Ohio State Turnpike Commission Revenue Series A 5.70%, due 2/15/17 2,000,000 2,025,000 --------- 4,357,500 --------- Principal Amount Value ============================= PENNSYLVANIA (3.4%) Allegheny County Airport Revenue Greater Pittsburgh International The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statement 14 Airport, Series C 8.25%, due 1/1/16 $ 4,800,000 $ 5,061,120 Allegheny County, Pennsylvania Hospital Development Authority Revenue, Saint Margaret Memorial Hospital, Project A 9.80%, due 7/1/10 (b) 1,500,000 1,527,000 Emmaus Pennsylvania General Authority Revenue, Series E 7.90%, due 5/15/18 6,450,000 6,917,625 Pottsville Hospital Authority Revenue, Warne Clinic 7.00%, due 7/1/14 4,000,000 4,105,000 ---------- 17,610,745 ---------- PUERTO RICO (0.1%) Puerto Rico Commonwealth Aqueduct & Sewer Authority Revenue 5.00%, due 7/1/15 300,000 277,500 Puerto Rico Commonwealth Highway & Transportation Authority Revenue Series Y 5.50%, due 7/1/26 100,000 96,500 ---------- 374,000 ---------- TEXAS (8.7%) Arlington Texas Independent School District 4.75%, due 2/15/22 7,335,000 6,473,138 Brazos River Authority Texas Revenue Houston Lighting & Power Co. Project Series B 7.20%, due 12/1/18 740,000 799,200 Series C 8.10%, due 5/1/19 2,050,000 2,185,813 Series A 8.25%, due 5/1/19 2,500,000 2,659,375 Keller Texas Independent School District Series A 5.40%, due 8/15/23 6,925,000 6,708,593 Matagorda County Texas Navigation District 1, Pollution Control Revenue Central Power & Light Co. Project 7.50%, due 12/15/14 3,150,000 3,461,063 Houston Lighting & Power Co. Series E 7.20%, due 12/1/18 (b) 6,470,000 7,011,862 Portfolio of Investments continued Principal Amount Value ============================= LONG-TERM MUNICIPAL BONDS (Continued) TEXAS (Continued) Tarrant County Texas Junior College District 4.625%, due 2/15/15 $ 3,000,000 $ 2,692,500 Texas Water Resources Finance Authority Revenue 7.625%, due 8/15/08 (b) 11,905,000 12,812,756 ----------- 44,804,300 ----------- UTAH (3.4%) Intermountain Power Agency of Utah Power Supply Revenue Series A 5.00%, due 7/1/21 3,400,000 3,034,500 Series F 5.00%, due 7/1/13 4,450,000 4,110,687 Series B 7.20%, due 7/1/19 3,475,000 3,591,482 Series D 8.625%, due 7/1/21 (b) 6,530,000 6,818,234 ----------- 17,554,903 ----------- VIRGINIA (0.5%) Capital Region Airport Commission Revenue, Richmond International Airport Project, Series A 5.625%, due 7/1/25 2,650,000 2,643,375 ----------- WASHINGTON (1.5%) Washington State Public Power Supply System Revenue Nuclear Project 2, Series A 5.625%, due 7/1/10 5,000,000 5,012,500 Nuclear Project 1, Series B 5.70%, due 7/1/10 2,500,000 2,503,125 ----------- 7,515,625 ----------- WEST VIRGINIA (0.8%) West Virginia School Building Authority Revenue, Series B 6.75%, due 7/1/17 1,000,000 1,068,750 West Virginia State Building Commission Lease Revenue, West Virginia Regional Jail & Correction Series A 7.00%, due 7/1/15 3,000,000 3,262,500 ----------- 4,331,250 ----------- Total Long Term Municipal Bonds (Cost $497,931,828) 502,625,109 ----------- (a) Interest on these securities is subject to alternative minimum tax. (b) Segregated as collateral for futures contracts. (c) Variable rate security that may be tendered back to the issuer at any time prior to maturity at par (d) The cost stated also represents the aggregate cost for Federal income tax purposes. (e) At December 31, 1996 net unrealized appreciation was $4,693,281, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $10,482,933 and aggregate gross unrealized depreciation for all investments on which there was an excess of cost over market value of $5,789,652. (f) Less than one tenth of a percent. (g) Represents the difference between the value of the contracts at the time they were opened and the value at December 31, 1996. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 Principal Amount Value ============================= SHORT-TERM INVESTMENT (0.2%) ALASKA (0.2%) Valdez Alaska Marine Terminal Revenue, Exxon Pipeline Co. Project, Series C 5.10%, due 12/1/33 (c) $ 800,000 $ 800,000 ------------ Total Short-Term Investment (Cost $800,000) 800,000 800,000 ------------ Total Investments (Cost $498,731,828) (d) 98.2% 503,425,109(e) Cash and Other Assets, Less Liabilities 1.8 9,291,793 ------------ ------------ Net Assets 100.0% $512,716,902 ============ ============ Contracts Unrealized Long Appreciation ================================ FUTURES CONTRACTS (0.0%)(f) Municipal Bond March 1997 (30 year) 174 $48,937 ------- Total Futures Contracts (Settlement Value $20,194,875) $48,937(g) ======= Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 16 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $498,731,828) ..... $ 503,425,109 Cash .................................................................. 57,074 Receivables: Interest ............................................................ 10,561,232 Fund shares sold .................................................... 67,094 Other assets .......................................................... 353 ------------- Total assets ....................................................... 514,110,862 ------------- LIABILITIES: Payables: Fund shares redeemed ................................................ 543,008 NYLIFE Distributors ................................................. 333,379 Adviser ............................................................. 130,778 Transfer agent ...................................................... 39,220 Custodian ........................................................... 8,495 Trustees ............................................................ 3,763 Accrued expenses ...................................................... 100,018 Variation margin payable on futures contracts ......................... 235,299 ------------- Total liabilities .................................................. 1,393,960 ------------- Net assets ............................................................ $ 512,716,902 ============= COMPOSITION OF NET ASSETS: Shares of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized: Class A ............................................................. $ 16,762 Class B ............................................................. 504,209 Additional paid-in capital ............................................ 523,246,413 Accumulated distributions in excess of net investment income .......... (245) Accumulated net realized loss on investments .......................... (15,792,455) Net unrealized appreciation on investments ............................ 4,742,218 ------------- Net assets ............................................................ $ 512,716,902 ============= CLASS A Net assets applicable to outstanding shares ........................... $ 16,486,256 ============= Shares of beneficial interest outstanding ............................. 1,676,249 ============= Net asset value per share outstanding ................................. $ 9.84 Maximum sales charge (4.50% of offering price) ........................ 0.46 ------------- Maximum offering price per share outstanding .......................... $ 10.30 ============= CLASS B Net assets applicable to outstanding shares ........................... $ 496,230,646 ============= Shares of beneficial interest outstanding ............................. 50,420,942 ============= Net asset value per share outstanding ................................. $ 9.84 ============= Statement of Operations The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 17 FOR THE YEAR ENDED DECEMBER 31, 1996 INVESTMENT INCOME: Income: Interest .......................................... $ 33,650,181 ------------ Expenses: Administration .................................... 1,579,820 Advisory .......................................... 1,579,820 Service ........................................... 1,316,517 Distribution--Class B ............................. 1,084,391 Transfer agent .................................... 270,792 Shareholder communication ......................... 175,429 Recordkeeping ..................................... 80,430 Professional ...................................... 71,164 Custodian ......................................... 52,434 Registration ...................................... 33,651 Trustees .......................................... 13,583 Miscellaneous ..................................... 40,941 ------------ Total expenses ................................... 6,298,972 ------------ Net investment income ............................... 27,351,209 ------------ REALIZED AND UNREALIZED GAIN (LOSS)ON INVESTMENTS: Net realized gain (loss) from: Security transactions ............................. 2,593,131 Futures transactions .............................. (125,212) ------------ Net realized gain on investments .................... 2,467,919 ------------ Net change in unrealized appreciation on investments: Security transactions ............................. (13,380,089) Futures transactions .............................. 48,937 ------------ Net unrealized loss on investments .................. (13,331,152) ------------ Net realized and unrealized loss on investments ..... (10,863,233) ------------ Net increase in net assets resulting from operations $ 16,487,976 ============ Statement of Changes in Net Assets The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 18 Year ended Year December 31, Dece 1996 1 ------------ ---- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income ........................................................ $ 27,351,209 $ 28 Net realized gain on investments ............................................. 2,467,919 3 Net change in unrealized appreciation (depreciation) on investments .......... (13,331,152) 42 ------------- ----- Net increase in net assets resulting from operations ......................... 16,487,976 74 ------------- ----- Dividends to shareholders: From net investment income: Class A ..................................................................... (738,853) ( Class B ..................................................................... (26,567,311) (27, ------------- ----- Total dividends to shareholders ........................................... (27,306,164) (28, ------------- ----- Capital share transactions: Net proceeds from sale of shares: Class A ..................................................................... 10,869,272 9 Class B ..................................................................... 41,870,887 57 Net asset value of shares issued to shareholders in reinvestment of dividends: Class A ..................................................................... 551,381 Class B ..................................................................... 16,676,585 17 ------------- ----- 69,968,125 85 Cost of shares redeemed: Class A ..................................................................... (4,558,162) (1 Class B ..................................................................... (94,941,242) (90 ------------- ----- Decrease in net assets derived from capital share transactions ............ (29,531,279) (6 ------------- ----- Net increase (decrease) in net assets ..................................... (40,349,467) 39 NET ASSETS: Beginning of year .............................................................. 553,066,369 513 ------------- ----- End of year .................................................................... $ 512,716,902 $ 553 ============= ===== Accumulated distributions in excess of net investment income ................... $ (245) $ ============= ===== Financial Highlights selected per share data and ratios * The Fund changed its fiscal year end from August 31 to December 31. + Annualized. (a) Total return is calculated exclusive of sales charges and is not annualized. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 19 Cla -------------------- Class A Class B Class A Class B September 1 ------- ------- ------- ------- through Year ended Year ended December 31 ---- December 31, 1996 December 31, 1995 1994* 1994 ----------------- ----------------- ----- ---- Net asset value at beginning of period .................... $10.02 $10.03 $9.20 $9.20 $9.71 $10.3 ------ ------ ----- ----- ----- ----- Net investment income .................. 0.54 0.51 0.52 0.51 0.17 0.5 Net realized and unrealized gain (loss) on investments ......................... (0.19) (0.19) 0.83 0.83 (0.51) (0.5 ------ ------ ----- ----- ----- ----- Total from investment operations ............................. 0.35 0.32 1.35 1.34 (0.34) (0.0 ------ ------ ----- ----- ----- ----- Less dividends and distributions: From net investment income ................................. (0.53) (0.51) (0.53) (0.51) (0.17) (0.5 From net realized gain on investments ......................... -- -- -- -- -- (0.0 ------ ------ ----- ----- ----- ----- Total dividends and distributions .......................... (0.53) (0.51) (0.53) (0.51) (0.17) (0.6 ------ ------ ----- ----- ----- ----- Net asset value at end of period .......................... $9.84 $9.84 $10.02 $10.03 $9.20 $9.7 Total investment return (a) ............................. 3.63% 3.33% 15.00% 14.86% (3.53%) (0.6 Ratios (to average net assets)/Supplemental Data: Net investment income ............... 5.4% 5.2% 5.5% 5.2% 5.6%+ 5.4 Expenses ............................ 1.0% 1.2% 1.0% 1.2% 1.2%+ 1.2 Portfolio turnover rate ................ 95% 95% 110% 110% 37% 92 Net assets at end of period (in 000's) $16,486 $496,231 $9,752 $543,314 $513,781 $552,156 MainStay Tax Free Bond Fund Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay Tax Free Bond Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's investment objective is to provide a high level of current income free from regular Federal income tax, consistent with preservation of capital. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange, (b) by appraising options and futures contracts at the last sale price on the market where such options or futures are principally traded, and (c) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between 20 Notes to Financial Statements market value on the 61st day prior to maturity and value on maturity date if their original term to maturity at purchase exceeded 60 days. Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Futures Contracts. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date, or to make or receive a cash payment based on the value of a securities index. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin". When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund has entered into contracts for the future delivery of debt securities in order to attempt to protect against the effects of adverse changes in interest rates or to lengthen or shorten the average maturity or duration of the Fund's portfolio. The use of futures contracts involves, to varying degrees, elements of market risk. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts are conducted through regulated exchanges which minimize counterparty credit risks. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income or excise tax provision is required. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends monthly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued daily except when collection is not expected. Premiums on securities purchased by the Fund are amortized on the constant yield method over the life of the respective securities or, if applicable, over the period to the first call date. Discounts are accreted when required by Federal tax regulations. 21 MainStay Tax Free Bond Fund Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expenses incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized and unrealized gains and losses are incurred. Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.30% of the average daily net assets of the Fund. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the 22 Notes to Financial Statements continued Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.25% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charges on sales of Class A Fund shares retained by NYLIFE Distributors was $51,345 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges on redemptions of Class B shares of $605,386 for the year ended December 31, 1996. Trustees Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $9,124. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $16,662 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Trust by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $80,430. 23 MainStay Tax Free Bond Fund Note 4--Federal Income Tax: At December 31, 1996, for Federal income tax purposes, capital loss carryforwards of $15,743,517 are available to the extent provided by regulations to offset future realized gains through 2003. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. The Fund utilized $2,516,857 of capital loss carryforward during the current year. Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $489,837 and $507,884, respectively. Note 6--Capital Share Transactions (in 000's): 24 Year Ended December 31 1996 1995 ------------------ -------------- Class A Class B Class A Clas ------- ------- ------- ---- Shares sold .................................................. 1,114 4,283 1,047 5,9 Shares issued in reinvestment of dividends ................... 56 1,707 38 1,7 ----- ----- ----- --- 1,170 5,990 1,085 7,7 Shares redeemed .............................................. 467 9,724 112 9,4 ----- ----- ----- --- Net increase (decrease) ...................................... 703 (3,734) 973 (1,7 ===== ===== ===== === Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of MainStay Tax Free Bond Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1996 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 25 THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 26 - ------------------------------------------------------------------------------------------------------- GROWTH FUNDS FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a con Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a combin Total Return Fund graph indicating opportunities by investing in stocks, growth potential risk/reward of Fund] bonds, and money market instruments risk through dive - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to maxi Value Fund graph indicating attractive dividends and a stimulus securities which risk/reward of Fund] for positive change tial than the ma - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income f Convertible Fund graph indicating a special blend of long-term growth may offer growth risk/reward of Fund] potential and dividend income into common stock - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 27 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks a high level of current income You are seeking Government Fund graph indicating consistent with safety of principal current income risk/reward of Fund] primarily from U.S. government securities.(ss.) - ------------------------------------------------------------------------------------------------------- HIGH YIELD [Horizontal bar An aggressive high yield bond You want to max CORPORATE BOND FUND graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUND - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig TAX FREE BOND FUND graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY Tax Free Bond Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechart Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Adminstrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay Tax Free Bond Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. [GRAPHIC] MSAN14 (297) Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay Total Return Fund Highlights 3 $10,000 Invested in the MainStay Total Return Fund versus S&P 500 and Inflation--Class A & Class B Shares 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by Industry--Top 5 7 Portfolio Composition 8 Returns & Lipper Rankings 9 Top 10 Equity Holdings 10 Top 10 Bond Holdings 10 10 Largest Purchases 11 10 Largest Sales 11 Portfolio of Investments 12 Financial Statements 18 Notes to Financial Statements 22 Report of Independent Accountants 27 The MainStay Funds 28 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 MainStay Total Return Fund Highlights 1996 MARKET HIGHLIGHTS o The year was marked by a strong, but volatile equity market with a severe downturn in June and July and a strong recovery in the second half o Strong equity sectors included financials, technology, and energy o Health care and consumer stocks had mixed results throughout the year o The bond market was relatively weak, with wandering yields and interest rates o Government bonds underperformed corporate and mortgage-backed securities 1996 FUND HIGHLIGHTS o One-year total returns of 13.22% and 12.73% for Class A and Class B shares, respectively, excluding all sales charges, as of 12/31/96 o Both share classes underperformed the average Lipper+ balanced fund o The Fund benefited from overweighting in financial and technology issues and strong performances in selected health care and consumer stocks o Strong performance among yankee bonds and selected vintage mortgage-backed securities helped boost performance in the fixed-income portion of the portfolio + See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 3 [GRAPHIC] $10,000 Invested in the MainStay Total Return Fund versus S&P 500 and Inflation CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Total Return Fund [GRAPHIC] S&P 500* [GRAPHIC] Inflation+ CLASS B SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Total Return Fund [GRAPHIC] S&P 500* [GRAPHIC] Inflation+ The Class A graph assumes an initial investment of $10,000 made on 12/28/87 reflecting the effect of the 5.5% maximum up-front sales charge, thereby reducing the amount of the investment to $9,450 and includes the historical performance of the Class B shares for periods from inception (12/28/87) through 12/31/94. The Class B graph assumes an initial investment of $10,000 made on 12/28/87. Returns shown do not reflect the MainStay Total Year-end S&P 500 Return Fund Inflation - -------------------------------------------------------------------------------- 12/87 $10,761 $ 9,497.25 $10,017 12/88 12,543 10,223.40 10,459 12/89 16,509 11,756.10 10,944 12/90 15,997 12,350.80 11,628 12/91 20,861 16,900.50 11,975 12/92 22,448 17,512.20 12,329 12/93 24,702 19,350.50 12,667 12/94 25,028 18,884.50 12,996 12/95 34,423 24,297.40 13,334 12/96 39,327 27,510.10 13,752 MainStay Total Year-end S&P 500 Return Fund Inflation - -------------------------------------------------------------------------------- 12/87 $10,761 $10,050.00 $10,017 12/88 12,543 10,818.40 10,459 12/89 16,509 12,440.30 10,944 12/90 15,997 13,069.60 11,628 12/91 20,861 17,884.10 11,975 12/92 22,448 18,531.40 12,329 12/93 24,702 20,476.70 12,667 12/94 25,028 19,983.60 12,996 12/95 34,423 25,571.40 13,334 12/96 39,327 28,827.60 13,752 Contingent Deferred Sales Charge (CDSC), as it would not apply for the period shown. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. Results assume the reinvestment of all income and capital gain distributions. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 [GRAPHIC] Portfolio Management Discussion and Analysis [GRAPHIC] Photo of Total Return Fund Team TOTAL RETURN FUND TEAM Edmund Spelman, Rudy Carryl, Eileen Cook, Christopher Harms, and Ravi Akhoury In 1996, the stock market provided positive, but highly volatile performance. After a strong first quarter, stocks took a sharp downturn in June and July, followed by a general resurgence throughout the second half. In the fourth quarter, however, investors shifted their focus from growth equities to larger value stocks with relatively predictable earnings prospects. Winning sectors included financials, technology, and energy stocks. While some consumer and health care stocks were stellar performers, in general, the market for these securities was weak. Indeed, most of the advances in the stock market were among a relatively limited number of larger, more familiar names. Rising interest rates in the second quarter led most bond sectors to close the first half with negative returns. Rates declined somewhat in the second half, but rose again in December, leaving bond investors with disappointingly low returns. Certain sectors, however, including yankee bonds and seasoned mortgage-backed securities, provided attractive yield advantages. The average Lipper++ balanced fund provided a total return of 13.76% for the 12 months ended 12/31/96. Given this context, how did the MainStay Total Return Fund do in 1996? For the 12 months ended December 31, 1996, the MainStay Total Return Fund posted total returns of 13.22% and 12.73% for Class A and Class B shares, respectively, excluding all sales charges. Both share classes underperformed the average Lipper balanced fund over the same period. What was the primary reason for the Fund's underperformance? Although the performance of the Fund's stock holdings was strong, weaknesses in the bond portion of the portfolio contributed to the Fund's underperformance for the year. Although the Fund's duration strategy was conservative, being long in the first quarter as interest rates rose, and short in the third quarter, when they declined, had a negative impact on the Fund's performance. Fortunately, the Fund was relatively well positioned in the second and fourth quarters, which benefited the bond portion of the portfolio. With interest rates rising then [GRAPHIC] Duration A measure of average maturity, which adjusts for the time value of the payments investors will receive and which takes into account interest payments as well as principal payments. Duration is a better gauge of interest-rate sensitivity than average maturity alone. ++ See footnote and table on page 9 for more information on Lipper Analytical Services, Inc. 5 YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL] Returns are for Class B shares unless otherwise noted. See footnote* on page 9 for more information on performance. falling during the year, and negative total returns for most bond sectors in the first half, we're pleased the Fund performed as close as it did to the average peer fund. What were the strengths in the equity portion of the portfolio? As a result of our bottom-up investment approach, based on individual security selection, we were overweighted in financial stocks all year. This benefited the portfolio with names like SunAmerica, up 91%,* Green Tree Financial, up 46%, and First USA and Travelers Group, which contributed 52% and 49%, respectively, to our positive performance. In technology stocks, we identified the earnings growth potential of Intel, 3Com, Microsoft, and Computer Associates International. Intel increased 131%, and 3Com was up 57%. Microsoft had a strong year and Computer Associates International did well, despite some negative news about its European earnings at year end. Another networking company, Cisco Systems, realized much of the potential we'd identified and gained 24% for our shareholders. Did you have any disappointments in these sectors? Yes. We sold Bank of New York and Barnett Banks in the third quarter, only to watch them rise to all-time highs in the fourth. While we sold Micron Technology and Motorola because of pricing weaknesses in semiconductors, we held Lam Research, which was a major disappointment, down 39% for the year. What other stocks did well? We bought Nike in the first quarter based on strong fundamentals that have continued to improve. The stock returned 54% for the Fund. Safeway also showed strong growth characteristics and returned 44%. HFS, a diversified hotel franchiser, condominium time share, real estate, and rental car company, was up 49%. We bought Tyco International, a diversified manufacturer, in the third quarter based on its strong fundamentals and it gained 30% for the Fund. Finally, the Fund owned WorldCom, the nation's fourth largest long distance company, when it bought MFS Communications. While investor concerns [GRAPHIC] Bottom-up investing Security selection based on the specific fundamental merits of individual issues. The opposite of "top-down" Year-End Total Return % - -------- ----------------------- 12/87 0.50 12/88 7.65 12/89 14.99 12/90 5.06 12/91 36.84 12/92 3.62 12/93 10.50 12/94 -2.41 12/95 28.66 Class A 12/95 27.96 Class B 12/96 13.22 Class A 12/96 12.73 Class B investing, which starts with general economic trends, compares market sectors, and uses relative security values to narrow the range of issues to examine. Weighting The proportion of a portfolio allocated to a specific security or sector, i.e., a fund is said to be overweighted in a sector when that portion of the portfolio is greater than the sector's general relationship to the market as a whole. Auction The competitive bidding process through which Treasury securities are sold. * Returns reflect performance during the period securities were held in the Fund. 6 DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. caused the price to dip, we continued to hold the stock based on its long-range earnings potential and were rewarded by the end of the year. What happened in the health care industry? We saw mixed results there. HMOs were hit relatively hard, with United Healthcare and Humana both losing 30% as a result of higher costs, low utilization, and slow premium growth. Other health care and medical products companies, including Johnson & Johnson, Schering-Plough, Medtronic, and Guidant, all provided strong performance for the Fund. While Mylan Laboratories was down 29% for the year, we sold it earlier in the year to limit the loss to the Fund. Besides interest rates, what affected the bond portion of the portfolio? A number of factors. The introduction of new auctions for 10- and 30-year Treasuries shifted the supply dynamics in that market. We sold new issues and bought older ones, believing that oversupply of new issues would help reduce demand. Our decision had a positive effect. Also, we reduced the Fund's exposure to Treasuries in favor of mortgage-backed securities, and corporates, including yankee bonds, all of which helped benefit the Fund. Why did you choose yankee bonds? To enhance the potential yield we could offer our shareholders. Few investors are well researched on yankee bonds, and by doing our homework and overweighting the portfolio in yankee bonds, we were able to make selective purchases at attractive valuation levels, which helped to benefit our shareholders. What other bonds did you buy during the year? We also purchased selective seasoned mortgage issues that had attractive origination years. This strategy helped add value to the portfolio in the second and third quarters. We also invested in some nonstandard loans in the fourth quarter, including home equity loans and manufactured housing paper. We also [GRAPHIC] Mortgage-backed securities Securities representing interests in "pools" of mortgages in which principal and interest payments by the holders of underlying fixed- or adjustable-rate mortgages are, in effect, "passed through" to investors (net of fees paid to the issuer or guarantor of the securities). Yankee bonds Dollar-denominated bonds issued in the United States by foreign banks and corporations, usually when Sector Percentage - -------------------------------------------------------- U.S. Government Obligations & Agencies 18.2% Finance 8.4% Technology 7.1% Retail 7.0% Commercial Mortgage Loans 5.1% All Other 54.2% conditions in the U.S. are more favorable than other markets, including the issuer's domestic market overseas. 7 invested in low-balance mortgages, which may have lower prepayments and offer yield advantages. Late in the year, we added Fannie Mae noncallable multiple-family project bonds and Ginnie Mae adjustable rate mortgage paper that was trading at a discount to its potential yield. We believe all of these investments added value to the portfolio during the year. What's your outlook for the future? It's positive. If the U.S. economy can maintain moderate growth and reasonable interest rates, it should be good for stocks and bonds. We're continuing to look for opportunities wherever they may be found, provided they fall within the risk-management guidelines we've outlined for the Fund. Whatever happens, we will continue to seek current income consistent with reasonable opportunity for future growth of capital and income. Ravi Akhoury Rudy Carryl Edmund Spelman Portfolio Managers [GRAPHIC] PORTFOLIO COMPOSITION AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. 8 Sector Percentage - -------------------------------------------------------- [GRAPHIC] Common Stocks 60.8% [GRAPHIC] Bonds 37.0% [GRAPHIC] Cash & Equivalents 2.2% Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for CDSC or applicable sales charges. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. Class A shares, first offered to the public on 1/3/95, are sold with a maximum initial sales charge of 5.5% and an annual 12b-1 fee of .25%. Performance figures for this class include the historical performance of the Class B shares for periods from inception (12/28/87) up to 12/31/94. Performance data for the two classes after this date vary based on differences in their expense structures. Class B shares of the Fund are sold with no initial sales charge, but are subject to a maximum CDSC of up to 5% if shares are redeemed during the first 6 years of purchase and an annual 12b-1 fee of up to 1%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Lipper averages listed above are not class specific. Life of Fund return is from the period of the Class B shares' initial offering through 12/31/96. The Fund's Class A shares were first offered to the public on 1/3/95; Class B shares on 12/28/87. [GRAPHIC] 9 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 13.22% 10.23% 12.59% Class B 12.73% 10.02% 12.46% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 7.00% 8.99% 11.88% Class B 7.73% 9.74% 12.46% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 145 out of n/a n/a 272 funds Class B 166 out of 46 out of 21 out of 272 funds 72 funds 45 funds Average Lipper balanced fund 13.76% 10.73% 12.15% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset values & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $20.09 $0.3692 $0.5091 Class B $20.10 $0.2734 $0.5091 ================================================================================ Top 10 Equity Holdings as of 12/31/96 Top 10 Bond Holdings as of 12/31/96 [GRAPHIC] Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. 10 - -------------------------------------------------------------------------------- HOLDING AMOUNT ================================================================================ 3Com Corp. $24,287,125 SunAmerica, Inc. 23,722,875 HFS, Inc. 19,663,725 Green Tree Financial Corp. 19,467,000 Medtronic, Inc. 16,660,000 Computer Associates International, Inc. 16,628,938 Intel Corp. 16,275,531 Travelers Group, Inc. 15,729,924 Oracle Corp. 14,215,875 Nike, Inc. Class B 13,479,600 ================================================================================ - -------------------------------------------------------------------------------- HOLDING AMOUNT ================================================================================ Government National Mortgage Association I (Mortgage Pass- Through Security) 8.00%, due 12/15/23 $23,701,146 Federal National Mortgage Association (Mortgage Pass-Through Security) 7.00%, due 8/1/11 15,540,155 United States Treasury Bond 6.50%, due 11/15/26 11,982,034 United States Treasury Bond 8.875%, due 8/15/17 10,760,714 Federal National Mortgage Association (Mortgage Pass-Through Security) 6.00%, due 1/23/27 8,432,625 Federal Depository Insurance Corp. Series 1996-C1 Class 1A 6.75%, due 7/25/26 8,020,865 United States Treasury Note 6.375%, due 3/31/01 7,651,072 Asset Securitization Corp. Series 1996-MD6 Class A1B 6.88%, due 11/13/26 6,676,999 Independent National Mortgage Corp. Series 1996-D Class A2 7.00%, due 5/25/26 6,675,947 Federal National Mortgage Association (Mortgage Pass-Through Security) 9.00%, due 6/1/26 6,078,684 ================================================================================ 10 Largest Purchases for the 12 months ended 12/31/96 10 Largest Sales for the 12 months ended 12/31/96 [GRAPHIC] Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. All purchases and sales are aggregated by issuer. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed above. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. 11 - -------------------------------------------------------------------------------- SECURITY AMOUNT OF PURCHASE ================================================================================ United States Treasury Notes, due 2/15/96 - 2/15/06 $495,870,444 Government National Mortgage Association I and II due 12/15/17 - 6/15/26 303,117,025 Federal Home Loan Mortgage Corporation, due 6/26/96 - 5/1/26 170,204,536 Federal National Mortgage Association due 7/25/98 - 1/14/27 167,132,008 United States Treasury Bonds, due 2/15/15 - 11/15/26 162,648,128 Residential Accredit Loans, Inc. and Residential Asset Securitization Trust, due 6/25/26 - 9/25/26 19,537,011 Tennessee Valley Authority, due 4/1/36 - 7/15/43 15,902,378 Columbia Republic, due 2/15/03 - 10/7/16 15,670,903 Asset Securitization Corp.,due 10/13/26 - 2/14/29 13,879,016 Green Tree Financial Corp.,due 9/15/27 - 11/15/28 12,184,125 ================================================================================ - -------------------------------------------------------------------------------- SECURITY AMOUNT OF SALE ================================================================================ United States Treasury Notes, due 2/15/96 - 2/15/06 $598,334,414 Government National Mortgage Association I and II, due 1/20/23 - 6/15/26 288,767,936 Federal Home Loan Mortgage Corporation, due 10/6/04 - 5/1/26 161,346,937 United States Treasury Bonds, due 2/15/15 - 8/15/26 159,155,838 Federal National Mortgage Association, due 7/25/98 - 12/1/24 118,918,070 Residential Asset Securitization Trust and Residential Funding Mortgage Securities I,due 4/25/09 - 9/25/26 12,214,869 Tennessee Valley Authority, due 4/1/36 - 7/15/43 11,363,923 Ford Capital BV, Ford Credit Auto Lease Trust, Ford Credit Grantor Trust, and Ford Motor Co., due 8/15/98 - 10/1/08 10,432,681 BCH Cayman Islands, due 6/15/04 - 7/15/06 9,386,271 Province of Quebec, due 2/9/24 - 7/22/26 8,951,301 ================================================================================ MainStay Total Return Fund Principal Amount Value ====================================== LONG-TERM BONDS (37.0%)+ ASSET-BACKED SECURITIES (10.5%) AIRPLANE LEASES (0.6%) Aircraft Lease Portfolio Securitization Series 1996-1 Class C 6.975%, due 6/15/06 (call date 1/15/97) (c)(e) .................... $ 4,537,499 $ 4,538,905 Airplane Pass-Through Trust Series 1 Class C 8.15%, due 3/15/19 (call date 1/1/97) ............................ 1,575,000 1,630,125 --------------- 6,169,030 --------------- COMMERCIAL MORTGAGE LOANS (5.1%) Asset Securitization Corp. Series 1996-MD6 Class A1B 6.88%, due 11/13/26 ........................... 6,650,000 6,676,999 Series 1996-D2 Class A1 6.92%, due 2/14/29 ............................ 3,605,152 3,601,763 Series 1996-D3 Class A1C 7.40%, due 10/13/26 ........................... 3,400,000 3,481,804 Blackrock Capital Finance L.P. Series 1996-C2 Class A 7.641%, due 11/15/26 (c) ...................... 2,607,428 2,641,663 Donaldson Lufkin & Jenrette Mortgage Acceptance Corp. Series 1996-CF2 Class A1A 6.86%, due 11/12/21 (c) ....................... 4,395,966 4,416,584 Federal Depository Insurance Corp. Series 1996-C1 Class 1A 6.75%, due 7/25/26 ............................ 8,045,000 8,020,865 General Motors Acceptance Corp. Commercial Mortgage Securities Inc. Series 1996-C1 Class A2A 6.79%, due 9/15/03 ............................ 4,243,402 4,250,021 Merrill Lynch Mortgage Investors, Inc. Series 1996-C2 Class A1 6.69%, due 11/21/28 ........................... 3,307,939 3,311,048 Series 1996-C1 Class A1 7.15%, due 4/25/28 ............................ 3,668,857 3,728,476 Mortgage Capital Funding, Inc. Series 1996-MC1 Class A2A 7.35%, due 7/15/05 ............................ 3,129,971 3,198,924 Nomura Asset Securities Corp. Series 1996-MD5 Class A1B 7.12%, due 4/13/36 ............................ 4,000,000 4,040,000 Structured Asset Securities Corp. Series 1996-CFL Class A1B 5.751%, due 2/25/28 ........................... 2,144,128 2,130,063 Series 1996-2 Class A1 7.00%, due 8/25/26 ............................ 3,671,000 3,693,356 Principal Amount Value ====================================== COMMERCIAL MORTGAGE LOANS (Continued) Wells Fargo Capital Markets Apartment Financing Series APT Class 1 6.56%, due 12/29/05 (c) ....................... $ 3,325,000 $ 3,296,937 --------------- 56,488,503 --------------- + Percentages indicated are based on Fund net assets. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 12 CREDIT CARD RECEIVABLES (0.3%) Standard Credit Card Master Trust Series 1995-4 Class A 5.60%, due 2/15/00 (e) ........................ 3,630,000 3,631,125 --------------- EQUIPMENT LOANS (1.0%) Case Equipment Loan Trust Series 1995-B Class A3 6.15%, due 9/15/02 ............................ 4,200,000 4,209,198 Newcourt Receivables Asset Trust Series 1996-3 Class A 6.24%, due 12/20/04 ........................... 3,024,562 3,017,001 Series 1996-2 Class A 6.87%, due 6/20/04 ............................ 3,538,942 3,566,050 --------------- 10,792,249 --------------- HOME EQUITY LOANS (1.1%) Green Tree Financial Corp. Series 1996-10 Class A6 7.30%, due 11/15/28 ........................... 3,902,000 3,832,505 Series 1996-6 Class A6 7.95%, due 9/15/27 ............................ 5,437,000 5,581,407 Series 1996-8 Class A7 8.05%, due 10/15/27 ........................... 2,850,000 2,930,171 --------------- 12,344,083 --------------- RESIDENTIAL MORTGAGE LOANS (2.4%) Bear Stearns Mortgage Securities Inc. Series 1996-5 Class A2 10.00%, due 9/25/27 ........................... 3,665,149 3,813,477 Series 1996-4 Class AI2 10.50%, due 9/25/27 ........................... 3,427,100 3,594,171 Capstead Securities Corp. IV Series 1992-1 Class G 8.75%, due 1/25/20 ............................ 4,164,000 4,244,698 Independent National Mortgage Corp. ............ Series 1996-D Class A2 7.00%, due 5/25/26 ............................ 6,700,000 6,675,947 Residential Accredit Loans, Inc. ............... Series 1996-QS4 Class AI2 11.00%, due 8/25/26 ........................... 3,686,347 3,860,306 Portfolio of Investments December 31, 1996 Principal Amount Value ====================================== ASSET-BACKED SECURITIES (Continued) RESIDENTIAL MORTGAGE LOANS (Continued) Residential Asset Securitization Trust Series 1996-A2 Class A3 9.00%, due 6/25/26 ............................ $ 2,366,419 $ 2,422,622 Series 1996-A6 Class A10 9.00%, due 9/25/26 ............................ 1,716,372 1,748,554 --------------- 26,359,775 --------------- Total Asset-Backed Securities (Cost $115,491,395) 115,784,765 --------------- BRADY BOND (0.5%) EURO BOND (0.5%) Poland-Global Registered Series RSTA 3.25%, due 10/27/24 (call date 4/27/97) (e) ....................... 9,265,000 5,813,787 --------------- Total Brady Bond (Cost $5,210,165) ............................. 5,813,787 --------------- CORPORATE BONDS (5.6%) BANKS (2.7%) BankBoston Capital Trust I Guaranteed 8.25%, due 12/15/26 (call date 12/15/06) (c) ...................... 5,425,000 5,503,446 Bank Hawaii Honolulu Series A 8.25%, due 12/15/26 (call date 12/15/06) (c) ...................... 3,625,000 3,620,723 Capital One Bank Medium-Term Senior Bank Notes 7.15%, due 9/15/06 (put date 9/15/99) ............................ 3,150,000 3,211,992 First USA Bank Wilmington, Delaware Deposit Notes 6.25%, due 10/9/98 ............................ 3,250,000 3,244,247 Midland Bank PLC Series 3M Seasoned 5.725%, due 6/29/49 (call date 6/17/97) (e)(h) .................... 2,900,000 2,508,500 Regions Financial Corp. 7.75%, due 9/15/24 (put date 7/15/04) ............................ 5,520,000 5,909,160 Principal Amount Value ====================================== BANKS (Continued) Southtrust Bank Birmingham, Alabama NA Medium-Term Notes 7.69%, due 5/15/25 (put date 5/15/05) ............................ $ 2,750,000 $ 2,932,517 Standard Chartered PLC Series 4 Seasoned 6.088%, due 1/29/49 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 13 (call date 7/14/97) (e)(h) .................... 3,200,000 2,668,000 --------------- 29,598,585 --------------- BROKERAGE (0.9%) Lehman Brothers Holdings Inc. 7.375%, due 5/15/07 (put date 5/15/00) ............................ 2,545,000 2,623,462 Merrill Lynch & Co., Inc. Medium-Term Notes Series B 6.65%, due 1/15/99 ............................ 3,985,000 4,016,442 Paine Webber Group Inc. 7.75%, due 9/1/02 ............................. 1,000,000 1,032,540 Salomon Inc. 6.70%, due 12/1/98 ............................ 2,170,000 2,182,152 --------------- 9,854,596 --------------- FINANCE (1.6%) Aetna Services Inc. 6.97%, due 8/15/36 (put date 6/15/04) ............................ 2,925,000 2,979,931 American Re Corp. 7.45%, due 12/15/26 (call date 1/1/97) (c) ........................ 2,850,000 2,846,438 Associates Corp. North America 7.75%, due 2/15/05 (put date 2/15/00) ............................ 5,125,000 5,440,700 Crestar Capital Trust I Guaranteed 8.16%, due 12/15/26 (call date 12/15/06) (c) ...................... 3,775,000 3,757,975 Travelers/Aetna Property & Casualty Corp. 6.75%, due 9/1/99 ............................. 3,000,000 3,030,060 --------------- 18,055,104 --------------- RETAIL (0.4%) Sears Roebuck Acceptance Corp. Medium-Term Notes Series 1 5.82%, due 12/7/98 ............................ 4,000,000 3,978,280 --------------- Total Corporate Bonds (Cost $61,438,609) ............................ 61,486,565 --------------- MainStay Total Return Fund Principal Amount Value ====================================== U.S. GOVERNMENT & FEDERAL AGENCIES (17.1%) FEDERAL AGENCY (0.5%) Tennessee Valley Authority 5.98%, due 4/1/36 (put date 4/1/98) ............................. $ 5,835,000 $ 5,913,889 --------------- FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD (MORTGAGE PASS-THROUGH SECURITY) (0.3%) 7.00%, due 12/1/01 ............................ 2,893,000 2,922,827 --------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (COLLATERALIZED MORTGAGE OBLIGATION) (0.3%) Series 1996-M7 Class A 6.521%, due 9/17/04 ........................... 3,599,594 3,589,479 --------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS- THROUGH SECURITIES) (7.1%) 6.00%, due 11/1/23 ............................ 5,522,638 5,156,763 6.00%, due 1/23/27 ARM TBA (b)(g) ............. 8,475,000 8,432,625 6.47%, due 12/1/01 ............................ 3,465,000 3,443,517 6.515%, due 12/1/03 ........................... 1,125,000 1,112,479 6.52%, due 12/1/03 ............................ 1,850,000 1,829,909 6.525%, due 12/1/03 ........................... 2,878,000 2,847,493 6.545%, due 1/14/27 ........................... 2,615,000 2,554,201 6.595%, due 1/31/03 TBA (b) ................... 3,025,000 3,004,339 6.625%, due 1/25/06 TBA (b) ................... 2,293,000 2,252,139 6.87%, due 1/24/11 TBA (b) .................... 4,220,000 4,215,147 7.00%, due 8/1/11 - 1/1/24 .................... 21,097,992 20,973,183 9.00%, due 1/5/05 - 8/1/26 .................... 20,824,836 21,974,872 --------------- 77,796,667 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION I (MORTGAGE PASS- THROUGH SECURITIES) (4.2%) 6.50%, due 4/15/23 - 12/15/23 ................. 5,273,509 5,055,976 7.50%, due 11/15/25 - 12/15/25 ................ 8,216,968 8,223,377 8.00%, due 12/15/23 ........................... 23,098,506 23,701,146 9.50%, due 12/15/17 - 5/15/22 ................. 8,329,048 9,071,327 --------------- 46,051,826 --------------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (MORTGAGE PASS- THROUGH SECURITIES) (0.9%) 6.50%, due 1/20/23 - 2/20/23 ARM (g) ....................................... 6,307,21 6,431,664 Principal Amount Value ====================================== GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (MORTGAGE PASS- THROUGH SECURITIES) (Continued) 7.00%, due 11/20/21 - 11/20/22 ARM (g) ....................................... $ 3,561,372 $ 3,636,011 --------------- 10,067,675 --------------- UNITED STATES TREASURY BONDS (2.6%) 6.25%, due 8/15/23 ............................ 4,836,000 4,533,750 6.50%, due 11/15/26 ........................... 12,209,000 11,982,034 8.875%, due 8/15/17 (d) ....................... 8,712,000 10,760,714 11.25%, due 2/15/15 ........................... 860,000 1,269,979 --------------- 28,546,477 --------------- UNITED STATES TREASURY NOTES (1.2%) 6.375%, due 3/31/01 ........................... 7,600,000 7,651,072 6.50%, due 5/15/05 ............................ 1,000,000 1,006,720 7.875%, due 11/15/04 .......................... 839,000 915,559 8.125%, due 2/15/98 ........................... 2,970,000 3,047,042 --------------- 12,620,393 --------------- Total U.S. Government & Federal Agencies (Cost $186,668,513) ........................... 187,509,233 --------------- YANKEE BONDS (3.3%) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 14 City of Naples 7.52%, due 7/15/06 ............................ 3,785,000 3,914,825 Columbia Republic 7.25%, due 2/15/03 ............................ 1,920,000 1,859,232 8.66%, due 10/7/16 (c) ........................ 5,800,000 6,057,752 Enersis SA 7.40%, due 12/1/16 ............................ 2,675,000 2,660,876 Guangdong International Trust & Investment Corp. 8.75%, due 10/24/16 (c) ....................... 5,550,000 5,718,442 Hero Asian BVI Ltd. 9.11%, due 10/15/01 (c) ....................... 1,920,000 2,009,549 Hydro-Quebec Series IO 8.05%, due 7/7/24 (put date 5/7/06) ............................. 3,350,000 3,681,617 Mexico-United Mexican States 7.563%, due 8/6/01 (call date 2/6/97) (c)(e) ..................... 3,000,000 3,007,500 Thai Farmers Bank PLC 8.25%, due 8/21/16 (c) ........................ 2,450,000 2,519,899 Wharf Capital International 1994 Ltd. 8.875%, due 11/1/04 ........................... 4,140,000 4,438,825 --------------- Portfolio of Investments continued Value ================== YANKEE BONDS (Continued) Total Yankee Bonds (Cost $35,237,825) ............................ $ 35,868,517 --------------- Total Long-Term Bonds (Cost $404,046,507) ........................... 406,462,867 --------------- Shares ================= COMMON STOCKS (60.8%) AUTO PARTS (0.5%) Lear Seating Corp. (a) ......................... 175,000 5,971,875 --------------- BANKS (1.7%) NationsBank Corp. .............................. 83,000 8,113,250 Wells Fargo & Co. .............................. 38,866 10,484,103 --------------- 18,597,353 --------------- BROKERAGE (0.7%) Schwab (Charles) Corp. ......................... 233,500 7,472,000 --------------- BUILDINGS (0.8%) Oakwood Homes Corp. ............................ 405,800 9,282,675 --------------- COMMERCIAL SERVICES (0.8%) Service Corp. International .................... 334,000 9,352,000 --------------- COMPUTER SERVICES (0.4%) Sabre Group Holdings Inc. ...................... 174,000 4,850,250 --------------- COMPUTERS & OFFICE EQUIPMENT (4.9%) Alco Standard Corp. ............................ 258,700 13,355,388 CompUSA, Inc. (a) .............................. 126,000 2,598,750 Danka Business Systems PLC ADR (f) ............. 193,000 6,827,375 Electronic Data Systems Corp. .................. 102,500 4,433,125 Hewlett-Packard Co. ............................ 186,000 9,346,500 Seagate Technology, Inc. (a) ................... 160,400 6,335,800 Sun Microsystems, Inc. (a) ..................... 422,000 10,840,125 --------------- 53,737,063 --------------- CONSUMER DURABLES (0.9%) Black & Decker Corp. ........................... 86,300 2,599,788 Harley-Davidson, Inc. .......................... 152,500 7,167,500 --------------- 9,767,288 --------------- Shares Value ====================================== CONSUMER FINANCIAL SERVICES (0.8%) First Data Corp. ............................... 234,00 $ 8,541,000 --------------- CONSUMER SERVICES (0.5%) CUC International, Inc. (a) .................... 267,750 6,359,063 --------------- The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 15 DRUGS (4.2%) Amgen, Inc. (a) ................................ 244,000 13,267,500 Elan Corp. PLC ADR (a)(f) ...................... 276,000 9,177,000 Genzyme Corp. (a) .............................. 70,900 1,542,075 Pharmacia & Upjohn, Inc. ....................... 160,700 6,367,737 Schering-Plough Corp. .......................... 155,000 10,036,250 Teva Pharmaceutical Industries Ltd. ADR (f) .................................. 124,000 6,231,000 --------------- 46,621,562 --------------- ELECTRONICS (1.0%) Harman International Industries, Inc. .............................. 88,000 4,895,000 Vishay Intertechnology, Inc. (a) ............... 238,635 5,578,093 --------------- 10,473,093 --------------- FINANCE (6.8%) Equifax, Inc. .................................. 139,000 4,256,875 Federal National Mortgage Association ................................... 290,000 10,802,500 Green Tree Financial Corp. ..................... 504,000 19,467,000 Household International, Inc. .................. 141,400 13,044,150 MGIC Investment Corp. .......................... 140,500 10,678,000 Travelers Group, Inc. .......................... 346,665 15,729,924 --------------- 73,978,449 --------------- FINANCIAL SERVICES (3.4%) Associates First Capital Corp. ................. 47,000 2,073,875 First USA, Inc. ................................ 336,000 11,634,000 SunAmerica, Inc. ............................... 534,600 23,722,875 --------------- 37,430,750 --------------- FOOD (0.2%) Richfood Holdings, Inc. ........................ 83,600 2,027,300 --------------- HEALTH CARE (2.8%) Columbia/HCA Healthcare Corp. .................. 274,164 11,172,183 HealthCare COMPARE Corp. (a) ................... 140,000 5,932,500 Pacificare Health Systems, Inc. Class B (a) .............................. 61,400 5,234,350 United Healthcare Corp. ........................ 190,500 8,572,500 --------------- 30,911,533 --------------- MainStay Total Return Fund Shares Value ====================================== COMMON STOCKS (Continued) HOSPITAL MANAGEMENT & SERVICES (1.4%) HEALTHSOUTH Corp. (a) .......................... 236,000 $ 9,115,500 OrNda HealthCorp (a) ........................... 217,000 6,347,250 --------------- 15,462,750 --------------- INDUSTRIAL (0.9%) Tyco International Ltd. ........................ 177,300 9,374,737 --------------- INSURANCE (1.2%) American International Group, Inc. ............. 121,000 13,098,250 --------------- LEISURE (0.6%) Mirage Resorts, Inc. (a) ....................... 284,400 6,150,150 --------------- MEDICAL EQUIPMENT (3.8%) Guidant Corp. .................................. 186,000 10,602,000 Heartport, Inc. ................................ 71,000 1,624,125 Johnson & Johnson .............................. 260,188 12,944,353 Medtronic, Inc. ................................ 245,000 16,660,000 --------------- 41,830,478 --------------- OIL & GAS EXPLORATION (0.7%) Triton Energy Ltd. (a) ......................... 147,600 7,158,600 --------------- OIL SERVICES (0.8%) Tidewater, Inc. ................................ 194,000 8,778,500 --------------- RESTAURANTS & LODGING (1.8%) HFS, Inc. (a) .................................. 329,100 19,663,725 --------------- RETAIL (6.6%) AutoZone, Inc. (a) ............................. 223,400 6,143,500 Bed, Bath & Beyond, Inc. (a) ................... 150,000 3,637,500 Home Depot, Inc. (The) ......................... 153,500 7,694,188 Kohl's Corp. (a) ............................... 234,000 9,184,500 Kroger Co. (The) (a) ........................... 179,000 8,323,500 Lowe's Companies, Inc. ......................... 252,000 8,946,000 Nike, Inc. Class B ............................. 225,600 13,479,600 Safeway, Inc. (a) .............................. 283,60 12,123,900 Staples, Inc. (a) .............................. 165,300 2,985,731 --------------- 72,518,419 --------------- Shares Value ====================================== SOFTWARE (2.3%) Computer Associates International, Inc. ........................... 334,250 $ 16,628,938 Microsoft Corp. (a) ............................ 108,000 8,923,500 --------------- 25,552,438 --------------- TECHNOLOGY (7.1%) Cisco Systems, Inc. (a) ........................ 171,500 10,911,687 The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 16 Intel Corp. .................................... 124,300 16,275,531 Lam Research Corp. (a) ......................... 134,500 3,782,813 Linear Technology Corp. ........................ 198,000 8,687,250 Oracle Corp. (a) ............................... 340,500 14,215,875 3Com Corp. (a) ................................. 331,000 24,287,125 --------------- 78,160,281 --------------- TELECOMMUNICATION SERVICES (1.6%) Lucent Technologies, Inc. ...................... 100,000 4,625,000 WorldCom, Inc. (a) ............................. 497,728 12,972,036 --------------- 17,597,036 --------------- TEXTILE & APPAREL (0.7%) Nine West Group, Inc. (a) ...................... 164,200 7,614,775 --------------- TURNKEY & SOFTWARE SYSTEMS (0.9%) Sterling Commerce, Inc. ........................ 174,389 6,147,212 Sterling Software, Inc. (a) .................... 109,500 3,462,938 --------------- 9,610,150 --------------- Total Common Stocks (Cost $391,034,590) ........................... 667,943,543 --------------- Principal Amount ================= SHORT-TERM INVESTMENTS (2.5%) COMMERCIAL PAPER (1.4%) American Express Credit Corp. 6.55%, due 1/2/97 ............................. $ 15,285,000 15,285,000 --------------- Total Commercial Paper (Cost $15,285,000) ............................ 15,285,000 --------------- Portfolio of Investments continued (a) Non-income producing securities. (b) TBA: Securities purchased on a forward commitment basis with an approximate principal amount and maturity date. The actual principal amount and maturity date will be determined upon settlement. (c) May be sold to institutional investors only. (d) Segregated or partially segregated as collateral for TBA. (e) Floating rate. Rate shown is the rate in effect at December 31, 1996. (f) ADR--American Depository Receipt. (g) ARM--Adjustable Rate Mortgage. Resets annually. (h) Seasoned--a euro bond that trades in U.S. dollars and must be held for at least 40 days before it can be sold. (i) The cost for Federal income tax purposes is $823,107,070. (j) At December 31, 1996 net unrealized appreciation was $279,253,733, based on cost for Federal income tax purposes. This consisted of aggregate gross unrealized appreciation for all investments on which there was an excess of market value over cost of $286,278,451 and aggregate gross unrealized depreciation for all investments on which there was an excess of cost over market value of $7,024,718. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 17 Principal Amount Value ====================================== SHORT-TERM INVESTMENTS (Continued) FEDERAL AGENCY (1.1%) Federal Home Loan Bank Discount Corp. 6.40%, due 1/14/97 (d) ........................ $ 12,700,000 $ 12,669,393 --------------- Total Federal Agency (Cost $12,681,318) ............................ 12,669,393 --------------- Total Short-Term Investments (Cost $27,966,318) ............................ 27,954,393 --------------- Total Investments (Cost $823,047,415) (i) ....................... 100.3% 1,102,360,803(j) Liabilities in Excess of Cash and Other Assets ......................... (0.3) (3,507,715) --------------- --------------- Net Assets ..................................... 100.0% $ 1,098,853,088 ============== =============== Statement of Assets and Liabilities The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. 18 AS OF DECEMBER 31, 1996 ASSETS: Investment in securities, at value (identified cost $823,047,415) .............................. $1,102,360,803 Cash ......................................................... 4,177 Receivables: Investment securities sold .................................. 16,403,942 Dividends and interest ...................................... 4,168,226 Fund shares sold ............................................ 1,132,604 Other assets ................................................. 449 -------------- Total assets ............................................... 1,124,070,201 -------------- LIABILITIES: Payables: Investment securities purchased ............................. 22,536,379 Fund shares redeemed ..........................